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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2010

OR



| ̈ | 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.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-1056194                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

110 South Poplar Street, Suite
101, Wilmington, Delaware 19801

(Address of principal executive offices)

(800) 819-5556

(Registrants telephone number, including area code)





Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90
days.    x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).     ̈  Yes     ̈  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller Reporting Company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).     ̈  Yes    x  No

There is no public market for the Registrants securities.









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LEASE EQUITY APPRECIATION FUND II, L.P.

INDEX TO ANNUAL REPORT

ON FORM 10-Q



|           |  |                                                                                                                     |    |      |    | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                                                     |    | PAGE |   
|PART I     |  | FINANCIAL INFORMATION                                                                                               |    |      |    | 
|ITEM 1.    |  | Financial Statements                                                                                                |    |      |    | 
|           |  | Consolidated Balance Sheets  September 30, 2010 and December 31, 2009
(Unaudited)                                  |    |      | 3  | 
|           |  | Consolidated Statements of Operations  Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)         |    |      | 4  | 
|           |  | Consolidated Statement of Changes in Partners Capital (Deficit)  Nine Months Ended September 30,
2010 (Unaudited) |    |      | 5  | 
|           |  | Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2010 and 2009
(Unaudited)                   |    |      | 6  | 
|           |  | Notes to Consolidated Financial Statements  September 30, 2010 (Unaudited)                                         |    |      | 7  | 
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                               |    |      | 17 | 
|ITEM 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                          |    |      | 26 | 
|ITEM 4.    |  | Controls and Procedures                                                                                             |    |      | 27 | 
|           |  |                                                                                                                    
|PART II    |  | OTHER INFORMATION                                                                                                   |    |      |    | 
|ITEM 6.    |  | Exhibits                                                                                                            |    |      | 28 | 
|           | 
|SIGNATURES |  |                                                                                                                     | 30 |     



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PART I. FINANCIAL INFORMATION

Item 
1. Financial Statements

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)



|                                                  |  |                   |         |   |                  |   |         |  
|------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                  |  | September 30,2010 |         |   | December 31,2009 |  
|ASSETS                                            |  |                   |         |   |                  |   |         |  
|Cash                                              |  | $                 | 52      |   |                  | $ | 10      |  
|Restricted cash                                   |  |                   | 18,063  |   |                  |   | 20,378  |  
|Accounts receivable                               |  |                   | 69      |   |                  |   | 77      |  
|Investment in leases and loans, net               |  |                   | 104,478 |   |                  |   | 159,015 |  
|Deferred financing costs, net                     |  |                   | 2,277   |   |                  |   | 2,517   |  
|Other assets                                      |  |                   | 282     |   |                  |   | 601     |  
|                                                  |  |                   |         |   |                  |   |         |  
|Total assets                                      |  | $                 | 125,221 |   |                  | $ | 182,598 |  
|                                                  |  |                   |         |   |                  |   |         |  
|                                                  |  |                  
|LIABILITIES AND PARTNERS (DEFICIT) CAPITAL       |  |                   |         |   |                  |   |         |  
|Liabilities:                                      |  |                   |         |   |                  |   |         |  
|Bank debt                                         |  | $                 | 99,518  |   |                  | $ | 151,981 |  
|Note payable - related party                      |  |                   | 8,072   |   |                  |   |        |  
|Accounts payable and accrued expenses             |  |                   | 383     |   |                  |   | 488     |  
|Other liabilities                                 |  |                   | 532     |   |                  |   | 830     |  
|Derivative liabilities at fair value              |  |                   | 3,168   |   |                  |   | 5,381   |  
|Due to affiliates                                 |  |                   | 17,122  |   |                  |   | 21,464  |  
|                                                  |  |                   |         |   |                  |   |         |  
|Total liabilities                                 |  |                   | 128,795 |   |                  |   | 180,144 |  
|                                                  |  |                   |         |   |                  |   |         |  
|                                                  |  |                  
|Commitments and contingencies                     |  |                   |         |   |                  |   |         |  
|                                                  |  |                  
|Partners (Deficit) Capital:                      |  |                   |         |   |                  |   |         |  
|General partner                                   |  |                   | (526    | ) |                  |   | (443    | )
|Limited partners                                  |  |                   | (826    | ) |                  |   | 7,318   |  
|Accumulated other comprehensive loss              |  |                   | (2,222  | ) |                  |   | (4,421  | )
|                                                  |  |                   |         |   |                  |   |         |  
|Total partners (deficit) capital                 |  |                   | (3,574  | ) |                  |   | 2,454   |  
|                                                  |  |                   |         |   |                  |   |         |  
|Total liabilities and partners (deficit) capital |  | $                 | 125,221 |   |                  | $ | 182,598 |  
|                                                  |  |                   |         |   |                  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except unit and per unit data)

(Unaudited)



|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                               |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                               |  | 2010                            |         |   | 2009                           |   |         | 2010 |  |   | 2009    |  
|Revenues:                                                                      |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest on equipment financings                                               |  | $                               | 2,411   |   |                                | $ | 4,002   |      |  | $ | 8,130   |   |  | $ | 14,017  |  
|Rental income                                                                  |  |                                 | 346     |   |                                |   | 652     |      |  |   | 1,318   |   |  |   | 2,168   |  
|Gains (losses) on sales of equipment and lease dispositions, net               |  |                                 | 107     |   |                                |   | (170    | )    |  |   | (316    | ) |  |   | (146    | )
|Other                                                                          |  |                                 | 315     |   |                                |   | 451     |      |  |   | 1,554   |   |  |   | 1,312   |  
|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                               |  |                                 | 3,179   |   |                                |   | 4,935   |      |  |   | 10,686  |   |  |   | 17,351  |  
|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                               |  |                                 |         |  
|Expenses:                                                                      |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                                                               |  |                                 | 1,796   |   |                                |   | 3,295   |      |  |   | 6,735   |   |  |   | 10,089  |  
|Interest expense - related party                                               |  |                                 | 245     |   |                                |   |        |      |  |   | 526     |   |  |   |        |  
|Depreciation on operating leases                                               |  |                                 | 272     |   |                                |   | 510     |      |  |   | 1,026   |   |  |   | 1,786   |  
|Provision for credit losses                                                    |  |                                 | 1,652   |   |                                |   | 4,335   |      |  |   | 6,062   |   |  |   | 8,742   |  
|General and administrative expenses                                            |  |                                 | 288     |   |                                |   | 529     |      |  |   | 1,310   |   |  |   | 2,104   |  
|Administrative expenses reimbursed to affiliate                                |  |                                 | 335     |   |                                |   | 547     |      |  |   | 1,297   |   |  |   | 1,923   |  
|Management fees to affiliate                                                   |  |                                 |        |   |                                |   | 695     |      |  |   | (215    | ) |  |   | 2,281   |  
|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                               |  |                                 | 4,588   |   |                                |   | 9,911   |      |  |   | 16,741  |   |  |   | 26,925  |  
|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                                       |  | $                               | (1,409  | ) |                                | $ | (4,976  | )    |  | $ | (6,055  | ) |  | $ | (9,574  | )
|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss allocated to limited partners                                         |  | $                               | (1,395  | ) |                                | $ | (4,926  | )    |  | $ | (5,994  | ) |  | $ | (9,478  | )
|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                               |  |                                 |         |  
|Weighted average number of limited partner units outstanding during the period |  |                                 | 592,809 |   |                                |   | 592,809 |      |  |   | 592,809 |   |  |   | 593,082 |  
|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss per weighted average limited partner unit                             |  | $                               | (2.35   | ) |                                | $ | (8.31   | )    |  | $ | (10.11  | ) |  | $ | (15.98  | )
|                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Consolidated Statement of Changes in Partners Capital (Deficit)

(In thousands, except unit data)

(Unaudited)



|                                             |         |        |      |                  |       |  |               |             |  |           |               |   |               |           |        |   |               |   |        |   |  |   |        |  
|-------------------------------------------- | ------- | ------ | ---- | ---------------- | ----- |  | ------------- | ----------- |  | --------- | ------------- | - | ------------- | --------- | ------ | - | ------------- | - | ------ | - |  | - | ------ | -
|                                             |         |        |      |                  |       |  |               | Accumulated |  |           | Total         |   |               |           |       
|                                             | General |        |      |                  |       |  | Other         |             |  | Partners |               |   |               |          
|                                             | Partner |        |      | Limited Partners |       |  | Comprehensive |             |  | Capital   |               |   | Comprehensive |          
|                                             |         | Amount |      |                  | Units |  |               | Amount      |  |           | Income (Loss) |   |               | (Deficit) |        |   | Income (Loss) |  
|Balance, January 1, 2010                     |         | $      | (443 | )                |       |  | 592,809       |             |  | $         | 7,318         |   |               | $         | (4,421 | ) |               | $ | 2,454  |   |  |   |        |  
|Cash distributions                           |         |        | (22  | )                |       |  |              |             |  |           | (2,150        | ) |               |           |       |   |               |   | (2,172 | ) |  |   |        |  
|Net loss                                     |         |        | (61  | )                |       |  |              |             |  |           | (5,994        | ) |               |           |       |   |               |   | (6,055 | ) |  | $ | (6,055 | )
|Unrealized gain on hedging derivatives       |         |        |     |                  |       |  |              |             |  |           |              |   |               |           | 2,485  |   |               |   | 2,485  |   |  |   | 2,485  |  
|Amortization of gain on financial derivative |         |        |     |                  |       |  |              |             |  |           |              |   |               |           | (286   | ) |               |   | (286   | ) |  |   | (286   | )
|                                             |         |        |      |                  |       |  |               |             |  |           |               |   |               |           |        |   |               |   |        |   |  |   |        |  
|Balance, September 30, 2010                  |         | $      | (526 | )                |       |  | 592,809       |             |  | $         | (826          | ) |               | $         | (2,222 | ) |               | $ | (3,574 | ) |  | $ | (3,856 | )
|                                             |         |        |      |                  |       |  |               |             |  |           |               |   |               |           |        |   |               |   |        |   |  |   |        |  

The accompanying notes are an integral part of these consolidated financial statements.



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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                          |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |        
|                                                                                          |  | 2010                           |         |   | 2009 |  
|Cash flows from operating activities:                                                     |  |                                |         |   |      |   |         |  
|Net loss                                                                                  |  | $                              | (6,055  | ) |      |   | (9,574  | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                                |         |   |      |   |         |  
|Losses on sales of equipment and lease dispositions, net                                  |  |                                | 316     |   |      |   | 146     |  
|Depreciation on operating leases                                                          |  |                                | 1,026   |   |      |   | 1,786   |  
|Provision for credit losses                                                               |  |                                | 6,062   |   |      |   | 8,742   |  
|Amortization of deferred financing costs                                                  |  |                                | 1,145   |   |      |   | 1,006   |  
|Amortization of gain on financial derivative                                              |  |                                | (286    | ) |      |   | (286    | )
|Changes in operating assets and liabilities:                                              |  |                                |         |   |      |   |         |  
|Accounts receivable                                                                       |  |                                | 8       |   |      |   | (16     | )
|Other assets                                                                              |  |                                | 591     |   |      |   | (300    | )
|Accounts payable and accrued expenses and other liabilities                               |  |                                | (323    | ) |      |   | (143    | )
|Due to affiliates                                                                         |  |                                | (4,342  | ) |      |   | 8,113   |  
|                                                                                          |  |                                |         |   |      |   |         |  
|Net cash (used in) provided by operating activities                                       |  |                                | (1,858  | ) |      |   | 9,474   |  
|                                                                                          |  |                                |         |   |      |   |         |  
|                                                                                          |  |                               
|Cash flows from investing activities:                                                     |  |                                |         |   |      |   |         |  
|Purchases of leases and loans                                                             |  |                                | (7,777  | ) |      |   | (7,696  | )
|Proceeds from leases and loans                                                            |  |                                | 55,397  |   |      |   | 72,061  |  
|Security deposits collected, net of returns                                               |  |                                | (487    | ) |      |   | 599     |  
|                                                                                          |  |                                |         |   |      |   |         |  
|Net cash provided by investing activities                                                 |  |                                | 47,133  |   |      |   | 64,964  |  
|                                                                                          |  |                                |         |   |      |   |         |  
|                                                                                          |  |                               
|Cash flows from financing activities:                                                     |  |                                |         |   |      |   |         |  
|Borrowings of bank debt                                                                   |  |                                | 6,735   |   |      |   | 6,656   |  
|Repayment of bank debt                                                                    |  |                                | (59,198 | ) |      |   | (84,225 | )
|Borrowings - note payable - related party                                                 |  |                                | 8,000   |   |      |   |        |  
|Repayments - note payable - related party                                                 |  |                                | (8      | ) |      |   |        |  
|Decrease in restricted cash                                                               |  |                                | 2,315   |   |      |   | 6,854   |  
|Increase in deferred financing costs                                                      |  |                                | (905    | ) |      |   | (958    | )
|Redemption of limited partner units                                                       |  |                                |        |   |      |   | (77     | )
|Cash distributions to partners                                                            |  |                                | (2,172  | ) |      |   | (2,784  | )
|                                                                                          |  |                                |         |   |      |   |         |  
|Net cash used in financing activities                                                     |  |                                | (45,233 | ) |      |   | (74,534 | )
|                                                                                          |  |                                |         |   |      |   |         |  
|                                                                                          |  |                               
|Increase (decrease) in cash                                                               |  |                                | 42      |   |      |   | (96     | )
|Cash, beginning of period                                                                 |  |                                | 10      |   |      |   | 149     |  
|                                                                                          |  |                                |         |   |      |   |         |  
|Cash, end of period                                                                       |  | $                              | 52      |   |      | $ | 53      |  
|                                                                                          |  |                                |         |   |      |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2010

(Unaudited)

NOTE 1  ORGANIZATION AND NATURE OF BUSINESS

Lease Equity Appreciation Fund II, L.P. (the Fund) is a Delaware limited partnership formed on March 30, 2004 by its General Partner, LEAF Financial Corporation (the General
Partner). The General Partner manages the Fund. The General Partner is a subsidiary of Resource America, Inc. (RAI). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate,
service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 13, 2006, the Fund raised $60.0 million by selling 600,000 of its
limited partner units. It commenced operations in April 2005.

The Fund is expected to have a nine-year life, consisting of an
offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Funds leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its
leases and secured loans during the maturity period, the Fund is expected to continue to return capital to its partners as those leases and loans mature. Substantially all of the Funds leases and loans mature by the end of 2014. The Fund
expects to enter its maturity period beginning in October 2011. The Fund will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.

The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of
Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate
regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.

As of
September 30, 2010, in addition to its 1% general partnership interest, the General Partner also had invested $0.9 million for a 1.6% limited partnership interest in the Fund.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Fund and its wholly-owned subsidiaries, LEAF Fund II,
LLC and LEAF II Receivables Funding, LLC. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring
nature and necessary for a fair statement of the Funds financial position as of September 30, 2010, and the results of its operations and cash flows for the periods presented. The results of operations for the three and nine months ended
September 30, 2010 are not necessarily indicative of results of the Funds operations for the 2010 fiscal year. The Fund has evaluated subsequent events through the date the financial statements were issued. The financial statements have
been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S.
generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Funds financial statements and
notes thereto presented in the Funds Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on April 1, 2010.

Reclassification

A reclassification has been made to the 2009 consolidated
financial statements to conform to the 2010 presentation. In the statement of operations, renewal income of approximately $85 thousand for the third quarter and $260 thousand for the nine months ended September 30, 2009, that was previously
included in Interest on equipment financings has been reclassified to Gains(losses) on sales of equipment and lease dispositions, net. This corresponding reclassification has also been made in the 2009 statement of cash
flows.

Significant Accounting Policies

Investments in Leases and Loans

The Funds investments in
leases and loans consist of direct financing leases, operating leases and loans.

Direct Financing Leases: Certain of
the Funds lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Funds



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investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned
finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum lease payments plus the estimated unguaranteed residual value
over the cost of the related equipment.

Unguaranteed residual value represents the estimated amount to be received at lease
termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partners history with regard to the realization of residuals, available industry data and the
General Partners senior managements experience with respect to



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comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the
equipments fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.

Operating Leases.Leases not meeting the criteria to be classified as direct financing leases are deemed to be
operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipments
estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis. Generally, during the lease terms
of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Funds policy is to review, on a quarterly basis,
the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount
exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the three and nine months ended September 30, 2010 and 2009.

Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments
receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the
cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.

Allowance for credit losses.The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases
and loans) based upon, among other factors, managements historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for
expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days
past due, any remaining balance is fully-reserved less an estimated recovery amount. Generally, the account is then charged-off and referred to our internal recovery group consisting of a team of credit specialists and collectors. The group utilizes
several resources in an attempt to maximize recoveries on charged-off accounts including: 1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or
3) repossessing and remarketing the equipment through third parties. The Funds policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote.
The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. As of September 30, 2010 and December 31, 2009, the Fund had $6.7 million and $15.0 million, respectively, of leases
and loans on non-accrual status. Fees from delinquent payments are recognized when received and are included in other income.

Recent
Accounting Standards

Accounting Standard Issued But Not Yet Effective

Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.In July 2010, the Financial
Accounting Standards Board (FASB) issued guidance that will require SEC filers to provide more information about the credit quality of their financing receivables in the disclosures to financial statements including, but not limited to,
significant purchases and sales of financing receivables, aging information and credit quality indicators. The guidance is effective for the Fund as of December 15, 2010. The Fund does not anticipate that adoption will have a significant
effect on its consolidated financial statements.

Newly Adopted Accounting Principles

The Fund adopted the following accounting guidance during the nine months ended September 30, 2010:

Subsequent Events.In February 2010, FASB issued guidance which removes the requirement for an SEC filer to disclose a date
through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either a correction of error or retrospective application of U.S.
GAAP. This guidance was effective upon issuance.The adoption of this guidance did not have a material effect on the Funds consolidated financial statements.



9



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Fair Value
Measurements. In January 2010, the FASB issued guidance that requires new disclosures and clarifies some existing disclosure requirements about fair value measurements. The new pronouncement requires a reporting entity: (1) to disclose
separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) to present separately information about purchases, sales, issuances, and settlements
in the reconciliation for fair value measurements using significant unobservable inputs. In addition, it clarifies the requirements of the following existing disclosures: (1) for purposes of reporting fair value measurement for each class of
assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance did not have a material effect on
the Funds consolidated financial statements.

Transfers of financial assets.In June 2009, the FASB issued
guidance for accounting for transfers of financial assets. The guidance eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires greater transparency of
related disclosures. This statement is effective for fiscal years beginning after November 15, 2009. Adoption of this statement did not have a material impact on the Funds consolidated financial statements.

NOTE 3  SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosure of cash flow information is as follows (in thousands):



|               |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 
|-------------- |  | ------------------------------- | ----- |  | ------------------------------ | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|               |  | Three Months EndedSeptember 30, |       |  | Nine Months EndedSeptember 30, |  
|               |  | 2010                            |       |  | 2009                           |   |       | 2010 |  |   | 2009  | 
|Cash paid for: |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 
|Interest       |  | $                               | 1,626 |  |                                | $ | 2,861 |      |  | $ | 5,581 |  |  | $ | 9,781 | 
|               |  |                                 |       |  |                                |   |       |      |  |   |       |  |  |   |       | 

NOTE 4  INVESTMENT IN LEASES AND LOANS

The Funds investment in leases and loans, net, consists of the following (in thousands):



|                            |  |                   |         |   |                  |   |         |  
|--------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                            |  | September 30,2010 |         |   | December 31,2009 |  
|Direct financing leases (a) |  | $                 | 77,372  |   |                  | $ | 131,020 |  
|Loans (b)                   |  |                   | 30,035  |   |                  |   | 35,152  |  
|Operating leases            |  |                   | 2,411   |   |                  |   | 4,223   |  
|                            |  |                   |         |   |                  |   |         |  
|                            |  |                   | 109,818 |   |                  |   | 170,395 |  
|Allowance for credit losses |  |                   | (5,340  | ) |                  |   | (11,380 | )
|                            |  |                   |         |   |                  |   |         |  
|                            |  | $                 | 104,478 |   |                  | $ | 159,015 |  
|                            |  |                   |         |   |                  |   |         |  



|(a) | The Funds direct financing leases are for initial lease terms generally ranging from 24 to 84 months.
|--- | ------------------------------------------------------------------------------------------------------

|(b) | The interest rates on loans generally range from 7% to 14%.
|--- | -----------------------------------------------------------

The components of direct financing leases and loans are as follows (in thousands):



|                                               |  |                   |        |   |                  |   |        |        |  |   |         |   |  |   |        |  
|---------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | ------ |  | - | ------- | - |  | - | ------ | -
|                                               |  | September 30,2010 |        |   | December 31,2009 |  
|                                               |  | Leases            |        |   | Loans            |   |        | Leases |  |   | Loans   |  
|Total future minimum lease payments            |  | $                 | 83,729 |   |                  | $ | 34,932 |        |  | $ | 145,109 |   |  | $ | 41,426 |  
|Unearned income                                |  |                   | (9,101 | ) |                  |   | (4,761 | )      |  |   | (16,900 | ) |  |   | (6,116 | )
|Residuals, net of unearned residual income (a) |  |                   | 3,542  |   |                  |   |       |        |  |   | 4,289   |   |  |   |       |  
|Security deposits                              |  |                   | (798   | ) |                  |   | (136   | )      |  |   | (1,478  | ) |  |   | (158   | )
|                                               |  |                   |        |   |                  |   |        |        |  |   |         |   |  |   |        |  
|                                               |  | $                 | 77,372 |   |                  | $ | 30,035 |        |  | $ | 131,020 |   |  | $ | 35,152 |  
|                                               |  |                   |        |   |                  |   |        |        |  |   |         |   |  |   |        |  



|(a) | Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from lease extensions or disposition of the
equipment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Funds
investment in operating leases, net, consists of the following (in thousands):



|                         |  |                   |  |                  |          | 
|------------------------ |  | ----------------- |  | ---------------- | -------- | 
|                         |  | September 30,2010 |  | December 31,2009 |         
|Equipment                |  | $  7,868          |  |                  | $12,061  | 
|Accumulated depreciation |  | (5,433)           |  |                  | (7,738)  | 
|Security deposits        |  | (24)              |  |                  | (100)    | 
|                         |  |                   |  |                  |          | 
|                         |  | $  2,411          |  |                  | $  4,223 | 
|                         |  |                   |  |                  |          | 

The following is a summary of the Funds allowance for credit losses (in thousands):



|                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                 |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                 |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Allowance for credit losses, beginning of period |  | $                               | 4,760  |   |                                | $ | 7,170  |      |  | $ | 11,380  |   |  | $ | 5,770  |  
|Provision for credit losses                      |  |                                 | 1,652  |   |                                |   | 4,335  |      |  |   | 6,062   |   |  |   | 8,742  |  
|Charge-offs                                      |  |                                 | (1,433 | ) |                                |   | (4,479 | )    |  |   | (12,945 | ) |  |   | (7,712 | )
|Recoveries                                       |  |                                 | 361    |   |                                |   | 224    |      |  |   | 843     |   |  |   | 450    |  
|                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Allowance for credit losses, end of period       |  | $                               | 5,340  |   |                                | $ | 7,250  |      |  | $ | 5,340   |   |  | $ | 7,250  |  
|                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  

NOTE 5  DEFERRED FINANCING COSTS

As of September 30, 2010 and December 31, 2009, deferred financing costs include $2.3 million and $2.5 million, respectively, of unamortized deferred financing costs which are being amortized
over the terms of the estimated useful life of the related debt. Accumulated amortization as of September 30, 2010 and December 31, 2009 was $3.5 million and $2.4 million, respectively. Estimated amortization expense of the Funds
existing deferred financing costs for the years ending September 30 is as follows (in thousands):



|     |  |   |       | 
|---- |  | - | ----- | 
|2011 |  | $ | 938   | 
|2012 |  |   | 690   | 
|2013 |  |   | 600   | 
|2014 |  |   | 49    | 
|     |  |   |       | 
|     |  | $ | 2,277 | 
|     |  |   |       | 



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NOTE 6  BANK DEBT

The Funds bank debt consists of the following (in thousands):



|                                             |  |      |           |  |               |  |            |                    |  |   |                   |  |  |                 |        |  |                                     |   |     |                                            |  |  |                                     |  |  |  |      |  |  |   |         | 
|-------------------------------------------- |  | ---- | --------- |  | ------------- |  | ---------- | ------------------ |  | - | ----------------- |  |  | --------------- | ------ |  | ----------------------------------- | - | --- | ------------------------------------------ |  |  | ----------------------------------- |  |  |  | ---- |  |  | - | ------- | 
|                                             |  |      |           |  |               |  |            | September 30, 2010 |  |   |                   |  |  |                 |        |  |                                     |  
|                                             |  | Type |           |  | Maturity Date |  |            | FacilityAmount     |  |   | AmountOutstanding |  |  | AmountAvailable |        |  | Interest rateper annum peragreement |   |     | Interest rateper annumadjusted forSwap (2) |  |  | December 31,2009 OutstandingBalance | 
|WestLB, AG (1)                               |  |      | Revolving |  |               |  | (3)        |                    |  | $ | 125,000           |  |  | $               | 63,081 |  |                                     |   | (3) |                                            |  |  | (3)                                 |  |  |  | 5.7% |  |  | $ | 87,781  | 
|                                             |  |      |           |  |               |  |            |                   
|2007-01- Term Securitization - Class A-3 (4) |  |      | Term      |  |               |  | July 2012  |                    |  |   | 21,908            |  |  |                 | 21,908 |  |                                     |   | N/A |                                            |  |  | One monthLIBOR + 0.20%              |  |  |  | 5.6% |  |  |   | 49,671  | 
|                                             |  |      |           |  |               |  |            |                   
|2007-01 Term Securitization - Class B (4)    |  |      | Term      |  |               |  | March 2015 |                    |  |   | 14,529            |  |  |                 | 14,529 |  |                                     |   | N/A |                                            |  |  | 6.7%                                |  |  |  | 6.7% |  |  |   | 14,529  | 
|                                             |  |      |           |  |               |  |            |                    |  |   |                   |  |  |                 |        |  |                                     |   |     |                                            |  |  |                                     |  |  |  |      |  |  |   |         | 
|                                             |  |      |           |  |               |  |            |                    |  | $ | 161,437           |  |  | $               | 99,518 |  |                                     | $ |    |                                            |  |  |                                     |  |  |  |      |  |  | $ | 151,981 | 
|                                             |  |      |           |  |               |  |            |                    |  |   |                   |  |  |                 |        |  |                                     |   |     |                                            |  |  |                                     |  |  |  |      |  |  |   |         | 



|(1) | Availability under this credit facility is subject to having eligible leases or loans (as defined in the respective agreements) to pledge as collateral, compliance with
covenants and the borrowing base formula.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | To mitigate fluctuations in interest rates, the Fund entered into interest rate swap agreements. The interest rate swap agreements terminate on various dates and fix
the interest rate.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This revolving line of credit is collateralized by specific lease receivables and related equipment, with a 1% credit reserve of the outstanding line of credit.
Interest on borrowings prior to March 2009 are calculated at London Interbank Offered Rate (LIBOR) plus 1.20% per annum. Borrowings under this facility after March 2009 are a rate of LIBOR plus 2.50% per annum. To mitigate
fluctuations in interest rates, the Fund entered into interest rate swap agreements, which terminate on various dates ranging from July 2013 to August 2015. As of September 30, 2010, the interest rate swap agreements fixed the interest rate on
this facility at 5.7%. This credit facility expired on June 30, 2010 and renewal discussions are ongoing. Unless renewal occurs, there are no additional borrowings available on this facility. If this facility is not renewed, we would not be
required to make immediate full repayment. Rather, we would continue to repay the principal and interest on any outstanding debt as payments are received on the underlying leases and loans pledged as collateral. Recourse under this facility is
limited to the amount of collateral pledged. As of September 30, 2010, $68.8 million of leases and loans and $4.6 million of restricted cash were pledged as collateral under this facility.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | As of September 30, 2010, $39.8 million of leases and loans and $11.7 million of restricted cash were pledged as collateral under this securitization.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

The Fund is subject to certain financial covenants related to its debt facilities. These covenants are
related to such things as minimum tangible net worth, maximum leverage ratios and portfolio delinquency. The minimum tangible net worth covenants measure its equity adjusted for intangibles and amounts due to the Funds General Partner.
The maximum leverage covenants restrict the amount the Fund can borrow based on a ratio of its total debt compared to its net worth. The portfolio performance covenants generally provide that the Fund would be in default if a specified percentage of
its portfolio of leases and loans was delinquent in payment beyond acceptable grace periods.

In addition, the Funds
debt facilities include financial covenants covering affiliated entities responsible for servicing its portfolio. These covenants exist to provide the lenders with information about the financial viability of the entities that service its portfolio.
These entities include the Funds General Partner and certain other affiliates involved in the sourcing and servicing of its portfolio. These covenants are similar in nature to the Funds covenants and are related to such things as the
entitys minimum tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance of the debt terms of all of the Funds General Partners managed entities.

As of September 30, 2010, the Fund was in breach of several covenants under its debt facility with WestLB. Additionally, the
Funds affiliate responsible for servicing the Funds portfolio incurred a breach of the minimum net worth covenant under the terms of the WestLB debt facility.

In conjunction with the ongoing renewal discussions, the Fund has requested waivers or amendments from WestLB with respect to these breaches. WestLB has various remedies under its loan agreement such as
allowing repayment of the outstanding balance as payments are received on the underlying leases and loans or selling the pledged leases and loans in a commercially reasonable manner. Although the Fund expects to obtain a renewal of this
facility and waivers or amendments to the covenants in the loan agreement with WestLB, there can be no assurance that such waivers or amendments will be executed.



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If the Fund does not
meet the requirements of the covenants in future, a default could occur that could have an adverse effect on its operations and could force it to liquidate all or a portion of its portfolio securing its debt facilities. If required, a sale of a
portfolio could be at prices lower than its carrying value, which could result in losses and reduce the Funds income and distribution to its partners.

Debt repaymentsEstimated annual principal payments on the Funds aggregate borrowings (assuming that WestLB waives the aforementioned covenant breaches) over the next five years ended
September 30 and thereafter, are as follows (in thousands):



|     |  |   |        | 
|---- |  | - | ------ | 
|2011 |  | $ | 45,682 | 
|2012 |  |   | 28,941 | 
|2013 |  |   | 16,242 | 
|2014 |  |   | 5,917  | 
|2015 |  |   | 2,736  | 
|     |  |   |        | 
|     |  | $ | 99,518 | 
|     |  |   |        | 

NOTE 7  DERIVATIVE INSTRUMENTS

Since the Funds assets are structured on a fixed-rate basis, and funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if rates rise
because it will increase the Funds borrowing costs. In addition, when the Fund acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost
the Fund will pay when it funds those loans. Increases in interest rates that increase the Funds permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this
spread.

To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as
interest rate swaps. For derivatives designated and qualifying as cash flow hedges, the effective portion of changes in fair value of those derivatives are recorded in accumulated other comprehensive loss and are subsequently reclassified into
earnings when the hedged forecasted interest payments are recognized in earnings. For derivatives that are undesignated, changes in the fair value of those derivatives are recorded directly to earnings as they occur. The Fund does not use derivative
financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has
agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the
lender, then the Fund could also be declared in default on its derivative obligations. The Fund has agreements with certain of its derivative counterparties that incorporate the loan covenant provisions of the Funds indebtedness with a
lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Fund being in default on any derivative instrument obligations covered by the agreement. As of September 30, 2010, the Fund
has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at September 30, 2010, it could be required to settle its obligations under the agreements at their termination value of $2.8 million.

Before entering into a derivative transaction for hedging purposes, the Fund determines whether a high degree of initial
effectiveness exists between the change in the value of the hedged forecasted transactions and the change in the value of the derivative from a movement in interest rates. High effectiveness means that the change in the value of the derivative is
expected to provide a high degree of offset against changes in the value of the hedged forecasted transactions caused by changes in interest rate risk. The Fund measures the effectiveness of each cash flow hedge throughout the hedge period. Any
hedge ineffectiveness on cash flow hedging relationships, as defined by U.S. GAAP, is recognized in the consolidated statements of operations.



13



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At September 30,
2010, the Fund has 23 interest rate swaps which terminate on various dates ranging from September 2011 to August 2015. The following tables present the fair value of the Funds derivative financial instruments as well as their classification on
the consolidated balance sheet as of September 30, 2010 and on the consolidated statement of operations for the three and nine months ended September 30, 2010 and 2009 (in thousands):



|                                                  |  |                |         |  |                        |                                      |            |   |        |  
|------------------------------------------------- |  | -------------- | ------- |  | ---------------------- | ------------------------------------ | ---------- | - | ------ | -
|                                                  |  | NotionalAmount |         |  | Balance Sheet Location |                                      | Fair Value |  
|Derivatives designated as hedging instruments     |  |                |         |  |                        |                                      |           
|Interest rate swap contracts                      |  | $              | 58,453  |  |                        | Derivative liabilities at fair value |            | $ | (3,205 | )
|Derivatives not designated as hedging instruments |  | $              | 124,024 |  |                        | Derivative liabilities at fair value |            |   | 37     |  
|                                                  |  |                |         |  |                        |                                      |            |   |        |  
|                                                  |  |                |         |  |                        |                                      |            | $ | (3,168 | )
|                                                  |  |                |         |  |                        |                                      |            |   |        |  



|                                                          |  |                                                                              |        |   |                                                                                                        |   |                                 |   |  |                  |  |   |        |   |  |   |        |  
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------- | ------ | - | ------------------------------------------------------------------------------------------------------ | - | ------------------------------- | - |  | ---------------- |  | - | ------ | - |  | - | ------ | -
|Derivatives designated as Cash Flow Hedging
Relationships |  | Amount of Gain or (Loss)Recognized in OCI on 
Derivatives(Effective Portion) |        |   | Location and Amount of Gain or (Loss) Reclassified fromAccumulated OCI into Income
(Effective Portion) |  
|                                                          |  | Nine Months Ended                                                            |        |   |                                                                                                        |   | Nine Months Ended               |  
|                                                          |  | September 30,                                                                |        |   |                                                                                                        |   | September 30,                   |  
|                                                          |  | 2010                                                                         |        |   | 2009                                                                                                   |   |                                 |   |  | 2010             |  |   | 2009   |  
|Interest Rate Products                                    |  | $                                                                            | (1,441 | ) |                                                                                                        | $ | (2,518                          | ) |  | Interest expense |  | $ | (3,640 | ) |  | $ | (6,863 | )
|                                                          |  |                                                                              |       
|                                                          |  | Three Months EndedSeptember 30,                                              |        |   |                                                                                                        |   | Three Months EndedSeptember 30, |  
|                                                          |  | 2010                                                                         |        |   | 2009                                                                                                   |   |                                 |   |  | 2010             |  |   | 2009   |  
|Interest Rate Products                                    |  | $                                                                            | (506   | ) |                                                                                                        | $ | (1,045                          | ) |  | Interest expense |  | $ | (993   | ) |  | $ | (2,036 | )

The Fund had ineffective
swaps and net cash exchange for three and nine months ended September 30, 2010 was $29,000 and $358,000, respectively which is included in interest expense in the consolidated statements of operation.

Simultaneously with the 2007 term securitization, the Fund terminated interest rate swap agreements with WestLB and Merrill Lynch with
total underlying notional amounts of $298.8 million, resulting in a gain of $2.3 million which was recorded in other comprehensive income at September 30, 2007. The Fund is amortizing the gain to interest expense over the remaining term of the
terminated swap agreements. For the three and nine months ended September 30, 2010, $95,000 and $286,000, respectively, was recognized into interest expense. As of September 30, 2010, the unamortized balance of $982,000 is included in
accumulated other comprehensive loss.

For the three and nine months ended September 30, 2010 and 2009, the Fund
recognized no gain or loss for hedge ineffectiveness. Assuming market rates remain constant with those at September 30, 2010, $2.0 million of the $2.2 million in accumulated other comprehensive loss is expected to be charged to earnings over
the next 12 months.

In the fourth quarter of 2010, the Fund made an election to discontinue the use of hedge accounting for
its derivative financial instruments. While this change may create future volatility in the Funds reported income statement results, it is not expected to have any impact on the Funds future cash flows.

NOTE 8  FAIR VALUE MEASUREMENT

For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since
interest rates approximate current market rates.

It is not practicable for the Fund to estimate the fair value of the
Funds leases and loans. They are comprised of a large number of transactions with commercial customers in different businesses, and may be secured by liens on various types of equipment and may be guaranteed by third parties and
cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyers assessment of the transactions credit quality, collateral value, guarantees, payment history,
yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Funds and the buyers views of economic and industry
conditions, the Funds and the buyers tax considerations, and other factors.



14



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Fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S.
GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined
based on the lowest level input that is significant to the measurement in its entirety.



| |  |  | Level 1  Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the
measurement date.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in
active markets or quoted prices for identical assets or liabilities in inactive markets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Unobservable inputs that reflect the entitys own assumptions about the assumptions that market participants would use in
the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded on the consolidated balance sheets at their fair value as either
assets or liabilities. Because the Funds derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable
market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by
itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are
not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Liabilities measured at fair value on a recurring basis included the following (in thousands):



|                                          |  |                               |   |  |             |   |        |         |  |   |               |  |  |   |        |  
|----------------------------------------- |  | ----------------------------- | - |  | ----------- | - | ------ | ------- |  | - | ------------- |  |  | - | ------ | -
|                                          |  | Fair Value Measurements Using |   |  | Liabilities |  
|                                          |  | Level 1                       |   |  | Level 2     |   |        | Level 3 |  |   | At Fair Value | 
|Interest Rate Swaps at September 30, 2010 |  | $                             |  |  |             | $ | (3,168 | )       |  | $ |              |  |  | $ | (3,168 | )
|Interest Rate Swaps at December 31, 2009  |  | $                             |  |  |             | $ | (5,381 | )       |  | $ |              |  |  | $ | (5,381 | )

NOTE 9  CERTAIN RELATIONSHIPS AND
TRANSACTIONS WITH AFFILIATES

The Fund relies on the General Partner and its affiliates to manage the Funds
operations and pays the General Partner or its affiliates fees to manage the Fund. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):



|                        |               |                    |     |               |                   |   |     |      |  |   |       |   |  |   |       | 
|----------------------- | ------------- | ------------------ | --- | ------------- | ----------------- | - | --- | ---- |  | - | ----- | - |  | - | ----- | 
|                        |               | Three Months Ended |     |               | Nine Months Ended |  
|                        | September 30, |                    |     | September 30, |                  
|                        |               | 2010               |     |               | 2009              |   |     | 2010 |  |   | 2009  |  
|Acquisition fees        |               | $                  |    |               |                   | $ |    |      |  | $ | 153   |   |  | $ | 123   | 
|Management fees         |               | $                  |    |               |                   | $ | 695 |      |  | $ | (215  | ) |  | $ | 2,281 | 
|Administrative expenses |               | $                  | 335 |               |                   | $ | 547 |      |  | $ | 1,297 |   |  | $ | 1,923 | 

Acquisition Fees:The General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment
financing.

Management Fee:The General Partner is paid a subordinated annual asset management fee equal to 4% of gross
rental payments for operating leases or 2 % for full payout leases, or a competitive fee, whichever is less. During the Funds five-year investment period, the management fees will be subordinated to the payment to the Funds limited
partners of a cumulative annual distribution of 8.0% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Beginning December 1, 2009, the General Partner waived asset management fees. Approximately
$502,000 of management fees were waived for the period ended September 30, 2010. It is expected that the General Partner will also waive all future management fees.



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Administrative
Expenses:The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate which dont exceed the General Partners cost of those fees or services.

Due to Affiliates:Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of
equipment from its General Partner, management fees and reimbursed expenses.

Note Payable- related party: In March
2010, the Fund borrowed $8.0 million from Resource Capital Corporation (RCC). RCC is an affiliate of the Fund through common management with RAI. The note bears interest at 12% per annum. Principal is payable monthly at
one-sixtieth of one percent and interest is payable quarterly. Any unpaid principal and interest are due on March 3, 2011. The Fund expensed $245,000 and $526,000 of interest related to this loan for the three and nine months ended
September 30, 2010, respectively.

NOTE 10  COMMITMENTS AND CONTINGENCIES

In connection with a sale of leases and loans to a third party in July of 2008, the Fund contractually agreed to repurchase delinquent
leases up to a maximum of $2.3 million calculated as 7.5% of total proceeds received from the sale (Repurchase Commitment). The Fund has no remaining Repurchase Commitment at September 30, 2010. The Fund has recorded a liability of
$105,000 as an estimate of losses it expects to incur on leases and loans repurchased under this arrangement. This liability is included in Other Liabilities on the Consolidated Balance Sheets.

The Fund is party to various legal proceeding arising out of the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect on the Funds financial condition or results of operations.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 other documents filed with Securities and Exchange Commission. 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.

The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be
read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) our consolidated financial statements, related notes, and managements discussion and analysis of financial condition and results of
operations included in our Annual Report on Form 10-K for the year ended December 31, 2009.

As used herein, the terms
we, us, or our refer to Lease Equity Appreciation Fund II, L.P. and Subsidiary.

Business

We are a Delaware limited partnership formed on March 30, 2004 by our General Partner, LEAF Financial Corporation
(our General Partner), which manages us. Our General Partner is a subsidiary of Resource America, Inc. (RAI). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise, to evaluate, originate,
service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of October 13, 2006, we raised $60 million by selling 600,000 of our limited
partner units. We commenced operations in April 2005.

We are expected to have a nine-year life, consisting of an offering
period of up to two years, a five year reinvestment period and a subsequent maturity period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and secured loans during
the maturity period, we expect to continue to return capital to our partners as those leases and loans mature. Substantially all of our leases and loans mature by the end of 2014. We expect to enter our maturity period beginning in October 2011. We
will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.

We acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors.
Our financings are typically acquired from our General Partner. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no
difference to us between a secured loan and a full payout equipment lease. We finance business-essential equipment including, but not limited to, computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and
construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:



| |  | 500 or fewer employees;
|- |  | -----------------------



| |  | $1.0 billion or less in total assets; or
|- |  | ----------------------------------------



| |  | $100.0 million or less in total annual sales.
|- |  | ---------------------------------------------

Our principal objective is to generate regular cash distributions to our limited partners.

Our leases consist of direct financing leases and operating leases as defined by accounting principles generally accepted in the United States of America (U.S. GAAP). Under the direct
financing method of accounting, interest income (the excess of the aggregate future rentals and estimated unguaranteed residuals upon expiration of the lease over the related equipment cost) is recognized over the life of the lease using the
interest method. Under the operating method, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over its estimated useful life. Rental
income on operating leases consists primarily of monthly periodic rentals due under the terms of the leases. Generally, during the lease terms of existing operating leases, we will not recover all of the cost and related expenses of rental equipment
and, therefore, we are prepared to remarket the equipment in future years. We discontinue the recognition of revenue for leases and loans for which payments are more than 90 days past due. These assets are classified as non-accrual.



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Fund Summary

When we commenced operations in 2005, the United States economy was experiencing strong growth, an abundance of liquidity in the debt
markets and historically low credit losses. It is widely believed that the United States economy over the past few years, has suffered through the worst economic recession in over 75 years. The recession has been severe and its consequences broadly
felt. Many well-known major financial institutions failed and others had to be bailed out. Unemployment soared to generational highs and has remained at such levels. Bank lending was severely reduced and became more expensive. In recent years, banks
became much more reluctant to lend, and when they did it became more expensive to borrow. If existing loans came up for renewal and were extended, they were written for reduced amounts and at higher interest rates. Also, lenders insisted on
ever-tighter covenants around delinquencies and write-offs that made it more difficult to remain in compliance. As our primary debt facilities matured and we had to extend, renew or refinance them, our costs increased. Most significantly, we had to
reduce our debt on the leases previously financed. The money to pay down the debt had to come from lease payments and those amounts were no longer available to re-invest in new leases. The lenders higher fees and costs also had to be paid from
funds that were then unavailable to re-invest in new leases. All of this happened while losses increased. The small businesses that represent our typical leasing customer have suffered through the recession. The increase in write-offs also created
an additional burden on the cash available to re-invest.

Our losses, while greater than projected, were still modest
considering the magnitude of the economic storm. In fact, the General Partner changed its underwriting standards early in 2008, and the portfolio of leases written since then have performed as well as originally modeled. We proactively negotiated
with WestLB to prevent them from foreclosing on any collateral, or requiring a fire sale of leases that would have badly impaired capital. Additionally, our General Partner has deferred payment of fees and reimbursement of expenses totaling
approximately $17.1 million from inception through September 30, 2010, in order to preserve cash for us. When we enter our maturity phase in October 2011, we will be prohibited under the partnership agreement from acquiring new leases.

To date, limited partners have received total distributions ranging from approximately 25% to 37% of their original amount
invested, depending upon when the investment was made. Management is working to maximize the amount that can be distributed to limited partners in the future. However, we could not continue to support 8% distributions, and beginning in August 2010,
distributions were lowered to 2.0%. The July 2010 distribution was made at the 8% rate. Additionally, the General Partner will not earn additional management fees for future services.

Economic Overview

For the six months of 2010, our lease and loan portfolio
performance continued to be negatively impacted by the recession. Our lease and loan customers are typically small and mid-size companies that are especially sensitive to macro-economic trends. Several trends in particular: unemployment, housing
sales and prices, and bankruptcies continued to be problematic in the recent period.



| |  |  | As reported by the U.S. Bureau of Labor Statistics, the national unemployment rate peaked in the second half of 2009 but has continued to remain at a
high level since that time exceeding 9%, and staying above 9.4% for the past fifteen months. High unemployment results in reduced demand for goods and services which leads to decreased revenues for the small business customers in the OUR portfolio
thereby impacting their ability to repay loan or lease obligations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The National Association of Realtors reports that existing home sales fell 27.2% in July 2010 as compared to June 2010, and the July 2010 sales have
fallen 25.5% from one year earlier in July 2009. The S&P/Case-Shiller Home Price Report released in July 2010 shows that as a result of the decline in house prices caused by the recession, U.S. home prices are still at 2003 levels. The
continuing housing problem, both home sales and home prices, affects the small to mid-size business community in two ways: 1) the lack of new construction has eliminated an important source of business activity for small business; and 2) home equity
that historically has provided credit availability to small business owners has either disappeared or become scarce.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Nationwide, as reported by the Administrative Office of the U.S. courts, business bankruptcies rose 20% in the twelve month period ending June 30,
2010 as compared to the twelve month period ending June 30, 2009. Among those bankruptcies, the most severe Chapter 7 liquidation bankruptcies, increased even faster at 25%. Increased bankruptcies affect our performance in two ways: 1) small
business customers in the portfolio may default due to bankruptcy and 2) good performing small business customers may face reduced revenues due to bankruptcies among their customers thereby impacting their ability to repay loan or lease obligations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Since the start of the
recession these national economic problems have manifested themselves in our portfolio performance. Beginning in 2008, as the recession took hold of the economy delinquencies began to rise in our portfolio. Delinquencies are a precursor to losses.
However, the timing of losses will trail behind the timing of delinquencies, and the recession related losses are now being felt in our portfolio.

We are seeing delinquency trends in the portfolio that are consistent with delinquency trends reported by industry groups that track lease and loan portfolio performance. The recent delinquency trend in
our portfolio is that delinquency has stabilized, particularly in the early stage delinquency categories. This stabilizing trend is also seen in the Monthly Lease and Finance Index published by the Equipment Lease and Finance Association, and the
Thomson Reuters/PayNet Small Business Lending Index. However, despite these trends, the economy is still unsettled and periodic swings in performance may still be expected.

Finance Receivables and Asset Quality

Information about our portfolio of
leases and loans is as follows (dollars in thousands):



|                                                                              |  |                   |         |   |                  |   |         |  
|----------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                              |  | September 30,2010 |         |   | December 31,2009 |  
|Investment in leases and loans, net                                           |  | $                 | 104,478 |   |                  | $ | 159,015 |  
|                                                                              |  |                  
|Number of contracts                                                           |  |                   | 14,000  |   |                  |   | 18,000  |  
|Number of individual end users(a)                                             |  |                   | 12,300  |   |                  |   | 15,700  |  
|Average original equipment cost                                               |  | $                 | 25.2    |   |                  | $ | 27.0    |  
|Average initial term (in months)                                              |  |                   | 62      |   |                  |   | 57      |  
|                                                                              |  |                  
|States accounting for more than 10% of lease and loan portfolio:              |  |                   |         |   |                  |   |         |  
|California                                                                    |  |                   | 10      | % |                  |   | 13      | %
|                                                                              |  |                  
|Types of equipment accounting for more than 10% of lease and loan portfolio:  |  |                   |         |   |                  |   |         |  
|Industrial Equipment                                                          |  |                   | 27      | % |                  |   | 27      | %
|Medical Equipment                                                             |  |                   | 18      | % |                  |   | 18      | %
|Office Equipment                                                              |  |                   | 11      | % |                  |   | 11      | %
|Water Purification                                                            |  |                   | 10      | % |                  |   | 0       | %
|                                                                              |  |                  
|Types of businesses accounting for more than 10% of lease and loan portfolio: |  |                   |         |   |                  |   |         |  
|Services                                                                      |  |                   | 45      | % |                  |   | 45      | %
|Retail Trade                                                                  |  |                   | 13      | % |                  |   | 13      | %
|Manufacturing                                                                 |  |                   | 12      | % |                  |   | 12      | %



|(a) | Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 1% of our
portfolio based on original cost of the equipment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We utilize debt facilities in addition to our equity to fund
the acquisitions of lease portfolios. As of September 30, 2010 and December 31, 2009, our outstanding bank debt was $99.5 million and $152.0 million, respectively. As is more fully discussed in the Liquidity and Capital Resources
section, our primary revolving debt facility has expired effective June 30, 2010. Unless this facility is renewed, we cannot borrow under this agreement.



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Portfolio Performance

The performance of our lease and loan portfolio is a measure of our General Partners underwriting and collection
standards, skills policies and procedures and is an indication of asset quality. The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to
non-performance or impairment (dollars in thousands):



|                                                                                                    |  |                                                  |         |   |                                          |   |         |        |  |   |         |   |  |      |     |    |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------- | - | ---------------------------------------- | - | ------- | ------ |  | - | ------- | - |  | ---- | --- | -- |  | - | ------- | -
|                                                                                                    |  | As of and for theNine Months Ended
September 30, |         |   | As of and for theYear Ended
December 31, |  
|                                                                                                    |  |                                                  |         |   |                                          |   |         | Change |  |  
|                                                                                                    |  | 2010                                             |         |   | 2009                                     |   |         | $      |  |   | %       |   |  | 2009 |    
|Investment in leases and loans before allowance for credit losses                                   |  | $                                                | 109,818 |   |                                          | $ | 197,605 |        |  | $ | (87,787 | ) |  |      | (44 | )% |  | $ | 170,395 |  
|Less: allowance for credit losses                                                                   |  |                                                  | 5,340   |   |                                          |   | 7,250   |        |  |   | (1,910  | ) |  |      | (26 | )% |  |   | 11,380  |  
|                                                                                                    |  |                                                  |         |   |                                          |   |         |        |  |   |         |   |  |      |     |    |  |   |         |  
|Investment in leases and loans, net                                                                 |  | $                                                | 104,478 |   |                                          | $ | 190,355 |        |  | $ | (85,877 | ) |  |      | (45 | )% |  | $ | 159,015 |  
|                                                                                                    |  |                                                  |         |   |                                          |   |         |        |  |   |         |   |  |      |     |    |  |   |         |  
|                                                                                                    |  |                                                  |         |   |                                         
|Weighted average investment in direct financing leases and loans before allowance for credit losses |  | $                                                | 137,006 |   |                                          | $ | 231,308 |        |  | $ | (94,302 | ) |  |      | (41 | )% |  | $ | 218,902 |  
|Non-performing assets                                                                               |  | $                                                | 6,731   |   |                                          | $ | 18,725  |        |  | $ | (11,994 | ) |  |      | (64 | )% |  | $ | 14,994  |  
|Charge-offs, net of recoveries                                                                      |  | $                                                | 12,102  |   |                                          | $ | 7,262   |        |  | $ | 4,840   |   |  |      | 67  | %  |  | $ | 12,331  |  
|As a percentage of finance receivables:                                                             |  |                                                  |         |   |                                          |   |         |        |  |   |         |   |  |      |     |    |  |   |         |  
|Allowance for credit losses                                                                         |  |                                                  | 4.86    | % |                                          |   | 3.67    | %      |  |   |         |   |  |      |     |    |  |   | 6.68    | %
|Non-performing assets                                                                               |  |                                                  | 6.13    | % |                                          |   | 9.48    | %      |  |   |         |   |  |      |     |    |  |   | 8.80    | %
|As a percentage of weighted average finance receivables:                                            |  |                                                  |         |   |                                          |   |         |        |  |   |         |   |  |      |     |    |  |   |         |  
|Charge-offs, net of recoveries                                                                      |  |                                                  | 8.83    | % |                                          |   | 3.14    | %      |  |   |         |   |  |      |     |    |  |   | 5.63    | %



20



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We manage our credit
risk by adhering to strict credit policies and procedures, and closely monitoring our receivables. Our General Partner, the servicer of our leases and loans, responded to the current economic recession in part, by implementing early intervention
techniques in collection procedures. Our General Partner has also increased its credit standards and limited the amount of business we do with respect to certain industries, geographic locations and equipment types. Because of the current scarcity
of credit available to small and mid size businesses, we have been able to increase our credit standards without reducing the interest rate we charge on our leases and loans.

Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment
finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration
analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge off to the allowance those financings which are in default and for which management has determined the
probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.

The equipment we finance includes computers, copiers, office furniture, water filtration systems, machinery used in
manufacturing and construction, medical equipment and telecommunications equipment. We focus on financing equipment used by small to mid-sized businesses. The current economic recession in the US has made it more difficult for some of our customers
to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue until the US economy recovers. The increase in delinquencies, as
well as the current economic trends, has caused us to conclude that a greater allowance for credit loss is necessary.

Critical Accounting
Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of
long-lived assets and the fair value and effectiveness of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal
2009 under Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies and Estimates. There have been no material changes to these policies through September 30,
2010.



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Results of Operations

Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009



|                                                                 |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   
|---------------------------------------------------------------- |  | ---- | ------ | - | ------------------- | - | ------ | - |  |  | ------ | - |  |  | ---- | --
|                                                                 |  |      |        |   | Increase (Decrease) |  
|                                                                 |  | 2010 |        |   | 2009                |   |        | $ |  |  | %      |  
|Revenues:                                                        |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   
|Interest on equipment financings                                 |  | $    | 2,411  |   |                     | $ | 4,002  |   |  |  | (1,591 | ) |  |  | (40  | )%
|Rental income                                                    |  |      | 346    |   |                     |   | 652    |   |  |  | (306   | ) |  |  | (47  | )%
|Gains (losses) on sales of equipment and lease dispositions, net |  |      | 107    |   |                     |   | (170   | ) |  |  | 277    |   |  |  | (163 | )%
|Other                                                            |  |      | 315    |   |                     |   | 451    |   |  |  | (136   | ) |  |  | (30  | )%
|                                                                 |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   
|                                                                 |  |      | 3,179  |   |                     |   | 4,935  |   |  |  | (1,756 | ) |  |  | (36  | )%
|                                                                 |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   
|                                                                 |  |      |        |  
|Expenses:                                                        |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   
|Interest expense                                                 |  |      | 1,796  |   |                     |   | 3,295  |   |  |  | (1,499 | ) |  |  | (45  | )%
|Interest expense - related party                                 |  |      | 245    |   |                     |   |       |   |  |  | 245    |   |  |  |     | % 
|Depreciation on operating leases                                 |  |      | 272    |   |                     |   | 510    |   |  |  | (238   | ) |  |  | (47  | )%
|Provision for credit losses                                      |  |      | 1,652  |   |                     |   | 4,335  |   |  |  | (2,683 | ) |  |  | (62  | )%
|General and administrative expenses                              |  |      | 288    |   |                     |   | 529    |   |  |  | (241   | ) |  |  | (46  | )%
|Administrative expenses reimbursed to affiliate                  |  |      | 335    |   |                     |   | 547    |   |  |  | (212   | ) |  |  | (39  | )%
|Management fees to affiliate                                     |  |      |       |   |                     |   | 695    |   |  |  | (695   | ) |  |  | (100 | )%
|                                                                 |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   
|                                                                 |  |      | 4,588  |   |                     |   | 9,911  |   |  |  | (5,323 | ) |  |  |      |   
|                                                                 |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   
|Net loss                                                         |  | $    | (1,409 | ) |                     | $ | (4,976 | ) |  |  | 3,567  |   |  |  |      |   
|                                                                 |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   
|Net loss allocated to limited partners                           |  | $    | (1,395 | ) |                     | $ | (4,926 | ) |  |  | 3,531  |   |  |  |      |   
|                                                                 |  |      |        |   |                     |   |        |   |  |  |        |   |  |  |      |   

As discussed in more specific detail below, the overall reductions in both revenues and expenses
were caused by the significant decrease in the size of the leases and loans portfolio as well as the significant reduction in debt in the third quarter of 2010 as compared to the third quarter of 2009.

The decrease in total revenues was primarily attributable to the following:



| |  |  | a decrease in interest on equipment financings. Our weighted average net investment in financing assets decreased to $118.1 million for the three
months ended September 30, 2010 as compared to $207.8 million for the three months ended September 30, 2009, a decrease of $89.7 million (43%).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in rental income which was principally the result of a decrease in our investment in operating leases in the 2010 period compared to the
2009 period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

These decreases in total revenue were partially offset by the following:



| |  |  | an increase in gains on sales of equipment. Gains or losses on sales of equipment may vary significantly from period to period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------

The decrease in total expenses was primarily attributable to the following:



| |  |  | a decrease in interest expense primarily due to a decrease in average debt outstanding. Weighted average borrowings for three months ended
September 30, 2009 were $109.1 million as compared to $190.9 million as of September 30, 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in depreciation on operating leases directly related to a decrease in our investment in operating leases.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in management fees to affiliate attributable to the decrease in our portfolio of equipment financing assets, since management fees are paid
based on lease payments received. Beginning December 1, 2009, the General Partner waived asset management fees. In addition, approximately $502,000 of management fees were waived for the three months ended September 30, 2010. It is
expected that the General Partner will also waive all future management fees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in general and administrative expenses and administrative expenses reimbursed to affiliates due to the decrease in the size of our
portfolio, partially offset by increased legal costs associated with collection efforts.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The net loss per
limited partner unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2010 and 2009 was $2.35 and $8.31, respectively, based on a weighted average number of limited partner units outstanding of
592,809 and 592,809, respectively.

Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009



|                                                         |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   
|-------------------------------------------------------- |  | ---- | ------ | - | ------------------- | - | ------ | - |  |  | ------- | - |  |  | ---- | --
|                                                         |  |      |        |   | Increase (Decrease) |  
|                                                         |  | 2010 |        |   | 2009                |   |        | $ |  |  | %       |  
|Revenues:                                                |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   
|Interest on equipment financings                         |  | $    | 8,130  |   |                     | $ | 14,017 |   |  |  | (5,887  | ) |  |  | (42  | )%
|Rental income                                            |  |      | 1,318  |   |                     |   | 2,168  |   |  |  | (850    | ) |  |  | (39  | )%
|Losses on sales of equipment and lease dispositions, net |  |      | (316   | ) |                     |   | (146   | ) |  |  | (170    | ) |  |  | 116  | % 
|Other                                                    |  |      | 1,554  |   |                     |   | 1,312  |   |  |  | 242     |   |  |  | 18   | % 
|                                                         |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   
|                                                         |  |      | 10,686 |   |                     |   | 17,351 |   |  |  | (6,665  | ) |  |  | (38  | )%
|                                                         |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   
|                                                         |  |      |        |  
|Expenses:                                                |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   
|Interest expense                                         |  |      | 6,735  |   |                     |   | 10,089 |   |  |  | (3,354  | ) |  |  | (33  | )%
|Interest expense - related party                         |  |      | 526    |   |                     |   |       |   |  |  | 526     |   |  |  |     | % 
|Depreciation on operating leases                         |  |      | 1,026  |   |                     |   | 1,786  |   |  |  | (760    | ) |  |  | (43  | )%
|Provision for credit losses                              |  |      | 6,062  |   |                     |   | 8,742  |   |  |  | (2,680  | ) |  |  | (31  | )%
|General and administrative expenses                      |  |      | 1,310  |   |                     |   | 2,104  |   |  |  | (794    | ) |  |  | (38  | )%
|Administrative expenses reimbursed to affiliate          |  |      | 1,297  |   |                     |   | 1,923  |   |  |  | (626    | ) |  |  | (33  | )%
|Management fees to affiliate                             |  |      | (215   | ) |                     |   | 2,281  |   |  |  | (2,496  | ) |  |  | (109 | )%
|                                                         |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   
|                                                         |  |      | 16,741 |   |                     |   | 26,925 |   |  |  | (10,184 | ) |  |  |      |   
|                                                         |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   
|Net loss                                                 |  | $    | (6,055 | ) |                     | $ | (9,574 | ) |  |  | 3,519   |   |  |  |      |   
|                                                         |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   
|Net loss allocated to limited partners                   |  | $    | (5,994 | ) |                     | $ | (9,478 | ) |  |  | 3,484   |   |  |  |      |   
|                                                         |  |      |        |   |                     |   |        |   |  |  |         |   |  |  |      |   

As discussed in more specific detail below, the overall reductions in both revenues and expenses
were caused by the significant decrease in the size of the leases and loans portfolio as well as the significant reduction in debt in of the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009.

The decrease in total revenues was primarily attributable to the following:



| |  |  | a decrease in interest on equipment financings. Our weighted average net investment in financing assets decreased to $137.0 million for the nine months
ended September 30, 2010 as compared to $231.3 million for the nine months ended September 30, 2009, a decrease of $94.3 million (41%).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in rental income which was principally the result of a decrease in our investment in operating leases in the 2010 period compared to the
2009 period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

These decreases in total revenue were partially offset by the following:



| |  |  | an increase in losses on sales of equipment. Gains or losses on sales of equipment may vary significantly from period to period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

The decrease in total expenses was primarily attributable to the following:



| |  |  | a decrease in interest expense primarily due to a decrease in average debt outstanding. Weighted average borrowings for the nine months ended
September 30, 2010 were $126.8 million as compared to $217.2 million for the nine months ended September 30, 2009.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in depreciation on operating leases directly related to a decrease in our investment in operating lease
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in management fees to affiliate attributable to the decrease in our portfolio of equipment financing assets, since management fees are paid
based on lease payments received. Beginning December 1, 2009, the General Partner waived asset management fees. In addition, approximately $502,000 million of management fees were waived for the nine months ended September 30, 2010 and
certain management fee accruals recorded previously in 2010 were reversed. It is expected that the General Partner will also waive all future management fees.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in general and administrative expenses and administrative expenses reimbursed to affiliates due to the decrease in the size of our
portfolio, partially offset by increased legal costs associated with collection efforts.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We provide for credit
losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. Our allowance for credit losses has decreased to $5.3 million as of September 30, 2010 compared to $7.3 million as of
September 30, 2009, which resulted in a decrease in non-performing assets as a percentage of finance receivables to 6.13% as of September 30, 2010 as compared to 9.48% as of September 30, 2009.

The net loss per limited partner unit, after the net loss allocated to our General Partner, for the nine months ended September 30,
2010 and 2009 was $10.11 and $15.98, respectively, based on a weighted average number of limited partner units outstanding of 592,809 and 593,082, respectively.

Liquidity and Capital Resources

General

Our major source of liquidity is obtained by the collection of lease and loan payments after payments of debt principal and interest on
debt. Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners. In addition to cash generated from operations, we plan to meet our cash requirements
through borrowings under credit facilities.

The following table sets forth our sources and uses of cash for the periods
indicated (in thousands):



|                                                    |  |                                |         |   |      |  |         |  
|--------------------------------------------------- |  | ------------------------------ | ------- | - | ---- |  | ------- | -
|                                                    |  | Nine Months EndedSeptember
30, |        
|                                                    |  | 2010                           |         |   | 2009 | 
|Net cash (used in) provided by operating activities |  |                                | (1,858  | ) |      |  | 9,474   |  
|Net cash provided by investing activities           |  |                                | 47,133  |   |      |  | 64,964  |  
|Net cash used in financing activities               |  |                                | (45,233 | ) |      |  | (74,534 | )
|                                                    |  |                                |         |   |      |  |         |  
|Increase (decrease) in cash                         |  |                                | 42      |   |      |  | (96     | )
|                                                    |  |                                |         |   |      |  |         |  

During the nine months ended September 30, 2010, cash increased by $42,000 which was primarily due to
net proceeds from leases and loans of $47.0 million and an increase in borrowing on notes payable from related party of $8.0 million, partially offset by a net debt repayment of $52.5 million and distributions to our partners of $2.2 million. As a
result of increased delinquencies, the amount of borrowing availability under our leases and loans was reduced, resulting in the net debt repayment.

For the period August 2009 through February 2010, we suspended monthly distributions to our partners in order to increase liquidity to enable us to renew our WestLB debt agreement. We resumed the payment
of monthly distributions to our partners in March of 2010. Ongoing distributions are dependent on us having sufficient cash and liquidity to make such distributions.

Partners distributions paid for the nine months ended September 30, 2010 and 2009 were $2.2 million and $2.8 million respectively. Prior to August 1, 2009, distributions to limited
partners were paid at a rate of 8% per annum of invested capital. Cumulative partner distributions paid from our inception to September 30, 2010 were approximately $17.5 million.

Future cash distributions are dependent on our performance and are impacted by a number of factors which include: our ability to obtain
and maintain debt financing on acceptable terms to build and maintain our equipment finance portfolio; lease and loan defaults by our customers; and prevailing economic conditions. Due to the prolonged economic recession we continue to see a
scarcity of available debt on terms beneficial to the partnership and higher than expected and loan defaults resulting in poorer fund performance than projected.

Borrowings

Our borrowing relationships each require the pledging of
eligible leases and loans to secure amounts advanced. Borrowings outstanding under our credit facilities are as follows as of September 30, 2010 (in thousands):



|                                    |  |      |           |  |                |   |         |                   |  |   |                 |  |  |                         |     |   |  |   |         | 
|----------------------------------- |  | ---- | --------- |  | -------------- | - | ------- | ----------------- |  | - | --------------- |  |  | ----------------------- | --- | - |  | - | ------- | 
|                                    |  | Type |           |  | FacilityAmount |   |         | AmountOutstanding |  |   | AmountAvailable |  |  | Amount ofCollateral (1) |    
|WestLB (2)                          |  |      | Revolving |  |                | $ | 125,000 |                   |  | $ | 63,081          |  |  |                         | (3  | ) |  | $ | 73,367  | 
|Series 2007-Term Securitization (4) |  |      | Term      |  |                |   | 36,437  |                   |  |   | 36,437          |  |  |                         | N/A |   |  |   | 51,495  | 
|                                    |  |      |           |  |                |   |         |                   |  |   |                 |  |  |                         |     |   |  |   |         | 
|                                    |  |      |           |  |                | $ | 161,437 |                   |  | $ | 99,518          |  |  | $                       |    |   |  | $ | 124,862 | 
|                                    |  |      |           |  |                |   |         |                   |  |   |                 |  |  |                         |     |   |  |   |         | 



24



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|(1) | Recourse under these facilities is limited to the amount of collateral pledged.
|--- | -------------------------------------------------------------------------------

|(2) | Availability under this credit facility is subject to having eligible leases or loans to pledge as collateral, compliance with covenants and the borrowing base formula.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The WestLB revolving line of credit is collateralized by specific lease receivables and related equipment, with a 1% credit reserve of the outstanding line of credit.
Interest on the borrowings prior to March 2009 are calculated at LIBOR plus 1.20% per annum. Borrowings under this facility after March 2009 are at a rate of LIBOR plus 2.50% per annum. To mitigate fluctuations in interest rates, we
entered into interest rate swap agreements, which terminate on various dates ranging from July 2013 to August 2015. As of September 30, 2010, the interest rate swap agreements fixed the interest rate on this facility at 5.7%. Interest and
principal are due as payments are received under the financings. This credit facility expired on June 30, 2010 and renewal discussions are ongoing. Unless renewal occurs, there are no additional borrowings available on this facility. If this
facility is not renewed, we would not be required to make immediate full repayment. Rather, we would continue to repay the principal and interest on any outstanding debt as payments are received on the underlying leases and loans pledged as
collateral. Recourse under this facility is limited to the amount of collateral pledged.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The original amount borrowed at June 2007 was $276.8 million. A term note securitization is a one-time funding that pays down over time without any ability for us to
draw down additional amounts.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In March 2010, we borrowed $8.0 million from Resource Capital Corporation
(RCC), a related entity of ours through common management with RAI. The note bears interest at 12% per annum. Principal is payable monthly at one-sixtieth of one percent and interest is payable quarterly. Any unpaid principal is due
on March 3, 2011. These funds were used as part of our ongoing efforts to reduce debt owed to WestLB, to reduce the balance owed to our general partner and to purchase more leases and loans in an effort to improve our operating results.

The Fund is subject to certain financial covenants related to its debt facilities. These covenants are related to such
things as minimum tangible net worth, maximum leverage ratios and portfolio delinquency. The minimum tangible net worth covenants measure its equity adjusted for intangibles and amounts due to the Funds General Partner. The maximum
leverage covenants restrict the amount that we can borrow based on a ratio of its total debt compared to its net worth. The portfolio performance covenants generally provide that the Fund would be in default if a specified percentage of its
portfolio of leases and loans was delinquent in payment beyond acceptable grace periods.

In addition, our debt facilities
include financial covenants covering affiliated entities responsible for servicing its portfolio. These covenants exist to provide the lenders with information about the financial viability of the entities that service its portfolio. These entities
include us, the General Partner and certain other affiliates involved in the sourcing and servicing of its portfolio. These covenants are similar in nature to the Funds covenants and are related to such things as the entitys minimum
tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance of the debt terms of all of the General Partners managed entities.

As of September 30, 2010, we were in breach of several covenants under our debt facility with WestLB. Additionally, our affiliate responsible for servicing our portfolio incurred a breach of the
minimum net worth covenant under the terms of the WestLB debt facility.

In conjunction with the ongoing renewal discussions,
we have requested waivers or amendments from WestLB with respect to these breaches. WestLB has various remedies under its loan agreement such as allowing repayment of the outstanding balance as payments are received on the underlying leases and
loans or selling the pledged leases and loans in a commercially reasonable manner. Although we expect to obtain a renewal of this facility and waivers or amendments to the covenants in the loan agreement with WestLB, there can be no assurance
that such waiver or amendment will be executed.

If we do not meet the requirements of the covenants in the future, a default
could occur that would have an adverse effect on our operations and could force us to liquidate all or a portion of our portfolio securing our debt facilities. If required, a sale of a portfolio could be at prices lower than its carrying value,
which could result in losses and reduce our income and distributions to our partners.

Liquidity Summary

We use debt to acquire leases and loans. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan
becomes delinquent we must repay our lender, even though our customer has not paid us. Higher-than-expected lease and loan defaults will reduce our liquidity.

Our liquidity has been and could be further adversely affected by higher than expected equipment lease defaults, which results in a loss of revenues. These losses may adversely affect our ability to make
distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. In evaluating our allowance for losses on uncollectible leases, we consider
our contractual delinquencies, economic conditions and trends, lease portfolio



25



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##### Table of Contents

characteristics and our General Partners managements prior experience with similar lease assets. At September 30, 2010, our credit evaluation indicated a need for an allowance
for credit losses of $5.3 million. As our lease portfolio ages, and if the economy in the United States deteriorates even further or the recession continues for a substantial period of time, we anticipate the need to increase our allowance for
credit losses.

The current tightening of the credit markets has and may continue to adversely affect our liquidity,
particularly our ability to obtain or renew debt financing needed to execute our investment strategies. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If our banks do not renew a
revolving facility upon maturity, the debt facility would convert to a term facility and we would not be able to borrow additional amounts under the line of credit. A term debt facility is a loan that is contractually repaid over a period of time.
If we are unable to obtain new debt or renew existing facilities that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.

To date, we have been successful in obtaining new debt financing and either extending or refinancing our credit facilities prior to their
maturities; however, there can be no assurance that we will be able to continue to do so, as such activities are dependent on many factors beyond our control, including general economic and credit conditions. We continue to seek additional sources
of financing, including expanded bank financing that will enable us to originate investments and generate income while preserving capital. We expect that future financings may be at higher interest rates with lower leverage. As a result, our
profitability may be negatively impacted if we are unable to increase our lease and loan rates to offset increases in borrowing rates.

Legal Proceedings

We
are a party to various routine legal proceedings arising in the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial
condition or results of operations.

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of losses arising from changes in values of financial instruments. We are exposed to market risks
associated with changes in interest rates and our earnings may fluctuate with changes in interest rates. The lease assets we originate are almost entirely fixed-rate. Accordingly, we seek to finance these assets with fixed interest rate debt. At
September 30, 2010, our outstanding bank debt totaled $99.5 million which consisted of variable rate debt. To mitigate interest rate risk on the variable rate debt, we employ a hedging strategy using derivative financial instruments such as
interest rate swaps, which fixes the interest rates at 5.7% and 6.0% for the WestLB and Series 2007-term securitization, debt facilities, respectively. At September 30, 2010, the notional amounts of the 23 interest rate swaps were $182.5
million. The interest rate swap agreements terminate on various dates ranging from September 2011 to August 2015.

The
following sensitivity analysis table shows, at September 30, 2010, the estimated impact on the fair value of our interest rate-sensitive investments and liabilities of changes in interest rates, assuming rates instantaneously fall 100 basis
points and rise 100 basis points (dollars in thousands):



|                                  |  |                                    |        |   |           |   |        |                                    |  |   |        |   
|--------------------------------- |  | ---------------------------------- | ------ | - | --------- | - | ------ | ---------------------------------- |  | - | ------ | --
|                                  |  | Interest ratesfall 100 basispoints |        |   | Unchanged |   |        | Interest ratesrise 100 basispoints | 
|Hedging instruments               |  |                                    |        |   |           |   |        |                                    |  |   |        |   
|Fair value                        |  | $                                  | (3,795 | ) |           | $ | (3,168 | )                                  |  | $ | (2,539 | ) 
|Change in fair value              |  |                                    | (627   | ) |           |   |       |                                    |  |   | 629    |   
|Change as a percent of fair value |  |                                    | 20     | % |           |   |       |                                    |  |   | (20    | )%

It is important to note
that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when
interest rates change beyond 100 basis points from current levels. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to
future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and
adverse to our partners.



26



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ITEM 4  CONTROLS AND PROCEDURES

Disclosure Controls

We maintain disclosure controls and procedures that
are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our General Partners chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as
of the end of the period covered by this report. Based upon that evaluation, our General Partners chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.



27



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ITEM 6  EXHIBITS



|           |  |                                                                                                                                                                                                                                                                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                  
|3.1        |  | Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (1)                                                                                                                                                                                                                                                           
|           | 
|3.2        |  | Amended Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P.(2)                                                                                                                                                                                                                                                    
|           | 
|3.3        |  | Amended and Restated Agreement of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (4)                                                                                                                                                                                                                                        
|           | 
|4.1        |  | Forms of letters sent to limited partners confirming their investment (1)                                                                                                                                                                                                                                                                    
|           | 
|10.1       |  | Origination & Servicing Agreement among LEAF Financial Corporation, Lease Equity Appreciation Fund II, L.P. and LEAF Funding, Inc. dated April 15, 2005 (3)                                                                                                                                                                                  
|           | 
|10.2       |  | Secured Loan Agreement dated as of June 1, 2005 with LEAF Fund II, LLC as Borrower, LEAF Funding, Inc. as Originator, Lease Equity Appreciation Fund II, L.P. as Seller, LEAF
Financial Corporation as Servicer, U.S. Bank National Association, as Collateral Agent and Securities Intermediary and WestLB AG, New York Branch as Lender (3)
|           | 
|10.3       |  | First Amendment to WestLB AG, New York Branch, Secured Loan Agreement (5)                                                                                                                                                                                                                                                                    
|           | 
|10.4       |  | Second Amendment to WestLB AG, New York Branch, Secured Loan Agreement (6)                                                                                                                                                                                                                                                                   
|           | 
|10.5       |  | Third Amendment to WestLB AG, New York Branch, Secured Loan Agreement (7)                                                                                                                                                                                                                                                                    
|           | 
|10.6       |  | Fifth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (8)                                                                                                                                                                                                                                                                    
|           | 
|10.7       |  | Sixth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (9)                                                                                                                                                                                                                                                                    
|           | 
|10.8       |  | Indenture among LEAF II Receivables Funding, LLC as issuer, and U.S. Bank National Association as trustee and custodian (9)                                                                                                                                                                                                                  
|           | 
|10.9       |  | Seventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)                                                                                                                                                                                                                                                                 
|           | 
|10.10      |  | Eighth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)                                                                                                                                                                                                                                                                  
|           | 
|10.11      |  | Ninth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)                                                                                                                                                                                                                                                                   
|           | 
|10.12      |  | Tenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)                                                                                                                                                                                                                                                                   
|           | 
|10.13      |  | Eleventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)                                                                                                                                                                                                                                                                
|           | 
|10.14      |  | Twelfth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)                                                                                                                                                                                                                                                                 
|           | 
|10.15      |  | Thirteenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)                                                                                                                                                                                                                                                              
|           | 
|10.16      |  | Fourteenth Amendment to West LB AG, New York Branch, Secured Loan Agreement (12)                                                                                                                                                                                                                                                             
|           | 
|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 Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            
|           | 
|32.2       |  | Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            



|(1) | Filed previously on June 17, 2004 as an exhibit to our Registration Statement and by this reference incorporated herein.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(2) | Filed previously on September 7, 2004 in Pre-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed previously as an exhibit to our Form 10-Q for the quarter ended June 30, 2005 and by this reference incorporated herein.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed previously on December 27, 2005 as Appendix A Post-Effective Amendment No. 1 to our Registration Statement and by this reference incorporated herein.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



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|(5) | Filed previously as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and by this reference incorporated herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and by this reference incorporated herein.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and by this reference incorporated herein.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 and by this reference incorporated herein.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and by this reference incorporated herein.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009 and by this reference incorporated herein.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.



|                  |  |                                         |  |                                     
|----------------- |  | --------------------------------------- |  | ------------------------------------
|                  |  | LEASE EQUITY APPRECIATION FUND II, L.P.
|                  | 
|                  |  | Delaware Limited Partnership           
|                  |  |                                        
|                  |  | By:                                     |  | LEAF Financial Corporation          
|                  |  |                                        
|November 15, 2010 |  | By:                                     |  | /s/ CRIT S. DEMENT                  
|                  |  |                                         |  | CRIT S. DEMENT                      
|                  |  |                                         |  | Chairman and Chief Executive Officer
|                  |  |                                        
|November 15, 2010 |  | By:                                     |  | /s/ ROBERT K. MOSKOVITZ             
|                  |  |                                         |  | ROBERT K. MOSKOVITZ                 
|                  |  |                                         |  | Chief Financial Officer             



30