##### 



United States
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 333-116595
 LEASE EQUITY APPRECIATION FUND II, L.P.
  Delaware
    
    20-1056194(State or other jurisdiction ofincorporation or organization)
    
    (I.R.S. Employer Identification No.)
 
 
 þ o
  o o þ
  o þ




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2007 (unaudited) and December 31, 2006
    
    
    3Consolidated Statements of Operations Three and Nine Months Ended September 30,
2007 and 2006 (unaudited)
    
    
    4Consolidated Statement of Partners Capital and Comprehensive Loss
For the Nine Months Ended September 30, 2007 (unaudited)
    
    
    5Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2007 and 2006 (unaudited)
    
    
    6Notes to Consolidated Financial Statements  September 30, 2007 (unaudited)
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22ITEM 4. Controls and Procedures
    
    
    22PART II OTHER INFORMATIONITEM 6. Exhibits
    
    
    22SIGNATURES
    
    
    23
 2




---



##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (audited)ASSETSCash
    
    $
    156
    
    
    $
    14,210Restricted cash
    
    
    28,008
    
    
    
    2,574Due from lockbox
    
    
    609
    
    
    
    4,565Accounts receivable
    
    
    466
    
    
    
    475Investment in direct financing leases and notes, net
    
    
    348,931
    
    
    
    306,431Investment in operating leases (net of accumulated depreciation of $6,815 and
$3,577)
    
    
    12,041
    
    
    
    14,439Fair value of interest rate swap
    
    
    
    
    
    
    1,803Other assets
    
    
    3,752
    
    
    
    1,845$
    393,963
    
    
    $
    346,342LIABILITIES AND PARTNERS CAPITALLiabilities:Debt
    
    $
    337,876
    
    
    $
    291,118Accounts payable and accrued expenses
    
    
    1,281
    
    
    
    1,081Security deposits
    
    
    4,615
    
    
    
    3,020Fair value of interest rate swap
    
    
    3,465
    
    
    
    Due to related parties, net
    
    
    3,359
    
    
    
    644Total liabilities
    
    
    350,596
    
    
    
    295,863Partners Capital
    
    
    43,367
    
    
    
    50,479$
    393,963
    
    
    $
    346,342
  3




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except unit data)
 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Income:Interest on equipment financings
    
    $
    6,501
    
    
    $
    2,153
    
    
    $
    18,098
    
    
    $
    4,460Rental income
    
    
    1,439
    
    
    
    1,082
    
    
    
    4,346
    
    
    
    2,487Gain on sale of equipment and lease dispositions, net
    
    
    870
    
    
    
    144
    
    
    
    1,272
    
    
    
    181Other
    
    
    772
    
    
    
    165
    
    
    
    1,732
    
    
    
    3629,582
    
    
    
    3,544
    
    
    
    25,448
    
    
    
    7,490Expenses:Interest expense
    
    
    4,998
    
    
    
    1,508
    
    
    
    13,591
    
    
    
    3,179Depreciation on operating leases
    
    
    1,183
    
    
    
    890
    
    
    
    3,624
    
    
    
    2,062Provision for credit losses
    
    
    970
    
    
    
    223
    
    
    
    2,672
    
    
    
    505Management fee to related party
    
    
    899
    
    
    
    287
    
    
    
    2,688
    
    
    
    609Administrative expense reimbursed to related party
    
    
    435
    
    
    
    203
    
    
    
    1,225
    
    
    
    494General and administrative expenses
    
    
    500
    
    
    
    137
    
    
    
    1,794
    
    
    
    3698,985
    
    
    
    3,248
    
    
    
    25,594
    
    
    
    7,218Net income (loss)
    
    $
    597
    
    
    $
    296
    
    
    $
    (146
    )
    
    $
    272Weighted average number of limited partner units outstanding during the
period
    
    
    598,633
    
    
    
    454,979
    
    
    
    599,483
    
    
    
    293,140Net income (loss) attributed to limited partner units unit
    
    $
    0.99
    
    
    $
    0.64
    
    
    $
    (0.24
    )
    
    $
    0.92
  4




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
 AND COMPREHENSIVE LOSS
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
 (in thousands, except unit data)
 (unaudited)
 AccumulatedGeneral
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Partners
    
    
    ComprehensivePartner
    
    
    Limited Partners
    
    
    Comprehensive
    
    
    Capital
    
    
    LossAmount
    
    
    Units
    
    
    Amount
    
    
    Income (loss)
    
    
    Total
    
    
    TotalBalance, January 1, 2007
    
    $
    (32
    )
    
    
    600,000
    
    
    $
    48,708
    
    
    $
    1,803
    
    
    $
    50,479Cash distributions paid
    
    
    (36
    )
    
    
    
    
    
    
    (3,585
    )
    
    
    
    
    
    
    (3,621
    )Redemption of Limited Partnership units
    
    
    
    
    
    
    (2,055
    )
    
    
    (205
    )
    
    
    
    
    
    
    (205
    )Net(loss)
    
    
    (1
    )
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    (146
    )
    
    $
    (146
    )Amortization of gain on financial
derivative derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127
    )
    
    
    (127
    )
    
    
    (127
    )Unrealized loss on hedging derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,013
    )
    
    
    (3,013
    )
    
    
    (3,013
    )Balance, September 30, 2007
    
    $
    (69
    )
    
    
    597,945
    
    
    $
    44,773
    
    
    $
    (1,337
    )
    
    $
    43,367
    
    
    $
    (3,286
    )
  5




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (146
    )
    
    $
    272Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Gain on sale of equipment and lease dispositions net
    
    
    (1,272
    )
    
    
    (181
    )Depreciation
    
    
    3,624
    
    
    
    2,062Provision for credit losses
    
    
    2,672
    
    
    
    505Amortization of deferred financing costs
    
    
    192
    
    
    
    46Amortization of gain on financial derivative
    
    
    (127
    )
    
    
    Changes in operating assets and liabilities:Due from lockbox
    
    
    3,956
    
    
    
    (1,108
    )Accounts receivable
    
    
    9
    
    
    
    (265
    )Other assets
    
    
    250
    
    
    
    (1,163
    )Accounts payable and accrued expenses
    
    
    200
    
    
    
    777Due to related parties, net
    
    
    2,715
    
    
    
    1,172Net cash provided by operating activities
    
    
    12,073
    
    
    
    2,117Cash flows from investing activities:Investment in direct financing leases and notes
    
    
    (129,216
    )
    
    
    (114,409
    )Investment in equipment under operating lease, net
    
    
    (1,236
    )
    
    
    (9,699
    )Proceeds from direct financing leases net of earned income
    
    
    85,327
    
    
    
    22,473Security deposits, net
    
    
    1,595
    
    
    
    2,147Net cash used in investing activities
    
    
    (43,530
    )
    
    
    (99,488
    )Cash flows from financing activities:Proceeds from term securitization
    
    
    276,849
    
    
    
    Repayment of term securitization
    
    
    (34,634
    )
    
    
    Proceeds from debt
    
    
    125,350
    
    
    
    83,606Repayment of debt
    
    
    (320,807
    )
    
    
    (15,610
    )Increase in restricted cash
    
    
    (25,434
    )
    
    
    (747
    )Deferred financing costs
    
    
    (2,349
    )
    
    
    (257
    )Proceeds from financial derivative
    
    
    2,254
    
    
    
    Limited Partners capital contribution
    
    
    
    
    
    
    46,943Payment of offering costs incurred for the sale of limited partnership units
    
    
    
    
    
    
    (6,203
    )Redemption of Limited Partnership units
    
    
    (205
    )
    
    
    Cash distributed to partners
    
    
    (3,621
    )
    
    
    (1,459
    )Net cash provided by financing activities
    
    
    17,403
    
    
    
    106,273(Decrease) increase in cash
    
    
    (14,054
    )
    
    
    8,902Cash, beginning of period
    
    
    14,210
    
    
    
    1,034Cash, end of period
    
    $
    156
    
    
    $
    9,936
  6




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2007
 (unaudited)
 NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
      NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Classification
  7




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Use of Estimates
      Concentration of Credit Risk
  Revenue Recognition
  8




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Direct Financing Lease.
 Operating Leases.
 Notes Receivable.
  Income Taxes
  Supplemental Disclosure of Cash Flow Information
  2007
    
    
    2006Cash paid for:Interest
    
    $
    13,115
    
    
    $
    2,933Non-cash activities:Purchase of financing assets from Merrill Lynch Equipment Finance
    
    $
    
    
    
    $
    173,043Revolving line of credit Merrill Lynch Commercial Finance Corporation
    
    $
    
    
    
    $
    173,043
 9




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2007
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Recently Issued Accounting Pronouncements
  ,
 Transfers of Financial Assets
  Fair Value of Financial Instruments
   NOTE 3  RESTRICTED CASH
  10




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2007
(unaudited)
 NOTE 4  DUE FROM LOCKBOX
  NOTE 5 - INVESTMENT IN LEASES AND NOTES
  September 30,
    
    
    December 31,2007
    
    
    2006Direct financing leases
    
    $
    286,932
    
    
    $
    264,711Notes receivable
    
    
    63,417
    
    
    
    42,841$
    350,349
    
    
    $
    307,552Allowance for possible losses
    
    
    (1,418
    )
    
    
    (1,121
    )$
    348,931
    
    
    $
    306,431
  September 30,
    
    
    December 31,2007
    
    
    2006Total future minimum lease payments
    
    $
    319,394
    
    
    $
    292,944Unearned rental income
    
    
    (39,062
    )
    
    
    (34,893
    )Residuals, net of unearned residual income
    
    
    6,600
    
    
    
    6,660$
    286,932
    
    
    $
    264,711
  Nine Months EndedSeptember 30,2007
    
    
    2006Allowance for possible losses, beginning of period
    
    $
    1,121
    
    
    $
    130Allowance for possible losses, in connection with acquisition (see Note 7)
    
    
    
    
    
    
    920Provision for credit losses
    
    
    2,672
    
    
    
    505Net write offs
    
    
    (2,375
    )
    
    
    (435
    )Allowance for possible losses, end of period
    
    $
    1,418
    
    
    $
    1,120
 NOTE 6  OTHER ASSETS
  11




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
September 30, 2007
(unaudited)
 NOTE 7 - EQUIPMENT FINANCE PORTFOLIO ACQUISITION
  NOTE 8 - DEBT
  September 30,2007
    
    
    December 31, 2006In September 2007, the Fund closed a
$276.8 million term securitization
(Series 2007-1 Notes). In
connection with the Series 2007-1
transaction, four tranches of notes
were issued to investors in the form
of $84 million Class A-1 notes, $77
million ClassA-2 notes, $101.3
million Class A-3 Notes and $14.5
million Class B notes. Interest
rates and maturities on the four
tranches are as follows: Class A-1
5.38%, maturing in September 2008;
Class A-2 one month LIBOR plus 0.12%,
maturing in January 2010; Class A-3
one month LIBOR plus 0.20%, maturing
in July 2010 and Class B 6.65%,
maturing in July 2010. To mitigate
fluctuations in interest rates on
Class A-2 and Class A-3 notes the
Fund has entered into interest rate
swap agreements. The interest rate
swap agreements terminate at various
dates ranging from March 2009 to July
2012. As of September 30, 2007, the
interest rate swap agreements fix the
interest rate on Class A-2 and Class
A-3 notes at 5.40% on a weighted
average basis.
    
    $
    242,215
    
    
    
    WestLB AG, New York Branch revolving
line of credit, with an aggregate
borrowing limit of $150 million
collateralized by specific leases and
notes receivables and related
equipment, with a 1% credit reserve
of the outstanding line of credit.
Interest on this facility is
calculated at LIBOR plus .95% per
annum. To mitigate fluctuations in
interest rates the Fund has entered
into interest rate swap agreements.
The interest rate swap agreements
terminate on various dates ranging
from December 2010 to March 2014. As
of September 30, 2007, the interest
rate swap agreements fix the interest
rate on the outstanding balance at
6.32% on a weighted average basis.
Interest and principal are due
monthly. The line of credit is
renewable for one year periods in
2007 and 2008. The terms of the
Funds credit facility with WestLB
includes financial covenants related
to the Funds net worth and leverage
used. As of September 30, 2007, the
Fund is in compliance with all such
covenants.
    
    
    95,661
    
    
    $
    99,731Merrill Lynch Commercial Finance
Corporation revolving line of credit,
with an aggregate borrowing limit of
$200 million collateralized by
specific leases and notes receivables
and related equipment. Interest on
this facility was calculated at one
month LIBOR plus .95% per annum. To
mitigate fluctuations in interest
rates the Fund had entered into an
interest rate swap agreement. In
June 2007, all interest rate swap
agreements for this facility were
terminated and the facility was paid
in full in connection with the Fund
entering into a term securitization.
    
    
    
    
    
    
    191,387Total outstanding debt
    
    $
    337,876
    
    
    $
    291,118
 12




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2007
(unaudited)
 NOTE 8 - DEBT  (Continued)
  2008
    
    $
    112,8442009
    
    
    91,2412010
    
    
    67,1982011
    
    
    41,0322012
    
    
    19,999Thereafter
    
    
    5,562$
    337,876
 NOTE 9 - DERIVATIVE INSTRUMENTS
       13




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2007
(unaudited)
 NOTE
10 - TRANSACTIONS WITH AFFILIATES
       Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Acquisition fees
    
    $
    715
    
    
    $
    546
    
    
    $
    2,209
    
    
    $
    1,900Asset management fees
    
    
    899
    
    
    
    287
    
    
    
    2,688
    
    
    
    609Reimbursed administrative expenses
    
    
    435
    
    
    
    203
    
    
    
    1,225
    
    
    
    494
  14




---



##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2007
(unaudited)
 NOTE 11 - ALLOCATION OF PARTNERSHIP INCOME, LOSS AND CASH DISTRIBUTIONS
   NOTE 12  COMPREHENSIVE (LOSS) INCOME
  NOTE 13  NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
  15




---



##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
 When used in this Form 10-Q , the words believes anticipates, expects and similar
expressions are intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties more particularly described in Item 1A, under the caption Risks
Inherent in Our Business, in our annual report on Form 10-K for year ended December 31, 2006
These risks and uncertainties could cause actual results to differ materially. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date hereof. We undertake no obligation to publicly release the results of any revisions to
forward-looking statements which we may make to reflect events or circumstances after the date of
this Form 10-Q or to reflect the occurrence of unanticipated events.
 OVERVIEW
   
    
    500 or fewer employees;
    
    $1.0 billion or less in total assets; or
    
    $100.0 million or less in total annual sales.
   16




---



##### 



Our Lease Portfolio
  Direct Financing Leases and Notes
 September 30, 2007
    
    
    December 31, 2006Net
    
    
    
    
    
    
    NetType of Equipment
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageIndustrial Equipment
    
    $
    98,770
    
    
    
    28.2
    %
    
    $
    60,046
    
    
    
    19.5
    %Medical Equipment
    
    
    75,311
    
    
    
    21.5
    
    
    
    69,631
    
    
    
    22.6Computers
    
    
    59,231
    
    
    
    16.9
    
    
    
    70,412
    
    
    
    22.9Office Equipment
    
    
    20,468
    
    
    
    5.8
    
    
    
    20,814
    
    
    
    6.8Restaurant Equipment
    
    
    20,223
    
    
    
    5.8
    
    
    
    16,761
    
    
    
    5.5Garment Care
    
    
    18,107
    
    
    
    5.2
    
    
    
    19,463
    
    
    
    6.3Communications
    
    
    15,404
    
    
    
    4.4
    
    
    
    11,614
    
    
    
    3.8Software
    
    
    14,577
    
    
    
    4.2
    
    
    
    14,334
    
    
    
    4.7Building systems
    
    
    10,236
    
    
    
    2.9
    
    
    
    9,930
    
    
    
    3.2Other
    
    
    18,022
    
    
    
    5.1
    
    
    
    14,547
    
    
    
    4.7$
    350,349
    
    
    
    100.0
    %
    
    $
    307,552
    
    
    
    100.0
    %
 Operating Leases
 September 30, 2007
    
    
    December 31, 2006Net
    
    
    
    
    
    
    NetType of Equipment
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageIndustrial Equipment
    
    $
    3,364
    
    
    
    28.0
    %
    
    $
    3,667
    
    
    
    25.4
    %Computers
    
    
    2,837
    
    
    
    23.6
    
    
    
    4,254
    
    
    
    29.4Communications
    
    
    2,547
    
    
    
    21.2
    
    
    
    2,780
    
    
    
    19.3Office Equipment
    
    
    2,121
    
    
    
    17.6
    
    
    
    2,247
    
    
    
    15.6Building systems
    
    
    342
    
    
    
    2.8
    
    
    
    154
    
    
    
    1.1Medical Equipment
    
    
    302
    
    
    
    2.5
    
    
    
    858
    
    
    
    5.9Restaurant Equipment
    
    
    209
    
    
    
    1.7
    
    
    
    237
    
    
    
    1.6Garment Care
    
    
    49
    
    
    
    0.4
    
    
    
    69
    
    
    
    0.5Software
    
    
    14
    
    
    
    0.1
    
    
    
    25
    
    
    
    0.2Other
    
    
    256
    
    
    
    2.1
    
    
    
    148
    
    
    
    1.0$
    12,041
    
    
    
    100.0
    %
    
    $
    14,439
    
    
    
    100.0
    %
  17




---



##### 



Direct Financing Leases and Notes
 September 30, 2007
    
    
    December 31, 2006Net
    
    
    
    
    
    
    NetType of Business
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageServices
    
    $
    170,771
    
    
    
    48.8
    %
    
    $
    167,651
    
    
    
    54.5
    %Retail Trade
    
    
    41,152
    
    
    
    11.7
    
    
    
    41,493
    
    
    
    13.5Manufacturing
    
    
    38,409
    
    
    
    11.0
    
    
    
    31,312
    
    
    
    10.2Transportation/Communication/Energy
    
    
    20,952
    
    
    
    6.0
    
    
    
    11,386
    
    
    
    3.7Construction
    
    
    19,032
    
    
    
    5.4
    
    
    
    11,169
    
    
    
    3.6Agriculture/Forestry/Fishing
    
    
    18,423
    
    
    
    5.3
    
    
    
    12,958
    
    
    
    4.2Wholesale Trade
    
    
    15,665
    
    
    
    4.5
    
    
    
    10,232
    
    
    
    3.3Finance/Insurance/Real Estate
    
    
    10,651
    
    
    
    3.0
    
    
    
    9,533
    
    
    
    3.1Public Administration
    
    
    845
    
    
    
    0.2
    
    
    
    1,248
    
    
    
    0.4Other
    
    
    14,449
    
    
    
    4.1
    
    
    
    10,570
    
    
    
    3.5$
    350,349
    
    
    
    100.0
    %
    
    $
    307,552
    
    
    
    100.0
    %
 Operating Leases
 September 30, 2007
    
    
    December 31, 2006Net
    
    
    
    
    
    
    NetType of Business
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageServices
    
    $
    4,895
    
    
    
    40.6
    %
    
    $
    6,371
    
    
    
    44.1
    %Construction
    
    
    3,489
    
    
    
    29.0
    
    
    
    3,940
    
    
    
    27.3Manufacturing
    
    
    1,419
    
    
    
    11.8
    
    
    
    1,613
    
    
    
    11.2Finance/Insurance/Real Estate
    
    
    599
    
    
    
    5.0
    
    
    
    481
    
    
    
    3.3Wholesale Trade
    
    
    435
    
    
    
    3.6
    
    
    
    494
    
    
    
    3.4Retail Trade
    
    
    386
    
    
    
    3.2
    
    
    
    327
    
    
    
    2.3Transportation/Communication/Energy
    
    
    307
    
    
    
    2.5
    
    
    
    414
    
    
    
    2.9Public Administration
    
    
    261
    
    
    
    2.2
    
    
    
    621
    
    
    
    4.3Agriculture/Forestry/Fishing
    
    
    205
    
    
    
    1.7
    
    
    
    113
    
    
    
    0.8Other
    
    
    45
    
    
    
    0.4
    
    
    
    65
    
    
    
    0.4$
    12,041
    
    
    
    100.0
    %
    
    $
    14,439
    
    
    
    100.0
    %
  18




---



##### 



Results of Operations
 Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006
  
    
    Interest income on equipment financings increased to $6.5 million for the three
months ended September 30, 2007 as compared to $2.2 million for the three months ended
September 30, 2006 an increase of $4.3 million (202%).
Our weighted average investment in direct financing leases and notes increased
to $332.2 million for the three months ended September 30,
2007 as compared to $122.0 million for the three months ended
September 30, 2006, an increase of $210.2 million (173%).
This increase is principally due to our acquisition of a portfolio of
leases and loans and related assets for approximately
$191.7 million from a subsidiary of Merrill Lynch at
September 30, 2006. In addition the growth was driven by our General Partners increased sales to us,
marketing efforts supported by lines of financing, and the purchase of a
lease portfolio from Pacific Capital Bank of $31.1 million.
    
    Rental income increased to $1.4 million for the three months ended September 30,
2007 as compared to $1.1 million for the three months ended September 30, 2006, an increase of
$357,000 (33%). Our average investment in operating leases increased to $12.5 million for the three
months ended September 30, 2007 as compared to $11.1 million for the three months ended
September 30, 2006, an increase of $1.5 million (13.5%).
    
    Gain on sale of equipment increased to $870,000 for the three months ended September
30, 2007 as compared to a gain of $144,000 for the three months ended September 30,
2006, an increase of $726,000 (504%). Gains and losses on sales of equipment may vary
significantly from period to period.
    
    Other income increased to $772,000 for the three months ended September 30, 2007 as
compared to $165,000 for the three months ended September 30, 2006, an increase of
$607,000 (368%). Other income consists primarily of late fee income. Late fee income
has increased due to the increase of the equipment financing portfolio coupled with an
increase in payment collection efforts. Our weighted average
investment in direct financing leases and notes increased to
$332.2 million for the three months ended September 30,
2007 as compared to $122.0 million for the three months ended
September 30, 2006, an increase of $210.2 million (173%).
  
    
    Interest expense increased to $5.0 million for the three months ended September 30,
2007 as compared to $1.5 million for the three months ended September 30, 2006, an
increase of $3.5 million (231%) due to our increase in average
debt outstanding. Our
average debt increased to $330.3 million for the three months ended September 30, 2007
as compared to $94.3 million for the three months ended September 30, 2006, an
increase of $236.0 million (250%). This increase is principally
due to our acquisition of a portfolio of leases, loans and related
assets for approximately $191.7 million, from a subsidiary of
Merrill Lynch at September 30, 2006.
    
    Depreciation on operating leases increased to $1.2 million for the three months
ended September 30, 2007 as compared to $890,000 for the three months ended September
30, 2006, an increase of $293,000 (33%). Our average operating leases increased to
$12.5 million for the three months ended September 30, 2007 as compared to $11.1
million for the three months ended September 30, 2006, an increase of $1.5 million
(13.5%).
    
    Our provision for credit losses increased to $970,000 for the three months ended
September 30, 2007 as compared to $223,000 for the three months ended September 30,
2006, an increase of $747,000 (335%). As our portfolio increases and ages, we expect
that our provision for credit losses will increase. This increase was within our
expectation. We provide for bad debts when losses are likely to occur based on a
migration analysis of past due payments and economic conditions.
    
    Management fees increased to $899,000 for the three months ended September 30, 2007
as compared to $287,000 for the three months ended September 30, 2006, an increase of
$612,000 (213%). This increase is directly attributable to the increase in our
portfolio of equipment financing assets, since management fees are paid based on lease
payments received.
    
    Administrative expenses reimbursed to related party increased to $435,000 for the
three months ended September 30, 2007 as compared to $203,000 for the three months
ended September 30, 2006, an increase of $232,000 (114%). This increase is due to the
increase in our portfolio of equipment financing assets.
    
    General and administrative expenses increased to $500,000 for the three months ended
September 30, 2007 as compared to $137,000 for the three months ended September 30,
2006, an increase of $363,000 (265%). This increase is principally related to
increased legal costs associated with collection efforts.
 19




---



##### 



Nine Months Ended September 30, 2007 compared to Nine Months Ended September 30, 2006
  
    
    Interest income on equipment financings increased to $18.1 million for the nine
months ended September 30, 2007 as compared to $4.5 million for the nine months ended
September 30, 2006 an increase of $13.6 million (306%). Our
weighted average investment in direct financing leases and notes increased to
$306.3 million for the nine months ended September 30, 2007
as compared to $80.4 million for the nine months ended
September 30, 2006, an increase of $225.9 million (281%). This increase is principally due to our acquisition of a portfolio of
leases, loans and related assets for approximately
$191.7 million from a subsidiary of Merrill Lynch at
September 30, 2006. In addition the growth was driven by our General Partners increased sales to us,
marketing efforts supported by lines of financing, and the purchase of a
lease portfolio from Pacific Capital Bank of $31.1 million.
    
    Rental income increased to $4.3 million for the nine months ended September 30, 2007
as compared to $2.5 million for the nine months ended September 30, 2006, an increase
of $1.9 million (75%). Our average investment operating leases increased to $13.6 million for the
nine months ended September 30, 2007 as compared to
$8.8 million for the nine months
ended September 30, 2006, an increase of $4.8 million (54.5%).
    
    Gain on sale of equipment and lease dispositions increased to $1.3 million for the
nine months ended September 30, 2007 as compared to $181,000 for the nine months ended
September 30, 2006, an increase of $1.1 million (603%). Gains and losses from
equipment and lease dispositions may vary significantly from period to period.
    
    Other income increased to $1.7 million for the nine months ended September 30, 2007
as compared to $362,000 for the nine months ended September 30, 2006, an increase of
$1.4 million (378%). Other income consists primarily of late fee income. Late fee
income has increased due to the increase of the equipment financing portfolio coupled
with an increase in payment collection efforts. Our weighted average
investment in direct financing leases and notes increased to
$306.3 million for the nine months ended September 30, 2007
as compared to $80.4 million for the nine months ended
September 30, 2006, an increase of $225.9 million (281%).
  
    
    Interest expense increased to $13.6 million for the nine months ended September 30,
2007 as compared to $3.2 million for the nine months ended September 30, 2006, an
increase $10.4 million (328%). This increase is primarily due to the increase of our
debt incurred to acquire equipment financing assets. Debt increased to $337.9 million
as of September 30, 2007 as compared to $276 million as of September 30, 2006, an
increase of $61.9 million (22%). This increase is principally
due to our acquisition of a portfolio of leases, loans and related
assets for approximately $191.7 million, from a subsidiary of
Merrill Lynch at September 30, 2006.
    
    Depreciation on operating leases increased to $3.6 million for the nine months ended
September 30, 2007 as compared to $2.1 million for the nine months ended September 30,
2006, an increase of $1.6 million (76%). Our average operating leases increased to
$13.6 million for the three months ended September 30, 2007 as compared to $8.8 million
for the three months ended September 30, 2006, an increase of $4.8 million (54.5%).
    
    Our provision for credit losses increased to $2.7 million for the nine months ended
September 30, 2007 as compared to $505,000 for the nine months ended September 30,
2006, an increase of $2.2 million (429%). This increase was within our expectation.
We provide for bad debts when losses are likely to occur based on a migration analysis
of past due payments and economic conditions.
    
    Management fees increased to $2.7 million for the nine months ended September 30,
2007 as compared to $609,000 for the nine months ended September 30, 2006 , an increase
of $2.1 million (341%). This increase is directly attributable to our continuing
receipt of payments on lease assets, since management fees are paid based on lease
payments received.
    
    Administrative expenses reimbursed to related party increased to $1.2 million for
the nine months ended September 30, 2007 as compared to $494,000 for the nine months
ended September 30, 2006, an increase of $731,000 (148%). This increase is due to our
growth in commercial financing assets.
    
    General and administrative expenses increased to $1.8 million for the nine months
ended September 30, 2007 as compared to $369,000 for the nine months ended September
30, 2006, an increase of $1.4 million (386%). This increase is principally related to
increased legal costs associated with collection efforts.
  20




---



##### 



Liquidity and Capital Resources
   September 30,2007
    
    
    2006Net cash provided by operating activities
    
    $
    12,073
    
    
    $
    2,117Net cash used in investing activities
    
    
    (43,530
    )
    
    
    (99,488
    )Net cash provided by financing activities
    
    
    17,403
    
    
    
    106,273(Decrease) increase in cash
    
    $
    (14,054
    )
    
    $
    8,902
       21




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II  OTHER INFORMATION
 
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description31.1
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.32.1
    
    Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.32.2
    
    Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.
 22




---



##### 



SIGNATURES
  LEASE EQUITY APPRECIATION FUND II, L.P.
A Delaware Limited Partnership
By: LEAF Financial Corporation, its General PartnerNovember 14, 2007
    /s/ Crit DeMentCRIT DEMENTChairman and Chief Executive Officer of the General PartnerNovember 14, 2007
    /s/ Robert K. MoskovitzROBERT K. MOSKOVITZChief Financial Officer, Treasurer of the General Partner 23