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, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 333-116595
 LEASE EQUITY APPRECIATION FUND II, L.P.
  Delaware
    
    20-1056194(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 
 
 þ o
  Large accelerated filer
o

    

  Accelerated filer
o

    

    Non-accelerated filer o
(Do not check if a smaller reporting company)

  

    Smaller reporting company
þ
 o þ




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2008 (unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)
    
    
    4Consolidated Statement of Partners Capital and Comprehensive Loss
Nine Months Ended September 30, 2008 (unaudited)
    
    
    5Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2008 and 2007 (unaudited)
    
    
    6Notes to Consolidated Financial Statements  September 30, 2008 (unaudited)
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27ITEM 4. Controls and Procedures
    
    
    27PART II OTHER INFORMATIONITEM 6. Exhibits
    
    
    28SIGNATURES
    
    
    29
  2




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##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)
    
    
    (audited)ASSETSCash
    
    $
    216
    
    
    $
    259Restricted cash
    
    
    28,646
    
    
    
    29,442Accounts receivable
    
    
    187
    
    
    
    297Investment in direct financing leases and notes, net
    
    
    295,528
    
    
    
    331,622Investment in operating leases, net of accumulated depreciation of $9,255 and
$7,855, respectively
    
    
    7,958
    
    
    
    11,693Deferred financing costs, net
    
    
    3,101
    
    
    
    2,728Other assets
    
    
    976
    
    
    
    1,347$
    336,612
    
    
    $
    377,388LIABILITIES AND PARTNERS CAPITALLiabilitiesDebt
    
    $
    282,788
    
    
    $
    324,170Accounts payable and accrued expenses
    
    
    1,491
    
    
    
    1,256Accrued repurchase liability
    
    
    392
    
    
    
    Security deposits
    
    
    7,302
    
    
    
    5,143Fair value of interest rate swaps
    
    
    8,508
    
    
    
    6,623Due to related parties
    
    
    9,152
    
    
    
    3,054Total liabilities
    
    
    309,633
    
    
    
    340,246Partners CapitalGeneral partner
    
    
    (177
    )
    
    
    (99
    )Limited partners
    
    
    33,845
    
    
    
    41,855Accumulated other comprehensive loss
    
    
    (6,689
    )
    
    
    (4,614
    )Total partners capital
    
    
    26,979
    
    
    
    37,142$
    336,612
    
    
    $
    377,388
  3




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##### 



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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Interest on equipment financings
    
    $
    6,337
    
    
    $
    6,501
    
    
    $
    20,414
    
    
    $
    18,098Rental income
    
    
    983
    
    
    
    1,439
    
    
    
    3,467
    
    
    
    4,346Gain on sale of equipment and lease dispositions, net
    
    
    911
    
    
    
    870
    
    
    
    1,454
    
    
    
    1,272Other
    
    
    602
    
    
    
    772
    
    
    
    1,839
    
    
    
    1,7328,833
    
    
    
    9,582
    
    
    
    27,174
    
    
    
    25,448Expenses:Interest expense
    
    
    4,460
    
    
    
    4,998
    
    
    
    13,916
    
    
    
    13,591Depreciation on operating leases
    
    
    892
    
    
    
    1,183
    
    
    
    2,991
    
    
    
    3,624Provision for credit losses
    
    
    3,951
    
    
    
    970
    
    
    
    7,459
    
    
    
    2,672Management fees to related party
    
    
    922
    
    
    
    899
    
    
    
    2,885
    
    
    
    2,688Administrative expense reimbursed to related party
    
    
    732
    
    
    
    435
    
    
    
    1,938
    
    
    
    1,225General and administrative expenses
    
    
    703
    
    
    
    500
    
    
    
    2,150
    
    
    
    1,79411,660
    
    
    
    8,985
    
    
    
    31,339
    
    
    
    25,594Net (loss) income
    
    $
    (2,827
    )
    
    $
    597
    
    
    $
    (4,165
    )
    
    $
    (146
    )Weighted average number of limited partner units
outstanding during the period
    
    
    595,065
    
    
    
    598,633
    
    
    
    596,115
    
    
    
    599,483Net (loss) income per weighted average limited partner unit
    
    $
    (4.70
    )
    
    $
    0.99
    
    
    $
    (6.92
    )
    
    $
    (0.24
    )
  4




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
 AND COMPREHENSIVE LOSS
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
 (in thousands, except unit data)
 (unaudited)
 AccumulatedOther
    
    
    Partners
    
    
    ComprehensiveGeneral
    
    
    Limited Partners
    
    
    Comprehensive
    
    
    Capital
    
    
    LossPartner
    
    
    Units
    
    
    Amount
    
    
    Loss
    
    
    Total
    
    
    TotalBalance at January 1, 2008
    
    $
    (99
    )
    
    
    597,945
    
    
    $
    41,855
    
    
    $
    (4,614
    )
    
    $
    37,142Cash distributions paid
    
    
    (36
    )
    
    
    
    
    
    
    (3,547
    )
    
    
    
    
    
    
    (3,583
    )Redemption of Limited
Partners Units
    
    
    
    
    
    
    (3,266
    )
    
    
    (340
    )
    
    
    
    
    
    
    (340
    )Net loss
    
    
    (42
    )
    
    
    
    
    
    
    (4,123
    )
    
    
    
    
    
    
    (4,165
    )
    
    $
    (4,165
    )Unrealized loss on hedging
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,789
    )
    
    
    (1,789
    )
    
    
    (1,789
    )Amortization of gain on
financial derivative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (286
    )
    
    
    (286
    )
    
    
    (286
    )Balance at September 30, 2008
    
    $
    (177
    )
    
    
    594,679
    
    
    $
    33,845
    
    
    $
    (6,689
    )
    
    $
    26,979
    
    
    $
    (6,240
    )
  5




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (4,165
    )
    
    $
    (146
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Gain on sale of equipment and lease dispositions, net
    
    
    (1,454
    )
    
    
    (1,272
    )Depreciation
    
    
    2,991
    
    
    
    3,624Provision for credit losses
    
    
    7,459
    
    
    
    2,672Amortization of deferred financing costs
    
    
    473
    
    
    
    192Amortization of gain on financial derivative
    
    
    (286
    )
    
    
    (127
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    132
    
    
    
    9Other assets
    
    
    359
    
    
    
    250Accounts payable and accrued expenses
    
    
    235
    
    
    
    200Due to related parties, net
    
    
    6,098
    
    
    
    2,715Net cash provided by operating activities
    
    
    11,842
    
    
    
    8,117Cash flows from investing activities:Investment in direct financing leases and notes
    
    
    (96,427
    )
    
    
    (129,216
    )Investments in operating leases
    
    
    (444
    )
    
    
    (1,236
    )Proceeds from direct financing leases, net of earned income
    
    
    91,357
    
    
    
    85,327Proceeds from (investment in) equipment under operating leases, net
    
    
    1,188
    
    
    
    Proceeds from sale of leases to third parties
    
    
    35,551
    
    
    
    Increase in security deposits, net
    
    
    2,159
    
    
    
    1,595Net cash provided by (used in) investing activities
    
    
    33,384
    
    
    
    (43,530
    )Cash flows from financing activities:Borrowings of debt
    
    
    68,015
    
    
    
    134,962Repayment of debt
    
    
    (109,397
    )
    
    
    (88,204
    )Increase (decrease) in restricted cash
    
    
    796
    
    
    
    (21,478
    )Increase in deferred financing costs
    
    
    (760
    )
    
    
    (2,349
    )Proceeds from termination of financial derivatives
    
    
    
    
    
    
    2,254Redemption of limited partner units
    
    
    (340
    )
    
    
    (205
    )Cash distributed to partners
    
    
    (3,583
    )
    
    
    (3,621
    )Net cash (used in) provided by financing activities
    
    
    (45,269
    )
    
    
    21,359Decrease in cash
    
    
    (43
    )
    
    
    (14,054
    )Cash, beginning of period
    
    
    259
    
    
    
    14,210Cash, end of period
    
    $
    216
    
    
    $
    156
  6




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2008
 (unaudited)
 NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
      NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Reclassifications
   7




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Use of Estimates
      Concentration of Credit Risk
   Revenue Recognition
  8




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Direct Financing Leases.
 Operating Leases.
 Notes Receivable.
  Income Taxes
  Supplemental Disclosure of Cash Flow Information
  Nine Months EndedSeptember 30,2008
    
    
    2007Cash paid for:Interest
    
    $
    13,280
    
    
    $
    13,115Non-cash activities:Borrowings under 2007-1 Term Securitization
    
    $
    
    
    
    $
    (267,237
    )Repayment of Merrill Lynch and WestLB line of credit
    
    $
    
    
    
    $
    267,237
 9




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Recently Issued Accounting Pronouncements
    Transfers of Financial Assets
  
 10




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 Fair Value of Financial Instruments
   NOTE 3  RESTRICTED CASH
  NOTE 4 - INVESTMENT IN LEASES AND NOTES
  September 30,
    
    
    December 31,2008
    
    
    2007Direct financing leases
    
    $
    240,868
    
    
    $
    268,983Notes receivable
    
    
    58,360
    
    
    
    64,599299,228
    
    
    
    333,582Allowance for credit losses
    
    
    (3,700
    )
    
    
    (1,960
    )$
    295,528
    
    
    $
    331,622
  September 30,
    
    
    December 31,2008
    
    
    2007Total future minimum lease payments
    
    $
    268,268
    
    
    $
    301,449Unearned rental income
    
    
    (28,960
    )
    
    
    (35,846
    )Residuals, net of unearned residual income
    
    
    1,560
    
    
    
    3,380$
    240,868
    
    
    $
    268,983
 11




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 4 - INVESTMENT IN LEASES AND NOTES  (Continued)
  Nine months endedSeptember 30,2008
    
    
    2007Allowance for credit losses, beginning of period
    
    $
    1,960
    
    
    $
    1,121Provision for credit losses
    
    
    7,459
    
    
    
    2,672Net write offs
    
    
    (5,719
    )
    
    
    (2,375
    )Allowance for credit losses, end of period
    
    $
    3,700
    
    
    
    1.418
  Direct FinancingPeriods Ending September 30,
    
    Leases
    
    
    Notes
    
    
    Operating Leases
    
    
    Total2009
    
    $
    109,828
    
    
    $
    15,055
    
    
    $
    2,958
    
    
    $
    127,8412010
    
    
    76,374
    
    
    
    14,877
    
    
    
    1,884
    
    
    
    93,1352011
    
    
    46,740
    
    
    
    12,551
    
    
    
    792
    
    
    
    60,0832012
    
    
    22,879
    
    
    
    9,807
    
    
    
    218
    
    
    
    32,9042013
    
    
    9,908
    
    
    
    4,329
    
    
    
    25
    
    
    
    14,262Thereafter
    
    
    2,539
    
    
    
    1,741
    
    
    
    13
    
    
    
    4,293$
    268,268
    
    
    $
    58,360
    
    
    $
    5,890
    
    
    $
    332,518
 NOTE 5 -SALES OF LEASES AND NOTES
    12




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 6  DEFERRED FINANCING COSTS, NET
  2009
    
    $
    6632010
    
    
    6632011
    
    
    6632012
    
    
    5942013
    
    
    389Thereafter
    
    
    129$
    3,101
 NOTE 7 - DEBT
  September 30, 2008
    
    
    December 31, 2007In June 2007, the
Fund entered into 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 Class A-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 was
fully repaid in March
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
(See Note 8). As of
September 30, 2008,
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
    
    $
    143,037
    
    
    $
    214,653WestLB 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 0.95% 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 July
2013 to August 2015.
As of September 30,
2008 the interest
rate swap agreements
fix the interest rate
on the outstanding
balance at 5.72% on a
weighted average
basis. Interest and
principal are due
monthly. The line of
credit is renewable
for a one year period
in June 2009. If the
Funds WestLB
facility is not
extended at the time
of renewal, the Fund
would not be required
to make full
repayment at the time
of renewal. Rather
the Fund would
continue to repay the
outstanding debt
under the original
terms
    
    
    139,751
    
    
    
    109,517Total outstanding debt
    
    $
    282,788
    
    
    $
    324,170
 13




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 7 - DEBT  (Continued)
   2009
    
    $
    102,9872010
    
    
    80,3682011
    
    
    52,8992012
    
    
    29,7672013
    
    
    13,176Thereafter
    
    
    3,591$
    282,788
 NOTE 8- DERIVATIVE INSTRUMENTS
      14




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 9   FAIR VALUE MEASUREMENT
 , ,
    Fair Value measurements Using
    
    LiabilitiesLevel 1
    
    Level 2
    
    Level 3
    
    At Fair ValueLiabilitiesInterest Rate Swaps
    
    
    
    
    
    $
    8,508
    
    
    
    
    
    
    $
    8,508
 NOTE 10  TRANSACTIONS WITH AFFILIATES
   15




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 10  TRANSACTIONS WITH AFFILIATES (Continued)
     Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Acquisition fees
    
    $
    899
    
    
    $
    715
    
    
    $
    1,802
    
    
    $
    2,209Asset management fees
    
    
    922
    
    
    
    899
    
    
    
    2,885
    
    
    
    2,688Reimbursed administrative expenses
    
    
    732
    
    
    
    435
    
    
    
    1,938
    
    
    
    1,225
  NOTE 11  ALLOCATION OF PARTNERSHIP INCOME (LOSS) AND CASH DISTRIBUTIONS
   NOTE 12  COMPREHENSIVE LOSS
  16




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
SEPTEMBER 30, 2008
(unaudited)
 NOTE 13  NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
  NOTE 14  FIRST QUARTER ADJUSTMENT
  17




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##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (unaudited)
 When used in this Form 10-Q , the words believes anticipates, expects and similar
expressions are intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties more particularly described in Item 1A, under the caption Risks
Inherent in Our Business, in our annual report on Form 10-K for 2007. 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.
      18




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##### 



Our Lease Portfolio
  Direct Financing Leases and Notes
 September 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    NetType of Equipment
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageIndustrial Equipment
    
    $
    77,429
    
    
    
    25.9
    %
    
    $
    96,100
    
    
    
    28.8
    %Medical Equipment
    
    
    54,233
    
    
    
    18.1
    
    
    
    69,545
    
    
    
    20.8Computers
    
    
    35,154
    
    
    
    11.7
    
    
    
    53,590
    
    
    
    16.1Office Equipment
    
    
    28,450
    
    
    
    9.5
    
    
    
    20,097
    
    
    
    6.0Building Systems
    
    
    9,695
    
    
    
    3.2
    
    
    
    13,992
    
    
    
    4.2Communications
    
    
    18,825
    
    
    
    6.3
    
    
    
    15,788
    
    
    
    4.7Restaurant Equipment
    
    
    17,305
    
    
    
    5.8
    
    
    
    19,553
    
    
    
    5.9Garment Care
    
    
    13,221
    
    
    
    4.4
    
    
    
    16,837
    
    
    
    5.0Water Purification
    
    
    18,980
    
    
    
    6.3
    
    
    
    
    
    
    
    Other
    
    
    25,936
    
    
    
    8.8
    
    
    
    28,080
    
    
    
    8.5$
    299,228
    
    
    
    100.0
    %
    
    $
    333,582
    
    
    
    100.0
    %
 Operating Leases
 September 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    NetType of Equipment
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageIndustrial Equipment
    
    $
    2,238
    
    
    
    28.1
    %
    
    $
    3,476
    
    
    
    29.7
    %Communications
    
    
    1,912
    
    
    
    24.0
    
    
    
    2,378
    
    
    
    20.3Office Equipment
    
    
    1,558
    
    
    
    19.6
    
    
    
    2,030
    
    
    
    17.4Computers
    
    
    1,283
    
    
    
    16.1
    
    
    
    2,514
    
    
    
    21.5Building systems
    
    
    359
    
    
    
    4.5
    
    
    
    419
    
    
    
    3.6Agriculture Equipment
    
    
    326
    
    
    
    4.1
    
    
    
    360
    
    
    
    3.1Restaurant Equipment
    
    
    184
    
    
    
    2.3
    
    
    
    197
    
    
    
    1.7Medical Equipment
    
    
    60
    
    
    
    0.8
    
    
    
    262
    
    
    
    2.2Garment Care
    
    
    23
    
    
    
    0.3
    
    
    
    43
    
    
    
    0.4Software
    
    
    15
    
    
    
    0.2
    
    
    
    14
    
    
    
    0.1$
    7,958
    
    
    
    100.0
    %
    
    $
    11,693
    
    
    
    100.0
    %
 19




---



##### 



Direct Financing Leases and Notes
 September 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    NetType of Business
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageServices
    
    $
    132,077
    
    
    
    44.1
    %
    
    $
    153,981
    
    
    
    46.1
    %Retail Trade
    
    
    36,103
    
    
    
    12.1
    
    
    
    38,120
    
    
    
    11.4Manufacturing
    
    
    33,593
    
    
    
    11.2
    
    
    
    36,334
    
    
    
    10.9Agriculture/Forestry/Fishing
    
    
    21,942
    
    
    
    7.3
    
    
    
    27,260
    
    
    
    8.2Transportation/Communication/Energy
    
    
    19,410
    
    
    
    6.5
    
    
    
    20,820
    
    
    
    6.2Construction
    
    
    17,772
    
    
    
    6.0
    
    
    
    19,219
    
    
    
    5.8Wholesale Trade
    
    
    13,584
    
    
    
    4.5
    
    
    
    15,240
    
    
    
    4.6Finance/Insurance/Real Estate
    
    
    12,339
    
    
    
    4.1
    
    
    
    9,981
    
    
    
    3.0Public Administration
    
    
    1,700
    
    
    
    0.6
    
    
    
    949
    
    
    
    0.3Other
    
    
    10,708
    
    
    
    3.6
    
    
    
    11,678
    
    
    
    3.5$
    299,228
    
    
    
    100.0
    %
    
    $
    333,582
    
    
    
    100.0
    %
 Operating Leases
 September 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    NetType of Business
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageServices
    
    $
    2,857
    
    
    
    35.9
    %
    
    $
    4,558
    
    
    
    39.0
    %Construction
    
    
    2,656
    
    
    
    33.4
    
    
    
    3,692
    
    
    
    31.6Manufacturing
    
    
    935
    
    
    
    11.7
    
    
    
    1,303
    
    
    
    11.1Finance/Insurance/Real Estate
    
    
    458
    
    
    
    5.7
    
    
    
    622
    
    
    
    5.3Wholesale Trade
    
    
    288
    
    
    
    3.6
    
    
    
    424
    
    
    
    3.6Retail Trade
    
    
    263
    
    
    
    3.3
    
    
    
    333
    
    
    
    2.9Agriculture/Forestry/Fishing
    
    
    205
    
    
    
    2.6
    
    
    
    267
    
    
    
    2.3Transportation/Communication/Energy
    
    
    173
    
    
    
    2.2
    
    
    
    273
    
    
    
    2.3Public Administration
    
    
    117
    
    
    
    1.5
    
    
    
    183
    
    
    
    1.6Other
    
    
    6
    
    
    
    0.1
    
    
    
    38
    
    
    
    0.3$
    7,958
    
    
    
    100.0
    %
    
    $
    11,693
    
    
    
    100.0
    %
 Critical Accounting Policies
  20




---



##### 



Results of Operations
 Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
  Increase (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Revenues:Interest on equipment financings
    
    $
    6,337
    
    
    $
    6,501
    
    
    $
    (164
    )
    
    $
    (3
    %)Rental income
    
    
    983
    
    
    
    1,439
    
    
    
    (456
    )
    
    
    (32
    %)Gains on sale of equipment and
lease dispositions, net
    
    
    911
    
    
    
    870
    
    
    
    41
    
    
    
    5
    %Other
    
    
    602
    
    
    
    772
    
    
    
    (170
    )
    
    
    (22
    %)8,833
    
    
    
    9,582
    
    
    
    (749
    )
    
    
    (8
    %)Expenses:Interest expense
    
    
    4,460
    
    
    
    4,998
    
    
    
    (538
    )
    
    
    (11
    %)Depreciation on operating leases
    
    
    892
    
    
    
    1,183
    
    
    
    (291
    )
    
    
    (25
    %)Provision for credit losses
    
    
    3,951
    
    
    
    970
    
    
    
    2,981
    
    
    
    307
    %Management fees to related party
    
    
    922
    
    
    
    899
    
    
    
    23
    
    
    
    3
    %Administrative expenses reimbursed
to related party
    
    
    732
    
    
    
    435
    
    
    
    297
    
    
    
    68
    %General and administrative expenses
    
    
    703
    
    
    
    500
    
    
    
    203
    
    
    
    41
    %11,660
    
    
    
    8,985
    
    
    
    2,675
    
    
    
    30
    %Net (loss) income
    
    $
    (2,827
    )
    
    $
    597
    
    
    $
    (3,424
    )
    
    $
    (574
    %)
 21




---



##### 




    
    a decrease in interest income on equipment financings due to a decrease in our
weighted average net investment in direct financing leases and notes to $298.7 million
for the three months ended September 30, 2008 as compared to $332.2 million for the
three months ended September 30, 2007, a decrease of $33.5 million (10%).
    
    a decrease in rental income which was principally the result of a decrease in our
investment in operating leases in the 2008 period compared to the 2007 period.
    
    a decrease in other income, which consists primarily of late fee income. Late fee
income has decreased due to the decrease of our equipment financing portfolio.The increase in total expenses was primarily attributable to the following:
 
    
    an increase in our provision for credit losses. We provide for credit losses when
losses are likely to occur based on a migration analysis of past due payments and
economic conditions. Our provision for credit losses has increased due to the growth
in size of the portfolio as well as the worsening of general economic conditions.
    
    an increase in administrative expenses reimbursed to related party due to the hiring
of additional collection personnel by our General Partner to minimize any impact on
delinquencies resulting from a weakened US economy.
    
    an increase in general and administrative expenses, principally related to increased
legal costs associated with collection efforts.
  
    
    a decrease in interest expense due to our decrease in average debt outstanding.
Weighted average borrowings for the three months ended September 30, 2008 and 2007 were
$293.6 million and $330.3 million, respectively, at an effective interest rate of 6.0%
and 6.0%, respectively.
    
    a decrease in depreciation on operating leases directly related to our decrease in
operating leases.
  22




---



##### 



Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
  Increase (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Revenues:Interest on equipment financings
    
    $
    20,414
    
    
    $
    18,098
    
    
    $
    2,316
    
    
    $
    13
    %Rental income
    
    
    3,467
    
    
    
    4,346
    
    
    
    (879
    )
    
    
    (20
    %)Gains on sale of equipment and
lease dispositions, net
    
    
    1,454
    
    
    
    1,272
    
    
    
    182
    
    
    
    14
    %Other
    
    
    1,839
    
    
    
    1,732
    
    
    
    107
    
    
    
    6
    %27,174
    
    
    
    25,448
    
    
    
    1,726
    
    
    
    7
    %Expenses:Interest expense
    
    
    13,916
    
    
    
    13,591
    
    
    
    325
    
    
    
    2
    %Depreciation on operating leases
    
    
    2,991
    
    
    
    3,624
    
    
    
    (633
    )
    
    
    (17
    %)Provision for credit losses
    
    
    7,459
    
    
    
    2,672
    
    
    
    4,787
    
    
    
    179
    %Management fees to related party
    
    
    2,885
    
    
    
    2,688
    
    
    
    197
    
    
    
    7
    %Administrative expenses reimbursed
to related party
    
    
    1,938
    
    
    
    1,225
    
    
    
    713
    
    
    
    58
    %General and administrative expenses
    
    
    2,150
    
    
    
    1,794
    
    
    
    356
    
    
    
    20
    %31,339
    
    
    
    25,594
    
    
    
    5,745
    
    
    
    22
    %Net loss
    
    $
    (4,165
    )
    
    $
    (146
    )
    
    $
    (4,019
    )
    
    $
    2,753
    %
  
    
    an increase in interest income on equipment financings due to increased yields on
leases and loans. Our weighted average net investment in financing assets decreased to
$314.8 million for the nine months ended September 30, 2008 as compared to $317.2
million for the nine months ended September 30, 2007, an decrease of $2.4 million (1%).
  
    
    a decrease in rental income which was principally the result of a decrease in our
investment in operating leases in the 2008 period compared to the 2007 period.
  
    
    an increase in interest expense due to our increase in average debt outstanding.
Weighted average borrowings for the nine months ended September 30, 2008 and 2007 were
$309.6 million and $305.3 million, respectively, at an effective interest rate of 8.9%
and 8.8%, respectively.
    
    an increase in our provision for credit losses. We provide for credit losses when
losses are likely to occur based on a migration analysis of past due payments and
economic conditions. Our provision for credit losses has increased due to the growth
in size of the portfolio as well as the worsening of general economic conditions.
    
    an increase in management fees attributable to increased payments received on leases
(since management fees are paid based on lease payments received).
    
    an increase in administrative expenses reimbursed to related party due to the hiring
of additional collection personnel by our General Partner to minimize any impact on
delinquencies resulting from a weakened US economy.
    
    an increase in general and administrative expenses related to increased legal costs
associated with collection efforts.
  
    
    a decrease in depreciation on operating leases related to our decrease in our
investment in operating leases.
 23




---



##### 



Finance Receivables and Asset Quality
  As of and ForAs of and For The
    
    
    TheNine Months Ended September 30,
    
    
    Year EndedChange
    
    
    December 312008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2007Investment in direct
financing leases and notes
before allowance for
credit losses:
    
    $
    299,228
    
    
    $
    350,349
    
    
    $
    (51,121
    )
    
    
    (15
    %)
    
    $
    333,582Weighted average
investment in direct
financing leases and notes
before allowance for
credit losses
    
    
    314,753
    
    
    
    317,202
    
    
    
    (2,449
    )
    
    
    (1
    %)
    
    
    321,991Allowance for credit losses
    
    
    3,700
    
    
    
    1,418
    
    
    
    2,282
    
    
    
    161
    %
    
    
    1,960Non-performing assets
    
    
    12,226
    
    
    
    12,383
    
    
    
    (157
    )
    
    
    (1
    %)
    
    
    9,996Net write-offs
    
    
    5,719
    
    
    
    2,375
    
    
    
    3,344
    
    
    
    141
    %
    
    
    5,008As a percentage of ending
finance receivables:Allowance for credit losses
    
    
    1.24
    %
    
    
    0.40
    %
    
    
    
    
    
    
    
    
    
    
    0.59
    %Non-performing assets
    
    
    4.09
    %
    
    
    3.53
    %
    
    
    
    
    
    
    
    
    
    
    3.00
    %As a percentage of
weighted average finance
receivables :Net write-offs
    
    
    1.82
    %
    
    
    0.75
    %
    
    
    
    
    
    
    
    
    
    
    1.56
    %
   24




---



##### 



Liquidity and Capital Resources
    Nine Months EndedSeptember 30,2008
    
    
    2007Net cash provided by operating activities
    
    $
    11,842
    
    
    $
    8,117Net cash provided by (used in) investing activities
    
    
    33,384
    
    
    
    (43,530
    )Net cash (used in) provided by financing activities
    
    
    (45,269
    )
    
    
    21,359Decrease in cash
    
    $
    (43
    )
    
    $
    (14,054
    )
   Borrowings
  Maximum Facility
    
    Amount
    
    AmountAmount
    
    Outstanding
    
    AvailableSeries
2007-Term Securitization
    
    $
    143,037
    
    
    $
    143,037
    
    
    $
    West LB(2)
    
    
    150,000
    
    
    
    139,751
    
    
    
    10,249$
    293,037
    
    
    $
    282,788
    
    
    $
    10,249
 
 (1)
    
    Availability subject to lease or loan eligibility and
borrowing base formula. The original amount borrowed at June, 2007
was $276.8 million.(2)
    
    Our term note securitizations are one-time fundings that pay down over time without any
ability for us to draw down additional amounts.   25




---



##### 



Contractual Obligations
  Payments Due By PeriodLess than
    
    1  3
    
    4  5
    
    After 5Total
    
    1 Year
    
    Years
    
    Years
    
    YearsContractual obligations:Debt
    
    $
    282,788
    
    
    $
    102,987
    
    
    $
    133,267
    
    
    $
    42,943
    
    
    $
    3,591
  26




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    27




---



##### 



PART II  OTHER INFORMATION
 
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Agreement of Limited Partnership (1)3.2
    
    Certificate of Limited Partnership (2)4.1
    
    Forms of letters sent to limited partners confirming their investment (2)31.1
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.32.1
    
    Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.32.2
    
    Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.
 
 (1)
    
    Filed previously as Appendix A to our Post-Effective Amendment
No. 3 to our Registration Statement on Form S-1, filed on January 24, 2004.(2)
    
    Filed previously as an Exhibit to Amendment No. 1 to our
Registration Statement on Form S-1 filed on September 7, 2002. 28




---



##### 



SIGNATURES
  LEASE EQUITY APPRECIATION FUND II, L.P.A Delaware Limited PartnershipBy: LEAF Financial Corporation, its General PartnerNovember 14, 2008
    
    /s/ Crit DeMentCRIT DEMENTChairman and Chief Executive OfficerNovember 14, 2008
    
    /s/ Robert K. MoskovitzROBERT K. MOSKOVITZChief Financial OfficerNovember 14, 2008
    
    /s/ Tonya L. Zweier

TONYA L. ZWEIERChief Accounting Officer
 29