##### Table of Contents





UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C. 20549
  FORM 10-K
 ANNUAL REPORT PURSUANT
    TO
 SECTION 13 OR 15(d) OF
    THE
 SECURITIES EXCHANGE ACT OF
    1934
 For the fiscal year ended
    December 31, 2007
 Commission file number 0-51028
  FIRST
    BUSINESS FINANCIAL SERVICES, INC.
   WISCONSIN

39-1576570(State or jurisdiction of
    incorporation or organization)

(I.R.S. Employer Identification
    No.)401 Charmany Drive Madison, WI

53719(Address of Principal Executive
    Offices)

(Zip Code)   (608) 238-8008
  Registrants telephone number,
    including area code
     Common
    Stock, $0.01 par value
  o þ
  o þ
  þ o
  Regulation S-K 10-K Form 10-K. o
  Rule 12b-2
  Large accelerated
    filer o



Accelerated
    filer oNon-accelerated
    filer o

(Do not check if a smaller reporting company)

Smaller Reporting
    Company þ   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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[This page
    intentionally left blank]




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##### 



Table of
    Contents
   
  Page No.PART I.Item 1.Business


1Item 1a. Risk Factors


9Item 1b. Unresolved Staff Comments


12Item 2.Properties


12Item 3. Legal Proceedings


12Item 4. Submission of Matters to a
    Vote of Security Holders


12PART II.Item 5. Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities


13Item 6. Selected Financial Data


14Item 7. Managements Discussion
    and Analysis of Financial Condition and Results of Operations


15Item 7a. Quantitative and Qualitative
    Disclosures About Market Risk


38Item 8. Financial Statements and
    Supplementary Data


40Item 9. Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure


74Item 9A(T). Controls and
    Procedures


74Item 9B. Other Information


74PART III.Item 10. Directors, Executive
    Officers and Corporate Governance


75Item 11. Executive Compensation


75Item 12. Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters


75Item 13. Certain Relationships and
    Related Transactions and Director Independence


75Item 14. Principal Accountant Fees
    and Services


75PART IV.Item 15. Exhibits, Financial
    Statement Schedules


75Signatures


76Annual Incentive Bonus ProgramConsent of KPMG LLPCertification of Chief Executive OfficerCertification of Senior Vice President and Chief Financial OfficerSection 1350 Certification




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##### Table of Contents



PART I.  Item 1.
    Business  General
  Item 7, Managements Discussion and Analysis of
    Financial Condition and Results of Operations.
           1




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##### Table of Contents



Consolidation of Variable Interest Entities, an
    Interpretation of Accounting Research Bulletin No. 51,
    Revised Note 11
  Available
    Information
  www.firstbusiness.com Form 10-K Form 10-K, Form 10-Q, Form 8-K
  Employees
    Supervision
    and Regulation
    General.
     2




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##### Table of Contents



The
    Corporation
        Sarbanes-Oxley Act of 2002.
  Item 9A(T).  Controls and Procedures Regulation S-K.
 3




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##### Table of Contents



The
    Banks
    Insurance of Deposits.
    Regulatory Capital Requirements.
 4




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##### Table of Contents



Minimum Required tobe Well CapitalizedMinimum Required


Under Promptfor Capital Adequacy


Corrective ActionActual


Purposes


RequirementsAmount


Ratio


Amount


Ratio


Amount


Ratio(In thousands)As of December 31, 2007Total capital (to risk-weighted assets)Consolidated

$
87,018



10.22
%

$
68,119



8.00
%


N/A



N/AFirst Business Bank


79,072



10.45



60,528



8.00


$
75,660



10.00
%First Business Bank  Milwaukee


9,847



10.26



7,679



8.00



9,599



10.00Tier 1 capital (to risk-weighted assets)Consolidated

$
46,164



5.42
%

$
34,060



4.00
%


N/A



N/AFirst Business Bank


71,097



9.40



30,264



4.00


$
45,396



6.00
%First Business Bank  Milwaukee


8,639



9.00



3,840



4.00



5,759



6.00Tier 1 capital (to average assets)Consolidated

$
46,164



5.12
%

$
36,065



4.00
%


N/A



N/AFirst Business Bank


71,097



9.04



31,459



4.00


$
39,324



5.00
%First Business Bank  Milwaukee


8,639



7.39



4,678



4.00



5,848



5.00   Minimum Required tobe Well CapitalizedMinimum Required


Under Promptfor Capital


Corrective ActionActual


Adequacy Purposes


RequirementsAmount


Ratio


Amount


Ratio


Amount


Ratio(In thousands)As of December 31, 2006Total capital (to risk-weighted assets)Consolidated

$
73,241



10.40
%

$
56,360



8.00
%


N/A



N/AFirst Business Bank


64,443



10.49



49,144



8.00


$
61,430



10.00
%First Business Bank  Milwaukee


10,205



11.31



7,218



8.00



9,022



10.00Tier 1 capital (to risk-weighted assets)Consolidated

$
43,944



6.24
%

$
28,180



4.00
%


N/A



N/AFirst Business Bank


57,838



9.42



24,572



4.00


$
36,858



6.00
%First Business Bank  Milwaukee


9,070



10.05



3,609



4.00



5,413



6.00Tier 1 capital (to average assets)Consolidated

$
43,944



5.99
%

$
29,331



4.00
%


N/A



N/AFirst Business Bank


57,838



9.22



25,086



4.00


$
31,358



5.00
%First Business Bank  Milwaukee


9,070



8.50



4,269



4.00



5,336



5.00   Prompt Corrective Action.
 5




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##### Table of Contents



Total Capital to Risk


Tier 1 Capital toCategory

Weighted Assets


Risk Weighted Assets


Tier 1 Leverage RatioWell capitalized


3
    10
%


3
    6
%


3
    5
%Adequately capitalized


3
    8
%


3
    4
%


3
    4
%*Undercapitalized


< 8
%


< 4
%


< 4
%*Significantly undercapitalized


< 6
%


< 3
%


< 3
%Critically undercapitalized


Ratio of tangible equity to total assets
    £
    2
%     *
    
    3% if the Banks receive the highest rating under the uniform
    system.  Limitations on Dividends and Other Capital
    Distributions.
  Liquidity.
  Federal Reserve System.
  Federal Home Loan Bank System.
   6




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##### Table of Contents



Form 8-K Item 7  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Liquidity and Capital Resources
  Restrictions on Transactions with
    Affiliates.
    Community Reinvestment Act.
  Riegle Community Development and Regulatory Improvement Act
    of 1994.
  USA PATRIOT Act of 2001.
  Commercial Real Estate Guidance.
 7




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##### Table of Contents



Fair and Accurate Transactions Act of 2003.
  Changing Regulatory Structure.
    Monetary Policy.
  Competition.
 8




---



##### Table of Contents



Executive
    Officers of the Registrant
                  Item 1a.
    Risk
    Factors    Competition.
 9




---



##### Table of Contents



Government Regulation and Monetary Policy. Item 1.
    Business  Supervision and Regulation.
  Key Personnel.
  Technology.
  Market Area.
  Loan Portfolio Risk.
  
    Commercial mortgage loan repayment is dependent upon cash flow
    generation sufficient to cover operating expenses and debt
    service.
    Commercial loan repayment is dependent upon the successful
    operation of the borrowers business. 10




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##### Table of Contents




    Consumer loans such as credit card loans and vehicle loans are
    collateralized, if at all, with assets that may not provide an
    adequate source of payment of the loan due to depreciation,
    damage or loss.  Environmental Risk.
  Loan and Lease Loss Allowance Risk.
  
    Current economic conditions and their estimated effects on
    specific borrowers;
    An evaluation of the existing relationships among loans and
    leases, probable loan and lease losses and the present level of
    the allowance for loan and lease losses;
    Results of examinations of the Banks loan and lease
    portfolios by regulatory agencies;
    Managements internal review of the loan and lease
    portfolios.    Interest Rate Risk.
  Trust Operations Risk. and/or
 11




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##### Table of Contents



Economic Conditions. and/or
    Item 1b.
    Unresolved
    Staff Comments    Item 2.
    Properties  Note 7 Note 14
  Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   12




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##### Table of Contents



PART II.  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities      DividendHigh


Low


Declared20071st Quarter

$
22.67


$
21.26


$
0.0652nd Quarter


22.50



19.80



0.0653rd Quarter


20.93



17.70



0.0654th Quarter


19.05



17.50



0.06520061st Quarter

$
24.00


$
21.50


$
0.062nd Quarter


24.84



22.76



0.063rd Quarter


24.50



22.02



0.064th Quarter


23.00



21.51



0.06     Equity Compensation Plan InformationNumber of SecuritiesRemaining Available forFuture Issuance UnderNumber of Securities to


Weighted-average


Equity Compensationbe Issued upon Exercise


Exercise Price of


Plans (Excludingof Outstanding Options,


Outstanding Options,


Securities Reflected inPlan Category

Warrants, and Rights.


Warrants, and Rights


Column (a))(a)


(b)


(c)Equity compensationplans approved bysecurity holders


159,540


$
22.10



431,129     Issuer Purchases of SecuritiesTotal Number of


Maximum NumberShares Purchased as


that May Yet bePart of Publicly


Purchased UnderTotal Number of


Average Price Paid


Announced Plans


the Plans orPeriod

Shares Purchased


Per Share


or Programs


ProgramsOctober 1  31, 2007


-



-



-



-November 1  30, 2007


30,000


$
19.00



30,000



23,691December 1  31, 2007


14,000


$
18.06



14,000



10,122  13




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##### Table of Contents



Item 6.
    Selected
    Consolidated Financial Data  Three
    Year Comparison of Selected Consolidated Financial
    Data
  As of and For the Year Ended December 31,2007


2006


2005(Dollars in Thousands, Except Share Data)FOR THE YEAR:Interest income

$
59,488


$
47,660


$
36,509Interest expense


36,280



28,689



18,733Net interest income


23,208



18,971



17,776Provision for loan and lease losses


2,904



1,519



400Gain on sale of 50% owned joint venture


-



-



973Non-interest income


4,416



3,674



3,266Non-interest expense


19,657



15,698



14,403Income tax expense


1,807



1,681



2,455Net income

$
3,256


$
3,747


$
4,757Yield on earning assets


7.36
%


7.21
%


6.22Cost of funds


4.91



4.77



3.59Interest rate spread


2.45



2.44



2.62Net interest margin


2.87



2.87



3.03Return on average assets


0.39



0.54



0.78Return on average equity


6.86



8.65



11.79ENDING BALANCE SHEET:Total Assets

$
918,438


$
788,323


$
669,249Securities


97,378



100,008



92,055Loans and leases, net


771,633



639,867



532,716Deposits


776,060



640,266



567,464Borrowed funds


81,986



92,970



39,758Junior subordinated debentures


-



-



10,310Stockholders equity


48,552



45,756



41,843FINANCIAL CONDITION ANALYSIS:Allowance for loan losses to year-end loans


1.26
%


1.28
%


1.25
%Allowance to non-accrual loans


111.17



748.06



438.67Net charge-offs to average loans


0.19



-



-Non-accrual loans to gross loans


1.13



0.17



0.29Average equity to average assets


5.64



6.26



6.61STOCKHOLDERS DATA:Basic earnings per share

$
1.33


$
1.53


$
1.96Diluted earnings per share


1.32



1.52



1.93Book value per share at end of period


19.35



18.36



17.18Dividend declared per share


0.26



0.24



0.175Dividend payout ratio


19.55
%


15.68
%


8.93
%Shares outstanding


2,509,213



2,493,578



2,435,008  14




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Forward-Looking
    Statements
  Item 1A, Risk Factors Form 10-K
      Form 10-K.
  Overview
     15




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Recent
    Developments
  Tax Audit.
    Critical
    Accounting Policies and Estimates
  Note 1
  Allowance for Loan and Lease Losses.
 16




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##### Table of Contents



Note 6
    Income Taxes.
  Note 15
     17




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##### Table of Contents



Lease Residuals. Note 6
  Goodwill and Other Intangible Assets. Note 1 and Note 8
    Results
    of Operations Comparison
    of the Years Ended December 31, 2007 and 2006
  Overview.
 18




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##### Table of Contents



Top Line Revenue.
  For the Year EndedDecember 31,2007


2006


Change(In Thousands)Net interest income

$
23,208


$
18,971



22.3
%Non-interest income


4,416



3,674



20.2Total top line revenue

$
27,624


$
22,645



22.0   Adjusted Net Income.
  For the Year EndedDecember 31,2007


2006


ChangeNet income, presented under US GAAP

$
3,256


$
3,747



(13.1
)%Add back:Provision for loan and lease losses, after tax


1,765



923



91.2
%Less:Net (charge-offs) recoveries, after tax


(818
)


2




*Adjusted net income

$
4,203


$
4,672



(10.0
)%       Net Interest Income.
 19




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##### Table of Contents



Rate/Volume
    Analysis
  Increase (Decrease) For the Year Ended December 31,2007 Compared to 2006Rate/Rate


Volume


Volume


Net(In Thousands)Interest-Earning AssetsCommercial real estate and other mortgage loans

$
655


$
7,688


$
188


$
8,531Commercial and industrial loans


(296
)


3,201



(63
)


2,842Leases


(136
)


399



(41
)


222Consumer loans


(9
)


19



(1
)


9Total loans and leases receivable


214



11,307



83



11,604Mortgage-related securities


261



(15
)


(1
)


245Investment securities


11



(55
)


(6
)


(50
)Other investments


(32
)


(8
)


3



(37
)Fed funds sold and other


-



66



(12
)


54Short-term investments


1



11



-



12Total net change in income on interest-earning assets


455



11,306



67



11,828Interest-Bearing LiabilitiesNOW accounts


(17
)


687



(5
)


665Money market


(123
)


801



(14
)


664Certificates  regular


1,133



4,036



330



5,499Certificates  large


166



358



30



554Total deposits


1,159



5,882



341



7,382Junior subordinated debentures


(1,241
)


(1,241
)


1,241



(1,241
)FHLB advances


9



324



3



336Other borrowings


228



765



121



1,114Total net change in expense on interest-bearing liabilities


155



5,730



1,706



7,591Net change in net interest income

$
300


$
5,576


$
(1,639
)

$
4,237    20




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##### Table of Contents



21




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##### Table of Contents



Net
    Interest Income Information
  Average Interest-Earning Assets, Average Interest-Bearing
    Liabilities, Interest Rate Spread, and Net Interest
    Margin.
  For the Year Ended December 31,2007


2006Average








AverageAverage





Yield/


Average





Yield/Balance


Interest


Cost


Balance


Interest


Cost(Dollars in Thousands)Interest-Earning AssetsCommercial real estate and
    other mortgage
    loans(1)

$
481,039


$
35,307



7.34
%

$
373,731


$
26,776



7.16
%Commercial and industrial loans


200,414



18,000



8.98



165,473



15,158



9.16Leases


24,346



1,552



6.37



18,730



1,330



7.10Consumer loans


3,106



198



6.37



2,823



189



6.70Total loans and leases
    receivable(1)


708,905



55,057



7.77



560,757



43,453



7.75Mortgage-related
    securities(2)


92,094



4,167



4.52



92,444



3,922



4.24Investment
    securities(2)


1,640



60



3.66



3,297



110



3.34Federal Home Loan Bank stock


2,230



45



2.02



2,474



82



3.31Fed funds sold and other


1,118



56



5.01



33



2



6.06Short-term investments


2,212



103



4.66



1,980



91



4.60Total interest-earning assets


808,199



59,488



7.36



660,985



47,660



7.21Non-interest-earning assets


32,539











31,292Total assets

$
840,738










$
692,277Interest-Bearing LiabilitiesNOW accounts

$
67,189



2,838



4.22


$
51,048



2,173



4.26Money market


171,508



7,699



4.49



153,978



7,035



4.57Certificates-regular


387,974



19,385



5.00



300,601



13,886



4.62Certificates-large


50,025



2,536



5.07



42,377



1,982



4.68Total deposits


676,696



32,458



4.80



548,004



25,076



4.58Junior subordinated debentures


-



-



-



9,915



1,241



12.52FHLB advances


25,776



1,256



4.87



19,059



920



4.83Other borrowings


36,605



2,566



7.01



23,971



1,452



6.06Total interest-bearing liabilities


739,077



36,280



4.91



600,949



28,689



4.77Non-interest-bearing liabilities


54,204











47,992Total liabilities


793,281











648,941Stockholders equity


47,457











43,336Total liabilities and stockholders equity

$
840,738










$
692,277Net interest income/interest rate spread





$
23,208



2.45
%





$
18,971



2.44
%Net interest-earning assets

$
69,122










$
60,036Net interest margin










2.87
%










2.87
%Average interest-earning assets to average interest-bearing
    liabilities


109.35
%










110.00
%Return on average assets


0.39











0.54Return on average equity


6.86











8.65Average equity to average assets


5.64











6.26Non-interest expense to average assets


2.34











2.27     (1)
    
    The average balances of loans and leases include non-performing
    loans and leases. Interest income related to non-performing
    loans and leases is recognized when collected.(2)
    
    Includes amortized cost of basis of assets held and available
    for sale. 22




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##### Table of Contents



Provision for Loan and Lease Losses. Allowance for Loan and Lease
    Losses
  Non-Interest Income.
    Non-Interest Expense.
 23




---



##### Table of Contents



Income Taxes.
  Financial
    Condition December 31,
    2007
  General.
  Securities.
   24




---



##### Table of Contents



As of December 31,2007


2006Amortized


Fair


Amortized


FairCost


Value


Cost


Value(In Thousands)Securities available-for-saleU.S. Government corporations and agencies

$
1,500


$
1,497


$
1,497


$
1,467Municipals


85



85



185



182Collateralized mortgage obligations  government
    agencies


52,755



52,658



38,903



38,775Collateralized mortgage obligations  government
    sponsored agencies


43,631



43,138



60,952



59,584$
97,971


$
97,378


$
101,537


$
100,008  25




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##### Table of Contents



Less than One Year


One to Five Years


Five to Ten Years


Over Ten YearsWeighted





Weighted





Weighted





WeightedAverage





Average





Average





AverageBalance


Yield


Balance


Yield


Balance


Yield


Balance


Yield


Total(In Thousands)Available-for-saleU.S. Government corporations and agencies

$
1,497



3.41
%

$
-



-


$
-



-


$
-



-


$
1,497Municipals


85



5.63
%


-



-



-



-



-



-



85Collateralized mortgage obligations  government
    agencies


-



-



-



-



1,388



5.14
%


51,271



5.15



52,658Collateralized mortgage obligations  government
    sponsored agencies


30



6.01
%


423



3.84
%


17,830



3.84
%


24,856



4.16
%


43,138$
1,611



3.57
%

$
423



3.84
%

$
19,217



3.94
%

$
76,127



4.82
%

$
97,378     Derivative Activities. Note 1
  Loans and Leases Receivable.
 26




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##### Table of Contents



Loan Portfolio Composition.
  As of December 31,2007


2006


2005Percent





Percent





PercentAmount


of Total


Amount


of Total


Amount


of Total(In Thousands)Mortgage loans:Commercial real estate

$
336,153



43.01
%

$
274,262



42.30
%

$
249,133



46.16
%Construction and land development


90,545



11.58



78,257



12.07



50,619



9.38Multi-family


41,821



5.35



34,635



5.34



22,115



4.101-4 family


48,437



6.20



35,721



5.51



26,513



4.91Total mortgage loans


516,956



66.14



422,875



65.22



348,380



64.55Commercial loans and leases:Commercial and industrial


147,856



18.92



125,256



19.32



102,482



18.98Asset-based


65,930



8.43



51,445



7.93



49,206



9.12Direct financing leases, net


29,383



3.76



23,203



3.58



17,852



3.31Total commercial loans and leases


243,169



31.11



199,904



30.83



169,540



31.41Consumer loans:Home equity and second mortgage


9,784



1.25



8,859



1.37



8,231



1.53Credit card


854



0.11



785



0.12



560



0.10Personal


1,147



0.15



1,248



0.19



860



0.16Other


9,724



1.24



14,679



2.27



12,159



2.25Total consumer loans


21,509



2.75



25,571



3.95



21,810



4.04Gross loans and leases receivable


781,634



100.00
%


648,350



100.00
%


539,730



100.00
%Contras to loans and leases:Allowance for loan and lease losses


(9,854
)






(8,296
)






(6,773
)Deferred loan fees


(147
)






(187
)






(241
)Loans and leases receivable, net

$
771,633






$
639,867






$
532,716     Construction,Commercial


Commercial


Multi-Family,


Lease


ConsumerReal Estate


and Industrial


1-4 Family


Receivables


and other


Total(In Thousands)Amounts due:In one year or less

$
47,274


$
88,419


$
85,850


$
296


$
13,875


$
235,714After one year through five years


229,642



120,355



84,834



21,924



7,557



464,312After five years


59,237



5,012



10,119



7,163



77



81,608$
336,153


$
213,786


$
180,803


$
29,383


$
21,509


$
781,634Interest rate terms on amounts due after one year:Fixed

$
252,589


$
63,039


$
74,904


$
29,087


$
7,604


$
427,223Adjustable

$
36,290


$
62,328


$
20,049


$
-


$
30


$
118,697   Commercial Real Estate.
 27




---



##### Table of Contents



Commercial Loans.
    Construction, Multi-family Loans and 1-4
    Family.
      Leases.
    Consumer and other mortgage loans.
 28




---



##### Table of Contents



Net Fee Income from Lending Activities.
  Loan and Lease Delinquencies.
    As of December 31,2007


2006


2005% of





% of





% ofGross





Gross





GrossLoans and





Loans and





Loans andDays Past Due

Balance


Leases


Balance


Leases


Balance


Leases(In Thousands)30 to 59 days

$
621



0.08
%

$
5,860



0.90
%

$
389



0.07
%60 to 89 days


85



0.01



-



0.00



99



0.0290 days and
    over(3)


2,487



0.32



455



0.07



721



0.13$
3,193



0.41
%

$
6,315



0.97
%

$
1,209



0.22
%     (3)
    
    Includes loans and leases contractually 90 days past due
    and which have been placed on non-accrual status.  30-59 days
  Non-performing Assets and Impaired Loans and
    Leases.
   29




---



##### Table of Contents



and/or
  Year Ended December 31,2007


2006


2005(In Thousands)Non-accrual loans

$
8,805


$
1,109


$
1,454Non-accrual leases


59



-



90Total non-accrual loans and leases


8,864



1,109



1,544Foreclosed properties and repossessed assets, net


660



-



-Total non-performing assets

$
9,524


$
1,109


$
1,544Performing troubled debt restructurings

$
-


$
-


$
-Total non-accrual loans and leases to total loans and leases


1.13
%


0.17
%


0.29
%Total non-performing assets to total assets


1.04



0.14



0.23Allowance for loan and lease losses to total loans and leases


1.26



1.28



1.25Allowance for loan and lease losses to non-accrual loans and
    leases


111.17



748.06



438.67      30




---



##### Table of Contents



As of December 31,2007


2006(In Thousands)Impaired loans and leases with no impairment reserves

$
6,500


$
683Impaired loans and leases with impairment reserves required


2,617



1,404Total impaired loans and leases


9,117



2,087Less:Impairment reserve (included in allowance for loan and lease
    losses)


834



863Net impaired loans and leases

$
8,283


$
1,224Average impaired loans and leases

$
3,439


$
1,444Interest income attributable to impaired loans and leases

$
365


$
210Interest income recognized on impaired loans and leases


41



217Net foregone interest income on impaired loans and leases

$
324


$
(7
)   Allowance for Loan and Lease Losses.
    and/or
 31




---



##### Table of Contents



Year Ended December 31,2007


2006


2005(In Thousands)Allowance at beginning of period

$
8,296


$
6,773


$
6,375Charge-offs:Commercial real estate and other mortgage


(571
)


-



-Commercial and industrial


(778
)


-



-Lease


(25
)


-



-Consumer


-



-



(10
)Total charge-offs


(1,374
)


-



(10
)Recoveries:Commercial real estate and other mortgage


5



4



4Commercial and industrial


23



-



4Lease


-



-



-Consumer


-



-



-Total recoveries


28



4



8Net (charge-offs) recoveries


(1,346
)


4



(2
)Provision for loan and lease loss


2,904



1,519



400Allowance at end of period

$
9,854


$
8,296


$
6,773Allowance to gross loans and leases


1.26
%


1.28
%


1.25
%        32




---



##### Table of Contents



As of December 31,2007


2006


2005Allowance


Percent of


Allowance


Percent of


Allowance


Percent offor Loan


Loans in


for Loan


Loans in


for Loan


Loans inand Lease


Each Category


and Lease


Each Category


and Lease


Each CategoryLoss


to Total Loans


Loss


to Total Loans


Loss


to Total Loans(In Thousands)Commercial real estate

$
3,858



43.01
%

$
2,998



42.30
%

$
2,777



46.16Construction and land development


1,328



11.58



826



12.07



553



9.38Multi-family


423



5.35



340



5.34



231



4.101-4 family


557



6.20



369



5.51



291



4.91Commercial and industrial loans


3,042



27.35



3,115



27.25



2,414



28.10Direct financing leases, net


355



3.76



380



3.58



268



3.31Consumer and other


291



2.75



268



3.95



237



4.04Unallocated


-



-



-



-



-



-Total

$
9,854



100.00
%

$
8,296



100.00
%

$
6,773



100.00
%     Deposits.
   33




---



##### Table of Contents



Over SixOver Three


MonthsMonths


ThroughThree Months


Through


Twelve


Over TwelveInterest Rate

and Less


Six Months


Months


Months


Total(In Thousands)0.00% to 1.99%

$
-


$
-


$
-


$
-


$
-2.00% to 2.99%


20



-



-



-



203.00% to 3.99%


347



238



289



111



9854.00% to 4.99%


55,329



59,973



68,587



118,425



302,3145.00% and greater


38,095



21,237



23,241



115,424



197,997$
93,791


$
81,448


$
92,117


$
233,960


$
501,316     Borrowings.
    As of December 31,2007


2006Weighted


Weighted





Weighted


WeightedAverage


Average





Average


AverageBalance


Balance


Rate


Balance


Balance


Rate(In Thousands)Fed funds purchased and securities sold under agreements to
    repurchase

$
14,250


$
10,394



5.35
%

$
33,751


$
13,875



5.12
%FHLB advances


34,526



25,776



4.87



36,584



19,059



4.83Junior subordinated debentures


-



-



-



-



9,915



12.52Line of credit


2,210



2,556



7.20



1,635



3,167



6.82Subordinated notes payable


31,000



23,630



7.73



21,000



6,929



7.58Other


-



25



7.00



-



-



-$
81,986


$
62,381



6.13


$
92,970


$
52,945



6.82Short-term borrowings

$
32,470










$
52,443Long-term borrowings


49,516











40,527$
81,986










$
92,970    34




---



##### Table of Contents



Note 11
    Year Ended December 31,2007


2006(In Thousands)Maximum month-end balance:FHLB advances

$
34,529


$
36,584Fed funds purchased and securities sold under agreements to
    repurchase


30,970



33,751   Stockholders Equity.
  Non-bank
    Subsidiaries
  First Madison Investment Corporation.
  First Business Capital Corp.
 35




---



##### Table of Contents



FMCC Nevada Corp.
  First Business Equipment Finance, LLC. 2
  Liquidity
    and Capital Resources
  Note 12
         36




---



##### Table of Contents



Item 1,
    Business Supervision and Regulation
  Off-balance
    Sheet Arrangements
  Note 16 Note 18
  Contractual
    Obligations
    Payment Due by PeriodLess Than 1








More ThanTotal


Year


1-3 Years


4-5 Years


5 Years(In Thousands)Operating lease obligations

$
5,861


$
830


$
1,576


$
1,236


$
2,219Fed funds purchased and securities sold under repurchase
    agreements


14,250



14,250



-



-



-Time deposits


501,316



267,356



231,606



2,354



-Line of credit


2,210



2,210



-



-



-Subordinated debt


31,000



-



-



-



31,000FHLB advances


34,526



16,010



18,034



-



482Uncertain tax
    positions(1)Total contractual obligations

$
589,163


$
300,656


$
251,216


$
3,590


$
33,701     (1)
    
    The contractual obligations table excludes the
    Corporations uncertain tax payments of $1.8 million
    because the we cannot make a reliable estimate of the timing of
    cash payments.  Recently
    Issued Accounting Pronouncements
  Note 1-
    Summary of Significant Accounting Policies and Nature of
    Operations, Recent Accounting Changes
 37




---



##### Table of Contents



Item 7a.
    Quantitative
    and Qualitative Disclosures about Market Risk        Change in interest rates in basis points−200


−100


0


+100


+200Impact on net interest income


6.60
%


3.19
%


-



(3.21
%)


(6.45
%)     and/or
 38




---



##### Table of Contents



Estimated Maturity or Repricing at December 31, 2007Within


3-12


1-5


After3 Months


Months


Years


5 Years


Total(In Thousands)Assets:Investment securities

$
10,237


$
24,281


$
56,569


$
6,291


$
97,378Commercial loans


74,168



17,538



64,083



1,774



157,563Real estate loans


166,287



35,041



262,694



62,734



526,756Asset-based loans


65,930



-



-



-



65,930Lease receivables


1,268



3,955



24,160



-



29,383Consumer loans


1,161



735



105



-



2,001Total earning assets

$
319,051


$
81,550


$
407,612


$
70,799


$
879,011LiabilitiesInterest-bearing checking

$
65,034


$
-


$
-


$
-


$
65,034Money market accounts


162,585



-



-



-



162,585Time deposits under $100,000


59,499



139,631



229,668



-



428,797Time deposits $100,000 and over


31,845



36,382



4,293



-



72,519Securities sold under agreements to repurchase


-



-



-



-



-FHLB advances


6,000



10,000



18,000



526



34,526Short-term borrowings


16,460



-



-



-



16,460Long-term debt


31,000



-



-



-



31,000Interest rate swaps


(404
)


128



276



-



-Total interest-bearing liabilities

$
372,031


$
186,141


$
252,236


$
526


$
810,922Interest rate gap

$
(52,968
)

$
(104,591
)

$
155,375


$
70,273


$
68,089Cumulative interest rate gap

$
(52,968
)

$
(157,559
)

$
(2,184
)

$
68,089Cumulative interest rate gap to total earning assets


(6.03
)%


(17.92
)%


(0.24
)%


7.75
%  39




---



##### 



Item 8.
    Financial
    Statements and Supplementary Data  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS OF FIRST BUSINESS FINANCIAL
    SERVICES
  The
    following financial statements are included in this Annual
    Report on
    Form 10-K:
   
 Consolidated Financial
    Statements

Page No.Consolidated Balance Sheets as of
    December 31, 2007 and 2006


42Consolidated Statements of Income for the Years
    Ended December 31, 2007 and 2006


43Consolidated Statements of Changes in
    Stockholders Equity and Comprehensive Income for the Years
    Ended December 31, 2007 and 2006


44Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2007 and 2006


45Notes to Consolidated Financial Statements


46Report of Independent Registered Public
    Accounting Firm


74   40




---



##### Table of Contents



First
    Business Financial Services, Inc.



Consolidated
    Balance Sheets  December 31,


December 31,2007


2006(In Thousands, Except Share Data)AssetsCash and due from banks

$
17,421


$
19,215Short-term investments


203



246Cash and cash equivalents


17,624



19,461Securities available-for-sale, at fair value


97,378



100,008Loans and leases receivable, net of allowance for loan and lease
    losses of $9,854 and $8,296, respectively


771,633



639,867Leasehold improvements and equipment, net


1,546



1,051Cash surrender value of bank-owned life insurance


14,757



13,469Investment in Federal Home Loan Bank stock, at cost


2,367



2,024Goodwill and other intangibles


2,787



2,817Accrued interest receivable and other assets


10,346



9,626Total assets

$
918,438


$
788,323Liabilities and Stockholders EquityDeposits

$
776,060


$
640,266Securities sold under agreement to repurchase


-



451Federal Home Loan Bank and other borrowings


81,986



92,519Accrued interest payable and other liabilities


11,840



9,331Total liabilities


869,886



742,567Commitments and contingenciesStockholders equity:Preferred stock, $10 par value, 10,000 Series A shares
    and 10,000 Series B shares authorized, none issued or
    outstanding


-



-Common stock, $0.01 par value, 8,000,000 shares
    authorized, 2,576,849 and 2,516,193 shares issued,
    2,509,213 and 2,493,578 outstanding in 2007 and 2006,
    respectively


26



25Additional paid-in capital


23,462



23,029Retained earnings


26,836



24,237Accumulated other comprehensive loss


(399
)


(1,005
)Treasury stock (67,636 and 22,615 shares in 2007 and 2006,
    respectively), at cost


(1,373
)


(530
)Total stockholders equity


48,552



45,756Total liabilities and stockholders equity

$
918,438


$
788,323    41




---



##### Table of Contents



First
    Business Financial Services, Inc.



Consolidated
    Statements of Income  For the Years Ended December 31,2007


2006(In Thousands, Except Share Data)Interest income:Loans and leases

$
55,057


$
43,452Securities income, taxable


4,227



4,033Short-term investments


204



175Total interest income


59,488



47,660Interest expense:Deposits


32,458



25,076Notes payable and other borrowings


3,822



2,372Junior subordinated debentures


-



1,241Total interest expense


36,280



28,689Net interest income


23,208



18,971Provision for loan and lease losses


2,904



1,519Net interest income after provision for loan and lease losses


20,304



17,452Non-interest income:Trust and investment services fee income


1,914



1,356Service charges on deposits


715



756Increase in cash surrender value of bank-owned life insurance


697



614Loan fees


630



630Credit, merchant and debit card fees


210



176Change in fair value of interest rate swaps


-



(283
)Net cash settlement of interest rate swaps


-



120Other


250



305Total non-interest income


4,416



3,674Non-interest expense:Compensation


12,121



9,280Occupancy


1,040



993Equipment


497



518Data processing


1,054



994Marketing


1,076



936Professional fees


1,411



1,299Other


2,458



1,678Total non-interest expense


19,657



15,698Income before income tax expense


5,063



5,428Income tax expense


1,807



1,681Net income

$
3,256


$
3,747Earnings per share:Basic

$
1.33


$
1.53Diluted

$
1.32


$
1.52Dividends declared per share

$
0.26


$
0.24    42




---



##### Table of Contents



First
    Business Financial Services, Inc.
  Consolidated
    Statements of Changes in Stockholders Equity and
    Comprehensive Income  AccumulatedAdditional





OtherCommon


Paid-in


Retained


Comprehensive


TreasuryStock


Capital


Earnings


Loss


Stock


Total(In Thousands, Except Share Data)Balance at December 31, 2005

$
24


$
22,712


$
21,085


$
(1,469
)

$
(509
)

$
41,843Comprehensive income:Net income


-



-



3,747



-



-



3,747Unrealized securities gains arising during the period


-



-



-



549



-



549Reclassification adjustment for realized loss on securities


-



-



-



7



-



7Unrealized derivative gains arising during the period


-



-



-



5



-



5Reclassification adjustment for realized losses on derivatives


-



-



-



99



-



99Income tax effect


-



-



-



(196
)


-



(196
)Comprehensive income






















4,211Share-based compensation  restricted shares


1



181



-



-



-



182Cash dividends ($0.24 per share)


-



-



(595
)


-



-



(595
)Treasury stock purchased (869 shares)


-







-



-



(21
)


(21
)Stock options exercised (14,314 shares)


-



136



-



-



-



136Balance at December 31, 2006

$
25


$
23,029


$
24,237


$
(1,005
)

$
(530
)

$
45,756Comprehensive income:Net income


-



-



3,256



-



-



3,256Unrealized securities gains arising during the period


-



-



-



936



-



936Unrealized derivative losses arising during the period


-



-



-



(9
)


-



(9
)Reclassification adjustment for realized losses on derivatives


-



-



-



4



-



4Income tax effect


-



-



-



(325
)


-



(325
)Comprehensive income






















3,862Share-based compensation  restricted shares


1



396



-



-



-



397Cash dividends ($0.26 per share)


-



-



(657
)


-



-



(657
)Treasury stock purchased (45,021 shares)


-



-



-



-



(843
)


(843
)Stock options exercised (3,128 shares)


-



37



-



-



-



37Balance at December 31, 2007

$
26


$
23,462


$
26,836


$
(399
)

$
(1,373
)

$
48,552    43




---



##### Table of Contents



First
    Business Financial Services, Inc.
 Consolidated
    Statements of Cash Flows  For the Years Ended December 31,2007


2006(In Thousands)Operating activitiesNet income

$
3,256


$
3,747Adjustments to reconcile net income to net cash provided by
    operating activities:Deferred income taxes, net


(392
)


(836
)Provision for loan and lease losses


2,904



1,519Depreciation, amortization and accretion, net


475



602Share-based compensation


397



182Change in fair value of interest rate swaps


-



283Increase in cash surrender value of bank-owned life insurance


(697
)


(614
)Origination of loans held for sale


(1,340
)


(1,082
)Sale of loans held for sale


1,346



1,089Gain on sale of loans held for sale


(6
)


(7
)Loss on sale of available-for-sale securities


-



7Gain on sale of 50% owned joint venture


-



-Increase in accrued interest receivable and other assets


(694
)


(950
)Increase in accrued interest payable and other liabilities


2,492



602Net cash provided by operating activities


7,741



4,542Investing activitiesProceeds from maturities of available-for-sale securities


22,045



22,480Proceeds from sale of available-for-sale securities


-



749Proceeds from sale of 50% owned joint adventure


-



-Purchases of available-for-sale securities


(18,523
)


(30,780
)Proceeds from sale of FHLB stock


-



1,125Purchases of FHLB stock


(343
)


(251
)Net increase in loans and leases


(134,670
)


(108,671
)Purchases of leasehold improvements and equipment, net


(856
)


(283
)Purchase of bank-owned life insurance


(591
)


-Net cash used in investing activities


(132,938
)


(115,631
)Financing activitiesNet increase in deposits


135,794



72,802Net decrease in FHLB line of credit


(17,048
)


17,048Repayment of FHLB advances


(10
)


(9
)Proceeds from FHLB advances


15,000



7,000Net decrease in short-term borrowed funds


(18,926
)


13,173Repayment of subordinated notes payable


-



(5,000
)Proceeds from subordinated notes payable


10,000



21,000Repayment of junior subordinated debentures


-



(10,310
)Termination of interest rate swaps


-



(1,384
)Exercise of stock options


37



136Cash dividends paid


(644
)


(592
)Purchase of treasury stock


(843
)


(21
)Net cash provided by financing activities


123,360



113,843Net (decrease) increase in cash and cash equivalents


(1,837
)


2,754Cash and cash equivalents at the beginning of the period


19,461



16,707Cash and cash equivalents at the end of the period

$
17,624


$
19,461Supplementary cash flow informationInterest paid on deposits and borrowings

$
34,363


$
27,639Income taxes paid


2,495



2,385Transfer to other real estate owned


660



-    44




---



##### Table of Contents



First
    Business Financial Services, Inc.
 NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS  Note 1 
    Summary
    of Significant Accounting Policies and Nature of
    Operations  Nature of Operations.
  Basis of Financial Statement Presentation.
    Cash and Cash Equivalents.
  Securities Available-for-Sale.
      Federal Home Loan Bank Stock.
 45




---



##### Table of Contents



Loans and Leases.
  Loans Held for Sale.
  Net Investment in Direct Financing Leases.
  Operating Leases.
  Interest on Loans.
  Loan and Lease Origination Fees.
 46




---



##### Table of Contents



Foreclosed Properties and Repossessed
    Assets.
  Allowance for Loan and Lease Losses. loan-by-loan
         47




---



##### Table of Contents



Derivative Instruments.
            Goodwill and Other Intangible Assets.
 48




---



##### Table of Contents



Note 8
  Leasehold Improvements and Equipment.
  Other Investments.
  Bank-Owned Life Insurance.
  Income Taxes.
   49




---



##### Table of Contents



Earnings Per Share.
  Segments and Related Information.
  Defined Contribution Plan.
  Stock Options.
  Share-Based Payment
  Reclassifications.
 50




---



##### Table of Contents



Recent
    Accounting Changes.
  Accounting for Uncertainty in Income Taxes. Accounting for Uncertainty in Income Taxes Accounting for Income Taxes.
  Fair Value Measurements. Fair Value
    Measurements
  Fair Value Option for Financial Assets and Financial
    Liabilities. The Fair Value Option for Financial
    Assets and Liabilities  Including an Amendment of
    SFAS No. 115 Accounting for Certain Investments in Debt and Equity
    Securities,
      Business Combinations. Business Combinations,
  Noncontrolling Interests in Consolidated Financial
    Statements. Noncontrolling Interests in
    Consolidated Financial Statements  an amendment of
    Accounting Research Bulletin No. 51,
 51




---



##### Table of Contents



Note 2 
    Equity Incentive Plans
    Stock
    Options
      For the Years Ended December 31,2007


2006Weighted





WeightedAverage





AverageOptions


Price


Options


PriceOutstanding at beginning of year


166,168


$
21.97



201,532


$
21.05Granted


-



-



-



-Exercised


(3,128
)


11.91



(14,314
)


9.50Forfeited


(3,500
)


24.71



(21,050
)


21.71Outstanding at end of year


159,540



22.10



166,168



21.97Options exercisable at end of year


140,637







106,445     Options OutstandingWeighted





ExercisableAverage


Weighted





WeightedRemaining


Average





AverageContractual


Exercise





ExerciseRange of Exercise
    Prices

Shares


Life (Years)


Price


Shares


Price$15.00  $17.50


9,984



6.04



15.33



9,984



15.33$17.51  $20.00


18,356



3.54



19.08



17,953



19.08$20.01  $22.50


69,450



5.16



22.00



69,450



22.00$22.51  $25.00


61,750



6.77



24.21



43,250



24.15159,540



5.65



22.10



140,637



21.82  52




---



##### Table of Contents



Restricted
    Shares
    2007


2006Weighted





WeightedNumber of


Average


Number of


AverageRestricted


Grant-Date


Restricted


Grant-DateShares


Fair Value


Shares


Fair ValueNonvested balance at beginning of year


45,125


$
23.08



-


$
-Granted


61,885



20.12



48,475



23.07Vested


(11,274
)


23.08



-



-Forfeited


(4,357
)


21.37



(3,350
)


23.03Nonvested balance as of end of year


91,379



21.16



45,125



23.08     Note 3 
    Earnings
    per Share    2007


2006Income available to common stockholders

$
3,256,341


$
3,747,352Basic average shares


2,453,157



2,444,408Dilutive effect of share-based awards


6,079



16,409Dilutive average shares


2,459,236



2,460,817Earnings per share:Basic

$
1.33


$
1.53Diluted

$
1.32


$
1.52     Note 4 
    Cash and Due From Banks.
   53




---



##### Table of Contents



Note 5 
    Securities    As of December 31, 2007Gross


GrossUnrealized


UnrealizedAmortized


Holding


Holding


EstimatedCost


Gains


Losses


Fair Value(In Thousands)U.S. Government corporations and agencies

$
1,500


$
-


$
(3
)

$
1,497Municipals


85



-



-



85Collateralized mortgage obligations  government
    agencies


52,755



282



(379
)


52,658Collateralized mortgage obligations  government
    sponsored agencies


43,631



2



(495
)


43,138$
97,971


$
284


$
(877
)

$
97,378   As of December 31, 2006Gross


GrossUnrealized


UnrealizedAmortized


Holding


Holding


EstimatedCost


Gains


Losses


Fair Value(In thousands)U.S. Government corporations and agencies

$
1,497


$
-


$
(30
)

$
1,467Municipals


185



-



(3
)


182Collateralized mortgage obligations  government
    agencies


38,903



85



(213
)


38,775Collateralized mortgage obligations  government
    sponsored agencies


60,952



-



(1,368
)


59,584$
101,537


$
85


$
(1,614
)

$
100,008           54




---



##### Table of Contents



Amortized


EstimatedCost


Fair Value(In Thousands)Due in one year or less

$
1,615


$
1,611Due in one year through five years


429



423Due in five through ten years


19,412



19,217Due in over ten years


76,515



76,127$
97,971


$
97,378     As of December 31, 2007Less than 12 Months


12 Months or Longer


TotalFair Value


Unrealized Losses


Fair Value


Unrealized Losses


Fair Value


Unrealized Losses(In Thousands)U.S. Government corporations and agencies

$
-


$
-


$
1,497


$
3


$
1,497


$
3Collateralized mortgage obligations  government
    agencies


13,054



374



579



5



13,633



379Collateralized mortgage obligations  government
    sponsored agencies


6,463



66



35,317



429



41,780



495$
19,517


$
440


$
37,393


$
437


$
56,910


$
877   55




---



##### Table of Contents



As of December 31, 2006Less than 12 Months


12 Months or Longer


TotalFair Value


Unrealized Losses


Fair Value


Unrealized Losses


Fair Value


Unrealized Losses(In Thousands)U.S. Government corporations and agencies

$
-


$
-


$
1,467


$
30


$
1,467


$
30Municipals


-



-



182



3



182



3Collateralized mortgage obligations  government
    agencies


14,044



97



9,843



116



23,887



213Collateralized mortgage obligations  government
    sponsored agencies


407



10



59,178



1,358



59,585



1,368$
14,451


$
107


$
70,670


$
1,507


$
85,121


$
1,614   Note 6 
    Loan and
    Lease Receivables and Allowance for Loan and Lease
    Losses    December 31


December 31,2007


2006(In Thousands)First mortgage loans:Commercial real estate

$
336,153


$
274,262Construction


90,545



78,257Multi-family


41,821



34,6351-4 family


48,437



35,721516,956



422,875Commercial and industrial loans


213,786



176,701Direct financing leases, net


29,383



23,203Home equity loans and second mortgage loans


9,784



8,859Credit card and other


11,725



16,712781,634



648,350Less:Allowance for loan and lease losses


9,854



8,296Deferred loan fees


147



187Loans and lease receivables, net

$
771,633


$
639,867    56




---



##### Table of Contents



Years Ended December 31,2007


2006(In Thousands)Allowance at beginning of period

$
8,296


$
6,773Charge-offs:Commercial real estate and other mortgage


(571
)


-Commercial and industrial


(778
)


-Lease


(25
)


-Consumer


-



-Total charge-offs


(1,374
)


-Recoveries:Commercial real estate and other mortgage


5



4Commercial and industrial


23



-Lease


-



-Consumer


-



-Total recoveries


28



4Net (charge-offs) recoveries


(1,346
)


4Provision for loan and lease loss


2,904



1,519Allowance at end of period

$
9,854


$
8,296Allowance to gross loans and leases


1.26
%


1.28
%     Years Ended December 31,2007


2006(In Thousands)Non-accrual loans

$
8,864


$
1,109Non-accrual leases


-



-Total non-accrual loans and leases


8,864



1,109Foreclosed properties and reposed assets, net


660



-Total non-performing assets

$
9,524


$
1,109Performing troubled debt restructurings

$
-


$
-Total non-accrual loans and leases to total loans and leases


1.13
%


0.17
%Total non-performing assets to total assets


1.04



0.14Allowance for loan and lease losses to total loans and leases


1.26



1.28Allowance for loan and lease losses to non-accrual loans and
    leases


111.17



748.06    57




---



##### Table of Contents



As of December 31,2007


2006(In Thousands)Impaired loans and leases with no impairment reserves required

$
6,500


$
683Impaired loans and leases with impairment reserves required


2,617



1,404Total impaired loans and leases


9,117



2,087Less:Impairment reserve (included in allowance for loan and lease
    loss)


834



863Net impaired loans and leases

$
8,283


$
1,224Average impaired loans and leases

$
3,439


$
1,444Foregone interest income attributable to impaired loans and
    leases

$
365


$
210Interest income recognized on impaired loans and leases


41



217Net foregone interest income on impaired loans and leases

$
324


$
(7
)     As of December 31,2007


2006(In Thousands)Minimum lease payments receivable

$
27,572


$
21,184Estimated unguaranteed residual values in leased property


6,642



5,544Initial direct costs


236



273Less unearned lease and residual income


(5,067
)


(3,798
)Investment in commercial direct financing leases

$
29,383


$
23,203       Maturities
    during year ended December 31,
  2008

$
7,3122009


6,5942010


5,8192011


4,3762012


2,047Thereafter


1,424$
27,572  58




---



##### Table of Contents



Note 7 
    Leasehold
    Improvements and Equipment    As of December 31,2007


2006(In Thousands)Leasehold improvements

$
1,241


$
892Furniture and equipment


2,447



2,1243,688



3,016Less: accumulated depreciation


(2,142
)


(1,965
)$
1,546


$
1,051   Note 8 
    Goodwill and Intangible Assets.
      Year Ended December 31,2007


2006(In Thousands)Core deposit intangibles:Gross carrying amount

$
145


$
145Accumulated amortization


(95
)


(77
)Net book value

$
50


$
68Amortization during the period

$
(18
)

$
(23
)Other intangibles:Gross carrying amount

$
120


$
120Accumulated amortization


(72
)


(60
)Net book value

$
48


$
60Amortization during the period

$
(12
)

$
(12
)     Estimate
    for the year ended December 31,
  Core Deposit


OtherIntangibles


Intangibles


Total(In Thousands)2008

$
13


$
12


$
252009


10



12



222010


7



12



192011


5



12



172012


3



-



3Thereafter


12







12$
50


$
48


$
98  59




---



##### Table of Contents



Note 9 
    Other
    Assets      Note 10 
    Deposits    December 31, 2007


December 31, 2006Weighted





WeightedBalance


Average Rate


Balance


Average Rate(In Thousands)Transaction accounts:Demand deposits

$
47,124



0.00
%

$
45,171



0.00
%Negotiable order of withdrawal (NOW) accounts


65,035



4.22



58,927



4.26112,159







104,098Money market accounts


162,585



4.49



171,996



4.57Certificates of deposit


501,316



5.00



364,172



4.63$
776,060






$
640,266     Maturities
    during year ended December 31,
  2008

$
267,3562009


90,1552010


117,9342011


23,5172012


2,354Thereafter


-$
501,316    60




---



##### Table of Contents



Note 11 
    Borrowed
    Funds    December 31, 2007


December 31, 2006Weighted


Weighted





Weighted


WeightedAverage


Average





Average


AverageBalance


Balance


Rate


Balance


Balance


Rate(In Thousands)Fed funds purchased and securities sold under agreements to
    repurchase

$
14,250


$
10,394



5.35
%

$
33,751


$
13,875



5.12
%FHLB advances


34,526



25,776



4.87



36,584



19,059



4.83Junior subordinated debentures


-



-



-



-



9,915



12.52Line of credit


2,210



2,556



7.20



1,635



3,167



6.82Subordinated notes payable


31,000



23,630



7.73



21,000



6,929



7.58Other


-



25



7.00



-



-



-$
81,986


$
62,381



6.13


$
92,970


$
52,945



6.82Short-term borrowings

$
32,470










$
52,443Long-term borrowings


49,516











40,527$
81,986










$
92,970         Maturities
    during year ended December 31,
  2008

$
16,0102009


112010


16,0112011


2,0122012


13Thereafter


469$
34,526    61




---



##### Table of Contents



Note 12 
    Stockholders
    Equity         62




---



##### Table of Contents



MinimumRequired to beMinimum


Well CapitalizedRequired for


Under PromptCapital


CorrectiveAdequacy


ActionActual


Purposes


RequirementsAmount


Ratio


Amount


Ratio


Amount


Ratio(In Thousands)As of December 31, 2007Total capital (to risk-weighted assets)Consolidated

$
87,018



10.22
%

$
68,119



8.00
%


N/A



N/AFirst Business Bank


79,072



10.45



60,528



8.00


$
75,660



10.00
%First Business Bank  Milwaukee


9,847



10.26



7,679



8.00



9,599



10.00Tier 1 capital (to risk-weighted assets)Consolidated

$
46,164



5.42
%

$
34,060



4.00
%


N/A



N/AFirst Business Bank


71,097



9.40



30,264



4.00


$
45,396



6.00
%First Business Bank  Milwaukee


8,639



9.00



3,840



4.00



5,759



6.00Tier 1 capital (to average assets)Consolidated

$
46,164



5.12
%

$
36,065



4.00
%


N/A



N/AFirst Business Bank


71,097



9.04



31,459



4.00


$
39,324



5.00
%First Business Bank  Milwaukee


8,639



7.39



4,678



4.00



5,848



5.00As of December 31, 2006Total capital (to risk-weighted assets)Consolidated

$
73,241



10.40
%

$
56,360



8.00
%


N/A



N/AFirst Business Bank


64,443



10.49



49,144



8.00


$
61,430



10.00
%First Business Bank  Milwaukee


10,205



11.31



7,218



8.00



9,022



10.00Tier 1 capital (to risk-weighted assets)Consolidated

$
43,944



6.24
%

$
28,180



4.00
%


N/A



N/AFirst Business Bank


57,838



9.42



24,572



4.00


$
36,858



6.00
%First Business Bank  Milwaukee


9,070



10.05



3,609



4.00



5,413



6.00Tier 1 capital (to average assets)Consolidated

$
43,944



5.99
%

$
29,331



4.00
%


N/A



N/AFirst Business Bank


57,838



9.22



25,086



4.00


$
31,358



5.00
%First Business Bank  Milwaukee


9,070



8.50



4,269



4.00



5,336



5.00     As of December 31,2007


2006(In Thousands)Stockholders equity of the Corporation

$
48,552


$
45,756Unrealized and accumulated gains and losses on specific items
    and disallowed goodwill and intangible assets


(2,388
)


(1,812
)Tier 1 capital


46,164



43,944Plus: Allowable general valuation allowances and subordinated
    debt


40,854



29,296Risk-based capital

$
87,018


$
73,241  63




---



##### Table of Contents



and/or
  Note 13 
    Employee
    Benefit Plans        Note 14 
    Leases      2008

$
8302009


8492010


7272011


6202012


616Thereafter


2,219$
5,861  64




---



##### Table of Contents



Note 15 
    Income
    Taxes    Year Ended December 31,2007


2006(In thousands)Current:Federal

$
1,527


$
2,180State


672



3372,199



2,517Deferred:Federal


(275
)


(564
)State


(117
)


(272
)(392
)


(836
)Total income tax expense

$
1,807


$
1,681       At December 31,2007


2006(In thousands)Deferred tax assets:Allowance for loan and lease losses

$
3,784


$
3,179Deferred compensation


641



751Unrealized loss on securities


200



527Unrealized loss on interest rate swaps


4



2Federal and state net operating loss carryforwards


2,387



2,058Other


1,076



7948,092



7,311Valuation allowance


(1,074
)


(857
)Total deferred tax assets


7,018



6,454Deferred tax liabilities:Leasing and fixed asset activities


4,032



3,581Other


234



188Total deferred tax liabilities


4,266



3,769Net deferred tax asset

$
2,752


$
2,685     At December 31,2007


2006(In Thousands)Change in net deferred tax assets

$
(67
)

$
(640
)Deferred taxes allocated to OCI


(325
)


(196
)Deferred income tax benefit

$
(392
)

$
(836
)    65




---



##### Table of Contents



Year Ended December 31,2007


2006(In Thousands)Income before income tax expense

$
5,063


$
5,428Tax expense at statutory federal rate of 34% applied to income
    before income tax expense

$
1,721



1,846State income tax, net of federal effect


287



43Low income housing tax credits


(48
)


(68
)Bank-owned life insurance


(237
)


(209
)Other


84



69Total income tax expense

$
1,807


$
1,681Effective tax rate


35.69
%


30.97
%   out-of-state out-of-state
   66




---



##### Table of Contents



Unrecognized tax benefits at beginning of year

$
1,397Additions based on tax positions related to current year


-Additions for tax positions of prior years


649Reductions for tax positions of prior years


(234
)Settlements


-Unrecognized tax benefits at end of year

$
1,812     Note 16 
    Commitments,
    Contingencies, and Financial Instruments with Off-Balance Sheet
    Risk        At December 31,2007


2006(In Thousands)Commitments to extend credit, primarily commercial loans

$
172,660


$
211,611Standby letters of credit and other credit substitutes


12,174



12,211   case-by-case
 67




---



##### Table of Contents



Note 17 
    Fair
    Value of Financial Instruments      Securities:
  Loans and Leases:
  Federal Home Loan Bank stock:
  Cash surrender value of life insurance:
  Deposits:
   68




---



##### Table of Contents



Securities sold under agreement to
    repurchase:
  Borrowed funds:
  Financial instruments with off-balance sheet
    risks:
    Interest rate swaps:
  Limitations:
      December 31, 2007


December 31, 2006Carrying





CarryingAmount


Fair Value


Amount


Fair Value(In Thousands)Financial assets:Cash and cash equivalents

$
17,624


$
17,624


$
19,461


$
19,461Securities
    available-for-sale


97,378



97,378



100,008



100,008Loans and lease receivables


771,633



788,879



639,867



636,436Federal Home Loan Bank stock


2,367



2,367



2,024



2,024Cash surrender value of life insurance


14,757



14,757



13,469



13,469Accrued interest receivable


3,566



3,566



3,407



3,407Financial liabilities:Deposits

$
776,060


$
782,075


$
640,226


$
637,700Federal funds purchased


14,250



14,250



33,300



33,300Securities sold under agreements to repurchase


-



-



451



451Federal Home Loan Bank and other borrowings


67,736



68,818



59,219



58,634Interest rate swaps


10



10



5



5Accrued interest payable


5,911



5,911



3,993



3,993Off balance sheet items:Standby letters of credit


55



55



55



55Commitments to extend credit


-




*


-




*     *
    
    Not meaningful 69




---



##### Table of Contents



Note 18 
    Derivative
    and Hedging Activities        As of December 31,2007


2006Notional


Maturity

Fixed


Variable


Notional


Maturity

Fixed


VariableAmount


Date

Rate


Rate


Amount


Date

Rate


Rate(In Thousands)Cash flow hedge:Pay-fixed interest rate swap

$
447


April, 2009


5.24
%


3.56
%

$
618


April, 2009


5.24
%


5.04
%        70




---



##### Table of Contents



Note 19 
    Condensed
    Parent Only Financial Information    Condensed
    Balance Sheets
  At December 31,2007


2006(In Thousands)AssetsCash and cash equivalents

$
29


$
180Investments in subsidiaries, at equity


82,124



68,720Leasehold improvements and equipment, net


724



651Other


449



161Total assets

$
83,326


$
69,712Liabilities and Stockholders EquityBorrowed funds

$
33,210


$
22,635Other liabilities


1,564



1,321Total liabilities


34,774



23,956Stockholders equity


48,552



45,756Total liabilities and stockholders equity

$
83,326


$
69,712   Condensed
    Statements of Income
  Year Ended December 31,2007


2006(In Thousands)Interest income

$
17


$
-Interest expense


2,010



1,981Net interest expense


(1,993
)


(1,981
)Non-interest incomeConsulting and rental income from subsidiaries


3,956



2,030Other


3



109Total non-interest income


3,959



2,139Non-interest expense


6,268



3,928Loss before tax benefit and equity in undistributed net income
    of subsidiaries


(4,302
)


(3,770
)Income tax benefit


(1,522
)


(1,253
)Loss before equity in undistributed net income of subsidiaries


(2,780
)


(2,517
)Equity in undistributed net income of subsidiaries


6,036



6,264Net income

$
3,256


$
3,747  71




---



##### Table of Contents



Condensed
    Statements of Cash Flows
  Year Ended December 31,2007


2006(In Thousands)Operating activitiesNet income

$
3,256


$
3,747Adjustments to reconcile net income to net cash used in
    operating activities:Equity in undistributed earnings of subsidiaries


(6,036
)


(6,264
)Share-based compensation


135



58Change in fair value of interest rate swaps


-



(96
)Increase (Decrease) in liabilities


260



(822
)Other, net


(391
)


1,392Net cash used in operating activities


(2,776
)


(1,985
)Investing activitiesPayments for investment in and advances to subsidiaries


(6,500
)


(2,000
)Net cash used in investing activities


(6,500
)


(2,000
)Financing activitiesExercise of stock options


37



136Proceeds from advances and other borrowed funds


7,075



5,585Repayment of advances and other borrowed funds


(6,500
)


(6,700
)Proceeds from issuance of long-term debt


10,000



21,000Repayment of long-term debt


-



(5,000
)Repayment of junior subordinated debentures


-



(10,310
)Purchase of treasury stock


(843
)


(21
)Dividends paid


(644
)


(592
)Net cash provided by financing activities


9,125



4,098(Decrease) Increase in cash and cash equivalents


(151
)


113Cash and cash equivalents at beginning of year


180



67Cash and cash equivalents at end of year

$
29


$
180   Note 20 
    Condensed
    Quarterly Earnings (unaudited)  2007


2006First


Second


Third


Fourth


First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter(Dollars in Thousands, Except per Share Data)Interest income

$
13,816


$
14,488


$
15,275


$
15,909


$
10,811


$
11,536


$
12,165


$
13,148Interest expense


(8,435
)


(8,850
)


(9,413
)


(9,582
)


(6,287
)


(6,730
)


(7,448
)


(8,223
)Net interest income


5,381



5,638



5,862



6,327



4,524



4,806



4,717



4,925Provision for loan losses


(576
)


(701
)


(596
)


(1,031
)


-



(71
)


(413
)


(1,036
)Non-interest income


1,002



1,157



1,101



1,156



734



936



1,004



1,000Non-interest expense


(4,876
)


(4,787
)


(4,944
)


(5,050
)


(3,990
)


(4,060
)


(4,133
)


(3,515
)Income before income taxes


931



1,307



1,423



1,402



1,268



1,611



1,175



1,374Income taxes


(332
)


(448
)


(538
)


(489
)


(411
)


(532
)


(309
)


(429
)Net income

$
599


$
859


$
885


$
913


$
857


$
1,079


$
866


$
945Per share data:Basic earnings per share

$
0.24


$
0.35


$
0.36


$
0.37


$
0.35


$
0.44


$
0.35


$
0.39Diluted earnings per share

$
0.24


$
0.35


$
0.36


$
0.37


$
0.35


$
0.44


$
0.35


$
0.38Dividends

$
0.065


$
0.065


$
0.065


$
0.065


$
0.06


$
0.06


$
0.06


$
0.06  72




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm           
    73




---



##### Table of Contents



Item 9.
    Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure   Item 9A(T).
    Controls and Procedures  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Managements
    Annual Report on Internal Control over Financial
    Reporting
  Rules 13a-15(f) 15d-15(f)
      Changes
    in Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 Item 9B.
    Other Information   74




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PART III. Item 10.
    Directors, Executive Officers and Corporate Governance  (a)
    Directors of the Registrant. Information with
    respect to the Directors of the registrant, included in the
    definitive Proxy Statement for the Annual Meeting of the
    Stockholders to be held on May 5, 2008 under the captions
    Board of Directors and Section 16(a)
    Beneficial Ownership Reporting Compliance is incorporated
    herein by reference.(b)
    Executive Officers of the Registrant. The
    information is presented in Item 1of this document.  (c)
    Code of Ethics. The Corporation has adopted a code
    of ethics applicable to all employees, including the principal
    executive and principal accounting officer of the Corporation.
    The FBFS Code of Ethics is posted on the Corporations
    website at www.firstbusiness.com Item 11.
    Executive Compensation   Item 12.
    Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters   Item 13.
    Certain Relationships and Related Transactions, and Director
    Independence   Item 14.
    Principal Accountant Fees and Services   ITEM IV. Item 15.
    Exhibits, Financial Statements Schedules  Item 8  Financial
    Statements and Supplementary Data Form 10-K.
  Exhibits.
 75




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Signatures    FIRST BUSINESS FINANCIAL SERVICES, INC.
  
      76




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##### Table of Contents



Exhibit No.

Exhibit Name3.1

Amended and Restated Articles of Incorporation of First Business
    Financial Services, Inc. (previously filed as Exhibit 3.1 and
    incorporated by reference in the Amended Registration Statement
    on Form 10 filed April 28, 2005)3.2

Amended and Restated Bylaws of First Business Financial
    Services, Inc. (previously filed as Exhibit 3.2 and incorporated
    by reference in the Amended Registration Statement on Form 10
    filed April 28, 2005)4

Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the
    Registrant agrees to furnish to the Securities and Exchange
    Commission, upon request, any instrument defining the rights of
    holders of long-term debt not being registered that is not filed
    as an exhibit to this Registration Statement on Form 10.  No
    such instrument authorizes securities in excess of 10% of the
    total assets of the Registrant.10.1

1993 Incentive Stock Option Plan (previously filed in the
    Registration Statement on Form S-8 filed September 28, 2006)10.2

2001 Equity Incentive Plan (previously filed as Exhibit 10.1 and
    incorporated by reference in the Amended Registration Statement
    on Form 10 filed April 28, 2005)10.3

Form of Stock Option Agreement (previously filed as Exhibit 10.2
    and incorporated by reference in the Amended Registration
    Statement on Form 10 filed April 28, 2005)10.4

2006 Equity Incentive Plan (previously filed in the Registration
    Statement on Form S-8 filed September 28, 2006)10.5

Form of Restricted Stock Agreement (previously filed as Exhibit
    4.4 in the Registration Statement on Form S-8 filed September
    28, 2006)10.6

Restated Employment Agreement dated December 14, 2005 between
    the Registrant and Jerome J. Smith (previously filed as Exhibit
    10.1 to the current report on Form 8-K filed on December 16,
    2005)10.7

Employment and Repayment Agreement between First Business
    Capital Corp. and Charles H. Batson, dated December 14, 2005 and
    amended February 6, 2006 (previously filed as Exhibits 10.1 and
    10.2 to the current reports on Form 8-K filed on December 20,
    2005 and February 10, 2006)10.8

Restated Employment Agreement dated November 7, 2006 between the
    Registrant and Corey A. Chambas (previously filed as Exhibit
    10.1 to the current report on Form 8-K filed on November 13,
    2006)10.9

Annual Incentive Bonus Program21

Subsidiaries of the Registrant (previously filed as
    Exhibit 21 and incorporated by reference in the Amended
    Registration Statement on Form 10 filed April 28, 2005)23

Consent of KPMG LLP31.1

Certification of the Chief Executive Officer31.2

Certification of the Senior Vice President and Chief Financial
    Officer32

Certification of the Chief Executive Officer and Senior Vice
    President and Chief Financial Officer pursuant to 18 U.S.C.
    Section 135099

Proxy Statement for the Annual Meeting of the Stockholders (to
    be filed with the SEC under Regulation 14A within 120 days
    after December 31, 2007; except to the extent specifically
    incorporated by reference, the Proxy Statement for the Annual
    Meeting of the Stockholders shall not be deemed to be filed with
    the SEC as part of this Annual Report on Form 10-K)  77