EXHIBIT 13.1

To Our Stockholders:

2002 was a signature year for HPSC, Inc. Buoyed by the strength of the healthcare industry, one of the only expanding sectors of the economy, we generated
a record amount of new financing contracts.

Today,
healthcare spending accounts for around 15% of our country's gross domestic product. Demographic change in the U.S. is the primary factor contributing to investment by medical
professionals in a wide range of technology and office equipment. The "Baby Boom" generation continues to ageevery 8 seconds, another American turns 50! This generation expects and
demands the most advanced healthcare services. Manufacturers of medical technology are responding to this demand with new equipment such as lasers for plastic surgeons, new less-invasive
diagnostic tools for internists and digital x-rays for dentists. The strength of this medical technology market enabled HPSC to grow along with our customers, meeting their needs for
financing with competitive rates and high quality customer service.

HPSC
generated a record volume of new originations in 2002: $311 million, up some 18% from last year. We achieved these results through a focused and disciplined approach to our
market. We improved our outreach to manufacturers of medical technology and we increased our business in virtually all regions of the country and all segments of the market that we finance. We added
122 new companies to our existing 2,176 vendors, an impressive 6% increase.

The
Company showed strong bottom-line results in 2002: net income was $6.5 million, or $1.49 per fully diluted share, up from a net loss of $1.5 million, or
($0.39 per fully diluted share in 2001. Basic earnings per share were $1.59 in 2002, compared to ($0.39) in 2001. Net revenues increased by 17%, to $70.1 million in 2002 from
$60.1 million in 2001.    The gross owned and managed leases and notes receivables, which are an important measure of our growth rate, rose from $806 million at the end of
2001 to $935 million as of December 31, 2002, a 16% climb. Over the past five years, the combined average annual growth rate of the portfolio has been approximately 25%, a remarkable
rate of increase.

We
want you to know that we have fully resolved the employee defalcation that we discovered in June of 2002 at our subsidiary, ACFC. The unfortunate incident affected only a small
portion of our nearly billion-dollar portfolio, but necessitated a restatement of certain prior financial statements. We are confident that by handling the matter forthrightly we have preserved our
company's well-deserved reputation for integrity.

Where
do we go from here? It is our goal to continue to pursue growth. We will market our products and services aggressively but will apply our conservative, high standards of
underwriting. Our strategy is to capture even more repeat customersalready about 35% of our total originations. We have attained a strong market presence with the dental profession and
ten other specialties that we will strive to enhance. We also will continue to expand our financing of sales and purchases of medical practices. In this way, we will aid the transition of one
generation of medical professionals to the next, cementing strong relationships with future customers. As always, we will continuously monitor credit quality to manage our portfolio most effectively
and maintain high credit ratings, which are critical to our borrowings.

We
are especially proud to have added Richard D. Field to our board of directors this year. Dick brings exceptional experience in consumer and commercial banking operations, having most
recently served as Senior Executive Vice President of the Bank of New York. He also was Chairman of the U.S. Board of Directors of MasterCard International from 1992 to 1997, and served as a member of
its Executive Committee. He is one of the founders of LendingTree.com and also serves as a financial advisor to Epigen, Inc., a biopharmaceutical venture, giving him insights into the
healthcare arena. We welcome Dick to our company.

1

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We
appreciate your support in the past year and look forward to the year ahead.

Sincerely,

John W. Everets,
Chairman and Chief Executive Officer
March, 2003, as restated August 13, 2003

2

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HPSC, Inc. and Subsidiaries        CONSOLIDATED BALANCE SHEETS (As Restated- See Note P)

|                                                          |                                                                                                                           | December 31, |        
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------ | -------
|
|
|ASSETS                                                    |                                                                                                                           |              |        
|Cash and cash equivalents                                 |                                                                                                                           | $            | 51     
|Restricted cashServicing under securitization agreements |                                                                                                                           |              | 29,633 
|Investment in leases and notes:                           |                                                                                                                           |              |        
|                                                          | Lease contracts and notes receivable due in installments                                                                  |              |        
|                                                          | Notes receivable                                                                                                          |              |        
|                                                          | Retained interest in leases and notes sold                                                                                |              |        
|                                                          | Estimated residual value of equipment at end of lease term                                                                |              |        
|                                                          | Deferred origination costs                                                                                                |              |        
|                                                          | Less: Unearned income                                                                                                     |              |        
|                                                          | Security deposits                                                                                                         |              |        
|                                                          | Allowance for losses                                                                                                      |              |        
|                                                          |                                                                                                                           |              |        
|Total net investment in leases and notes                  |                                                                                                                           |              | 575,607
|                                                          |                                                                                                                           |              |        
|Other assets                                              |                                                                                                                           |              | 9,424  
|                                                          |                                                                                                                           |              |        
|Total Assets                                              |                                                                                                                           | $            | 614,715
|                                                          |                                                                                                                           |              |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                      |                                                                                                                           |              |        
|Revolving credit borrowings                               |                                                                                                                           | $            | 43,437 
|Senior notes, net of discount                             |                                                                                                                           |              | 473,830
|Subordinated debt                                         |                                                                                                                           |              | 17,960 
|Accounts payable and accrued liabilities                  |                                                                                                                           |              | 24,663 
|Accrued interest                                          |                                                                                                                           |              | 1,931  
|Interest rate swap contracts                              |                                                                                                                           |              | 16,050 
|Deferred income taxes                                     |                                                                                                                           |              | 4,461  
|                                                          |                                                                                                                           |              |        
|Total Liabilities                                         |                                                                                                                           |              | 582,332
|                                                          |                                                                                                                           |              |        
|Commitments and Contingencies (Note F)                    |                                                                                                                           |              |        
|Stockholders' Equity:                                     |                                                                                                                           |              |        
|                                                          | Preferred stock, $1.00 par value; authorized, 5,000,000 shares; none issued and outstanding                               |              |        
|                                                          | Common stock, $.01 par value; 15,000,000 shares authorized; issued, 4,817,705 shares in 2002 and 4,779,530 shares in 2001 |              |        
|                                                          | Additional paid-in capital                                                                                                |              |        
|                                                          | Retained earnings                                                                                                         |              |        
|                                                          | Less: Treasury stock, at cost; 685,951 shares in 2002 and 615,765 shares in 2001                                          |              |        
|                                                          | Accumulated other comprehensive loss, net of tax                                                                          |              |        
|                                                          | Deferred compensation                                                                                                     |              |        
|                                                          | Notes receivable from officers and employees                                                                              |              |        
|                                                          |                                                                                                                           |              |        
|Total Stockholders' Equity                                |                                                                                                                           |              | 32,383 
|                                                          |                                                                                                                           |              |        
|Total Liabilities and Stockholders' Equity                |                                                                                                                           | $            | 614,715
|                                                          |                                                                                                                           |              |        

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

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HPSC, Inc. and Subsidiaries        CONSOLIDATED STATEMENTS OF OPERATIONS (As Restated- See Note P)

|                                                           |                                        | Year Ended December 31, |          
|---------------------------------------------------------- | -------------------------------------- | ----------------------- | ---------
|
|
|Revenues:                                                  |                                        |                         |          
|                                                           | Earned income on leases and notes      |                         | $        
|                                                           | Gain on sales of leases and notes, net |                         |          
|                                                           | Provision for losses                   |                         |          
|                                                           |                                        |                         |          
|                                                           |                                        | Net Revenues            |          
|                                                           |                                        |                         |          
|Expenses:                                                  |                                        |                         |          
|                                                           | Selling, general and administrative    |                         |          
|                                                           | Term securitization costs              |                         |          
|                                                           | Loss from employee defalcation         |                         |          
|                                                           | Interest expense                       |                         |          
|                                                           | Interest income                        |                         |          
|                                                           |                                        |                         |          
|Income (Loss) before Income Taxes                          |                                        |                         | 10,729   
|Provision (Benefit) for Income Taxes                       |                                        |                         | 4,263    
|                                                           |                                        |                         |          
|Net Income (Loss)                                          |                                        | $                       | 6,466    
|                                                           |                                        |                         |          
|Basic Net Income (Loss) per Share                          |                                        | $                       | 1.59     
|                                                           |                                        |                         |          
|Shares Used to Compute Basic Net Income (Loss) per Share   |                                        |                         | 4,064,404
|                                                           |                                        |                         |          
|Diluted Net Income (Loss) per Share                        |                                        | $                       | 1.49     
|                                                           |                                        |                         |          
|Shares Used to Compute Diluted Net Income (Loss) per Share |                                        |                         | 4,339,846
|                                                           |                                        |                         |          

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

4

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HPSC, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (As Restated- See Note P)

|                                                                                      |  |           |  |   |    |  |   |        |  |   |        |   |   |        |   | Notes
Receivable
from
Officers
and
Employees |        |   |  
|------------------------------------------------------------------------------------- |  | --------- |  | - | -- |  | - | ------ |  | - | ------ | - | - | ------ | - | -------------------------------------------- | ------ | - | -
|
|
|
|
|
|Balance at January 1, 2000                                                            |  | 4,699,530 |  | $ | 47 |  | $ | 14,119 |  | $ | 29,955 |   | $ | (3,611 | ) | $                                            |       |   | $
|Net Income (Loss)                                                                     |  |          |  |   |   |  |   |       |  |   | (2,371 | ) |   |       |   |                                              |       |   |  
|Purchase of Treasury Stock                                                            |  |          |  |   |   |  |   |       |  |   |       |   |   | (219   | ) |                                              |       |   |  
|Restricted Stock Compensation                                                         |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              |       |   |  
|ESOP Compensation                                                                     |  |          |  |   |   |  |   | 157    |  |   |       |   |   |       |   |                                              |       |   |  
|Notes Receivable from Officers and Employees                                          |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              |       |   |  
|Stock Bonus Awards                                                                    |  | 7,000     |  |   |   |  |   | 52     |  |   |       |   |   |       |   |                                              |       |   |  
|Exercise of Stock Options, net of tax benefit                                         |  | 6,500     |  |   |   |  |   | 36     |  |   |       |   |   |       |   |                                              |       |   |  
|                                                                                      |  |           |  |   |    |  |   |        |  |   |        |   |   |        |   |                                              |        |   |  
|Balance at December 31, 2000                                                          |  | 4,713,030 |  |   | 47 |  |   | 14,364 |  |   | 27,584 |   |   | (3,830 | ) |                                              |       |   |  
|Net Income (Loss)                                                                     |  |          |  |   |   |  |   |       |  |   | (1,533 | ) |   |       |   |                                              |       |   |  
|Net unrealized gain on foreign currency translation (net of deferred taxes of $24)    |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              | 36     |   |  
|Net unrealized loss on interest rate swap contracts (net of deferred taxes of $5,833) |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              | (9,015 | ) |  
|                                                                                      |  |           |  |   |    |  |   |        |  |   |        |   |   |        |   |                                              |        |   |  
|Total Comprehensive loss                                                              |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              |       |   |  
|Purchase of Treasury Stock                                                            |  |          |  |   |   |  |   |       |  |   |       |   |   | (495   | ) |                                              |       |   |  
|Restricted Stock Compensation                                                         |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              |       |   |  
|ESOP Compensation                                                                     |  |          |  |   |   |  |   | 130    |  |   |       |   |   |       |   |                                              |       |   |  
|Notes Receivable from Officers and Employees                                          |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              |       |   |  
|Stock Bonus Awards                                                                    |  | 6,000     |  |   |   |  |   | 48     |  |   |       |   |   |       |   |                                              |       |   |  
|Exercise of Stock Options, net of tax benefit                                         |  | 60,500    |  |   | 1  |  |   | 325    |  |   |       |   |   |       |   |                                              |       |   |  
|                                                                                      |  |           |  |   |    |  |   |        |  |   |        |   |   |        |   |                                              |        |   |  
|Balance at December 31, 2001                                                          |  | 4,779,530 |  |   | 48 |  |   | 14,867 |  |   | 26,051 |   |   | (4,325 | ) |                                              | (8,979 | ) |  
|Net Income                                                                            |  |          |  |   |   |  |   |       |  |   | 6,466  |   |   |       |   |                                              |       |   |  
|Net realized gain on foreign currency translation (net of deferred taxes of $24)      |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              | (36    | ) |  
|Net unrealized loss on interest rate swap contracts (net of deferred taxes of $473)   |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              | (730   | ) |  
|                                                                                      |  |           |  |   |    |  |   |        |  |   |        |   |   |        |   |                                              |        |   |  
|Total Comprehensive income                                                            |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              |       |   |  
|Purchase of Treasury Stock                                                            |  |          |  |   |   |  |   |       |  |   |       |   |   | (538   | ) |                                              |       |   |  
|Restricted Stock Compensation                                                         |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              |       |   |  
|ESOP Compensation                                                                     |  |          |  |   |   |  |   | 153    |  |   |       |   |   |       |   |                                              |       |   |  
|Notes Receivable from Officers and Employees                                          |  |          |  |   |   |  |   |       |  |   |       |   |   |       |   |                                              |       |   |  
|Stock Bonus Awards                                                                    |  | 6,000     |  |   |   |  |   | 49     |  |   |       |   |   |       |   |                                              |       |   |  
|Exercise of Stock Options, net of tax benefit                                         |  | 32,175    |  |   |   |  |   | 163    |  |   |       |   |   |       |   |                                              |       |   |  
|                                                                                      |  |           |  |   |    |  |   |        |  |   |        |   |   |        |   |                                              |        |   |  
|Balance at December 31, 2002                                                          |  | 4,817,705 |  | $ | 48 |  | $ | 15,232 |  | $ | 32,517 |   | $ | (4,863 | ) | $                                            | (9,745 | ) | $
|                                                                                      |  |           |  |   |    |  |   |        |  |   |        |   |   |        |   |                                              |        |   |  

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

5

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HPSC, Inc. and Subsidiaries        CONSOLIDATED STATEMENTS OF CASH FLOWS (As Restated- See Note P)

|                                                     |                                                                                 | Year Ended December 31,                                                                                           |         
|---------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | --------
|
|
|Cash Flows from Operating Activities                 |                                                                                 |                                                                                                                   |         
|                                                     | Net income (loss)                                                               |                                                                                                                   | $       
|                                                     | Adjustments to reconcile net income to cash provided by operating activities:   |                                                                                                                   |         
|                                                     |                                                                                 | Depreciation and amortization                                                                                     |         
|                                                     |                                                                                 | Increase (decrease) in deferred income taxes                                                                      |         
|                                                     |                                                                                 | Restricted stock, stock option, and stock bonus award compensation                                                |         
|                                                     |                                                                                 | Gain on sale of lease contracts and notes receivable, net                                                         |         
|                                                     |                                                                                 | Interest rate swap breakage cost                                                                                  |         
|                                                     |                                                                                 | Structural costs and retained interest impairment upon transfer of assets from CP conduits to term securitization |         
|                                                     |                                                                                 | Provision for losses on lease contracts and notes receivable                                                      |         
|                                                     |                                                                                 | Increase (decrease) in accrued interest                                                                           |         
|                                                     |                                                                                 | Increase (decrease) in accounts payable and accrued liabilities                                                   |         
|                                                     |                                                                                 | Increase (decrease) in accrued income taxes                                                                       |         
|                                                     |                                                                                 | Decrease in refundable income taxes                                                                               |         
|                                                     |                                                                                 | (Increase) decrease in other assets                                                                               |         
|                                                     |                                                                                 |                                                                                                                   |         
|Cash provided by operating activities                |                                                                                 |                                                                                                                   | 16,963  
|                                                     |                                                                                 |                                                                                                                   |         
|Cash Flows from Investing Activities                 |                                                                                 |                                                                                                                   |         
|                                                     | Origination of lease contracts and notes receivable due in installments         |                                                                                                                   |         
|                                                     | Portfolio receipts, net of amounts included in income                           |                                                                                                                   |         
|                                                     | Proceeds from sales of lease contracts and notes receivable due in installments |                                                                                                                   |         
|                                                     | Net decrease in notes receivable                                                |                                                                                                                   |         
|                                                     | Net decrease in security deposits                                               |                                                                                                                   |         
|                                                     | Net increase (decrease) in other assets                                         |                                                                                                                   |         
|                                                     | Net (increase) decrease in loans to employees                                   |                                                                                                                   |         
|                                                     |                                                                                 |                                                                                                                   |         
|Cash used in investing activities                    |                                                                                 |                                                                                                                   | (101,345
|                                                     |                                                                                 |                                                                                                                   |         
|Cash Flows from Financing Activities                 |                                                                                 |                                                                                                                   |         
|                                                     | Proceeds from issuance of term securitization notes, net of debt issue costs    |                                                                                                                   |         
|                                                     | Repayments of term securitization notes                                         |                                                                                                                   |         
|                                                     | Proceeds from issuance of other senior notes                                    |                                                                                                                   |         
|                                                     | Repayments of other senior notes                                                |                                                                                                                   |         
|                                                     | Repayment of subordinated notes                                                 |                                                                                                                   |         
|                                                     | Net proceeds (repayments) from revolving notes payable to banks                 |                                                                                                                   |         
|                                                     | Interest rate swap breakage costs                                               |                                                                                                                   |         
|                                                     | Purchase of treasury stock                                                      |                                                                                                                   |         
|                                                     | (Increase) decrease in restricted cash                                          |                                                                                                                   |         
|                                                     | Exercise of employee stock options                                              |                                                                                                                   |         
|                                                     | Repayment of employee stock ownership plan promissory note                      |                                                                                                                   |         
|                                                     |                                                                                 |                                                                                                                   |         
|Cash provided by financing activities                |                                                                                 |                                                                                                                   | 83,735  
|                                                     |                                                                                 |                                                                                                                   |         
|Net increase (decrease) in cash and cash equivalents |                                                                                 |                                                                                                                   | (647    
|Cash and cash equivalents at beginning of year       |                                                                                 |                                                                                                                   | 698     
|                                                     |                                                                                 |                                                                                                                   |         
|Cash and cash equivalents at end of year             |                                                                                 | $                                                                                                                 | 51      
|                                                     |                                                                                 |                                                                                                                   |         
|Supplemental disclosures of cash flow information:   |                                                                                 |                                                                                                                   |         
|                                                     | Interest paid                                                                   |                                                                                                                   | $       
|                                                     | Income taxes paid                                                               |                                                                                                                   |         
|Non-cash transaction:                                |                                                                                 |                                                                                                                   |         
|                                                     | Asset sale transfers in satisfaction of senior notes                            |                                                                                                                   | $       

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

6

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HPSC, INC. and Subsidiaries        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (As restated- See Note P)

NOTE A. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of BusinessHPSC, Inc. ("HPSC") and its consolidated subsidiaries (the "Company") provide financing, in the
form of leases and notes, for equipment and other practice related expenses to the medical and healthcare professions. The Company does not carry any inventory. The Company acquires the financed
equipment from vendors at their customary selling price to other customers. All leases are classified as direct financing leases. The Company also finances the acquisition of healthcare practices by
healthcare professionals and provides financing for leasehold improvements, office furniture and equipment, and certain other costs involved in opening or maintaining a healthcare provider's office.
The Company periodically sells leases and notes in its securitization facilities and to various banks.

Through
its wholly-owned subsidiary, American Commercial Finance Corporation ("ACFC"), the Company also provides asset-based financing to manufacturing and distribution companies with
borrowing requirements of generally $4,000,000 or less. New originations at ACFC were discontinued in 2002, and HPSC is currently winding down its asset-based operations.

Basis of ConsolidationThe accompanying consolidated financial statements include HPSC and the following wholly-owned
subsidiaries: ACFC, an asset-based lender engaged in providing accounts receivable and inventory financing at variable rates, HPSC Bravo Funding, LLC ("Bravo"), HPSC Capital Funding Inc.
("Capital") (terminated in June 2001), HPSC Equipment Receivables
2000-1 LLC I and HPSC Equipment Receivables 2000-1 LLC II, each a special-purpose corporation formed in connection with securitization facilities. Certain financial assets have
been sold by HPSC Bravo Funding LLC with the assets and associated debt removed from the Company's consolidated balance sheet pursuant to the accounting provisions of Statement of Financial Accounting
Standards ("SFAS") No. 140. All inter-company transactions have been eliminated in consolidation.

Use of EstimatesThe preparation of financial statements in accordance with accounting principles generally accepted in the
United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant areas requiring the use of management estimates are the
allowance for losses on leases and notes, residual values and fair value disclosures and calculations. Actual results could differ from those estimates.

Revenue RecognitionThe Company finances equipment only after a customer's credit has been approved and a lease or financing
agreement for the transaction has been executed. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. When a transaction is initially
activated, the Company records the minimum payments and the estimated residual value of the equipment, if any, associated with the transaction. An amount equal to the sum of the payments due plus the
residual value less the cost of the transaction is recorded as unearned income. The unearned income is recognized as revenue over the life of the transaction using the effective interest method.
Recognition of revenue on these assets is suspended when a transaction enters the legal collection phase. Also included in earned income are fees from various portfolio service charges, gains and
losses on prepayments, and miscellaneous income items, net of initial direct cost

7

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amortization.
Notes receivable are reported at their outstanding principal balances. Interest income on notes receivable is recognized as it is accrued.

Sales of Leases and Notes ReceivableThe Company periodically sells leases and notes in its securitization facilities. Gains
on sales of leases and notes are recognized at the time of the sale. The gain is computed as the excess of the present value of the anticipated future cash flows plus the fair value of its retained
subordinated interest, minus initial direct costs and expenses and the Company's current carrying value of the assets sold. The Company retains servicing responsibility for financing contracts sold.
Servicing fees on sold assets, which the Company believes closely approximate its servicing costs, are deferred and recognized as revenue in proportion to the estimated periodic servicing costs.

Debt Issue CostsDebt issue costs incurred in securing credit facility financing are capitalized and subsequently amortized
over the term of the credit facility.

Cash and Cash EquivalentsThe Company considers all highly liquid investments with maturities of three months or less when
acquired to be cash equivalents.

Restricted CashAs part of its servicing obligation under its securitization and bank agreements (Note C), the Company
collects certain cash receipts on financing contracts pledged or sold. These collections are segregated in separate accounts for the benefit of the entity to which the related leases and notes were
pledged or sold and are remitted to such entities on a monthly basis.

Estimated Residual Value of Equipment at End of Lease TermResidual values, representing the estimated value of equipment at
the end of the lease term, are recorded in the consolidated financial statements at the inception of each lease. These amounts are estimated by management, based upon its experience and judgment, and
generally equal 10% of the original cost of the equipment.

Deferred Origination CostsThe Company capitalizes initial direct costs that relate to the origination of leases and notes in
accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases". These initial direct costs comprise
certain specific activities related to processing requests for financing, such as the costs to underwrite the transaction, to prepare and execute the documentation, filing fees, and commission
payments. Deferred origination costs are amortized using the effective interest method over the life of the receivable as an adjustment of yield.

Allowance for LossesThe Company records an allowance for estimated losses in its portfolio. The allowance is based on an
evaluation of its portfolio quality, delinquency trends, general economic conditions, historical loss experiences, as well as a specific analysis of potential loss accounts. An account is either
specifically reserved or written off when deemed uncollectible.

InventoryThe Company occasionally repossesses equipment from lessees or borrowers who have defaulted on their obligations to
the Company. There was no such equipment held for resale at December 31, 2002 or 2001.

8

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Property and EquipmentProperty and equipment used by the business are recorded at cost and depreciated using the
straight-line method over a period of three to five years. Leasehold improvements are amortized over the shorter of the estimated life of the asset or the lease term. Upon retirement or
other disposition, the cost and related accumulated depreciation of the asset are removed from the accounts and the resulting gain or loss is reflected in income. Net property and equipment, which are
included as a component of other assets, totaled $1,192,000 and $1,492,000 at December 31, 2002 and 2001, respectively.

Interest Rate Swap ContractsUnder the terms of its securitization agreements (Note C), the Company is required to
enter into interest rate swap contracts to manage its exposure to fluctuations in interest rates. Interest rate swap contracts are used to convert substantial portions of the Company's debt from a
variable-rate to a fixed-rate of interest. The periodic net interest payments from the swap contracts are recognized in the Company's consolidated statements of operations as a
component of interest expense. The Company does not hold or issue derivative financial instruments for trading purposes and is not a party to leveraged instruments. The Company has established a
control environment that includes procedures for risk assessment and approval, reporting and monitoring of derivative financial instruments.

On
January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138. SFAS No. 133,
as amended, requires all derivative instruments to be recorded on the Consolidated Balance Sheet as either assets or liabilities and measured at fair value. Prior to January 1, 2001, the
Company accounted for interest rate swap contracts using settlement accounting.

The
Company has designated its interest rate swap contracts to hedge its exposure to the variability in expected future cash flows attributable to its variable rate debt. Accordingly,
the Company assesses the effectiveness of the hedge for each reporting period. The fair value of each interest rate swap contract is recorded on the Consolidated Balance Sheet. Unrealized gains or
losses, representing the effective portion of the hedge, are excluded from earnings and reflected in stockholders' equity as a separate component of accumulated other comprehensive income (loss), net
of taxes. The ineffective portion of the hedge is determined by comparing the changes in the fair value of the swap contract to changes in the fair value of a hypothetical swap having terms equal to
the hedged debt. Any ineffective portion of the hedge is recognized in earnings. During the years ended December 31, 2002 and 2001, the swap contracts were effective in offsetting changes in
the cash flows of the Company's variable rate debt obligations. Amounts recorded in accumulated other comprehensive income (loss) will be reclassed out either as the hedged debt amortizes or as
interest rates fluctuate.

Accounting for Stock-Based CompensationThe Company accounts for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" (Note I). The Company applies the intrinsic value method under APB No. 25 to measure
compensation expense related to grants of stock options, and has disclosed the pro forma information required by SFAS No. 123, "Accounting for Stock-Based Compensation". No stock-based
compensation costs related to stock options are reflected in net income. If the Company had used the

9

---

fair-value
method to measure compensation under the accounting provisions of SFAS No. 123, reported net income (loss) and basic and diluted net income (loss) per share would have
been as follows:

2002

2001

2000(in thousands, except per share amounts)Net income (loss), as reported

$
6,466

$
(1,533
)
$
(2,371
)Less: Total stock-based compensation expense determined under fair Value method for all stock options granted, net of tax


(1,000
)

(961
)

(777
)Pro forma net income (loss)

$
5,466

$
(2,494
)
$
(3,148
)Basic net income (loss) per share, as reported

$
1.59

$
(0.39
)
$
(0.61
)Basic net income (loss) per share, pro forma

$
1.34

$
(0.63
)
$
(0.81
)Diluted net income (loss) per share, as reported

$
1.49

$
(0.39
)
$
(0.61
)Diluted net income (loss) per share, pro forma

$
1.26

$
(0.63
)
$
(0.81
)


For
purposes of determining the above disclosure, the fair value of options on their grant date was measured using the Black-Scholes option pricing model. Key assumptions used to apply
this pricing model were as follows:

2002

2001

2000Weighted-average risk-free interest rate

4.7%

4.2%

6.0%Expected life of option grants

10 years

10 years

10 yearsExpected volatility of stock

21.9%

24.1%

65.3%


The
pro forma presentation only includes the effects of grants made subsequent to January 1, 1995. The pro forma amounts may not be indicative of the future benefit, if any, to be
received by the option holder.

Deferred CompensationDeferred compensation, which includes notes receivable from the Company's Employee Stock Ownership Plan
("ESOP") and deferred compensation related to restricted stock awards, was as follows at December 31:

2002

2001

2000(in thousands)ESOP

$
106

$
211

$
316Restricted stock





94


319Total

$
106

$
305

$
635


Income TaxesCurrent tax liabilities or assets are recognized, through charges or credits to the current tax provision, for
the estimated taxes payable or refundable for the current year. Net deferred taxes are recognized, through charges or credits to the deferred tax provision, for the estimated future

10

---

tax
effects, based on enacted tax rates, attributable to temporary differences. Deferred tax liabilities are recognized for temporary differences that will result in amounts taxable in the future, and
deferred tax assets are recognized for temporary differences and tax benefit carryforwards that will result in amounts deductible or creditable in the future. The effect of enacted changes in tax law,
including changes in tax rates, on these deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A deferred tax valuation reserve is established if
it is more likely than not that all or a portion of the Company's deferred tax assets will not be realized. Changes in the deferred tax valuation reserve are recognized through charges or credits to
the deferred tax provision.

Recently Issued Accounting PronouncementsThe Company adopted the provisions of Statement of Position ("SOP")
01-6, "Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others" on January 1, 2002. The Company determined that
the adoption of this SOP did not have a material impact on its consolidated financial statements.

In
April 2002, SFAS No. 145, "Rescission of Financial Accounting Standards Board ("FASB") Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections" was issued. This statement rescinds and modifies earlier pronouncements, makes various technical corrections, clarifies meanings, and further describes their applicability
under changed conditions. The provisions of this statement will be effective for all fiscal years beginning after May 15, 2002. The accounting requirements provided by SFAS No. 145 will
not have a material effect on the Company's consolidated financial statements.

The
FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" in July 2002. The standard requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Previous accounting guidance was provided by EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 replaces EITF Issue No. 94-3. The provisions of SFAS No. 146 are to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The new accounting requirements of SFAS No. 146 will not have a material impact on the Company's consolidated financial results.

In
October 2002, SFAS No. 147 "Acquisitions of Certain Financial Institutions" was issued. This statement addresses the financial accounting and reporting for the
acquisition of all or part of a financial institution, except for transactions between mutual enterprises. The new accounting requirements of this statement were effective beginning October 1,
2002. The adoption of this statement did not have a material effect on the Company's consolidated financial statements.

The
FASB issued Interpretation No. 45 "Guarantor's accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" in
November 2002. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The
Company's asset-based lending subsidiary, ACFC, will issue, from time to time, trade guarantees for its customers' purchases of supplies from vendors. As of December 31, 2002, ACFC had no such
guarantees outstanding.

11

---

SFAS
No. 148 "Accounting for Stock-Based CompensationTransition and Disclosure, an amendment to SFAS No. 123" was issued in December 2002. The statement
provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reporting. The Company has adopted the disclosure provisions of this standard as of December 31, 2002.

In
January 2003, FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities". This interpretation of Accounting Research Bulletin No. 51
"Consolidated Financial Statements", addresses consolidation by business enterprises of variable interest entities ("VIE"), also commonly referred to as special purpose entities ("SPE"). The
interpretation requires consolidation of a VIE with an entity based on certain economic factors such as the extent of obligations of an entity to absorb the expected losses or the rights of an entity
to receive expected residual returns from a VIE. Previous accounting interpretations required consolidation of a VIE based on control of the VIE through voting interests. The Company does not believe
the provisions of Interpretation No. 46 will have an impact on the Company as a result of a specific exemption within the Interpretation for transferors of financial assets to a qualified SPE,
as such term is defined in SFAS No. 140.

ReclassificationsCertain amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform to
the current year presentation.

NOTE B. LEASES AND NOTES RECEIVABLE

The Company's financing contract portfolio consists of two general categories of assets.

The
first category consists of leases and notes due in installments to HPSC, which comprise approximately 97% and 95% of the Company's consolidated net investment in leases and notes at
December 31, 2002 and 2001, respectively. The majority of these leases and notes are from licensed medical professionals, principally dentists, who practice in individual or small group
practices. Approximately 70% of these leases and notes pertain to equipment financing while approximately 30% relate to practice financing, leasehold improvements, office furniture, working capital
and supplies. The Company operates principally in the portion of the healthcare finance market where the size of the transaction is $250,000 or less, generally referred to as the "small-ticket"
market. The average size of an obligor's original obligation under a financing contract originated by the Company during 2002 was approximately $40,000. The leases and notes are
non-cancelable contracts providing for a full payout at a fixed rate, with terms ranging from 12 to 84 months. The Company's leases provide for a purchase option at an amount
approximating the fair value of the equipment at maturity, generally equal to 10% of the original equipment cost.

The
second category consists of notes receivable due to ACFC and progress payment notes receivable due to HPSC, which together comprise approximately 3% and 5% of the Company's net
investment in leases and notes at December 31, 2002 and 2001, respectively. The notes to ACFC ($12,826,000 at December 31, 2002) consist of secured, asset-based, revolving lines of
credit of $4 million or less to small and medium-sized manufacturers and distributors, at variable interest rates.

12

---

Advances
on a revolving loan generally do not exceed 80% of a borrower's eligible accounts receivable or 50% of the value of a borrower's active inventory. ACFC loans, which typically have terms of
two to three years, are "fully followed", which means ACFC receives daily settlement statements of its borrower's accounts receivable and receives daily collections into ACFC controlled collection
accounts. On December 31, 2002, ACFC sold five revolving loans to a third party. At the time of the sale, the loans had a net book value of $7,426,000. The Company recorded a
pre-tax loss of $743,000, which is included in "Gain on sales of leases and notes, net" on the Consolidated Statement of Operations. The progress payment notes receivable due to HPSC
($6,525,000 at December 31, 2002) relate to progress payments made for construction or leasehold improvements in advance of the borrower's executing a lease or finance agreement with the
Company. These demand notes are secured by a blanket lien on all the assets of the licensed healthcare professional's practice.

The
Company's receivables are subject to credit risk. To reduce this risk, the Company has adopted underwriting policies for approving leases and notes. Additionally, the Company may be
subject to limited recourse from leases and notes sold under certain securitization agreements (Notes C and D). Such risk of loss to the Company is generally limited to the extent of the Company's
retained interest and residual values in the financing contracts sold.

A
summary of activity in the Company's consolidated allowance for losses for each of the years in the three-year period ended December 31, 2002 is as follows:

2002

2001

2000(in thousands)Balance, beginning of year

$
(15,359
)
$
(14,170
)
$
(9,150
)Provision for losses


(11,448
)

(9,409
)

(9,218
)Charge-offs


10,255


8,253


4,287Recoveries


(348
)

(33
)

(89
)Balance, end of year

$
(16,900
)
$
(15,359
)
$
(14,170
)


The
total gross contractual balances of delinquent leases and notes, both owned and managed by the Company, which were over 90 days past due, amounted to $27,973,000 at
December 31, 2002 compared to $24,945,000 at December 31, 2001. An account is considered delinquent when not paid within 30 days of the billing due date.

The
Company's agreements with its customers, except for its notes receivable, are non-cancelable and provide for a full payout at a fixed financing rate over terms of one to
seven years. Scheduled

13

---

future
receipts on leases and notes, plus anticipated cash flows on the retained interest in leases and notes sold, were as follows at December 31, 2002:

Leases and
Notes Due in
Installments

Retained
Interest in
Leases and
Notes Sold(in thousands)2003

$
198,869

$
8,7942004


152,205


8,0712005


117,342


6,8772006


81,823


5,3782007


53,484


3,4532008 and thereafter


40,174


1,401Total

$
643,897

$
33,974


NOTE C. DEBT AND SECURITIZATION FACILITIES

Revolving Credit BorrowingsThe Company utilizes its revolving credit borrowings primarily to temporarily warehouse new
financing contracts until permanent fixed-rate financing is available as well as to finance a portion of the loan portfolio of its ACFC subsidiary. In May 2001 the Company renewed
and amended its revolving credit facility with Fleet National Bank (the "Fleet Revolver"), providing the Company with available borrowings up to $83,500,000 through May 2002. In
May 2002, the Fleet Revolver was again renewed, providing availability up to $75,000,000 through August 2002. Under the terms of the Fleet Revolver, interest on the Company's base
borrowings was computed at variable interest rates of prime plus .75% to 1.25% and interest on excess borrowings was computed at LIBOR plus 2.25% to 2.75%. The level of spread to be paid above the
base rate and LIBOR rates was dependent upon the Company's balance sheet leverage as well as compliance with certain performance covenants. At December 31, 2001, the Company had $52,000,000
outstanding under the Fleet Revolver, at a weighted-average interest rate of 4.6%.

In
August 2002, Fleet National Bank assigned the Fleet Revolver to Foothill Capital Corporation, as Agent. The Company contemporaneously executed an agreement with Foothill
Capital Corporation and a group of lenders (the "Foothill Revolver"). The Foothill Revolver provides for a line of credit to HPSC (the "HPSC Foothill Revolver") and a separate line of credit to ACFC
(the "ACFC Foothill Revolver"). Substantially all of the assets of the Company, which does not include assets pledged or sold under securitizations, have been pledged to HPSC's lenders as security
under its credit arrangement. Under the terms of the HPSC Foothill Revolver, the Company may borrow up to $50,000,000 at variable interest rates of prime plus .50% to 1.00% and at LIBOR plus 2.50% to
3.00%, depending upon the Company's balance sheet leverage. This line was temporarily increased in November 2002 to $60,000,000, through January 24, 2003 (see subsequent events
Note O). The HPSC Foothill Revolver expires in August 2005. Under the ACFC Foothill Revolver, ACFC may borrow up to $20,000,000 at a variable interest rate of prime plus 1.00% for the
first 180 days and prime plus 2.00% thereafter. The ACFC Foothill Revolver expires on February 5, 2003 (see subsequent events Note O). Both the HPSC and the ACFC Revolvers are
subject to certain financial covenant requirements

14

---

including,
among others, tangible net worth, leverage, profitability levels, and interest coverage. Initial proceeds from the Foothill Revolver were used to repay remaining amounts due to Fleet
National Bank under the Fleet Revolver. At December 31, 2002, the Company had $42,606,000 outstanding under the HPSC Foothill Revolver and $831,000 outstanding under the ACFC Foothill Revolver.
The weighted-average interest rate of the Foothill Revolver was 5.25% at December 31, 2002.

As
described above, the HPSC Foothill Revolver contains certain financial covenant requirements for the Company including, among others, tangible net worth, leverage, profitability
levels, and portfolio delinquencies. The Company has received a waiver from the revolver lenders from the inception of the Foothill Revolver through the end of the quarter ended June 30, 2003
relating to the Company's
non-compliance with the leverage and net income covenant requirements in the HPSC Foothill Revolver arising out of the restatement described in Note P. The Company anticipates that
it will need to obtain further waivers of the leverage covenant and/or amend the leverage covenant in future periods. The Company intends to work with its lenders to obtain such waivers and/or
amendments.

Senior Subordinated NotesIn March 1997, the Company issued $20,000,000 of unsecured senior subordinated notes (the
"Notes") due in 2007. The Notes bear interest at a fixed rate of 11%, payable semi-annually on April 1 and October 1 of each year. The Notes are redeemable through the
operation of a sinking fund at established redemption prices, plus accrued interest to the date of redemption. Beginning July 1, 2002, the Company began redeeming, through scheduled, quarterly
sinking fund payments, a portion of the aggregate principal amount of the Notes at a redemption price of $1,000,000 plus accrued interest to the redemption date. Such payments are required on
January 1, April 1, July 1, and October 1 of each year until maturity. At December 31, 2002 and 2001, the Company had outstanding senior subordinated notes of
$17,960,000 and $19,985,000, respectively. The senior subordinated notes are full recourse to the Company.

Senior NotesVarious BanksThe Company periodically enters into secured, fixed-term loan agreements
with various banks for purposes of financing its operations. The loans are secured by certain of the Company's financing contracts and are full recourse to the Company. At December 31, 2002 and
2001, the Company had on its consolidated balance sheet outstanding borrowings of $7,210,000 and $11,559,000, respectively, under such loan agreements, at annual interest rates ranging from 6.5% to
8.0%.

Securitization Facilities-GeneralThe Company utilizes two primary securitization facilities to provide a substantial portion
of its financing requirements: the Bravo facility (the "Bravo Facility") and the Equipment Receivables 2000-1 facility ("ER 2000-1 Facility"). In connection with its
securitization financing activities, the Company has formed the following bankruptcy-remote, special-purpose entities: HPSC Bravo Funding LLC ("Bravo"), HPSC Equipment Receivables 2000-1
LLC I ("ER 2000-1 LLC I"), and HPSC Equipment Receivables 2000-1 LLC II ("ER 2000-1 LLC II"). Securitization is a process in which pools of financing contracts are
sold to a special-purpose entity which issues notes to investors to pay for the contracts. The notes are secured by a pledge of the assets in the financing contract pools. Principal and interest on
the notes are paid from the cash flows generated from the financing contracts. In both securitizations, the Company has retained the responsibility for servicing the financing contract portfolio.
Under certain circumstances, the Company, as the servicer, may also

15

---

be
obligated to advance amounts due on a financing contract if an obligor fails to remit a payment when due. The Company is reimbursed for such advances from available funds upon subsequent collection
from the obligor.

For
accounting purposes, the Company treats these securitizations as either financings (on-balance sheet transactions) or sales (off-balance sheet transactions)
pursuant to the accounting provisions of SFAS No. 140. In an on-balance sheet securitization, the securitized financing contracts are recorded as assets with the proceeds recorded
as senior notes on the Company's consolidated balance sheet. In an off-balance sheet securitization, the securitized financing contracts are treated as sold and removed from the
consolidated balance sheet and a gain or loss is recognized at the time of the sale. For these off-balance sheet transactions, the previous carrying amount of the transferred financing
contracts is allocated between the financing contracts sold and a retained interest based on the relative fair values of the financing contracts on the date of transfer. The Company estimates fair
value based on the present value of expected future cash flows, using management's best estimates of anticipated credit losses and discount rates. Management believes that such key estimates are
consistent with those that would be used by other market participants in determining fair value for the same retained interest. In both on-and-off-balance sheet
securitizations, the Company continues to service the portfolio and receives a servicing fee for doing so. The Company believes that its servicing fee approximates its estimated servicing costs but
has limited market basis to assess the fair value of its servicing asset. Accordingly, the Company has valued its servicing asset and deferred liability at zero. The securitization disclosures
required by SFAS No. 140 are included in Note D.

Securitizations-Bravo FacilityThe Bravo Facility, as amended, provides the Company with available borrowings of up to
$450,000,000. Under the terms of the Bravo Facility, the Company contributes certain financing contracts to Bravo which, in turn, either pledges or sells those contracts to a commercial paper conduit
entity. Credit enhancement is provided to the note holders through guarantees provided by MBIA, Inc. as to the payment of principal and interest on the notes. In the case of financing contracts
pledged by Bravo, the financing contracts and the associated debt of Bravo to the conduit entity are included on the Company's consolidated balance sheet. At December 31, 2002 and 2001, this
outstanding debt totaled $220,934,000 and $126,468,000, respectively, with weighted-average swapped interest rates of 3.79% and 5.45%, respectively. In the case of financing contracts sold by Bravo,
the financing contracts and associated debt are removed from the Company's consolidated balance sheet. Risk of loss to the Company is limited to the extent of the Company's retained interest and
residual values in the financing contracts sold. At December 31, 2002 and 2001, the total outstanding balance of these sold, off-balance sheet financing contracts was $213,624,000
and $74,388,000, respectively. The Bravo Facility expires in June 2003. The Company expects that it will be able to renew the Bravo Facility. However, in the event the facility is not renewed,
the Facility may then be limited to the then existing outstandings and may not be available to the Company to provide additional liquidity.

In
August 2002, the covenant requirements in the Bravo Facility were amended to substantially match the covenant requirements of the HPSC Foothill Revolver.

The
Company entered into a financing arrangement, as part of the Bravo Facility, with ING Capital LLC ("ING") in August 2002, pursuant to which ING agreed to provide the Company
with

16

---

additional
liquidity of up to 3.75% of financing contracts held in the MBIA portion of the Bravo Facility, up to a maximum amount of $20,000,000 (the "ING portion of the Bravo Facility"). Interest on
borrowings under the ING portion of the Bravo Facility is based on one-month LIBOR plus 3%. Amounts due ING are subordinate to amounts due on the Bravo notes. The ING portion of the Bravo
Facility contains delinquency and default covenants that are more restrictive than those contained in the MBIA portion of the Bravo Facility. Proceeds from financings with ING were used to retire
amounts outstanding under the Company's Fleet and Foothill Revolver agreements. At December 31, 2002, the ING portion of the Bravo Facility consisted of outstanding on-balance sheet
debt of $16,577,000.

Both the MBIA and the ING portions of the Bravo Facility are subject to certain financial covenant requirements including, among others, tangible net worth, leverage, profitability
levels, and portfolio delinquencies, which, as noted above, match substantially the covenant requirements of the Foothill Revolver. The Company has received a waiver through June 30, 2003 from
its Bravo Facility lenders relating to the Company's non-compliance with the leverage and net income covenant requirements in the Bravo Facility arising out of the restatement described in
Note P. The Company anticipates that it will need to obtain further waivers of the leverage covenant and/or amend the leverage covenant in future periods. The Company intends to work with its
Bravo Facility lenders to obtain such waivers and/or amendments.

Securitizations-Equipment Receivables 2000-1In December 2000, the Company completed a $527,106,000
private placement term securitization. HPSC, along with its subsidiaries ACFC, Bravo, and HPSC Capital Funding, Inc (a special-purpose entity terminated in June 2001), transferred certain
leases, notes and revolving loans to two newly formed, special-purpose entities, ER 2000-1 LLC I and ER 2000-1 LLC II. These entities issued notes to finance the purchase of,
and loan against, collateral consisting of leases and notes transferred from HPSC, ACFC, Bravo and Capital.

Financing contracts transferred to ER 2000-1 LLC I and ER 2000-1 LLC II were pledged as collateral for the notes, with the financing contracts and associated debt
included in the Company's Consolidated Balance Sheet. At December 31, 2002 and 2001, outstanding debt, net of discount, for both ER 2000-1 LLC I and ER 2000-1 LLC II
totaled $229,109,000 and $359,381,000, respectively, with a weighted-average interest rate of 6.67% for both years.

HPSC
provided additional credit enhancement to the ER 2000-1 note holders through the creation of a cash reserve account and a residual payment account. Pursuant to the terms
of the ER 2000-1 securitization agreements, certain excess cash flows generated by the financing contract portfolio are deposited to the cash reserve account or residual payment account,
up
to agreed upon limits. These interest-bearing restricted cash accounts are available to fund monthly interest and principal payments on the ER 2000-1 notes in the event of shortfalls in
monthly collections on the financing contracts. At December 31, 2002 and 2001, the balance in the restricted cash reserve account was $7,054,000 and $10,191,000, respectively, and the balance
in the restricted cash residual payment account was $295,000 and $1,433,000, respectively. The Company may also provide additional credit enhancement through the substitution of new leases and notes
for leases and notes previously contributed into ER 2000-1 LLC II, up to certain defined limits.

17

---



ER
2000-1 LLC I and ER 2000-1 LLC II originally issued seven classes of equipment contract backed notes and one class of equipment contract backed variable
funding notes ("VFN"). To provide credit enhancement, the classes of notes are structured to be payable in senior/subordinated order of priority. Details of the notes, ranked in senior/subordinated
priority, are as follows at December 31, 2002:

|Class              |       | Original
Principal
Balance |         | Remaining
Principal
Balance |   | Coupon
Rate,
per annum |         | Interest
Accrual
Method   |  | Rating
(Unaudited)
|------------------ | ----- | -------------------------- | ------- | --------------------------- | - | ---------------------- | ------- | ------------------------- |  | ------------------
|
|Class A            |       | $                          | 414,466 |                             | $ | 191,479                |         | 1 Month
USD LIBOR +0.30%  |  | Actual/360        
|Class B-1          |       |                            | 29,959  |                             |   | 13,841                 |         | 1 Month USD
LIBOR + 0.50% |  | Actual/360        
|Class B-2          |       |                            | 13,267  |                             |   | 6,129                  |         | 7.23%                     |  | 30/360            
|Class C            |       |                            | 19,070  |                             |   | 8,810                  |         | 7.70%                     |  | 30/360            
|Class D            |       |                            | 5,085   |                             |   | 2,349                  |         | 8.11%                     |  | 30/360            
|Class E            |       |                            | 8,899   |                             |   | 4,112                  |         | 10.00%                    |  | 30/360            
|Class F            |       |                            | 6,360   |                             |   | 2,938                  |         | 12.91%                    |  | 30/360            
|Class VFN (Note 1) |       |                            | 30,000  |                             |   |                       |         | 1 Month USD
LIBOR + 1.00% |  | Actual/360        
|                   |       |                            |         |                             |   |                        |         |                           |  |                   
|                   | Total |                            | $       | 527,106                     |   | $                      | 229,658 |                           |  |                   
|                   |       |                            |         |                             |   |                        |         |                           |  |                   

Note
1: The Class VFN notes were never issued, however, and remain available to the Company.

18

---

A
summary of the Company's total debt obligations and the total on-and-off-balance sheet financing contracts outstanding in the Company's various
securitization facilities at December 31, 2002 is as follows:

|                                                 |          | On-Balance
Sheet Debt
Obligations |         | Off-Balance Sheet
Sold Financing
Contracts |   | Total   |        
|------------------------------------------------ | -------- | --------------------------------- | ------- | ------------------------------------------ | - | ------- | -------
|
|HPSC Foothill Revolver                           |          | $                                 | 42,606  |                                            | $ |        |        
|ACFC Foothill Revolver                           |          |                                   | 831     |                                            |   |        |        
|Unsecured Senior Subordinated Notes              |          |                                   | 17,960  |                                            |   |        |        
|Various banks                                    |          |                                   | 7,210   |                                            |   |        |        
|Bravo (MBIA)                                     |          |                                   | 220,934 |                                            |   | 213,624 |        
|Bravo (ING)                                      |          |                                   | 16,577  |                                            |   |        |        
|ER 2000-1 LLC I and LLC II                       |          |                                   | 229,658 |                                            |   |        |        
|                                                 |          |                                   |         |                                            |   |         |        
|                                                 | Subtotal |                                   |         | 535,776                                    |   |         | 213,624
|Less: Original issue discount on ER 2000-1 notes |          |                                   | (549    | )                                          |   |        |        
|                                                 |          |                                   |         |                                            |   |         |        
|                                                 | Total    |                                   | $       | 535,227                                    |   | $       | 213,624
|                                                 |          |                                   |         |                                            |   |         |        

Scheduled
future annual maturities of the Company's on-balance sheet debt obligations, as detailed above, is as follows at December 31, 2002:

|                    |       | HPSC and
ACFC
Revolver |        | Senior
Subordinated |   | Various
Banks |        | Bravo
(MBIA) |       | Bravo
(ING) |   | ER 2000-1
(at face value) |         | Total
|------------------- | ----- | ---------------------- | ------ | ------------------- | - | ------------- | ------ | ------------ | ----- | ----------- | - | ------------------------- | ------- | -----
|
|2003                |       | $                      | 831    |                     | $ | 4,000         |        | $            | 2,198 |             | $ | 50,745                    |         | $    
|2004                |       |                        |       |                     |   | 4,000         |        |              | 2,268 |             |   | 44,118                    |         |      
|2005                |       |                        | 42,606 |                     |   | 4,000         |        |              | 1,806 |             |   | 40,552                    |         |      
|2006                |       |                        |       |                     |   | 4,000         |        |              | 928   |             |   | 33,765                    |         |      
|2007                |       |                        |       |                     |   | 1,960         |        |              | 10    |             |   | 26,651                    |         |      
|2008 and thereafter |       |                        |       |                     |   |              |        |              |      |             |   | 25,103                    |         |      
|                    |       |                        |        |                     |   |               |        |              |       |             |   |                           |         |      
|                    | Total |                        | $      | 43,437              |   | $             | 17,960 |              | $     | 7,210       |   | $                         | 220,934 |      
|                    |       |                        |        |                     |   |               |        |              |       |             |   |                           |         |      

NOTE D. ADDITIONAL SECURITIZATION DISCLOSURES

As described in Note C, the Company routinely sells leases and notes pursuant to sales and securitization agreements. Under each of its securitization
agreements, the Company continues to service the financing contracts sold, subject to complying with certain covenants. The Company believes that its servicing fee approximates its estimated servicing
costs, but it has limited market basis to assess the fair value of its servicing asset. Accordingly, the Company has valued its servicing asset and deferred liability at zero. The Company recognizes
servicing fee revenue as earned over the servicing period in proportion to its servicing costs. For fiscal years ended December 31, 2002, 2001, and 2000, the Company recognized servicing fee
revenues of $278,000, $71,000, and $405,000, respectively.

19

---

The
following is a summary of certain cash flow activity received from and (paid to) securitization facilities for each of the years for the two-year period ended
December 31, 2002:

2002

2001(in thousands)-Cash proceeds from new securitizations

$
51,538

$
26,145Cash collections from obligors, remitted to transferees


(30,487
)

(9,821
)Servicing fees cash received


281


110Transferor retained interest cash flows


7,160


3,047


The
following is a summary of the performance of the Company's total owned and managed financing contracts:

|                                                   |                         |   |         |         |   | Net Investment over
90 Days Past Due |         | Net Credit Losses
|-------------------------------------------------- | ----------------------- | - | ------- | ------- | - | ------------------------------------ | ------- | -----------------
|
|
|
|
|
|Licensed professional financing                    |                         | $ | 743,915 |         | $ | 623,077                              |         | $                
|Commercial and industrial financing                |                         |   | 12,826  |         |   | 27,611                               |         |                  
|                                                   |                         |   |         |         |   |                                      |         |                  
|                                                   | Total owned and managed |   |         | 756,741 |   |                                      | 650,688 |                  
|                                                   | Less:                   |   |         |         |   |                                      |         |                  
|Securitized licensed professional financing assets |                         |   | 181,134 |         |   | 57,422                               |         |                  
|                                                   |                         |   |         |         |   |                                      |         |                  
|Total owned                                        |                         | $ | 575,607 |         | $ | 593,266                              |         |                  
|                                                   |                         |   |         |         |   |                                      |         |                  

The
Company's primary exposure in determining the fair value of its retained interest in securitized financing contracts is credit risk associated with the obligors on these contracts.
The Company's retained interest in its financing contracts is subordinate to the interests of its credit providers. In recording the net gain upon the sale of financing contracts and the fair value of
its retained interest, the Company assumes a loss rate of approximately 0.50% per annum on a static pool basis, and discounts its retained interest at implicit rates ranging from 10.6% to 14.8%.
Prepayment risk on securitized financing contracts is limited due to the Company's prepayment policies with its obligors. To eliminate interest rate risk, the Company enters into interest rate swap
contracts as a hedge against its variable rate obligations. The fair value of the retained interest in the financing contracts sold is reviewed for impairment on a quarterly basis. Risk of loss to the
Company under its Bravo sales agreements is limited to the extent of the Company's retained interest and residual values in the financing contracts sold to the facility.

20

---

The
following is a summary at December 31, 2002 of key assumptions and the sensitivity of the fair value of retained interest cash flows to immediate 10 percent and
20 percent adverse changes in those assumptions:

Current

10%

20%($ in thousands)Retained interest

$
33,974Expected credit losses (annual rate)


0.5
%
$
(80
)
$
(161
)Residual cash flows discount rate (annual)


11.9
%
$
(543
)
$
(1,067
)


These
sensitivities are presented as hypothetical assumptions and do not reflect actual experience. Changes in the fair value based on a 10 percent variation in assumptions
generally cannot be extrapolated because the relationship of the change in assumption to the change in the fair value may not be linear. Also, the effect of a variation in a particular assumption on
the fair value of the retained interest is calculated without changing any other assumption; in reality, the change in one assumption may result in changes in another, which may magnify or counteract
the sensitivities.

NOTE E. DERIVATIVE INSTRUMENTS

At December 31, 2002, the Company had fourteen interest rate swap contracts outstanding hedging variable-rate exposures to
on-balance sheet debt obligations and fifteen interest rate swap contracts assigned to non-consolidated entities for the purpose of hedging variable-rate exposures
for sold financing contracts. The net fair value of the swap contracts hedging on-balance sheet debt obligations, which is recorded on the Company's balance sheet at December 31,
2002, was a liability of $16,050,000. In addition, the Company has assigned portions of interest rate swap contracts to third parties in connection with sales of leases and notes receivable. The net
fair value of the swap contracts hedging off-balance sheet amounts, which is not recorded on the Company's balance sheet, was a net liability of $10,310,000 at December 31, 2002.

An
officer of the Company is a member of an advisory committee of an affiliate of a counterparty to certain interest rate swap contracts.

21

---

The
Company's activity in accumulated other comprehensive loss related to derivatives classified as cash flow hedges for the years ended December 31, 2002 and 2001 is as follows:

2002

2001(in thousands, net of deferred taxes)Beginning balance, January 1

$
(9,015
)
$
Cumulative effect adjustment upon the adoption of SFAS No. 133





(1,547
)Change in fair value of derivatives during the period


(4,540
)

(7,854
)Interest rate swap contracts assigned to qualified special purpose entities upon securitization, net of taxes


3,430


Realized swap breakage costs included in net income, net of taxes


380


386Accumulated derivative loss included in accumulated other comprehensive loss, at December 31

$
(9,745
)
$
(9,015
)


During
the years ended December 31, 2002 and 2001, the Company's interest rate swaps were effective at offsetting changes to the hedged portion of the cash flows of the Company's
variable-rate debt obligations. The realized swap breakage costs included in net income in the above table relate to the after-tax effect of swap breakage during the respective
periods. The total pretax cost to terminate the swap contracts were $626,000 and $636,000 for the years ended December 31, 2002 and 2001, respectively, and are reflected as a component of
selling, general and administrative expenses in the Company's Statement of Operations.

NOTE F. COMMITMENTS AND CONTINGENCIES

The Company leases various office locations under non-cancelable lease arrangements that have initial terms of one to six years and may provide
renewal options from one to five years. Rent expense under all operating leases was $916,000, $875,000, and $828,000 for 2002, 2001, and 2000, respectively.

Future
minimum lease payments under non-cancelable operating leases as of December 31, 2002 are as follows:

(in thousands)2003

$
7772004


3392005


34Thereafter


Total

$
1,150


Although
the Company is from time to time subject to actions or claims for damages in the ordinary course of its business and engages in collection proceedings with respect to delinquent
accounts, the Company is aware of no such actions, claims, or proceedings currently pending or threatened that are expected to have a material adverse effect on the Company's business, operating
results or financial condition.

22

---

NOTE G. INCOME TAXES

Deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts
as measured by tax laws and regulations.

Income
tax expense (benefit) is as follows:

Year Ended December 31,2002

2001

2000(in thousands)Federal:Current

$
34

$
73

$
7Deferred


3,390


(779
)

(1,158
)State:Current


8


74


826Deferred


831


(288
)

(1,121
)Provision (benefit) for income taxes

$
4,263

$
(920
)
$
(1,446
)


A
reconciliation of the U.S. federal statutory income tax rate and the effective tax rate as a percentage of pre-tax income for each year is as follows:

Year Ended December 31,2002

2001

2000Statutory rate

34.0
%
34.0
%
34.0
%State taxes net of U.S. federal income tax benefit

5.2

5.7

5.1Non-deductible expenses

0.5

(2.2
)
(1.2
)39.7
%
37.5
%
37.9
%


23

---

The
items comprising a significant portion of net deferred tax (assets) liabilities are as follows at December 31:

2002

2001(in thousands)Gross deferred tax liabilities:Accounting for lease contracts and notes (Note 1)

$
27,611

$
23,345Gross deferred tax assets:Net operating loss carryforwards and tax credit carryforwards


(14,360
)

(14,349
)Accrued expenses and other


(2,254
)

(2,258
)Tax effect of accumulated comprehensive loss (Note 2)


(6,305
)

(5,809
)Miscellaneous


(231
)

(194
)Gross deferred tax assets


(23,150
)

(22,610
)Net deferred income tax liability

$
4,461

$
735


Note
1: The deferred tax liability from the accounting for leases and notes relates to temporary differences between book and tax treatment of sold securitized direct financing leases and notes.

Note
2: The tax effect of accumulated comprehensive loss arises primarily from the recording of the Company's interest rate swap contracts on the balance sheet at fair value (net of tax), pursuant to
SFAS No. 133.

At
December 31, 2002, the Company had federal and state net operating loss carryforwards of approximately $35,100,000 and $52,800,000, respectively. The federal net operating loss
carryforwards expire in the years 2018 through 2022, while the state net operating loss carryforwards expire in the years 2003 through 2022. At December 31, 2002, the Company anticipates
utilizing all its net operating loss carryforwards.

NOTE H. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE

Common StockThe Company has 15,000,000 shares authorized and 4,817,705 shares outstanding at
December 31, 2002. Of the outstanding shares, 300,000 shares have been issued to the Company's ESOP (Note J) and 685,951 shares are held in treasury.

Preferred StockThe Company has 5,000,000 shares of $1.00 par value preferred stock authorized with no shares outstanding at
December 31, 2002 or 2001. (Note K, Preferred Stock Purchase Rights Plan.)

24

---



Treasury StockIn December 2000, the Board of Directors approved an increase to the stock repurchase program whereby
the Company may repurchase up to an additional 250,000 shares of the Company's common stock subject to maximum dollar limitations as set forth under the Company's Foothill Revolver and Senior
Subordinated Note financing. Based on current market values at December 31, 2002 and the limitations as set forth in its most restrictive debt agreement, the Company may repurchase up to an
additional 129,000 shares of its common stock per year. No time limit has been established for the repurchase program. The Company expects to use the repurchased stock to meet current and future
requirements of its employee stock plans. During 2002, the Company repurchased 70,186 shares of its common stock for approximately $538,000.

Earnings per ShareThe Company's basic net income per share calculation is based on the weighted-average number of common
shares outstanding, which does not include unallocated shares under the Company's ESOP (Note J), restricted shares issued under the Stock Plans (Note I), treasury stock, or any shares
issuable upon the exercise of outstanding stock options. Diluted net income per share includes the weighted-average number of common shares subject to stock options and contingently issuable
restricted stock as calculated under the treasury stock method, but not treasury stock or unallocated shares under the Company's ESOP. The stock options and contingently issuable restricted shares of
187,708, 354,295 and 415,154 were excluded from the computation of diluted earnings per share ("EPS") for 2002, 2001 and 2000 respectively because their inclusion would have had an antidilutive effect
on EPS.

The
following is a reconciliation of the numerators and denominators of the basic and diluted net income per share:

|                                     |                                            | Year Ended December 31, |  
|------------------------------------ | ------------------------------------------ | ----------------------- | -
|
|
|Basic net income (loss) per share:   |                                            |                         |  
|                                     | Net income (loss)                          |                         | $
|                                     | Weighted-average common shares outstanding |                         |  
|                                     |                                            |                         |  
|                                     | Basic net income (loss) per share          |                         | $
|                                     |                                            |                         |  
|Diluted net income (loss) per share: |                                            |                         |  
|                                     | Net income (loss)                          |                         | $
|                                     | Weighted-average common shares outstanding |                         |  
|                                     | Stock options and restricted shares        |                         |  
|                                     |                                            |                         |  
|                                     | Total diluted shares                       |                         |  
|                                     |                                            |                         |  
|                                     | Diluted net income (loss) per share        |                         | $
|                                     |                                            |                         |  

25

---

NOTE I. STOCK OPTION AND STOCK INCENTIVE PLANS

Stock Option PlansThe following is a historical summary of the Company's various stock option plans for which stock options
remain outstanding at December 31, 2002:

|Stock Option Plan Name                      |  | Plan Inception
Date |  | Plan Termination Date (if applicable)        
|------------------------------------------- |  | ------------------- |  | ---------------------------------------------
|Stock Option Plan (the "1986 Plan")         |  | March 1986          |  | May 1995, upon approval of the 1995 Plan     
|1994 Stock Plan (the "1994 Plan")           |  | March 1994          |  | May 1995, upon approval of the 1995 Plan     
|1995 Stock Incentive Plan (the "1995 Plan") |  | May 1995            |  | February 1998, upon approval of the 1998 Plan
|1998 Stock Incentive Plan (the "1998 Plan") |  | February 1998       |  | April 2000, upon approval of the 2000 Plan   
|2000 Stock Incentive Plan (the "2000 Plan") |  | April 2000          |  | May 2002, upon approval of the 2002 Plan     
|2002 Stock Incentive Plan (the "2002 Plan") |  | May 2002            |  |                                              

1986 Plan and 1994 PlanOptions granted under the 1986 Plan and the 1994 Plan are non-qualified stock options
granted at an exercise price equal to the market price of the common stock on the date of grant.

1995 PlanUpon approval of the 1995 Plan in May 1995, 550,000 shares were initially reserved for the issuance of stock
options or awards of restricted stock. Options outstanding under the 1995 Plan are either incentive stock options or non-qualified stock options granted at an exercise price equal to the
market price of the Company's common stock on the date of the grant. Restricted shares of common stock were awarded under the 1995 Plan and remained unvested until certain performance and service
conditions were both met.

A
summary of restricted stock awards issued pursuant to the 1995 Plan is as follows:

Date of restricted stock awards

May 1995

May 1995

May 1997No. of restricted shares awarded (Note 1)

332,000

5,000

126,000Partial Performance Condition, per share

$5.90

$6.04

$8.05Full Performance Condition, per share

$7.37

$7.58

$10.10Date Partial Performance Condition achieved

Jun 1996

Jun 1996

May 1998Date Full Performance Condition achieved

Apr 1998

Apr 1998

Aug 1999Date service condition achieved

May 2000

May 2000

May 2002


Note 1:
In April 1998, 150,000 outstanding restricted shares were forfeited in exchange for stock options granted pursuant to the 1995 Plan.

At
the time each restricted stock award was granted, the Company recorded additional paid-in capital and deferred compensation in an amount equal to the number of shares
granted multiplied by the respective performance condition price per share. Compensation expense was then recognized on a straight-line basis over the five-year service period
beginning on the date of grant. A cumulative adjustment was recorded on the date the performance conditions were met to recognize retroactively compensation expense from the date of the issuance to
the date the performance condition was met. In 2002, 2001, and 2000, the Company recognized $94,000, $225,000, and $268,000, respectively, in

26

---

compensation
expense related to restricted stock awards under its 1995 Plan. All remaining restricted shares from the 1995 Plan were distributed in May 2002 upon achieving the required service
condition.

1998 PlanUpon the approval of the 1998 Plan in February 1998, 550,000 shares of common stock were reserved for the
issuance of stock options and/or awards of restricted stock. In addition, shares subject to options or stock awards under the 1995 Plan that expired or were terminated unexercised were made available
for issuance as stock options or restricted stock awards under the 1998 Plan. Options outstanding under the 1998 Plan are either incentive stock options or non-qualified stock options. The
exercise price for options granted is the average of the closing prices of the Company's common stock on each of the days on which the stock was traded during the 30-calendar day period
ending on the day before the date of the option grant. No restricted shares were awarded under the 1998 Plan.

2000 PlanUpon the approval of the 2000 Plan in April 2000, 450,000 shares of the Company's common stock were reserved
for the issuance of stock options or restricted stock awards. In addition, shares subject to options or stock awards under the 1998 Plan that expire or are terminated unexercised were made available
for issuance as stock options or restricted stock awards under the 2000 Plan. The 2000 Plan provides that with respect to options granted to key employees (except non-employee directors),
the option term and the terms and conditions upon which the option may be exercised are to be determined by the Compensation Committee of the Company's Board of Directors for each such option at the
time it is granted. Options granted to key employees of the Company are either incentive stock options or non-qualified options, as designated by the Compensation Committee, at an exercise
price not to be less than the closing price of the Company's common stock on the date of the option grant. No restricted shares were awarded under the 2000 Plan.

2002 PlanUpon the approval of the 2002 Plan in May 2002, 200,000 shares of the Company's common stock were reserved
for the issuance of stock options and restricted stock awards. In addition, shares subject to options or stock awards under the 2000 Plan that expire or are terminated unexercised are made available
for issuance as stock options or restricted stock awards under the 2002 Plan. The 2002 Plan provides that with respect to options granted to key employees (except non-employee directors),
the option term and the terms and conditions upon which the options may be exercised are to be determined by the Compensation Committee of the Company's
Board of Directors for each such option at the time it is granted. Options granted to key employees of the Company are either incentive stock options or non-qualified options, as
designated by the Compensation Committee, at an exercise price not to be less than 85% of the closing price of the Company's common stock on the date of the option grant. As of December 31,
2002, no restricted shares have been awarded under the 2002 Plan.

Each
non-employee director who was such at the conclusion of any regular annual meeting of the Company's stockholders while the 2002 Plan is in effect and who continues to
serve on the Board of Directors is granted automatic options to purchase 1,000 shares of the Company's common stock at an exercise price equal to the closing price of the Company's common stock on the
date of the option grant. Each automatic option is exercisable immediately in full or for any portion thereof and remains exercisable for 10 years after the date of grant, unless terminated
earlier (as provided in the 2002 Plan) upon or following termination of the holder's service as a director.

27

---

As
of December 31, 2002, the Company had granted 79,000 stock options and no restricted stock awards pursuant to the 2002 Plan.

The
following table summarizes stock option and restricted stock activity under all the plans combined:

OptionsNumber of
Options

Weighted-
Average
Exercise
Price

Restricted
StockOutstanding at January 1, 2000

1,053,875

$
5.15

311,000Granted

330,500


7.49

Exercised

(6,500
)

4.14

Forfeited

(10,000
)

9.08

Release of restriction on restricted stock






(187,000
)Outstanding at December 31, 2000

1,367,875


5.69

124,000Granted

131,000


6.33

Exercised

(60,500
)

3.88

Forfeited

(24,000
)

6.44

Outstanding at December 31, 2001

1,414,375


5.81

124,000Granted

105,000


8.13

Exercised

(32,175
)

3.77

Forfeited

(20,700
)

4.54

Release of restriction on restricted stock






(124,000
)Outstanding at December 31, 2002

1,466,500

$
6.04




The
following table sets forth information regarding options outstanding at December 31, 2002:

|  |           | Options Outstanding |           | Options Exercisable
|- | --------- | ------------------- | --------- | -------------------
|
|$ | 2.623.25 |                     | 195,000   |                    
|$ | 3.564.75 |                     | 35,500    |                    
|$ | 5.125.37 |                     | 555,500   |                    
|$ | 6.006.90 |                     | 160,000   |                    
|$ | 7.507.95 |                     | 319,500   |                    
|$ | 8.008.83 |                     | 126,000   |                    
|$ | 9.009.85 |                     | 75,000    |                    
|  |           |                     |           |                    
|$ | 2.629.85 |                     | 1,466,500 |                    
|  |           |                     |           |                    

The
weighted-average grant date fair values of options granted for the years ended December 31, 2002, 2001, and 2000 were $3.77, $3.06, and $5.84, respectively.

28

---

1998 Outside Directors Stock Bonus PlanUnder the terms of the 1998 Outside Directors Stock Bonus Plan, the Company will
award 1,000 bonus shares of common stock to each non-employee director who is such at the beginning of any regular annual stockholders meeting while the 1998 Outside Directors Stock Bonus
Plan is in effect and who will continue to serve on the Board of Directors. Bonus shares are issued in consideration of services previously rendered to the Company. At the time bonus shares are
issued, the Company recognizes compensation expense equal to the fair value of the shares issued. The Company amended the 1998 Outside Directors Stock Bonus Plan in 2001 to increase the number of
shares reserved under the Plan from 25,000 to 50,000. On a cumulative basis through December 31, 2002, the Company has issued 31,000 shares of common stock pursuant to the 1998 Outside
Directors Stock Bonus Plan.

Notes Receivable from Officers and Employees ("Stock Loan Program"The Company maintained a Stock Loan Program until
December 13, 2002 pursuant to which executive officers and other senior personnel of the Company could borrow from the Company for the purpose of acquiring common stock of the Company, to pay
the exercise price of options and to pay any taxes, including alternative minimum taxes, payable upon the exercise of options or the vesting of restricted stock. As of December 13, 2002, no
future loans will be made to executive officers, as required by the Sarbanes-Oxley Act of 2002. Loans outstanding at December 13, 2002 remain payable in accordance with their terms. All
outstanding loans at December 2002 provide for periodic principal repayments in an amount equal to 20% of the participant's after-tax bonus. A portion of any shares purchased with
such loans are
pledged to the Company as collateral for repayment of the loans. The Stock Loan Program was amended in October 2001 to provide that all loans under the program be forgiven upon a "change of
control" of the Company as defined in the 2000 Plan. In June 2002, the Company made one loan to an executive officer in the amount of $79,000.

2001 Supplemental Executive Bonus PlanIn October 2001, the Compensation Committee of the Board of Directors adopted
the 2001 Supplemental Executive Bonus Plan which permits the Committee, in its discretion, to award supplemental bonuses to key executives in an amount up to 20% of the executive's annual bonus. No
such supplemental bonus shall be awarded to an executive unless he or she has an outstanding loan under the Company's Stock Loan Program and not in excess of the amount of such outstanding loan. The
full after-tax amount of any supplemental bonus is required to be paid to reduce the amount of the executive's outstanding stock loan. During 2002, the Company paid $93,200 in supplemental
bonuses under the 2001 Supplemental Executive Bonus Plan.

NOTE J. EMPLOYEE BENEFIT PLANS

Employee Stock Ownership PlanIn 1993, the Company established an Employee Stock Ownership Plan ("ESOP") for the benefit of
all eligible employees. The ESOP invests in common stock of the Company on behalf of the employees. ESOP contributions are at the discretion of the Company's Board of Directors and are determined
annually. However, it is the Company's intention to make contributions sufficient to repay the ESOP's promissory note on a level-funding basis over a 10-year period. The Company measures
the expense related to such contributions based on the annual average fair value of the stock contributed. The spread between the average fair value of the stock contribution and the original cost of
the stock when issued to the ESOP is recorded as additional paid-in capital in

29

---

the
year to which the contribution relates. Principal repayments on the promissory note were $105,000 in each of 2002, 2001, and 2000.

Employees
with five or more years of service with the Company at the time of termination of employment will be fully vested in their benefits under the ESOP. For a participant with fewer
than five years of service at the time of termination, his or her account balance will vest at the rate of 20% for each year of employment. Upon the retirement or other termination of an ESOP
participant, the shares of common stock in which he or she is vested may, at the option of the participant, be converted to cash or distributed. Any unvested shares are allocated to the remaining
participants. The Company issued 300,000 shares of common stock to this plan in consideration of a promissory note in the original principal amount of $1,050,000. As of December 31, 2002, the
remaining principal balance of the note is $106,000, which is recorded as a component of deferred compensation in stockholders'
equity. Since inception of the ESOP, 265,426 shares of common stock have been allocated to participant accounts and 34,574 shares remain unallocated. The market value of the unallocated shares at
December 31, 2002 was approximately $268,000.

Savings PlanThe Company has established a Savings Plan covering substantially all full-time employees, which
allows participants to make contributions by salary deductions pursuant to Section 401(k) of the Internal Revenue Code. The Company matches employee contributions up to a maximum of 2% of the
employee's salary. Both employee and employer contributions are vested immediately. The Company's contributions to the Savings Plan were $164,000, $141,000 and $128,000 in 2002, 2001 and 2000,
respectively.

Supplemental Executive Retirement PlanIn 1997, the Company adopted an unfunded Supplemental Executive Retirement Plan (the
"SERP"). The SERP provides certain executives with retirement income benefits intended to supplement other retirement benefits available to the executives. Benefits under the plan, based on an
actuarial equivalent of a life annuity, are based on age, length of service and average earnings and vest over 15 years, assuming five years of service. Benefits are payable upon separation of
service.

30

---

Details
of the SERP for the years ended December 31, 2002 and 2001 are as follows:

2002

2001(in thousands)Change in benefit obligation:Benefit obligation, beginning of year

$
3,416

$
2,681Service cost


336


291Interest cost


244


223Actuarial loss


278


221Benefit obligation, end of year


4,274


3,416Funded status and statement of financial position:Fair value of assets, end of year





Benefit obligation, end of year


4,274


3,416Funded status


(4,274
)

(3,416
)Unrecognized actuarial loss


714


456Unrecognized prior service cost


1,032


1,156Net accrued benefit cost


(2,528
)

(1,804
)Amounts recognized in the statement of financial position consist of:Accrued benefit liability included in accrued liabilities


(3,103
)

(2,327
)Intangible assets included in other assets


575


523Net accrued benefit cost


(2,528
)

(1,804
)Components of net periodic benefit costs:Service cost


336


291Interest cost


244


223Amortization of prior service cost


124


124Recognized actuarial loss


20


18Net periodic benefit cost

$
724

$
656


2002

2001Weighted-average assumptions:For pension cost and year end benefit obligationDiscount rate

6.50%

7.00%Compensation increase

4.00%

4.00%Assumed retirement age

65 years

65 years


NOTE K. PREFERRED STOCK PURCHASE RIGHTS PLAN

Pursuant to a rights agreement between the Company and Fleet National Bank, as rights agent, dated August 1993 and amended and restated in
September 1999, the Board of Directors declared a

31

---

dividend
in August 1993 of one preferred stock purchase right ("Right") for each share of the Company's common stock (the "Shares") outstanding on or after August 13, 1993. The Right
entitles the holder to purchase one one-hundredth of a share of Series A preferred stock, which fractional share is substantially equivalent to one share of common stock, at an
exercise price of $20. The Rights will not be exercisable or transferable apart from the common stock until the earlier to occur of 10 days following a public announcement that a person or
affiliated group has acquired 15 percent or more of the outstanding common stock (such person or group, an "Acquiring Person"), or 10 business days after an announcement or commencement of a
tender offer which would result in a person or group becoming an Acquiring Person, subject to certain exceptions. The Rights beneficially owned by the Acquiring Person and its affiliates become null
and void upon the Rights becoming exercisable.

If
a person becomes an Acquiring Person or certain other events occur, each Right entitles the holder, other than the Acquiring Person, to purchase common stock (or one
one-hundredth of a
share of preferred stock, at the discretion of the Board of Directors) having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or other business
combination, each exercisable Right entitles the holder, other than the Acquiring Person, to purchase common stock of the acquiring company having a market value of two times the exercise price of the
Right.

At
any time after a person becomes an Acquiring Person and prior to the acquisition by such person of 50% or more of the outstanding common stock, the Board of Directors may direct the
Company to exchange the Rights held by any person other than an Acquiring Person at an exchange ratio of one share of common stock per Right. The Rights may be redeemed by the Company, subject to
approval by the Board of Directors, for one cent per Right in accordance with the provisions of the Rights Plan. The Rights have no voting or dividend privileges.

NOTE L. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in
a forced or liquidation sale.

Quoted
market prices are used when available; otherwise, management estimates fair value based on prices of financial instruments with similar characteristics or using valuation
techniques such as discounted cash flow models. Valuation techniques involve uncertainties and require assumptions and judgments regarding prepayments, credit risk and discount rates. Changes in these
assumptions will result in different valuation estimates. The fair values presented would not necessarily be realized in an immediate sale, nor are there plans to settle liabilities prior to
contractual maturity. Valuation techniques vary, therefore, it may be difficult to compare the Company's fair value information to other companies' fair value information.

32

---

The
following table presents a comparison of the carrying value and estimated fair value of the Company's financial instruments at December 31, 2002 and 2001:

|                       |                                                                                 | 2002 |   | 2001   
|---------------------- | ------------------------------------------------------------------------------- | ---- | - | -------
|
|
|Financial assets:      |                                                                                 |      |   |        
|                       | Cash and cash equivalents                                                       |      | $ | 51     
|                       | Restricted cash                                                                 |      |   | 29,633 
|                       | Net investment in leases and notes                                              |      |   | 575,607
|                       | Interest rate swap contracts, included in other assets (Note 1)                 |      |   |       
|Financial liabilities: |                                                                                 |      |   |        
|                       | Notes payable and subordinated debt, net of unamortized original issue discount |      |   | 535,227
|                       | Interest rate swap contracts (Note 1)                                           |      |   | 16,050 

Note
1: SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which became effective for the Company on January 1, 2001, requires all derivative instruments to be recorded on
the balance sheet as either assets or liabilities at their estimated fair value.

Interest
rate swap contracts reflect the marked-to-market valuation of the swaps hedging on-balance sheet debt obligations of the Company. In addition
to the swaps listed above, the Company has assigned certain interest rate swap contracts to third parties in connection with sales of leases and notes receivable (Notes C and E). The estimated fair
value of interest rate swap contracts assigned to third parties which are not recorded on the Company's consolidated balance sheet was a liability of $10,310,000 and $1,237,000 at December 31,
2002 and 2001, respectively.

The
following methods and assumptions were used to estimate the fair value of each class of financial instrument:



33

---





NOTE M. OPERATING SEGMENTS

GeneralThe Company has two reportable operating segments: (i) financing to licensed
professionals, and (ii) asset-based financing to commercial and industrial companies. The Company's financing agreements with licensed professionals are structured as
non-cancelable, full-payout leases or notes due in installments. Asset-based financing includes revolving lines of credit to commercial and industrial companies in the form of
notes receivable collateralized by accounts receivable, inventory and/or fixed assets. During 2002, the Company ceased originating new asset based loans in its ACFC commercial and industrial financing
segment. The licensed professional financing segment derives its revenues primarily from earnings on fixed-rate leases and notes, whereas revenues from the commercial and industrial
financing segment are derived predominantly from borrowings under variable-rate notes issued under the lines of credit plus miscellaneous commitment and performance-based fees.

In
June 2002, the Company discovered that an employee of its asset-based financing segment had perpetrated a defalcation of approximately $5 million over a period of
5 years. In August 2002, the Company filed with the Securities and Exchange Commission amended annual and quarterly reports containing restated financial statements reflecting the losses
in the periods they occurred.

On
December 31, 2002, the Company's asset-based financing segment sold five revolving loans to a third party. At the time of the sale, the loans had a net book value of
$7,426,000. The Company received proceeds of $6,683,000, plus accrued and unpaid interest to the date thereon, and incurred a pre-tax loss of $743,000.

Financial Statement InformationIn its monthly internal management reports, the Company allocates resources and assesses
performance of the operating segments by monitoring the profit contribution of each segment before interest expense, interest income on cash balances, and income tax provision. The Company does not
allocate corporate overhead to its asset-based financing segment since substantially all such overhead relates to the licensed professional financing segment.

34

---

A
summary of information about the Company's operations by operating segment for the years ended December 31, 2002, 2001, and 2000 is as follows:

|                                             |  | Licensed
Professional
Financing |         | Commercial
and
Industrial
Financing |   | Total  |  
|-------------------------------------------- |  | ------------------------------- | ------- | ----------------------------------- | - | ------ | -
|
|2002                                         |  |                                 |         |                                     |   |        |  
|Earned income on leases and notes            |  | $                               | 63,072  |                                     | $ | 2,654  |  
|Gain (loss) on sales of leases and notes     |  |                                 | 16,547  |                                     |   | (743   | )
|Provision for losses                         |  |                                 | (9,653  | )                                   |   | (1,795 | )
|Selling, general and administrative expenses |  |                                 | (20,248 | )                                   |   | (2,032 | )
|Loss from employee defalcation               |  |                                 |        |                                     |   | (448   | )
|                                             |  |                                 |         |                                     |   |        |  
|Net profit contribution                      |  |                                 | 49,718  |                                     |   | (2,364 | )
|                                             |  |                                 |         |                                     |   |        |  
|Total assets                                 |  |                                 | 601,266 |                                     |   | 13,449 |  
|2001                                         |  |                                 |         |                                     |   |        |  
|Earned income on leases and notes            |  |                                 | 59,571  |                                     |   | 3,923  |  
|Gain on sales of leases and notes            |  |                                 | 5,990   |                                     |   |       |  
|Provision for losses                         |  |                                 | (8,799  | )                                   |   | (610   | )
|Selling, general and administrative expenses |  |                                 | (20,519 | )                                   |   | (1,607 | )
|Loss from employee defalcation               |  |                                 |        |                                     |   | (1,379 | )
|                                             |  |                                 |         |                                     |   |        |  
|Net profit contribution                      |  |                                 | 36,243  |                                     |   | 327    |  
|                                             |  |                                 |         |                                     |   |        |  
|Total assets                                 |  |                                 | 594,972 |                                     |   | 28,671 |  
|2000                                         |  |                                 |         |                                     |   |        |  
|Earned income on leases and notes            |  |                                 | 44,982  |                                     |   | 5,349  |  
|Gain on sales of leases and notes            |  |                                 | 8,796   |                                     |   |       |  
|Provision for losses                         |  |                                 | (8,528  | )                                   |   | (690   | )
|Term securitization costs                    |  |                                 | (7,106  | )                                   |   |       |  
|Selling, general and administrative expenses |  |                                 | (17,913 | )                                   |   | (1,868 | )
|Loss from employee defalcation               |  |                                 |        |                                     |   | (1,361 | )
|                                             |  |                                 |         |                                     |   |        |  
|Net profit contribution                      |  |                                 | 20,231  |                                     |   | 1,430  |  
|                                             |  |                                 |         |                                     |   |        |  
|Total assets                                 |  |                                 | 629,323 |                                     |   | 31,976 |  

35

---

The
following reconciles net segment profit contribution as reported above to total consolidated income before income taxes:

2002

2001

2000(in thousands)Net segment profit contribution

$
47,354

$
36,570

$
21,661Interest expense


(37,053
)

(40,902
)

(26,496
)Interest income


428


1,879


1,018Income (loss) before income taxes

$
10,729

$
(2,453
)
$
(3,817
)


Other Segment InformationThe Company derives substantially all of its revenues from domestic customers. As of
December 31, 2002 and 2001, no single customer within the licensed professional financing segment accounted for greater than 1% of the total owned and serviced portfolio of financing contracts
in that segment. Within the commercial and industrial asset-based financing segment, no single customer accounted for greater than 21% and 10%, respectively, of the total portfolio in that segment.
The licensed professional financing segment relies on certain vendors to provide referrals to the Company, but for the year ended December 31, 2002 and 2001, no one vendor accounted for greater
than 7% of the Company's lease and loan originations.

36

---

NOTE N. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

Selected quarterly consolidated financial data (unaudited) for the years ended December 31, 2002 and 2001 are as follows:

|                                     |                                     | Three Months Ended |       
|------------------------------------ | ----------------------------------- | ------------------ | ------
|
|
|Year 2002                            |                                     |                    |       
|Revenues:                            |                                     |                    |       
|                                     | Earned income on leases and notes   |                    | $     
|                                     | Gain on sales of leases and notes   |                    |       
|                                     | Provision for losses                |                    |       
|                                     |                                     |                    |       
|                                     |                                     | Net Revenues       |       
|                                     |                                     |                    |       
|Operating and Other Expenses:        |                                     |                    |       
|                                     | Selling, general and administrative |                    |       
|                                     | Loss from employee defalcation      |                    |       
|                                     | Interest expense (net)              |                    |       
|                                     |                                     |                    |       
|Income before Income Taxes           |                                     |                    | 2,132 
|Provision for Income Taxes           |                                     |                    | 854   
|                                     |                                     |                    |       
|Net Income                           |                                     | $                  | 1,278 
|                                     |                                     |                    |       
|Basic Net Income per Share           |                                     | $                  | 0.32  
|                                     |                                     |                    |       
|Diluted Net Income per Share         |                                     | $                  | 0.30  
|                                     |                                     |                    |       
|Year 2001                            |                                     |                    |       
|Revenues:                            |                                     |                    |       
|                                     | Earned income on leases and notes   |                    | $     
|                                     | Gain on sales of leases and notes   |                    |       
|                                     | Provision for losses                |                    |       
|                                     |                                     |                    |       
|                                     |                                     | Net Revenues       |       
|                                     |                                     |                    |       
|Operating and Other Expenses:        |                                     |                    |       
|                                     | Selling, general and administrative |                    |       
|                                     | Loss from employee defalcation      |                    |       
|                                     | Interest expense (net)              |                    |       
|                                     |                                     |                    |       
|Income (Loss) before Income Taxes    |                                     |                    | (1,423
|Provision (benefit) for Income Taxes |                                     |                    | (535  
|                                     |                                     |                    |       
|Net Income (Loss)                    |                                     | $                  | (888  
|                                     |                                     |                    |       
|Basic Net Income (Loss) per Share    |                                     | $                  | (0.22 
|                                     |                                     |                    |       
|Diluted Net Income (Loss) per Share  |                                     | $                  | (0.22 
|                                     |                                     |                    |       

37

---

As
discussed in Note P, the Company restated its financial statements for fiscal year 2002 and 2001. The effects of the restatement on the Company's quarterly unaudited consolidated financial
data were as follows:

|                                     |  | For the Three Months Ended |       
|------------------------------------ |  | -------------------------- | ------
|
|
|
|Income Statement                     |  |                            |       
|Earned income                        |  | $                          | 12,213
|Gain on sales of leases and notes    |  |                            | 2,068 
|Interest expense (net)               |  |                            | 5,868 
|INCOME (LOSS) BEFORE TAXES           |  |                            | 1,384 
|Provision (benefit) for income taxes |  |                            | 560   
|NET INCOME (LOSS)                    |  | $                          | 824   
|BASIC NET INCOME (LOSS) PER SHARE    |  | $                          | 0.21  
|DILUTED NET INCOME (LOSS) PER SHARE  |  | $                          | 0.19  

|                                     |  | For the Three Months Ended |       
|------------------------------------ |  | -------------------------- | ------
|
|
|Earned income                        |  | $                          | 12,789
|Gain on sales of leases and notes    |  |                            | 3,839 
|Interest expense (net)               |  |                            | 6,347 
|INCOME (LOSS) BEFORE TAXES           |  |                            | 1,752 
|Provision (benefit) for income taxes |  |                            | 702   
|NET INCOME (LOSS)                    |  | $                          | 1,050 
|BASIC NET INCOME (LOSS) PER SHARE    |  | $                          | 0.26  
|DILUTED NET INCOME (LOSS) PER SHARE  |  | $                          | 0.24  

|                                  |  | For the Three Months Ended
|--------------------------------- |  | --------------------------
|
|
|Earned income                     |  | $                         
|Gain on sales of leases and notes |  |                           
|Interest expense (net)            |  |                           
|INCOME BEFORE TAXES               |  |                           
|Provision for income taxes        |  |                           
|NET INCOME                        |  | $                         
|BASIC NET INCOME PER SHARE        |  | $                         
|DILUTED NET INCOME PER SHARE      |  | $                         

38

---

|                             |  | For the Three Months Ended
|---------------------------- |  | --------------------------
|
|
|Earned income                |  | $                         
|Interest expense (net)       |  |                           
|INCOME BEFORE TAXES          |  |                           
|Provision for income taxes   |  |                           
|NET INCOME                   |  | $                         
|BASIC NET INCOME PER SHARE   |  | $                         
|DILUTED NET INCOME PER SHARE |  | $                         

NOTE O. SUBSEQUENT EVENTS

On January 29, 2003, the MBIA portion of the Bravo Facility was amended to increase availability to the Company temporarily from $450,000,000 to
$525,000,000. The increased liquidity expires upon the earlier to occur of the completion by the Company of a new term securitization transaction (described below) or April 30, 2003. In
addition, the Company's continued use of the Bravo Facility is contingent upon the Company's obtaining an additional securitization conduit facility with a third party (similar in nature to the Bravo
Facility). The amendment requires that the new conduit facility, which must be arranged by June 23, 2003, provide the Company with availability of at least $150,000,000.

On
January 31, 2003, the HPSC Foothill Revolver was amended to increase availability temporarily from $50,000,000 to $60,000,000, through April 24, 2003. In addition, the
amendment permits the Company to borrow up to $750,000 in the HPSC Foothill Revolver to finance the operations of its ACFC subsidiary. On February 5, 2003, the Company borrowed $276,000 from
the HPSC Foothill Revolver for the purpose of paying off the remaining outstanding balance of the ACFC Foothill Revolver.

On
March 31, 2003, the Company completed a $323,190,000 private placement term securitization. In conjunction with the securitization, the Company created two new special-purpose
entities, HPSC Gloucester Funding 2003-1 LLC I (GF 2003-1 LLC I) and HPSC Gloucester Funding 2003-1 LLC II (GF 2003-1 LLC II). The initial
financing contracts contributed to the securitization were transferred by HPSC and Bravo to GF 2003-1 LLC II. Proceeds from the note offering were used to pay down amounts outstanding in
both the MBIA and ING portions of the Bravo Facility. In addition, approximately 15% of the total proceeds from the notes were set aside in a restricted prefunding account for the purpose of acquiring
future financing contracts from the Company.

In June 2003, the MBIA portion of the Bravo Facility was renewed and further amended to add Merrill Lynch Commercial Finance as a provider of financing under the facility. In
addition, total availability provided to the Company was increased from $450,000,000 to $600,000,000. Additionally, on August 13, 2003, the Company's Board of Directors authorized an amendment
to the Company's Preferred Stock Purchase Rights Plan (the "Plan") to extend the Plan from August 13, 2003 to August 13, 2013 and to increase the exercise price from $20 to $40.

39

---

NOTE P. RESTATEMENT

Subsequent to the issuance of the Company's 2002 financial statements, the Company, after consultation with its auditors, determined that two of the Company's
asset securitization special purpose entities do not meet the technical requirements of a non-consolidated qualified special purpose entity under the provisions of SFAS No. 140. The
securitization subsidiaries affected are HPSC Equipment Receivables 2000-1 LLC I and HPSC Gloucester Funding 2003-1 LLC I. Since these subsidiaries did not meet the technical
requirements of a qualified non-consolidated special purpose entity, they need to be consolidated and the gains recognized in the consolidated Statement of Operations in conjunction with the sale
transfers for prior periods need to be reversed in the periods the transfers occurred. This also has the effect of increasing earning assets and the debt related to those assets on the consolidated
Balance Sheet in the respective periods the transfers took place. The restatement effects results previously reported for the fourth quarter of 2000 through the first quarter of 2003.

As a result, the accompanying consolidated financial statements have been restated. Net income for the twelve months ended December 31, 2002 increased to $6,466,000 ($1.49 diluted
net income per share) from $4,346,000 ($1.00 diluted net income per share) as previously reported. For the twelve months ended December 31, 2001, the Company recorded a net loss of $1,533,000
($0.39 diluted net loss per share) compared to previously reported net income of $2,379,000 ($0.55 diluted net income per share). Net loss for the twelve months ended December 31, 2000
increased to $2,371,000 ($0.61 diluted net loss per share) from a net loss of $739,000 ($0.19 diluted net loss per share) as previously reported.

A
summary of the effects of the restatement on the Company's Consolidated Balance Sheets and Statements of Operations follows:

|                                                         |  | At |         
|-------------------------------------------------------- |  | -- | --------
|
|
|
|Balance Sheet                                            |  |    |         
|Lease contracts and notes receivable due in installments |  | $  | 494,159 
|Retained interest in leases and notes sold               |  |    | 46,299  
|Deferred origination costs                               |  |    | 10,048  
|Unearned income                                          |  |    | (118,043
|Senior notes, net of discount                            |  |    | (344,867
|Accounts payable and accrued liabilities                 |  |    | (30,664 
|Accrued interest                                         |  |    | (1,681  
|Interest rate swap contracts                             |  |    | (9,406  
|Deferred income taxes                                    |  |    | (9,286  
|Retained earnings                                        |  |    | (35,941 
|Accumulated other comprehensive loss, net of tax         |  |    | 5,711   

40

---

|                                    |  | For the twelve months ended |       
|----------------------------------- |  | --------------------------- | ------
|
|
|
|Income Statement                    |  |                             |       
|Earned income                       |  | $                           | 50,954
|Gain on sales of leases and notes   |  |                             | 15,804
|Interest expense                    |  |                             | 25,773
|INCOME (LOSS) BEFORE TAXES          |  |                             | 7,237 
|Provision (benefit) for income tax  |  |                             | 2,891 
|NET INCOME (LOSS)                   |  | $                           | 4,346 
|BASIC NET INCOME (LOSS) PER SHARE   |  | $                           | 1.07  
|DILUTED NET INCOME (LOSS) PER SHARE |  | $                           | 1.00  

41

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholders of HPSC, Inc.:

We
have audited the accompanying consolidated balance sheets of HPSC, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated
statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of HPSC, Inc. and subsidiaries as of December 31,
2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.

As
discussed in Note A to the accompanying consolidated financial statements, effective January 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". Also, as discussed in Note P, the accompanying consolidated financial statements for the
three years in the period ended December 31, 2002 have been restated.

/s/
Deloitte & Touche LLP
Boston, Massachusetts

March 31, 2003 (August 13, 2003 as to the last paragraph of Note O and the matters discussed in Note P)

42

---

MARKET INFORMATION

The Company's common stock is traded on the American Stock Exchange (Symbol: "HDR"). The table below sets forth the representative high and low closing prices for
shares of the common stock of the Company as reported by the American Stock Exchange for the fiscal years 2002 and 2001:

|2002 Fiscal Year |  | High |       | Low |   | 2001 Fiscal Year |  | High           |  | Low
|---------------- |  | ---- | ----- | --- | - | ---------------- |  | -------------- |  | ---
|First Quarter    |  | $    | 7.30  |     | $ | 6.51             |  | First Quarter  |  | $  
|Second Quarter   |  |      | 10.00 |     |   | 6.60             |  | Second Quarter |  |    
|Third Quarter    |  |      | 9.16  |     |   | 8.30             |  | Third Quarter  |  |    
|Fourth Quarter   |  |      | 8.25  |     |   | 7.70             |  | Fourth Quarter |  |    

The
foregoing quotations represent prices between dealers, and do not include retail markups, markdowns, or commissions.

Holders

|Title of Class                         |  | Approximate Number of Record
Holders (as of February 21, 2003)
|-------------------------------------- |  | --------------------------------------------------------------
|Common Stock, par value $.01 per share |  | 81(1)                                                         

Dividends

The Company has never paid any dividends and anticipates that, for the foreseeable future, its earnings will be retained for use in its business.

43

---

SELECTED FINANCIAL DATA

|                                     |                                   | Year Ended |          
|------------------------------------ | --------------------------------- | ---------- | ---------
|
|
|
|Statement of Operations Data         |                                   |            |          
|Revenues:                            |                                   |            |          
|                                     | Earned income on leases and notes |            | $        
|                                     | Gain on sales of leases and notes |            |          
|                                     | Provision for losses              |            |          
|                                     |                                   |            |          
|Net Revenues                         |                                   |            | 70,082   
|Net Income (Loss)                    |                                   | $          | 6,466    
|                                     |                                   |            |          
|Net Income (Loss) per ShareBasic1   |                                   | $          | 1.59     
|                                     |                                   |            |          
|                                     |                                   |            |          
|Shares Used to ComputeBasic1        |                                   |            | 4,064,404
|Net Income (Loss) per ShareDiluted1 |                                   |            | 4,339,846
|                                     |                                   |            |          



|                                                 |  | Dec. 31,
2002 |         | Dec. 31,
2001 |   | Dec. 31,
20004 |  | Dec. 31,
1999 |         | Dec. 31,
1998
|------------------------------------------------ |  | ------------- | ------- | ------------- | - | -------------- |  | ------------- | ------- | -------------
|
|
|Balance Sheet Data                               |  |               |         |               |   |                |  |               |         |              
|Cash and cash equivalents                        |  | $             | 51      |               | $ | 698            |  | $             |        |              
|Restricted cash2                                 |  |               | 29,633  |               |   | 28,786         |  |               | 115,085 |              
|Lease and notes receivable3                      |  |               | 698,923 |               |   | 721,452        |  |               | 650,991 |              
|Unearned income                                  |  |               | 138,959 |               |   | 143,829        |  |               | 126,769 |              
|Total Assets                                     |  |               | 614,715 |               |   | 632,643        |  |               | 661,299 |              
|Revolving credit borrowings                      |  |               | 43,437  |               |   | 52,000         |  |               | 49,000  |              
|Senior notes, net of discount                    |  |               | 473,830 |               |   | 497,408        |  |               | 525,737 |              
|Subordinated debt                                |  |               | 17,960  |               |   | 19,985         |  |               | 19,985  |              
|Accumulated other comprehensive loss, net of tax |  |               | 9,745   |               |   | 8,979          |  |               |        |              
|Total Stockholders' Equity                       |  |               | 32,383  |               |   | 26,606         |  |               | 37,120  |              

---

44

---

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As discussed in Note P to the consolidated financial statements, the Company has restated its financial statements for the years ended December 31,
2002, 2001, and 2000. The accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of
financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The Company believes that, of its significant accounting policies (as discussed in Note A to the notes to consolidated financial
statements), the following may involve a higher degree of judgment or complexity:

Allowance for LossesThe allowance for losses is established through a charge to the provision for losses. Provisions are
made to reserve for estimated future losses arising from the Company's portfolio of lease and note financing contracts. Each reporting period, the Company evaluates the adequacy of the allowance for
losses and records an adjustment to the provision for losses to restore the allowance to designated levels. To evaluate the adequacy of the allowance for losses, the Company utilizes certain estimates
and assumptions. Management bases these estimates and assumptions on historical experience and on various other factors that they believe to be reasonable under the circumstances. Each delinquent
customer account is carefully evaluated based on specific criteria, such as delinquency status, value of equipment or other collateral, credit bureau scores, financial condition of any guarantors, and
recent payment performance of the obligor. In addition, the Company may factor in other considerations such as historical charge-off rates, delinquency trends and general economic
conditions. Applying different estimates or assumptions could potentially produce materially different results from those reported by the Company.

Sales of Financing ContractsThe Company periodically sells leases and notes in its Bravo securitization facility and to
various banks. Gains on sales of leases and notes are recognized in the consolidated statements of operations when the Company relinquishes control of the transferred financing contracts in accordance
with SFAS No. 140. The Company typically provides credit enhancement through the
establishment of a retained interest in the financing contracts sold. Recorded gains or losses upon the sale of financing contracts depend, in part, on the fair value of the retained interest. The
Company must also continually evaluate its retained interest in financing contracts sold for impairment to its fair value. These routine fair value calculations require management to utilize certain
estimates and assumptions regarding anticipated performance of the financing contracts sold, such as credit risk, prepayments, and discount rates. Management bases its estimates and assumptions on
historical portfolio performance. There is no guarantee that historical financing contract portfolio performance will be indicative of future performance.

Revenue RecognitionThe Company finances equipment only after a customer's credit has been approved and a lease or financing
agreement for the transaction has been executed. When a transaction is initially activated, the Company records the minimum payments and the estimated residual value of the equipment, if any,
associated with the transaction. An amount equal to the sum of the payments due plus the residual value less the cost of the transaction is recorded as unearned income. The Company also capitalizes
initial direct costs that relate to the origination of leases and notes. These initial direct costs comprise certain specific activities related to processing requests for financing, such as the costs
to underwrite the transaction, to prepare and execute the documentation,

45

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filing
fees, and commission payments. Unearned income and deferred origination costs are amortized using the effective interest method over the life of the receivable using the effective interest
method. Recognition of revenue and deferred origination costs are suspended when a transaction enters the legal collection phase. The Company also recognizes revenues from fees from various portfolio
service charges, gains and losses on prepayments, and miscellaneous assessments. Notes receivable are reported at their outstanding principal balances. Interest income on notes receivable and
miscellaneous fees and assessments are recognized on an accrual basis.

Derivative InstrumentsIn the normal course of its business, the Company is subject to a variety of risks, including market
risk associated with interest rate movements. The Company is exposed to such interest rate risk from the time elapsed between the approval of a transaction with a customer and when permanent fixed
rate financing is secured. The Company manages its exposure to interest rate risk by entering into interest rate swap agreements under its securitization transactions. These amortizing swap agreements
have the effect of converting the Company's debt from securitizations from a variable rate to a fixed rate, thereby locking in financing spreads on its fixed rate lease and loan portfolio. All
derivative instruments currently held by the Company are designated as hedges of interest risks pursuant to SFAS No. 133. Pursuant to the hedge accounting requirements of SFAS No. 133,
the fair value of the swaps hedging on-balance sheet debt obligations is recorded as an asset or a liability on the balance sheet, with an offsetting unrealized gain or loss recorded to
Accumulated Other Comprehensive Income (Loss), net of tax, in stockholders equity. In addition, the Company has assigned certain interest rate swap contracts to third parties in connection with sales
of leases and notes receivable. The net fair value of the swap contracts hedging off-balance sheet transactions is not recorded on the Company's balance sheet. The Company may be subjected
to realized gains or losses in the event any of these amortizing interest rate swap contracts are terminated prematurely.

RESULTS OF OPERATIONS

Fiscal Years Ended December 31, 2002 and December 31, 2001

The Company's owned net investment in leases and notes decreased by 3% to $575,607,000 at December 31, 2002 from $593,266,000 at December 31, 2001.
The total managed portfolio of financing contracts, which includes both leases and notes owned by the Company as well as those sold to others and serviced by the Company, increased to $756,741,000 at
December 31, 2002 from $650,688,000 at December 31, 2001, an increase of 16%.

Earned
income from leases and notes for 2002 was $65,726,000 as compared to $63,494,000 for 2001. The 4% increase was primarily due to an increase in the Company's financing contract
originations in its core licensed professional financing segment. Total financing contract originations for fiscal 2002 increased approximately 18% to $310,607,000 from $263,411,000 for 2001. This was
offset by an increase in asset sales activity during 2002 as compared to 2001. Additionally, weighted-average implicit rates on the owned portfolio of financing contracts decreased from 11.3% at
December 31, 2001 to 11.1% at December 31, 2002. Earned income, which is net of amortization of initial direct costs, is recognized over the life of the leases and notes using the
effective interest method.

Pre-tax
net gains from sales of leases and notes increased to $15,804,000 in 2002 compared to $5,990,000 in 2001, an increase of 164%. The $9,814,000 increase in gains on
sales of assets in 2002 were due to higher levels of lease and loan contracts sold during the current year in the licensed professional financing segment, which contributed $15,989,000 in additional
gain, offset by a decrease in market returns on such securitizations in the current year, which reduced year over year gains by $5,432,000, and by a loss of $743,000 from the sale of five loans in the
commercial and industrial asset-based financing segment. For the twelve months ended December 31, 2002, the Company sold a portion of its beneficial interest in leases and notes in its licensed
professional financing segment totaling $163,328,000 compared to $44,512,000 for the same period in 2001. In addition, the five

46

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revolving
loans sold in the commercial and industrial financing segment had a net book value of $7,426,000. The Company received proceeds of $6,683,000, plus accrued and unpaid interest to the date of
sale, and incurred a pre-tax loss of $743,000.

Interest
expense, net of interest income on cash balances, was $36,625,000 (55.7% of earned income) in 2002, a 6% decrease from the comparable total of $39,023,000 (61.5% of earned
income) for 2001. The decrease in amount and percentage was largely due to higher interest charges in 2001 associated with
the $95,000,000 provided to the Company from the ER 2000-1 prefunding arrangement as well as a lower weighted-average cost of funds in 2002. Based on average outstanding borrowings, the
Company's cost of funds, including its Senior Subordinated Notes, was 6.0% and 6.6% at December 31, 2002 and 2001, respectively.

Net
financing margin (earned income less net interest expense) for fiscal year 2002 was $29,101,000 (44.3% of earned income) as compared to $24,471,000 (38.5% of earned income) for 2001,
a 19% increase. The increase in amount and percentage was largely due to the decline in net interest charges in 2002 from higher interest charges incurred in the first quarter of 2001 associated with
the $95,000,000 provided to the Company from the ER 2000-1 prefunding arrangement as well as a lower weighted average cost of funds in 2002 compared to 2001.

The
provision for losses for the year ended December 31, 2002 was $11,448,000 compared to $9,409,000 for the same period in 2001, a 22% increase. The increase resulted in part
from higher levels of new financings in 2002. In addition, the Company has experienced higher charge-offs in its portfolio of financing contracts. In reviewing these facts as well as the
potential impact of general economic conditions, the Company has increased its allowance for losses. During the third quarter of 2002, the Company's asset-based lending subsidiary also recognized a
loss of $1.3 million upon the final liquidation of inventory held as collateral from a past due loan. This amount is included in both the provision for losses and in net charge-offs
against the allowance for losses for the period. At December 31, 2002, the Company's allowance for losses was $16,900,000 compared to $15,359,000 at December 31, 2001. Total consolidated
net charge-offs for 2002 were$9,907,000 compared to $8,220,000 in the prior year. The increase in 2002 was partially due to the
$1.3 million charge-off in the Company's asset-based lending subsidiary (described above). This variance was offset by a charge-off in 2001 in the Company's core
financing segment from the bankruptcy of an equipment vendor and resulting customer disputes over the products which the Company had financed. During the second quarter of 2001, the Company agreed to
settle the related lawsuit and subsequently wrote-off approximately $1.8 million remaining due on the disputed customer accounts.

Selling,
general and administrative expenses for fiscal year 2002 increased 0.7% to $22,280,000 compared to $22,126,000 for 2001. The increase was partially due to higher advertising and
marketing expenses, increased bank service charges and liquidity fees, and higher payroll and related expenses. In addition, legal and accounting related fees were higher in 2002 as a result of the
employee defalcation described in the Company's quarterly filing on Form 10-Q for the period ended June 30, 2002. The Company has filed a claim with its fidelity insurance
provider. The claim, in the amount of $1 million, has been denied by the insurance provider. The Company is pursuing its legal remedies for collection under the policy. The increases, as
described above, were partially offset by lower collection related expenses in 2002 than incurred in 2001 when the Company experienced extraordinary expenses relating to the bankruptcy of an equipment
vendor and settlement of a lawsuit against the Company relating to the vendor's products which the Company had financed.

During
2002, the Company discovered an employee defalcation resulting in pre-tax losses in 2002, 2001 and 2000 of $448,000, $1,379,000 and $1,361,000, respectively. The
Company restated its prior year financial statements to reflect these losses in the periods in which they occurred.

Income
(loss) before income taxes for fiscal year 2002 was $10,729,000 compared to ($2,453,000) for 2001, an 537% increase. The Company's effective income tax rate for the year ended
December 31,

47

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2002
was 39.7% compared to 37.5% for the year 2001. Net income (loss) for the year ended December 31, 2002 was $6,466,000 ($1.49 diluted net income per share) compared to ($1,533,000)
($0.39 diluted net loss per share) for fiscal year 2001. The increase in net income in 2002 compared to 2001 was due to an increase in earned income from leases and notes, an increase in gains
on sales of leases, and lower interest expense. These were offset by a higher provision for losses in the current year compared to the prior year.

Net
profit contribution, representing income before interest and taxes, from the licensed professional financing segment was $49,718,000 for the year ended December 31, 2002
compared to $36,243,000 for the comparable period in 2001, an 37% increase. The increase was due in part to an increase in earned income from leases and notes of $63,072,000 in 2002 from $59,571,000
in 2001, increased gains on sales of leases and notes of $16,547,000 in 2002 from $5,990,000 in 2001 resulting from higher levels of lease and loan contracts sold offset by a decrease in market
returns on securitizations in 2002, offset by a higher provision for losses in 2002 of $9,653,000 compared to $8,799,000 in 2001.

Net
profit contribution (income (loss) before interest and taxes) from the commercial and industrial asset-based financing segment was a loss of $2,364,000 for the year ended
December 31, 2002 compared to gain of $327,000 for the comparable period in 2001, an 823% decrease. The decrease was caused by reduced earnings from a lower level of portfolio assets of
$2,654,000 in 2002 compared to $3,923,000 in 2001, as well as a higher provision for losses of $1,795,000 in the current year compared to $610,000 in the prior year. In addition, selling, general and
administrative expenses were $2,032,000 in 2002 compared to $1,607,000 in 2001, largely due to the costs incurred as a result of the employee defalcation. Lastly, the commercial and industrial
asset-based financing segment sold five revolving loans in the current year and incurred a pre-tax loss of $743,000. These variances were partially offset by a loss from the employee
defalcation of $1,379,000 in the prior year compared to $448,000 in the current year.

At
December 31, 2002 the Company had $163,000,000 of customer applications approved but which had not yet resulted in a completed financing transaction, compared to $119,000,000
of such customer applications at December 31, 2001. Not all approved applications will result in a completed financing transaction with the Company.

Fiscal Years Ended December 31, 2001 and December 31, 2000

The Company's owned net investment in leases and notes increased by 11% to $593,266,000 at December 31, 2001 from $535,838,000 at December 31, 2000.
The total managed portfolio of financing
contracts, which includes both leases and notes owned by the Company as well as those sold to others and serviced by the Company, increased to $650,688,000 at December 31, 2001 from
$557,392,000 at December 31, 2000, an increase of 17%.

Earned
income from leases and notes for 2001 was $63,494,000 as compared to $50,331,000 for 2000. The 26% increase was primarily due to increased levels of earning assets during fiscal
2001 compared to 2000, and higher-average implicit rates. Financing contract originations for fiscal 2001 increased approximately 6% to $263,411,000 from $248,874,000 for 2000. Earned income on leases
and notes is a function of both the implicit rates as well as the average level of owned net investment in leases and notes for the year. Weighted-average implicit rates on the Company's financing
portfolio were 11.3% and 11.1% at December 31, 2001 and 2000, respectively. Earned income, which is net of amortization of initial direct costs, is recognized over the life of the leases and
notes using the effective interest method.

Pre-tax
gains from sales of leases and notes decreased to $5,990,000 in 2001 compared to $8,796,000 in 2000, a decrease of 32%. The decrease of $2,806,000 was due to lower
levels of lease and loan contracts sold during the current year. For the twelve months ended December 31, 2001, the

48

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Company
sold a portion of its beneficial interest in leases and notes totaling $44,512,000 compared to $110,546,000 for the same period in 2000.

Interest
expense, net of interest income on cash balances, was $39,023,000 (61.5% of earned income) in 2001, a 53% increase over the comparable total of $25,478,000 (50.6% of earned
income) for 2000. The increase in net interest expense was due to significantly higher levels of average outstanding debt during 2001 as compared to 2000, net interest charges incurred in the first
quarter of 2001 associated with the $95,000,000 provided to the Company from the ER 2000-1 prefunding arrangement, and increased amortization of deferred debt origination costs resulting
from completing the term securitization transaction. Based on average outstanding borrowings, the Company's cost of funds, including its Senior Subordinated Notes, was 6.6% and 6.8% at
December 31, 2001 and 2000, respectively.

Net
financing margin (earned income less net interest expense) for fiscal year 2001 was $24,471,000 (38.5% of earned income) as compared to $24,853,000 (49.4% of earned income) for 2000,
a 2% decrease. The decrease in amount was largely due to net interest charges incurred in the first quarter of 2001 associated with the $95,000,000 provided to the Company from the ER
2000-1 prefunding arrangement, as well as increased amortization of deferred debt origination costs resulting from completing the term securitization transaction.

The
provision for losses for the year ended December 31, 2001 was $9,409,000 compared to $9,218,000 for the same period in 2000, a 2% increase. The increase resulted in part from
higher levels of new financings in 2001. In addition, the Company has experienced higher charge-offs in its portfolio of financing contracts. In reviewing these facts as well as the
potential impact of general economic conditions, the Company has increased its allowance for losses. At December 31, 2001, the Company's allowance for losses was $15,359,000 compared to
$14,170,000 at December 31, 2000. Total consolidated net charge-offs were $8,220,000 in 2001 compared to $4,198,000 in 2000. The increase in 2001 was due in part to the bankruptcy
of an equipment vendor and the resulting customer lawsuits over the vendor's products financed by the Company. The Company agreed to settle the related lawsuit in June 2001 and subsequently
charged-off approximately $1,800,000 representing the remaining balances due on the disputed customers' accounts.

Selling,
general and administrative expenses for fiscal year 2001 increased 12% to $22,126,000 compared to $19,781,000 for 2000. The increase in the current year resulted in part from
increased bank service charges as well as higher legal and collection related expenses arising from increased collection activities. In addition, the Company paid $819,000 during the second quarter of
2001 to settle the lawsuit referred to in the previous paragraph. The Company does not anticipate incurring additional costs or legal fees related to this matter.

The
prior year results were negatively affected by one-time charges of $7,106,000 associated with completing the $527,000,000 term securitization transaction (Note C).
These charges fell into two primary categories. The first, which totaled approximately $3,118,000, were non-cash charges associated with structural and rate differences upon the transfer
of previously sold leases and notes from the Company's Bravo and Capital commercial paper conduit facilities into the term securitization facility as well as fair value impairment adjustments on the
Company's related retained interest. The second category of expense, which totaled approximately $3,988,000, related to costs incurred to break existing interest rate swap contracts hedging the
terminated borrowings under the Bravo and Capital Facilities.

The
Company recorded a pre-tax loss from an employee defalcation of $1,379,000 and $1,361,000 for the twelve months ended December 31, 2001 and 2000, respectively.

Pre-tax
loss for fiscal year 2001 was $2,453,000 compared to a pre-tax loss of $3,817,000 for 2000. The Company's effective income tax rate for the year ended
December 31, 2001 was 37.5% compared to 37.9% for the year 2000. Net loss for the year ended December 31, 2001 was $1,533,000 ($0.39

49

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diluted
net loss per share) compared to a net loss of $2,371,000 ($0.61 diluted net loss per share) for fiscal year 2000. The decrease in net loss in 2001 compared to 2000 was due to higher levels of
earnings assets in 2001, offset by lower gains on sales of leases and notes, higher interest costs, and increased selling, general, and administrative costs in 2001 as compared to the prior year.

Net
profit contribution, representing income before interest and taxes, from the licensed professional financing segment was $36,243,000 for the year ended December 31, 2001
compared to $20,231,000 for the comparable period in 2000, a 79% increase. The increase was due in part from higher earned income of $59,571,000 in 2001 compared to $44,982,000 in 2000 largely due to
higher levels of owned portfolio assets in 2001. This was offset by higher selling, general and administrative expenses of $20,519,000 in 2001 compared to $17,913,000 in 2000, due in part to increased
interest rate swap breakage costs, higher bank service charges, as well as higher legal and collection related expenses. In addition, year 2000 results were significantly affected by
one-time charges of $7,106,000 incurred in connection with completing the Company's term securitization transaction.

Net
profit contribution (income before interest and taxes) from the commercial and industrial asset-based financing segment was $327,000 for the year ended December 31, 2001
compared to $1,430,000 for the comparable period in 2000, a 77% decrease. The decrease was due to lower earned interest and fee income on notes of $3,923,000 in 2001 compared to $5,349,000 in 2000
resulting from generally lower average credit line utilization by ACFC's borrowers, offset by lower selling, general and administrative expenses of $1,607,000 in 2001 compared to $1,868,000 in 2000.

At
both December 31, 2001 and 2000, the Company had $119,000,000 of customer applications approved but which had not yet resulted in a completed financing transaction. Not all
approved applications will result in a completed financing transaction with the Company.

LIQUIDITY AND CAPITAL RESOURCES

The Company's financing activities require substantial amounts of capital, and its ability to originate new financing contracts depends on the availability of
cash and credit. At December 31, 2002, the Company had access to credit under its Foothill Revolver, the ER 2000-1 term securitization, its Bravo revolving securitization facility,
its senior notes to savings banks, and its outstanding Senior Subordinated Notes. The Company also obtains cash from sales of its financing contracts under its Bravo securitization facility and
through collections generated from its lease and note portfolio. Substantially all of the assets of the Company have been pledged to HPSC's lenders as security under its various credit arrangements.
The pledged assets include all of the Company's rights to receive payments under its financing contracts and the collateral security granted to the Company by the borrowers under those financing
contracts. Borrowings under the Foothill Revolver and borrowings under senior notes to savings banks are full recourse obligations of the Company.

The
Company's financing strategy is to warehouse temporarily new financing contracts through borrowings under its Foothill Revolver. The warehouse borrowings are repaid with the proceeds
obtained from other permanent financings through the Company's securitization facilities as well as from cash flows generated from the financing contracts. The Company usually obtains financing from
its securitization facilities within 30 to 60 days of original contract activation. Securitization financing may be in the form of a loan to the Company or in the form of a sale in which the
value of the financing contract, except for a retained interest and the residual value, is removed from the Company's balance sheet. The Company is typically obligated to provide additional credit
enhancement to credit providers. Credit enhancement may be provided in various forms, including a retained interest in the assets sold, the establishment of restricted cash reserve accounts, or
through third-party financial guarantees. ACFC's asset-based notes receivable have been financed through borrowings under the ACFC Foothill Revolver and through borrowings under the ER
2000-1 term securitization.

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Cash and Cash Flow Activities

At December 31, 2002, the Company had a total of $29,684,000 in cash, cash equivalents and restricted cash as compared to $29,484,000 at the end of 2001.
Substantially all of this cash was restricted pursuant to various securitization agreements. Components of restricted cash at December 31, 2002 and 2001 were as follows:

2002

2001(in thousands)Cash collections-Bravo

$
11,504

$
4,358Cash escrow- Bravo swap agreements


264


Cash collections-ER 2000-1 LLC I


4,351


3,386Cash collections-ER 2000-1 LLC II


4,322


8,418Cash escrow-ER 2000-1 swap agreement


1,000


1,000Cash reserves-ER 2000-1


7,349


11,624Cash collections-Foothill


435


Cash due purchaser of asset-based loans from ACFC


408


Total

$
29,633

$
28,786


Cash
and cash equivalents were $51,000 at December 31, 2002 compared to $698,000 at December 31, 2001. The following is a description of the significant activities
affecting the Company's cash and cash equivalents for the years 2002 and 2001.

Cash
provided by operating activities for the year ended December 31, 2002 was $16,963,000 compared to $8,596,000 for the prior year. The significant changes in cash provided by
operating activities were net income (loss) of $6,466,000 in 2002 compared to ($1,533,000) in 2001, adjusted for increased non-cash gains on sales of leases and notes receivable of
$15,804,000 in 2002 compared to $5,990,000 in 2001, increased deferred income taxes in 2002 of $4,162,000 compared to a decrease of $1,007,000 in 2001, higher provision for credit losses of
$11,448,000 in 2002 compared to $9,409,000 in the prior year, and an increase in accounts payable and accrued liabilities of $4,192,000 compared to $760,000 in the prior year.

Cash
used in investing activities was $101,345,000 for the year ended December 31, 2002 compared to $87,298,000 for the prior year. The significant components of cash used in
investing activities were an increase in cash used to originate new leases and notes receivables of $319,708,000 in 2002 compared to $258,782,000 in 2001, offset by portfolio receipts of $154,911,000
in 2002 and $143,570,000 in 2001, as well as proceeds from sales of leases and notes receivable of $51,538,000 in the current year as contrasted to $26,145,000 for the comparable 2001 period.

Cash
provided by financing activities was $83,735,000 for the year ended December 31, 2002 compared to $79,400,000 for the same period in 2001. The major components of cash
provided by financing activities include proceeds from the issuance of commercial paper conduit senior notes of $269,211,000 in 2002 as contrasted to $153,608,000 in 2001. During 2002, the Company did
not issue any new term securitization notes. In 2001, the Company received net proceeds of $4,592,000 from the sale of the Class E and Class F ER 2000-1 term securitization
notes. The proceeds received from the term securitization notes were used to retire amounts outstanding under both the Company's commercial paper conduit facilities and warehouse revolving credit
borrowings. Repayments of commercial paper conduit senior notes were $42,399,000 in 2002 compared to $30,864,000 in 2001. Repayments of term securitization notes were $130,704,000 in the current year
compared to $136,444,000 in the prior year. The Company had net repayments on revolving notes payable of $8,563,000 in 2002 compared to net borrowings of $3,000,000 in 2001. During 2002, the Company
also began making principal repayments on its subordinated notes, during which time $2,025,000 in principal was repaid as compared to none in the prior year. In addition, restricted cash increased
$847,000

51

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during
fiscal year 2002 as compared to a decrease of $86,299,000 in 2001. The decrease in 2001 resulted from the utilization of restricted cash provided to the Company through the ER
2000-1 term securitization prefunding arrangement.

Warehouse Financing

Revolving Loan AgreementIn May 2001, the Company renewed and amended its revolving credit facility with Fleet
National Bank (the "Fleet Revolver"), providing availability to the Company of up to $83,500,000 through May 2002. In May 2002, the Fleet Revolver was again renewed, providing
availability of up to $75,000,000 through August 2002. Under the Fleet Revolver, a base portion of the outstanding borrowings were at variable rates of 75 to 125 basis points above the prime
lending rate, while the remainder were at 225 to 275 basis points above LIBOR rates. The level of spread to be paid above the base rate and LIBOR rates was dependent upon the Company's balance sheet
leverage as well as compliance with certain performance covenants. At December 31, 2001, the Company had $52,000,000 outstanding under the Fleet Revolver.

In
August 2002, Fleet National Bank assigned the Fleet Revolver to Foothill Capital Corporation, as Agent. The Company contemporaneously executed an agreement with Foothill
Capital Corporation and a group of lenders (the "Foothill Revolver"). The Foothill Revolver provides for a line of credit to HPSC (the "HPSC Foothill Revolver") and a separate line of credit to ACFC
(the "ACFC Foothill Revolver"). Under the terms of the HPSC Foothill Revolver, the Company may borrow up to $50,000,000 at variable interest rates of prime plus .50% to 1.00% and at LIBOR plus 2.50%
to 3.00%, depending upon the Company's balance sheet leverage. The HPSC Foothill Revolver expires in August 2005. Under the ACFC Foothill Revolver, ACFC was permitted to borrow up to
$20,000,000 at a variable interest rate of prime plus 1.00% for the first 180 days and prime plus 2.00% thereafter. The ACFC Foothill Revolver expired and was paid in full on February 5,
2003. The HPSC Foothill Revolver
is subject to certain financial covenant requirements including, among others, tangible net worth, leverage, and profitability levels. As of December 31, 2002, HPSC was in compliance with its
covenant requirements. Initial proceeds from the Foothill Revolver were used to repay remaining amounts due to Fleet National Bank under the Fleet Revolver. At December 31, 2002, the Company
had $42,606,000 outstanding under the HPSC Foothill Revolver. As discussed in the section entitled "Results of Operations", on December 31, 2002 the Company sold five ACFC loans and received
net proceeds of $6,683,000, which were used to repay amounts outstanding under the ACFC Foothill Revolver. At December 31, 2002 the Company had $831,000 remaining outstanding under the ACFC
Foothill Revolver. Borrowings under the Foothill Revolver are not hedged, and therefore, may be exposed to upward movements in interest rates.

In
November 2002, the HPSC Foothill Revolver was temporarily increased to $60,000,000 through January 24, 2003. On January 31, 2003, the HPSC Foothill Revolver was
further amended to temporarily increase availability from $50,000,000 to $60,000,000, through April 24, 2003. The January 31, 2003 amendment also permits the Company to borrow up to
$750,000 in the HPSC Foothill Revolver to finance the operations of its ACFC subsidiary. On February 5, 2003, the Company borrowed $276,000 under the HPSC Foothill Revolver for the purpose of
paying off the remaining outstanding balance of the ACFC Foothill Revolver. The Company intends to seek permanent availability above $50,000,000 under the Foothill Revolver, but there can be no
assurance it will be able to do so. If the Company cannot obtain commitments above $50,000,000, the Company's ability to continue its historical growth rates may be constrained.

As
described above, the HPSC Foothill Revolver contains certain financial covenant requirements for the Company including, among others, tangible net worth, leverage, profitability
levels, and portfolio delinquencies. The Company has received a waiver from the revolver lenders from the inception of the Foothill Revolver through the end of the quarter ended June 30, 2003
relating to the Company's non-compliance with the leverage and net income covenant requirements in the HPSC

52

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Foothill
Revolver arising out of the restatement described in Note P. The Company anticipates that it will need to obtain further waivers of the leverage covenant and/or amend the leverage
covenant in future periods. The Company intends to work with its lenders to obtain such waivers and/or amendments.

Permanent Financing

Bravo FacilityIn March 2000, the Company, along with its wholly-owned, special-purpose subsidiary, HPSC Bravo
Funding Inc. (later merged into HPSC Bravo Funding LLC) ("Bravo"), signed an amended revolving credit facility (the "Bravo Facility") structured and guaranteed by MBIA, Inc. At
December 31, 2002 and December 31, 2001, the Bravo Facility provided the Company with available borrowings up to $450,000,000 and $385,000,000, respectively. Under the terms of the Bravo
Facility, the Company contributes certain of its financing contracts to Bravo which, in turn, either pledges or sells its interests in these contracts to a commercial paper conduit entity which issues
notes to investors. Credit enhancement is provided to the noteholders through financial guarantees provided by MBIA as to the payment of principal and interest on the notes. The Company's current
financing strategy is to either pledge or sell eligible financing contracts to Bravo on a monthly basis, thereby minimizing its exposure to fluctuating interest rates in the Foothill Revolver
warehouse facility. Financing contracts pledged by Bravo, along with the associated debt to the conduit entity, are included on the Company's consolidated balance sheet. In the case of financing
contracts sold by Bravo, the contracts and associated debt are removed from the Company's consolidated balance sheet. Additional credit enhancement is provided to investors through the creation of a
retained interest in the financing contracts sold. Risk of loss to the Company is limited to the extent of the Company's retained interest and residual values in the financing contracts sold. Bravo
incurs interest at variable rates in the commercial paper market and enters into interest rate swap contracts to assure fixed-rate funding. Monthly settlements of principal and interest
payments on the notes are made from the collections on the Bravo financing contract portfolio.

The
Company is the servicer of the Bravo portfolio, subject to its meeting certain performance covenants. In August 2002, the covenant requirements of the Bravo Facility were
amended to match substantially the covenant requirements of the HPSC Foothill Revolver. The agreement was effective for the quarter ended June 30, 2002. For each quarter prior to that date, a
waiver had been obtained for the Company's non-compliance with these covenant requirements. This non-compliance resulted primarily from costs incurred by the Company in
connection with completing the ER 2000-1 asset securitization in December 2000 and the impact of the Company's adoption of Statement of Financial Accounting Standard ("SFAS")
No. 133. Under the terms of the Company's other debt agreements, a default under the Bravo Facility could result in a cross default where the Company would also be in default with its other
debt agreements. If such a cross default were to occur, it could significantly affect the Company's ability to continue to raise additional liquidity, which would likely result in a substantial
curtailment of the Company's current growth and operations. In addition, under such circumstances, the Company could be replaced as the servicer of the Bravo facility.

The
Company executed a financing agreement with ING Capital LLC ("ING") in August 2002 which provides additional liquidity under the Bravo Facility. Under the terms of the
agreement (the "ING portion of the Bravo Facility"), ING will provide the Company with additional liquidity of up to 3.75% of financing contracts held in the MBIA portion of the Bravo Facility, up to
a maximum amount of $20,000,000. Interest on ING borrowings is payable on one-month LIBOR rates plus 3%. Amounts due under the ING portion of the Bravo Facility are subordinate to amounts
due to the other lenders under the Bravo Facility. The ING portion of the Bravo Facility contains delinquency and default covenant requirements that are more restrictive than those contained in the
Bravo Facility. The ING portion of the Bravo Facility and the MBIA portion of the Bravo Facility contain cross default provisions. At December 31, 2002, the Company was in compliance with its
covenant requirements in

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the
ING portion of the Bravo Facility. Initial proceeds of $13,840,000 from the ING portion of the Bravo Facility were used to retire amounts outstanding under the Fleet Revolver.

At
December 31, 2002, the Company had total debt of $220,934,000 outstanding under the loan portion of the Bravo Facility and, in connection therewith, had interest rate swap
contracts outstanding with a total notional value of $208,202,000. The total amount outstanding under the sales portion of the Bravo Facility was $213,624,000 at December 31, 2002 and, in
connection therewith, the Company had outstanding interest rate swap contracts assigned to third parties with a notional value of $208,245,000.

On
January 29, 2003, the MBIA portion of the Bravo Facility was amended to temporarily increase availability to the Company from $450,000,000 to $525,000,000. The increased
liquidity expires upon the earlier to occur of either the completion by the Company of a new term securitization transaction (see Gloucester Funding 2003-1 described below) or
April 30, 2003. In addition, continued availability to the Company under the Bravo Facility is contingent upon the Company's obtaining an additional securitization conduit facility with a third
party (similar in nature to the Bravo Facility). The amendment requires that the new conduit facility must be arranged by June 23, 2003 and must provide the Company with a line of availability
of at least $150,000,000.

The
MBIA and ING portions of the Bravo Facility expire in June 2003. The Company intends to continue to utilize the Bravo Facility for a portion of its permanent financing
requirements. The Company expects that it will be able to renew the Bravo Facility. It is possible, however, that the Bravo Facility or the banks providing liquidity under the facility will not extend
their commitment. In addition, although the Company believes that it can arrange a new conduit facility with a third party by June 2003, there can be no assurance it will be able to do so. If
the Bravo Facility is not renewed, the Facility may then be limited to the then existing outstandings and may not be available to the Company to provide future liquidity. If the liquidity banks
terminate or reduce their commitment, the Company will seek to replace the terminated or reduced amount, but there can be no assurance that the Company will be able to do so. If the Bravo Facility is
unavailable, the Company may be unable to conduct its business or may be unable to conduct its business at current levels.

Both
the MBIA and the ING portions of the Bravo Facility are subject to certain financial covenant requirements including, among others, tangible net worth, leverage, profitability
levels, and portfolio delinquencies, which, as noted above, match substantially the covenant requirements of the Foothill Revolver. The Company has received a waiver through June 30, 2003 from
its Bravo Facility lenders relating to the Company's non-compliance with the leverage and net income covenant requirements in the Bravo Facility arising out of the restatement described in
Note P. The Company anticipates that it will need to obtain further waivers of the leverage covenant and/or amend the leverage covenant in future periods. The Company intends to work with its
Bravo facility lenders to obtain such waivers and/or amendments.

Equipment Receivables 2000-1In December 2000, the Company completed a $527,106,000 private placement term
securitization, referred to as Equipment Receivables 2000-1. HPSC, along with subsidiaries ACFC, Bravo, and HPSC Capital Funding, Inc. (a special-purpose entity subsequently
terminated in June 2001), transferred certain lease and note contracts to newly formed special-purpose entities, ER 2000-1 LLC I and ER 2000-1 LLC II. ER
2000-1 LLC I and ER 2000-1 LLC II issued notes to finance the purchase of, and loan against, the collateral consisting of the leases and notes transferred from HPSC, ACFC,
Bravo and Capital. ER 2000-1 LLC I and ER 2000-1 LLC II are consolidated, special-purpose entities. Financing contracts transferred to ER 2000-1 LLC I and ER
2000-1 LLC II were pledged as collateral on the notes, with the carrying value of the financing contracts and associated debt included in the Company's consolidated balance sheet. The
proceeds from the notes were used to retire senior notes and other obligations outstanding in both the Bravo

54

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and
Capital Facilities as well as to pay down amounts outstanding under the Fleet Revolver warehouse facility.

The
securitization further provided for initial proceeds of $95,218,000 to be prefunded to ER 2000-1 LLC I and ER 2000-1 LLC II for the sole purpose of acquiring
additional financing contracts from the Company. The prefunding period expired in March 2001, at which time approximately $3,800,000 remained unused and was used to prepay principal on the
notes. The ER 2000-1 securitization agreement also provided for $1,049,000 of initial proceeds to be placed in a restricted cash account to service interest requirements to the noteholders
on the prefunded debt outstanding during the prefunding period. In addition, initial proceeds of $2,735,000 were deposited in the restricted cash collection account to service the interest
requirements on the ER 2000-1 notes for the initial interest accrual period ending in January 2001. At the time of entering into the interest rate swap contracts, the Company
deposited $1,000,000 into an interest bearing, cash escrow account as collateral on the swap contracts. The Company provided additional credit enhancement to the ER 2000-1 noteholders
through the creation of both a cash reserve account and a residual payment account. Pursuant to the terms of the ER 2000-1 securitization agreements, certain excess cash flows generated by
the portfolio of financing contracts are deposited to the cash reserve account or residual payment account, up to agreed-upon limits. These restricted cash accounts are available to fund
monthly interest and principal payments on the ER 2000-1 notes in the event of deficiencies from the monthly collections. At December 31, 2002 and 2001, the balance in these
restricted cash reserve accounts was $7,349,000 and $11,624,000, respectively. The Company may also provide additional credit enhancement through the substitution of new leases and notes for leases
and notes previously transferred to the securitization, up to certain defined limits.

ER
2000-1 entered into interest rate swap contracts as a hedge against interest rate risk related to its variable-rate obligations on the Class A and
Class B-1 notes. The interest rate swap contracts have the effect of converting the Company's interest payments from a variable-rate to a fixed-rate, thereby
locking in spreads on the Company's financing portfolio. At December 31, 2002, ER 2000-1 LLC I and ER 2000-1 LLC II had total debt outstanding, net of unamortized
original issue discount, with a remaining principal balance of $229,109,000 and, in connection with the amounts financed
through the issuance of the Class A and Class B-1 variable-rate notes, had interest rate swap contracts outstanding with a total notional value of $205,320,000.

The
Company is the servicer of the portfolio, subject to continuing to meet certain covenants. Monthly payments of principal and interest on the ER 2000-1 notes are made from
regularly scheduled collections generated from the lease and note portfolio. Under certain circumstances, the Company may be obligated to advance its own funds for amounts due on the notes in the
event an obligor fails to remit a payment when due. The Company is reimbursed for such advances from available funds upon the subsequent collection from the obligor. Credit enhancement is provided
through the structuring of several classes of notes, which are ranked for purposes of determining priority of payment. Under the terms of the various debt agreements, an event of default for
non-compliance by the Company with its covenants may result in an immediate acceleration of all principal amounts outstanding under all classes of notes. If such an event of default were
to occur, the Company's ability to continue to raise additional liquidity could be adversely affected, which would likely result in a substantial curtailment of the Company's current growth and
operations. In addition, the Company could be replaced as the servicer of the portfolio.

Various BanksThe Company periodically enters into secured, fixed-rate, fixed-term loan agreements
with various banks for purposes of financing its operations. The loans are generally subject to certain recourse and performance covenants. At December 31, 2002, the Company had outstanding
borrowings under such loan agreements of approximately $7,210,000 with annual interest rates ranging from 6.5% to 8.0%. These loans, which are full recourse to the Company, are included on the
Company's consolidated balance sheet as senior notes.

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Senior Subordinated NotesIn March 1997, the Company issued $20,000,000 of unsecured senior subordinated notes due in
2007 ("Senior Subordinated Notes") bearing interest at a fixed-rate of 11% (the "Note Offering"). The Company received approximately $18,300,000 in net proceeds from the Note Offering and
used such proceeds to repay amounts outstanding under the Fleet Revolver. The Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, other than through the
operation of a sinking fund, after April 1, 2002 at established redemption prices plus accrued but unpaid interest to the date of repurchase. Beginning July 1, 2002, the Company began
redeeming, through sinking-fund payments, a portion of the aggregate principal amount of the Senior Subordinated Notes at a quarterly redemption price of $1,000,000 plus accrued but unpaid
interest to the redemption date. Such payments are required January 1, April 1, July 1, and October 1 of each year until maturity. The Company expects to be able to meet
its payment obligations under its Senior Subordinated Notes, but there can be no assurance that it will be able to do so. The Senior Subordinated Notes are full recourse to the Company.

Gloucester Funding 2003-1On March 31, 2003, the Company completed a $323,190,000 private placement term
securitization. In conjunction with the securitization, the Company created two new special-
purpose entities, HPSC Gloucester Funding 2003-1 LLC I (GF 2003-1 LLC I) and HPSC Gloucester Funding 2003-1 LLC II (GF 2003-1 LLC II). These
entities were formed to issue notes to finance the purchase of, and loan against, leases and notes transferred from HPSC and Bravo. Financing contracts transferred to GF 2003-1 LLC I and
GF 2003-1 LLC II were pledged as collateral for the notes, with the carrying value of the financing contracts and associated debt included in the Company's consolidated balance sheet.
Proceeds from the note offering were used to pay down amounts outstanding in both the MBIA and ING portions of the Bravo Facility. In addition, approximately 15% of the total proceeds from the notes
were set aside in a restricted prefunding account for the purpose of acquiring future financing contracts from the Company.

The
Company plans periodically to enter into and utilize term securitizations in the future to finance portions of its financing contracts. The timing and the ability of the Company to
complete such financings will depend, to a large extent, on market conditions for such transactions, and there can be no assurance that the Company will be able to enter into such securitizations or
that it will be able to do so in a timely fashion. Management can not predict the impact of the restatement on its ability to continue to access capital at rates and in amounts as favorable as it has
historically been able to obtain.

Off-balance sheet arrangements

As discussed above, the Company routinely sells leases and notes pursuant to securitization agreements. The sales transactions are accomplished by first
transferring the financing contracts to a bankruptcy remote, non-consolidated special-purpose entity, which, in turn, sells its interest in those contracts. The Company surrenders control
over the financing contracts transferred to the qualifying special purpose entity. In all such sales transactions to date, the Company has provided additional credit enhancement to the noteholders
through the establishment of a retained interest in the financing contracts sold. The Company's primary exposure in determining the fair value of its retained interest in securitized financing
contracts is credit risk associated with the obligors on these contracts. The Company's retained interest in its financing contracts is subordinate to the interests of its credit providers. In
recording the net gain upon the sale of financing contracts and the fair value of its retained interest, the Company assumes a loss rate of approximately 0.50% per annum on a static pool basis, and
discounts its retained interest at implicit rates ranging from 10.6% to 14.8%. Prepayment risk on securitized financing contracts is limited due to the Company's prepayment policies with its obligors.
To eliminate interest rate risk, the Company enters into interest rate swap contracts as a hedge against its variable rate obligations. The fair value of the retained interest in the financing
contracts sold is reviewed for impairment on a quarterly basis. The Company does not sell the residual values in its sold financing contracts which are lease agreements. Risk of loss to the Company
under its Bravo sales

56

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agreement
is limited to the extent of the Company's retained interest and residual values in the financing contracts sold to the facility. The Company maintains an allowance for losses designed to
cover potential exposures in both its owned on-balance sheet portfolio as well as its residual interests in sold off-balance sheet contracts. Historically, the Company has sold
contracts through its securitization facilities each quarter. For the twelve months ended December 31, 2002, the Company sold a portion of its beneficial interest in leases and notes totaling
$163,228,000 compared to $44,512,000 for the same period in 2001. For the same periods, the Company recognized pre-tax gains from sales of financing contracts of $16,547,000 and
$5,990,000, respectively, which is included in "Gain on sales of leases and notes, net" on the Company's Consolidated Statement of Operations.

Summary of total contractual obligations

A summary of the Company's total debt obligations, the total on-and-off-balance sheet financing contracts outstanding through
the Company's various securitization facilities, and future minimum lease payments under its non-cancelable operating leases for its office locations, is as follows at December 31,
2002:

On-Balance
Sheet Debt

Off-Balance
Sheet Sold
Financing
Contracts

Operating
Leases

Total(in thousands)2003

$
154,581

$
52,838

$
777

$
208,1962004


116,100


47,663


339


164,1022005


133,197


42,194


34


175,4252006


64,709


34,105





98,8142007


40,421


22,520





62,9412008 and thereafter


26,768


14,304





41,072Total

$
535,776

$
213,624

$
1,150

$
750,550


Stock Repurchase Program

In December 2000, the Board of Directors approved an increase to the stock repurchase program whereby the Company may repurchase up to an additional
250,000 shares of the Company's common stock subject to maximum dollar limitations set forth under the Company's Foothill Revolver and Senior Subordinated Note financing. Based on current market
values at December 31, 2002 and the limitations set forth in its most restrictive debt agreement, the Company may repurchase up to an additional 129,000 shares of its common stock. No time
limit has been established for the repurchase program. The Company expects to use the repurchased stock to meet the current and future requirements of its employee stock plans. During 2002, the
Company repurchased 70,186 shares of its common stock for approximately $538,000.

Management
believes that the Company's sources of liquidity, including the Foothill Revolver, the Bravo Facility, the ER 2000-1 securitization, the Gloucester Funding
2003-1 securitization, the Senior Subordinated Notes, and loans from various savings banks, along with cash obtained from the sales of its financing contracts and from internally generated
revenues, are adequate to meet current obligations and carry on current operations. In order to finance its future operations, the Company will seek to renew and/or obtain new liquidity facilities and
may seek to raise additional equity. The Company expects that it will be able to obtain additional capital at competitive rates, but there can be no assurance it will be able to do so.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of its business, the Company is subject to a variety of risks, including market risk associated with interest rate movements. Interest rate
exposures exist between the time a transaction with a customer is approved and when permanent, fixed-rate financing is secured. The Company does not hold or issue financial instruments for
trading purposes.

The
Company temporarily finances its new fixed-rate financing contracts through a variable-rate revolving warehouse line of credit until permanent
fixed-rate financing is obtained through its securitization facilities. The Company is exposed to interest rate changes between the time a new financing contract is approved and the time
the permanent, fixed-rate financing is completed, thereby locking in financing spreads. To mitigate this exposure, the Company generally obtains permanent financing within 60 days
of the activation of a new financing contract. The Company believes it will be able to continue to utilize this operating strategy. The Company further manages its exposure to interest rate risk by
entering into interest rate swap contracts as a hedge against variable-rate interest incurred through its commercial paper securitization facility as well as its Class A and
Class B-1 term securitization notes. These swap agreements have the effect of converting the Company's securitization debt from a
variable-rate to a fixed-rate. At December 31, 2002, the net marked-to-market value of interest rate swap contracts hedging
on-balance sheet debt obligations was a liability of $16,050,000. Assuming a hypothetical 10% reduction in interest rates from current weighted-average swap rates at December 31,
2002, the marked-to-market valuation of these swap agreements would have been approximately $21,206,000.

The
Company's portfolio of financing contracts originated in its licensed professional financing segment are fixed-rate, non-cancelable, full payout leases and
notes. Changes in current market interest rates result in unrealized gains or losses in the fair value of the Company's fixed-rate assets and fixed-rate debt. In a rising
interest rate environment, fixed-rate assets lose market value whereas fixed-rate liabilities gain market value. The opposite is true in a declining rate environment. The fair
value of fixed-rate financial assets and liabilities can be determined by discounting associated cashflows at market rates currently available for instruments with similar risk
characteristics and maturities. Sensitivity analysis can be applied to determine the positive or negative effect market risk exposures may have on the fair value of the Company's financial assets and
liabilities. The following table summarizes the carrying value and estimated fair value of the Company's fixed-rate assets and liabilities at December 31, 2002. The table also
demonstrates the degree of sensitivity to the fair value of the Company's fixed-rate financial assets and liabilities assuming a hypothetical 10% adverse change from actual rates:

Carrying Value

Fair Value

10% change(in thousands)Fixed-rate leases and notes due in installments

$
554,555

$
556,485

$
544,078Fixed-rate debt


475,213


449,512


480,712


The
Company's variable-rate assets consist of commercial and industrial asset-based revolving loans originated by ACFC and progress payment notes receivable originated by
HPSC in the healthcare financing segment. The Company's variable-rate liabilities consist of amounts outstanding under the Foothill Revolver and senior notes outstanding under the ING
portion of the Bravo Facility. The carrying value of variable-rate assets and liabilities approximates current fair values. Sensitivity analysis

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can
be used to determine the positive or negative effect on the Company's interest income and interest expense due to changes in market interest rates, as summarized as follows at December 31,
2002:

Carrying Value

Fair Value

+/-Change to interest
assuming +/-10% change
from actual rates(in thousands)Variable-rate notes receivable

$
21,052

$
21,052

$
+/-302Variable-rate debt


60,014


60,014


+/-195


For
additional information about the Company's financial instruments, see Note L in the notes to consolidated financial statements.

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FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act. Discussions containing such forward-looking
statements may be found in the material set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as within the Annual Report generally. When
used in this Annual Report, the words "believes," "anticipates," "expects," "plans," "intends," "estimates," "continue," "may," or "will" (or the negative of such words) and similar expressions are
intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties including, but not limited to, the following: the Company's dependence on
maintaining and increasing funding sources, including warehouse and permanent financing facilities; compliance with financial and other covenants in funding documents; the Company's need to obtain
waivers and/or amendments of certain covenants under its funding agreements; payment restrictions and default risks in asset securitization transactions; the risk of being removed as the servicer of
its securititzation facilities; customer credit risks; competition for customers and for capital funding at favorable rates relative to the capital costs of the Company's competitors; changes in
healthcare payment policies; interest rate risk; the risk that the Company may not be able to realize the residual value on financed equipment at the end of its lease term; interest rate swap contract
risks; risks associated with the sale of certain receivable pools by the Company; dependence on sales representatives and the current management team; and fluctuations in quarterly operating results.
The Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K/A for the year ended December 31, 2002, as restated, filed on
August 13, 2003, contain additional information concerning such risk factors. Actual results in the future could differ materially from those described in the forward-looking statements as a
result of the risk factors set forth above, the risk factors described in the Annual Report on Form 10-K/A, and the matters set forth in this Annual Report generally. HPSC cautions
the reader, however, that such list of risk factors may not be exhaustive. HPSC undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances.

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OFFICERS

John W. EveretsChairman
Chief Executive Officer

Raymond R. DohertyPresident
Chief Operating Officer

Rene LefebvreSenior Executive Vice President
Treasurer Chief Financial Officer

Stephen K. BallouVice PresidentOperations

William S. HoftVice PresidentFinance

DIRECTORS

John W. Everets (3)Chairman
Chief Executive Officer

Raymond R. Doherty (3)President Chief Operating Officer

J. Kermit Birchfield, Jr. (1)(2)(3)(4)Chairman
Displaytech, Inc.

Dollie Cole (1)Chairperson
Dollie Cole Corporation

Samuel P. Cooley (2)(3)(4)Retired
Former Executive Vice President,
Shawmut National Corp.

Richard D. Field (1)(2)(4)Private Investor
Former Senior Executive Vice President,
The Bank of New York

Thomas M. McDougal, DDS (4)Practicing Dentist

Lowell P. Weicker, Jr. (1)(2)(4)Former Governor and U.S. Senator from Connecticut

(1) Member, Compensation Committee

(2) Member, Audit Committee

(3) Member, Executive Committee

(4) Member, Corporate Governance Committee

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AUDITORS

Deloitte &
Touche LLP
200 Berkeley Street
Boston, Massachusetts 02116

COUNSEL

Day
Berry & Howard LLP
260 Franklin Street
Boston, Massachusetts 02110

TRANSFER AGENT

Equiserve
Trust Company
P.O. Box 43010
Providence, RI. 02940-3068

Shareholder
Inquiries:(781) 575-3400
www.equiserve.com

10-K/A

HPSC's
Annual Report on Form
10-K/A is available to stockholders without charge by writing to:

Investor
Relations Department
HPSC, Inc.
60 State Street, Suite 3520
Boston, Massachusetts 02109

E-mail
address:hpsc@hpsc.com

Internet
web site:www.hpsc.com

HPSC's
Annual Report on Form 10-K/A is also available from the Securities and Exchange Commission (the "SEC") via the Internet. The SEC maintains a web site containing reports,
proxy and information statements, and other information regarding registrants who file with the SEC. The address of the SEC is:www.sec.gov

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