<PAGE>
                                    FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

         (Mark One)
         [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                      SECURITIES AND EXCHANGE ACT OF 1934
               For the Quarterly Period Ended September 30, 2002

                                       OR

         [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

                           Commission File No. 1-14771

                           MICROFINANCIAL INCORPORATED
             (Exact name of Registrant as specified in its Charter)

            Massachusetts                               04-2962824
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
     Incorporation or Organization)

                      950 Winter Street, Waltham, MA 02451
                    (Address of Principal Executive Offices)

                                 (781) 890-0177
              (Registrant's Telephone Number, Including Area Code)


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

     As of November 11, 2002, 12,821,946 shares of the registrant's common stock
were outstanding.


<PAGE>


                           MICROFINANCIAL INCORPORATED
                                TABLE OF CONTENTS




                                                                            Page
Part I                FINANCIAL INFORMATION

      Item 1   Financial Statements (unaudited):
                 Condensed Consolidated Balance Sheets
                   December 31, 2001 and September 30, 2002                   3
               Condensed Consolidated Statements of Operations
                 Three and nine months ended September 30, 2001 and 2002      4
               Condensed Consolidated Statements of Cash Flows
                 Three and nine months ended September 30, 2001 and 2002      5
               Notes to Condensed Consolidated Financial Statements           7

      Item 2   Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                         13

      Item 3   Quantitative and Qualitative Disclosures about Market Risk    18

      Item 4   Controls and Procedures                                       18

Part II               OTHER INFORMATION

      Item 1   Legal Proceedings                                             19

      Item 5   Other Information                                             22

      Item 6   Exhibits and Reports on Form 8-K                              23

      Signatures                                                             24

      Certifications                                                         25



<PAGE>


                           MICROFINANCIAL INCORPORATED
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                      December 31,   September 30,
                                                                          2001           2002
                                                                      ------------   -------------

<S>                                                                    <C>            <C>
                                     ASSETS
Net investment in leases and loans:
     Receivables due in installments                                   $ 399,361      $ 373,756
     Estimated residual value                                             37,114         32,115
     Initial direct costs                                                  7,090          5,597
     Loans receivable                                                      2,248          1,911
     Less:
        Advance lease payments and deposits                                 (287)          (130)
        Unearned income                                                 (104,538)       (77,900)
        Allowance for credit losses                                      (45,026)       (75,726)
                                                                       ---------      ---------
Net investment in leases and loans                                     $ 295,962      $ 259,623
Investment in service contracts                                           14,126         15,632
Cash and cash equivalents                                                  4,429          9,916
Restricted cash                                                           16,216         15,362
Property and equipment, net                                               16,034         11,033
Other assets                                                              14,961         12,643
                                                                       ---------      ---------
          Total assets                                                 $ 361,728      $ 324,209
                                                                       =========      =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Notes payable                                                          $ 203,053      $ 194,003
Subordinated notes payable                                                 3,262          3,262
Capitalized lease obligations                                                833            593
Accounts payable                                                           2,517          2,475
Dividends payable                                                            642            641
Other liabilities                                                          6,182          7,166
Income taxes payable                                                       4,211          1,659
Deferred income taxes payable                                             30,472         20,131
                                                                       ---------      ---------
          Total liabilities                                              251,172        229,930
                                                                       ---------      ---------
Commitments and contingencies                                                 --             --
Stockholders' equity:
     Preferred stock, $.01 par value; 5,000,000 shares authorized;
        no shares issued at 12/31/01 and 9/30/02                              --             --
     Common stock, $.01 par value; 25,000,000 shares authorized;
        13,410,646 shares issued at 12/31/01 and 9/30/02                     134            134
     Additional paid-in capital                                           47,723         47,723
     Retained earnings                                                    69,110         52,800
     Treasury stock (588,700 shares of common stock at 12/31/01
        and 9/30/02), at cost                                             (6,343)        (6,343)
     Notes receivable from officers and employees                            (68)           (35)
                                                                       ---------      ---------
          Total stockholders' equity                                     110,556         94,279
                                                                       ---------      ---------
          Total liabilities and stockholders' equity                   $ 361,728      $ 324,209
                                                                       =========      =========
</TABLE>


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

                                       3

<PAGE>


                           MICROFINANCIAL INCORPORATED
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, except share and per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                     For the three months ended        For the nine months ended
                                                             September 30,                    September 30,
                                                    -----------------------------      -------------------------
                                                         2001           2002             2001            2002
                                                       -------        --------         --------        ---------
<S>                                                 <C>             <C>              <C>              <C>
Revenues:
      Income on financing leases and loans             $18,105        $ 12,819         $ 54,897        $  41,845
      Income on service contracts                        2,186           2,479            6,420            7,332
      Rental income                                      9,744           9,212           28,131           28,295
      Loss and damage waiver fees                        1,598           1,633            4,746            4,691
      Service fees and other                             7,676           4,406           23,010           16,632
                                                    -----------------------------      -------------------------
                Total revenues                          39,309          30,549          117,204           98,795
                                                    -----------------------------      -------------------------

Expenses:
      Selling general and administrative                10,899          10,306           33,462           34,289
      Provision for credit losses                       15,064          44,672           37,150           66,460
      Depreciation and amortization                      3,618           5,713           10,700           14,203
      Interest                                           3,445           2,458           11,307            7,823
                                                    -----------------------------      -------------------------
                Total expenses                          33,026          63,149           92,619          122,775
                                                    -----------------------------      -------------------------

Income/(loss) before provision for income taxes          6,283         (32,600)          24,585          (23,980)
Provision/(benefit) for income taxes                     2,644         (13,042)          10,348           (9,593)
                                                    -----------------------------      -------------------------

Net income/(loss)                                      $ 3,639        $(19,558)        $ 14,237        $ (14,387)
                                                    =============================      =========================

Net income/(loss) per common share - basic             $  0.28        $  (1.53)        $   1.11        $   (1.12)
                                                    =============================      =========================

Net income/(loss) per common share - diluted           $  0.28        $  (1.53)        $   1.10        $   (1.12)
                                                    =============================      =========================

Weighted-average shares used to compute:
           Basic net income per share               12,825,139      12,821,946       12,775,519       12,821,946
                                                    -----------------------------    ---------------------------
           Fully diluted net income per share       13,094,690      12,821,946       12,988,959       12,821,946
                                                    -----------------------------    ---------------------------
</TABLE>


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


                                       4

<PAGE>


                           MICROFINANCIAL INCORPORATED
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                               For the three months ended   For the nine months ended
                                                                     September 30,                September 30,
                                                               --------------------------   -------------------------
                                                                    2001          2002          2001         2002
                                                                 ---------     ---------     ---------     ---------
<S>                                                              <C>           <C>           <C>           <C>
Cash flows from operating activities:
     Cash received from customers                                $  45,271     $  43,289     $ 140,398     $ 135,021
     Cash paid to suppliers and employees                          (11,503)      (10,339)      (32,703)      (32,130)
     Cash paid for income taxes                                       (573)         (475)       (5,280)       (3,734)
     Interest paid                                                  (3,378)       (3,024)      (11,418)       (7,913)
     Interest received                                                 326            80         1,094           322
                                                               --------------------------   -------------------------
          Net cash provided by operating activities                 30,143        29,531        92,091        91,566
                                                               --------------------------   -------------------------

Cash flows from investing activities:
     Investment in lease contracts                                 (22,863)      (19,042)      (71,514)      (62,426)
     Investment in inventory                                          (813)         (625)       (3,302)       (2,701)
     Investment in direct costs                                     (1,257)       (1,098)       (4,140)       (3,811)
     Investment in service contracts                                (1,661)       (2,131)       (4,620)       (6,538)
     Investment in Resource Leasing Corporation                          0             0        (6,900)            0
     Investment in fixed assets                                       (433)          (90)       (1,290)         (208)
     Repayment of notes from officers                                    0             0             0            33
     Investment in notes receivable                                    (23)            0           (70)            0
     Repayment of notes receivable                                       0             0             6             0
                                                               --------------------------   -------------------------
          Net cash used in investing activities                    (27,050)      (22,986)      (91,830)      (75,651)
                                                               --------------------------   -------------------------

Cash flows from financing activities:
     Proceeds from secured debt                                     17,440        12,292        75,293        33,521
     Repayment of secured debt                                     (22,396)      (14,204)      (76,085)      (42,156)
     Proceeds from refinancing of secured debt                     136,898       155,000       345,897       365,000
     Prepayment of secured debt                                   (130,555)     (155,100)     (339,555)     (365,100)
     Proceeds from short term demand notes payable                       0             0           889             0
     Repayment of short term demand notes payable                      (17)          (30)          (92)         (315)
     Proceeds from issuance of subordinated debt                         0             0         2,875             0
     Repayment of subordinated debt                                 (1,500)            0        (4,500)            0
     (Increase) decrease in restricted cash                         (2,229)          681        (9,268)          854
     Proceeds from exercise of common stock options                     52             0           810             0
     Repayment of capital leases                                      (131)         (101)         (387)         (308)
     Payment of dividends                                             (640)         (641)       (1,787)       (1,924)
                                                               --------------------------   -------------------------
                        Net cash used in financing activities       (3,078)       (2,103)       (5,910)      (10,428)
                                                               --------------------------   -------------------------

Net (decrease) increase in cash and cash equivalents:                   15         4,442        (5,649)        5,487
Cash and cash equivalents, beginning of period                       3,835         5,474         9,499         4,429
                                                               --------------------------   -------------------------

Cash and cash equivalents, end of period                         $   3,850     $   9,916     $   3,850     $   9,916
                                                               ==========================   =========================
</TABLE>


                          (continued on following page)

                                       5
<PAGE>


                           MICROFINANCIAL INCORPORATED
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Continued)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       For the three months ended    For the nine months ended
                                                               September 30,                September 30,
                                                       --------------------------    -------------------------
                                                             2001        2002            2001         2002
                                                          --------     --------        --------     --------
<S>                                                       <C>          <C>             <C>          <C>
Reconciliation of net income to net cash provided
     by operating activities:

     Net income                                           $  3,639     ($19,558)       $ 14,237     ($14,387)
     Adjustments to reconcile net income to cash
     Casprovidedebyboperatingnactivitieses:
        Depreciation and amortization                        3,618        5,713          10,700       14,203
        Provision for credit losses                         15,064       44,672          37,150       66,460
        Recovery of equipment cost and residual value,
          net oflrevenue recognizedt Income                  6,600       10,399          25,164       35,969
        Decrease in current taxes                             (573)         (40)         (2,340)      (2,552)
        Increase (decrease) in deferred income taxes         2,644      (13,042)          7,420      (10,340)
     Change in assets and liabilities:
        Increase (decrease) in other assets                 (1,205)         263          (1,113)       1,181
        Increase (decrease) in accounts payable                134          (65)           (384)         (42)
        Increase in accrued liabilities                        222        1,189           1,257        1,074
                                                       --------------------------    -------------------------
          Net cash provided by operating activities       $ 30,143     $ 29,531        $ 92,091     $ 91,566
                                                       ==========================    =========================

Supplemental disclosure of noncash activities:
     Property acquired under capital leases                   $138           $0            $479          $68
     Accrual of common stock dividends                        $642         $641            $642         $641
</TABLE>


                                                                     (Concluded)

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


                                       6

<PAGE>

                           MICROFINANCIAL INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             (tables in thousands, except share and per share data)
                                   (Unaudited)


(A)   Nature of Business:

      MicroFinancial Incorporated (the "Company") which operates primarily
through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized
commercial finance company that primarily leases and rents "microticket"
equipment and provides other financing services in amounts generally ranging
from $400 to $5,000 with an average amount financed of approximately $1,500 and
an average lease term of 44 months. The Company does not market its services
directly to lessees but sources leasing transactions through a network of
independent sales organizations and other dealer-based origination networks
nationwide. The Company funded its operations primarily through borrowings under
its credit facilities, issuances of subordinated debt and on balance sheet
securitizations.

      As of September 30, 2002 the revolving credit line was converted to a
term loan repayable in 36 monthly installments. On October 10, 2002, the
Company made a decision to temporarily suspend new contract originations until
a new line of credit is obtained. The Company also plans on leveraging the
Company's technology and loan servicing platforms in order to generate
additional fee revenue.

      Leasecomm Corporation periodically finances its lease and service
contracts, together with unguaranteed residuals, through securitizations using
special purpose vehicles. MFI Finance Corporation I and MFI Finance Corporation
II, LLC are special purpose companies. The assets of such special purpose
vehicles and cash collateral or other accounts created in connection with the
financings in which they participate are not available to pay creditors of
Leasecomm Corporation, MicroFinancial Incorporated, or other affiliates. While
Leasecomm Corporation generally does not sell its interests in leases, service
contracts or loans to third parties after origination, the Company does, from
time to time, contribute certain leases, service contracts, or loans to
special-purpose entities for purposes of obtaining financing in connection with
the related receivables. The contribution of such assets under the terms of such
financings are intended to constitute "true sales" of such assets for bankruptcy
purposes (meaning that such assets are legally isolated from Leasecomm
Corporation). However, the special purpose entities to which such assets are
contributed are not "qualifying special purpose entities" within the meaning
Statement of Financial Accounting Standards ("SFAS") SFAS No. 140, and are
required under generally accepted accounting principles to be consolidated in
the financial statements of the Company. As a result, such assets and the
related liability remain on the balance sheet and do not receive gain on sale
treatment.

(B)  Summary of Significant Accounting Policies:

Basis of Presentation:

      The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the Securities and
Exchange Commission for interim financial statements. Accordingly, the interim
statements do not include all of the information and disclosures required for
the annual financial statements. In the opinion of the Company's management, the
condensed consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation of these interim results. These financial statements should be read
in conjunction with the consolidated financial statements and notes included in
the Company's Annual Report and Form 10-K for the year ended December 31, 2001.
The results for the nine-month period ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the full year
ended December 31, 2002.

      The balance sheet at December 31, 2001 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.

Allowance for Credit Losses:

      The Company maintains an allowance for estimated credit losses on its
investment in leases, loans, rental contracts and service contracts at an amount
that it believes is sufficient to provide an adequate provision against losses
in its portfolio. The allowance is determined principally on the basis of the
historical loss experience of the Company and the level of recourse provided by
such leases, loans and service contracts, if any. In addition, the


                                       7

<PAGE>

                           MICROFINANCIAL INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             (tables in thousands, except share and per share data)
                                   (Unaudited)


allowance reflects management's judgment of the additional loss potential
considering current economic conditions and the nature and characteristics of
the underlying lease portfolio. The Company determines the necessary periodic
provision for the credit losses taking into account actual and expected losses
in the portfolio as a whole and the relationship of the allowance to the net
investment in leases, loans, rental contracts and service contracts.

     The following table sets forth the Company's allowance for credit losses as
of December 31, 2001 and September 30, 2002 and the related provision,
charge-offs and recoveries for the year ended December 31, 2001 and the nine
months ended September 30, 2002.

     Balance of allowance for credit losses at December 31, 2001         $45,026
                                                                         =======
     Provision for credit losses                                 66,460
      Total provisions for credit losses                                  66,460
     Charge-offs                                                 44,565
     Recoveries                                                   8,805
                                                                 -------
      Charge-offs, net of recoveries                                      35,760
                                                                         -------
     Balance of allowance for credit losses at September 30, 2002        $75,726
                                                                         =======


Earnings Per Share:

     Basic net income per common share is computed based upon the
weighted-average number of common shares outstanding during the period. Dilutive
net income per common share gives effect to all dilutive potential common shares
outstanding during the period. The computation of dilutive earnings per share
does not assume the issuance of common shares that have an antidulitive effect
on the net income per share. There were no antidilutive shares for the three
months ended September 30, 2001. Options to purchase 40,609 shares of common
stock were not included in the computation of diluted earnings per share for the
nine months ended September 30, 2001 because their effects were antidilutive.
Stock options were excluded from the computation of dilutive EPS for the three
and nine months ended September 30, 2002, because their inclusion would have had
an antidilutive effect on EPS.

<TABLE>
<CAPTION>
                                              For three months ended               For nine months ended
                                                  September 30,                        September 30,
                                          -----------------------------       -----------------------------
                                              2001             2002               2001              2002
                                          -----------      ------------       -----------      ------------
<S>                                       <C>              <C>                <C>              <C>
Net Income                                $     3,639      $    (19,558)      $    14,237      $    (14,387)
Shares used in computation:
  Weighted average common shares
     outstanding used in computation
     of net income per common share        12,825,139        12,821,946        12,775,519        12,821,946
   Dilutive effect of common stock
     options                                  269,551                 0           213,440                 0
Shares used in computation of net
   income per common share -
   assuming dilution                       13,094,690        12,821,946        12,988,959        12,821,946
                                          -----------------------------       -----------------------------

Net income per common share                     $0.28            $(1.53)            $1.11            $(1.12)
Net income per common share
      assuming dilution                         $0.28            $(1.53)            $1.10            $(1.12)

</TABLE>

                                       8

<PAGE>


                           MICROFINANCIAL INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             (tables in thousands, except share and per share data)
                                   (Unaudited)


Notes Payable:

     On December 21, 1999, the Company entered into a revolving line of credit
and term loan facility with a group of financial institutions whereby it may
borrow a maximum of $150,000,000 based upon qualified lease receivables, loans,
rentals and service contracts. On August 22, 2000, the revolving line of credit
and term loan facility was amended and restated where by the Company may now
borrow a maximum of $192,000,000 based upon qualified lease receivables, loans,
rentals and service contracts. The revolving line of credit has three components
which are Prime Rate Loans, LIBOR Loans, and Swing Line advances. Outstanding
borrowings with respect to the revolving line of credit bear interest based at
Prime minus 0.25% for Prime Rate Loans, the prevailing rate per annum as offered
in the London Interbank Offered Rate ("LIBOR") plus 1.75% for LIBOR Loans or the
seven-day Money Market rate plus 2.00% for Swing Line advances. If the LIBOR
Loans are not renewed upon their maturity they automatically convert into prime
rate loans. Swing Line advances have a seven-day maturity and upon their
maturity they automatically convert into prime rate loans. In addition, the
Company's aggregate outstanding principal amount of Swing Line advances shall
not exceed $10 million. The prime rate at December 31, 2001, and September 30,
2002 was 4.75%. The 90-day LIBOR rates December 31, 2001, and September 30, 2002
were 1.9380% and 1.8125%, respectively. The 7-day Money Market rates December
31, 2001, and September 30, 2002 were 1.88% and 1.82%, respectively.

The Company had borrowings outstanding under these agreements with the following
terms:

                           December 31, 2001         September 30, 2002
                          -------------------        -------------------
     Type                 Rate         Amount        Rate         Amount
     ----                 ----         ------        ----         ------
                                    (in thousands)           (in thousands)

     Prime               4.5000%        $4,640      4.5000%      $13,061
     LIBOR               3.8750%       100,000      3.6250%       50,000
     LIBOR                                          3.5625%       45,000
     LIBOR                                          3.5625%       30,000
                                      --------                  --------
       Total Outstanding              $104,640                  $138,061
                                      ========                  ========


     Outstanding borrowings are collateralized by leases, loans, rentals and
service contracts pledged specifically to the financial institutions. As of
September 30, 2002 the revolving credit line was converted to a term loan
repayable in 36 monthly installments. Based on the terms of the agreement, the
conversion to a term loan resulted in increased interest rates on outstanding
borrowings. Interest rates increased from Prime minus 0.25% to Prime plus 0.50%
for prime based loans and from LIBOR plus 1.75% to LIBOR plus 2.50% for LIBOR
based loans. The most restrictive covenants of the agreement have minimum net
worth and income requirements. Based on the current terms of the agreement, the
Company is obligated to repay $46 million, plus applicable interest, over the
next twelve months.

     At September 30, 2002, the Company was in default on one of its debt
covenants in its credit facility and securitizaton agreements. The covenant that
was in default with respect to the credit facility, requires that the Company
maintain a fixed charge ratio in an amount not less than 130% of consolidated
earnings. The covenant that was in default with respect to the securitizaton
agreements, requires that the Company maintain a fixed charge ratio in an amount
not less than 125% of consolidated earnings. The default was a result of the $35
million additional allowance reserved against certain dealer receivables, as
well as delinquent portfolio assets. The Company is in the process of working
with its lenders to receive a waiver for the covenant violation.

     MFI I has three series of notes outstanding, the 2000-1 Notes, the 2000-2
Notes, and the 2001-3 Notes. In March 2000, MFI I issued the 2000-1 Notes in
aggregate principal amount of $50,056,686. In December 2000, MFI I issued the
2000-2 Notes in aggregate principal amount of $50,561,633. In September 2001,
MFI I issued the 2001-3 Notes in aggregate principal amount of $39,397,354.
Outstanding borrowings are collateralized by specific pools of lease
receivables. In September 2001, MFI II, LLC was formed and issued one series of
notes, the 2001-1 Notes in aggregate principal amount of $10,000,000.
Outstanding borrowings are collateralized by a specific pool of lease
receivables as well as the excess cash flow from the MFI I collateral. These
notes are subordinate to the three series of notes issued by MFI I.


                                       9

<PAGE>

                           MICROFINANCIAL INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             (tables in thousands, except share and per share data)
                                   (Unaudited)



     At December 31, 2001 and September 30, 2002, MFI I and MFI II had
borrowings outstanding under the series of notes with the following terms:

                            December 31, 2001     September 30, 2002
                          --------------------    -------------------
   Series                 Rate          Amount     Rate        Amount
   ------                 ----         -------     ----        ------
                                   (in thousands)          (in thousands)
   MFI I
   2000-1 Notes            7.3750%       19,855   7.3750%        7,303
   2000-2 Notes            6.9390%       34,518   6.9390%       22,128
   2001-3 Notes            5.5800%       34,160   5.5800%       20,771

   MFI II LLC
   2001-1 Notes            8.0000%        8,725   8.0000%        4,900
                                        -------                -------
         Total Outstanding              $97,258                $55,102
                                        =======                =======

     At December 31, 2001 and September 30, 2002, the Company also had other
notes payable which totaled $1,155,000 and $840,000 respectively. Of these
notes, at December 2001 and September 30, 2002, $339,000 and $24,000,
respectively, are notes that are due on demand and bear interest at a rate of
prime less 1.00%. At December 31, 2001 and September 30, 2002, the Company also
had $816,000 of notes which were borrowed against the cash surrender value of
the life insurance policies held on key officers. The interest rates on these
loans range from 5.05% to 8.00%.

Stock Options:

     Under the 1998 Equity Incentive Plan (the "1998 Plan") which was adopted on
July 9, 1998 the Company had reserved 4,120,380 shares of the Company's common
stock for issuance pursuant to the 1998 Plan. A total of 60,000 options were
surrendered during the nine months ended September 30, 2002, and 2,185,000
options were outstanding at September 30, 2002 of which 676,000 were vested.

Dividends:

     On September 23, 2002, the Company's Board of Directors approved a dividend
of $.050 per common share for all outstanding common shares as of October 3,
2002 which is payable on November 15, 2002.

New Accounting Pronouncements:

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets". This Statement supersedes APB
Opinion No. 17, "Intangible Assets" and addresses financial accounting and
reporting for intangible assets, but not those acquired in a business
combination at acquisition. SFAS No. 142 addresses financial accounting and
reporting of goodwill and other intangible assets subsequent to their
acquisition, assigning a definite or indefinite useful life to these assets.
Goodwill and other intangible assets having an indefinite useful life will not
be amortized, but rather tested at least annually for impairment. It also
provides guidance on how to define, measure and record impairment losses on
goodwill and other intangible assets and provides for additional disclosures
regarding these assets in years subsequent to their acquisition. The provisions
for this Statement are required to be applied for fiscal years beginning after
December 15, 2001, although earlier adoption is permitted. The Company has
determined that the adoption of this Statement does not have a material impact
on its results of operations or consolidated financial position.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 provides new accounting standards for
recording of liabilities related to legal obligations to retire tangible
long-lived assets. The Statement requires an entity to recognize at fair value a
liability associated with an asset retirement obligation in the period in which
the liability is both incurred and in which the fair value is determinable. The


                                       10

<PAGE>


                           MICROFINANCIAL INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             (tables in thousands, except share and per share data)
                                   (Unaudited)



provisions of this Statement are effective for the Company's fiscal year ended
December 31, 2003, although earlier application is permitted. The Company has
not completed its evaluation of SFAS No. 143 and has not yet determined the
effect on its consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of a long-lived asset or
group of assets. This pronouncement, which supersedes and amends several earlier
interpretations, establishes a single comprehensive statement to provide
impairment accounting guidance for tangible long-lived assets to be either held
and continued to be used by the entity or disposed of by sale or by some other
means. This Statement will be effective for the first quarter of the Company's
fiscal year ending December 31, 2002, although earlier application is permitted.
The Company has determined that the adoption of this Statement does not have a
material impact on its results of operations or consolidated financial position.

     On January 1, 2002, the 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. The SOP was
effective for financial statements issued for the fiscal year beginning after
December 15, 2001. The Company has determined that the adoption of this SOP does
not have a material impact on its results of operations or consolidated
financial position.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64 and Technical Corrections." This Statement which rescinds and
amends several statements, improves financial reporting for extinguishment of
debt, modifies the accounting for certain leasing transactions, and makes
various technical corrections to existing pronouncements. The Statement requires
the gains and losses from the extinguishment of debt to be classified as
extraordinary items only if they meet the criteria in APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Also, the Statement requires that the accounting
treatment of certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The provisions for this Statement are required to
be applied for fiscal years beginning after May 15, 2002, with earlier
application encouraged. The Company has not completed its evaluation of SFAS No.
145 and has not yet determined the effect on its consolidated financial
statements.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (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)." This statement
requires an entity to recognize and measure initially at fair value a liability
for a cost associated with an exit or disposal activity, when the liability is
incurred. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002 although earlier adoption
is permitted. The Company has not completed its evaluation of SFAS No. 146 and
has not yet determined the effect on its consolidated financial statements.

     In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 addresses the financial accounting and
reporting for the acquisition of all or part of a financial institution except
for a transaction between two or more mutual enterprises. In addition, this
statement removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of FASB
Statement No.72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions," and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and
17 When a Savings and Loan Association or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method." SFAS 147 clarifies
that a branch acquisition that meets the definition of a business should be
accounted for as a business combination, otherwise the transaction should be
accounted for as an acquisition of net assets that does not result in the
recognition of goodwill. The provisions of this Statement are effective on
October 1, 2002. The Company has determined that the adoption of this Statement
does not have a material impact on its results of operations or consolidated
financial position.

                                       11

<PAGE>


                           MICROFINANCIAL INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             (tables in thousands, except share and per share data)
                                   (Unaudited)


Reclassification of Prior Year Balances:

     Certain reclassifications have been made to prior years' consolidated
financial Statements to conform to the current presentation.

Commitments and Contingencies:

     Please refer to Part II Other Information, Item 1 Legal Proceedings for
information about pending litigation of the Company.

Subsequent Events:

     As of September 30, 2002 the revolving credit line was converted to a term
loan repayable in 36 monthly installments.

     On October 10, 2002, the Company made a decision to temporarily suspend new
contract originations.

     In October, 2002, the Company was served with a Complaint in an action in
the United States District Court for the Southern District of New York filed by
approximately 170 present and former lessees asserting individual claims. The
Complaint contains claims for violation of RICO (18 U.S.C. ss. 1964), fraud,
unfair and deceptive acts and practices, unlawful franchise offerings, and
intentional infliction of mental anguish. The claims purportedly arise from
Leasecomm's dealer relationships with Themeware, E-Commerce Exchange,
Cardservice International, Inc., and Online Exchange for the leasing of websites
and virtual terminals. The Complaint asserts that the Company is responsible for
the conduct of its dealers in trade shows, infomercials and web page
advertisements, seminars, direct mail, telemarketing, all which are alleged to
constitute unfair and deceptive acts and practices. Further, the Complaint
asserts that Leasecomm's lease contracts as well as its collection practices and
late fees are unconscionable. The Complaint seeks restitution, compensatory and
treble damages, and injunctive relief. Because of the uncertainties inherent in
litigation, we cannot predict whether the outcome will have a material adverse
effect.


                                       12

<PAGE>


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

Three months ended September 30, 2002 as compared to the three months ended
September 30, 2001.

     Net income for the three months ended September 30, 2002 was approximately
($19.6) million, a decrease of $23.2 million or 637% from the three months ended
September 30, 2001. This represents diluted earnings per share for the three
months ended September 30, 2002 of ($1.53) per share on weighted-average
outstanding shares of 12,821,946 as compared to $0.28 per share on
weighted-average outstanding shares of 13,094,690 for the three months ended
September 30, 2001.

     Total revenues for the three months ended September 30, 2002 were $30.5
million, a decrease of $8.8 million, or 22%, from the three months ended
September 30, 2001. The decrease was primarily due to a decrease of $5.3
million, or 29%, in financing leases and loans, $3.3 million or 35% in fee and
other income, and $532,000 or 5% in rental income offset by an increase of
$293,000 or 13% in service contract income. The decrease in income on financing
leases and loans was due to the decreased number of leases originated primarily
resulting from the Company's decision to increase pricing and tighten its credit
approval standards. The decrease in fee income and other income is the result of
decreased fees from the lessees related to the collection and legal process
employed by the Company. The decrease in rental income is the result of a
decrease in originations in rental contracts. The increase in service contract
income is a result of an increase in originations in service contracts.

     Selling, general and administrative expenses decreased by $593,000, or 5%,
for the three months ended September 30, 2002, as compared to the three months
ended September 30, 2001. Cost of goods sold expenses decreased $567,000 or 5%.

     Depreciation and amortization increased by $2.1 million or 58%, due to an
increase in the number of early terminations of monthly rental and service
contracts.

     The Company's provision for credit losses, including an additional
provision of $35 million, increased by $29.6 million or 197%, for the three
months ended September 30, 2002 as compared to the three months ended September
30, 2001. Excluding the additional provision, the Company's provision for credit
losses decreased by $5.4 million for the three months ended September 30, 2002
from $15.1 million for the three months ended September 30, 2001, while net
charge offs decreased 17% to $9.8 million. This provision was based on the
Company's historical policy, based on experience, of providing a provision for
credit losses based upon the dealer fundings and revenue recognized in any
period and reflects management's judgement of loss potential considering current
economic conditions and the nature of the underlying receivables. The Company
took an additional provision of $35 million in the third quarter to reserve
against certain dealer receivables as well as delinquent portfolio assets. This
additional allowance will provide for 104% coverage of our 90-day past due
accounts as compared to previous quarters which had coverage in the 50-60%
range. In the past, dealer receivables had been offset, in some instances,
against the funding of new contracts. Since we have temporarily suspended the
funding of new deals we feel that the collection of these receivables will be
more difficult. Although the Company will continue to pursue collections on
these accounts, management believes that the cost associated with the legal
enforcement would outweigh the benefits realized.

     Interest expense decreased by $987,000, or 29%, for the three months ended
September 30, 2002 as compared to the three months ended September 30, 2001.
This decrease resulted primarily from the Company's lower cost of funds, and an
overall decrease in the level of borrowings.

     Dealer fundings were $21.3 million for the three months ended September 30,
2002, down $3.9 million, or 15% as compared to the three months ended September
30, 2001. This decrease is a result of the Company's decision during the second
quarter of 2000 to increase pricing and tighten its credit approval standards.
The new credit policies were put into place in August of 2000. On October 10,
2002, the Company made a decision to temporarily suspend dealer fundings as a
result of implementing a new business plan. Total cash from customers decreased
by $2 million or 4% to a total of $43.3 million. This decrease is primarily the
result of a decrease in the size of the overall portfolio. Investment in lease
and loan receivables due in installments, estimated residuals, rental and
service contracts were down from $470.6 million in December of 2001 to $438.7
million in September of 2002.


                                       13

<PAGE>


Nine months ended September 30, 2002 as compared to the nine months ended
September 30, 2001.

     Net income for the nine months ended September 30, 2002 was approximately
($14.4) million, a decrease of $28.6 million or 201% from the nine months ended
September 30, 2001. This represents diluted earnings per share for the nine
months ended September 30, 2002 of ($1.12) per share on weighted-average
outstanding shares of 12,821,946 as compared to $1.10 per share on
weighted-average outstanding shares of 12,988,959 for the nine months ended
September 30, 2001.

     Total revenues for the nine months ended September 30, 2002 were $98.8
million, a decrease of $18.4 million, or 16%, from the nine months ended
September 30, 2001. The decrease was primarily due to a decrease of $13.1
million, or 24%, in financing leases and loans, and $6.4 million or 23% in fee
and other income offset by an increase of $1.1 million or 3% in rental and
service contract income. The decrease in income on financing leases and loans
was due to the decreased number of leases originated primarily resulting from
the Company's change in its credit approval process. The decrease in fee income
and other income is the result of decreased fees from the lessees related to the
collection and legal process employed by the Company. The increase in rental and
service contract income is a result of the increased number of lessees that have
continued to rent their equipment beyond their original lease term, an increase
in the rental business originated through our Resource Leasing division, and an
increase in originations in rental and service contracts.

     Selling, general and administrative expenses increased by $827,000, or 2%,
for the nine months ended September 30, 2002, as compared to the nine months
ended September 30, 2001. Marketing programs increased $1.1 million or 156%,
legal expenses increased $507,000 or 83%, insurance expense increased $194,000
or 68%, professional services increased $170,000 or 10%, lease expense increased
$149,000 or 280%, and debt closing expenses increased $127,000 or 22%. These
increases were offset by decreases in collection expense of $713,000 or 14%,
payroll expenses of $292,000 or 2%, postage and courier expenses of $168,000 or
15%, and bank service charge expense of $129,000 or 14%.

     Depreciation and amortization increased by $3.5 million, or 33%, due to an
increase in the number of early terminations of monthly rental and service
contracts.

     The Company's provision for credit losses, including an additional
provision of $35 million, increased by $29.3 million, or 79%, for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001. Excluding the additional provision, the Company's provision for credit
losses decreased by $5.7 million for the nine months ended September 30, 2002
from $37.1 million for the three months ended September 30, 2001, while net
charge offs decreased 11% to $35.8 million. This provision was based on the
Company's historical policy, based on experience, of providing a provision for
credit losses based upon the dealer fundings and revenue recognized in any
period and reflects management's judgement of loss potential considering current
economic conditions and the nature of the underlying receivables. The Company
took an additional provision of $35 million in the third quarter to reserve
against certain dealer receivables as well as delinquent portfolio assets. This
additional allowance will provide for 104% coverage of our 90-day past due
accounts as compared to previous quarters which had coverage in the 50-60%
range. In the past, dealer receivables had been offset, in some instances,
against the funding of new contracts. Since we have temporarily suspended the
funding of new deals we feel that the collection of these receivables will be
more difficult. Although the Company will continue to pursue collections on
these accounts, management believes that the cost associated with the legal
enforcement would outweigh the benefits realized.

     Interest expense decreased by $3.5 million, or 31%, for the nine months
ended September 30, 2002 as compared to the nine months ended September 30,
2001. This decrease resulted primarily from the Company's lower cost of funds,
and an overall decrease in the level of borrowings.

     Dealer fundings were $69.6 million for the nine months ended September 30,
2002, down $17.7 million, or 20% as compared to the nine months ended September
30, 2001. This decrease is a result of the Company's decision during the second
quarter of 2000 to increase pricing and tighten its credit approval standards.
The new credit policies were put into place in August of 2000. On October 10,
2002, the Company made a decision to


                                       14

<PAGE>


temporarily suspend dealer fundings as a result of implementing a new business
plan. Total cash from customers decreased by $5.4 million or 4% to a total of
$135 million. This decrease is primarily the result of a decrease in the size of
the overall portfolio. Investment in lease and loan receivables due in
installments, estimated residuals, rental and service contracts were down from
$470.6 million in December of 2001 to $438.7 million in September of 2002.

CRITICAL ACCOUNTING POLICIES

     In response to the SEC's release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," Management identified the most
critical accounting principles upon which the Company's financial status
depends. The Company determined the critical principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments. Management identified the most critical accounting policies to be
those related to revenue recognition and maintaining the allowance for credit
losses. These accounting policies are discussed below as well as within the
notes to the consolidated financial statements.

     The Company's lease contracts are accounted for as financing leases. At
origination, the Company records the gross lease receivable, the estimated
residual value of the leased equipment, initial direct costs incurred and the
unearned lease income. Unearned lease income is the amount by which the gross
lease receivable plus the estimated residual value exceeds the cost of the
equipment. Unearned lease income and initial direct costs incurred are amortized
over the related lease term using the interest method. Amortization of unearned
lease income and initial direct costs is suspended if, in the opinion of
management, full payment of the contractual amount due under the lease agreement
is doubtful. In conjunction with the origination of leases, the Company may
retain a residual interest in the underlying equipment upon termination of the
lease. The value of such interests is estimated at inception of the lease and
evaluated periodically for impairment. Other revenues such as loss and damage
waiver fees, service fees relating to the leases, contracts and loans, and
rental revenues are recognized as they are earned.

     The Company's investments in cancelable service contracts are recorded at
cost and amortized over the expected life of the service period. Income on
service contracts from monthly billings is recognized as the related services
are provided. The Company periodically evaluates whether events or circumstances
have occurred that may affect the estimated useful life or recoverability of the
investment in service contracts. Rental equipment is either recorded at
estimated residual value and depreciated using the straight-line method over a
period of 12 months or at the acquisition cost and depreciated using the
straight line method over a period of 36 months. Loans are reported at their
outstanding principal balance. Interest income on loans is recognized as it is
earned.

     The Company maintains an allowance for credit losses on its investment in
leases, service contracts, rental contracts and loans at an amount that it
believes is sufficient to provide adequate protection against losses in its
portfolio. The allowance is determined principally on the basis of the
historical loss experience of the Company and the level of recourse provided by
such lease, service contract, rental contract or loan, if any, and reflects
management's judgment of additional loss potential considering current economic
conditions and the nature and characteristics of the underlying lease portfolio.
The Company determines the necessary periodic provision for credit losses taking
into account actual and expected losses in the portfolio as a whole and the
relationship of the allowance to the net investment in leases, service
contracts, rental contracts and loans. Such provisions generally represent a
percentage of funded amounts of leases, contracts and loans. The resulting
charge is included in the provision for credit losses.

     Leases and loans are charged against the allowance for credit losses and
are put on non-accrual when they are deemed to be uncollectable. Generally, the
Company deems leases, service contracts, rental contracts and loans to be
uncollectable when one of the following occurs: (i) the obligor files for
bankruptcy; (ii) the obligor dies, and the equipment is returned; or (iii) when
an account has become 360 days delinquent without contact with the lessee. The
typical monthly payment under the Company's leases is between $30 and $50 per
month. As a result of these small monthly payments, the Company's experience is
that lessees will pay past due amounts later in the process because of the small
amount necessary to bring an account current (at 360 days past due, a lessee
will only owe lease payments of between $360 and $600).


                                       15

<PAGE>


     The Company has developed and regularly updates proprietary credit scoring
systems designed to improve its risk-based pricing. The Company uses credit
scoring in most, but not all, of its extensions of credit. In addition, the
Company aggressively employs collection procedures and a legal process to
resolve any credit problems.

EXPOSURE TO CREDIT LOSSES

     The following table sets forth certain information as of December 31, 2000
and 2001 and September 30, 2002 with respect to delinquent leases, service
contracts and loans. The percentages in the table below represent the aggregate
on such date of the actual amounts not paid on each invoice by the number of
days past due, rather than the entire balance of a delinquent receivable, over
the cumulative amount billed at such date from the date of origination on all
leases, service contracts, and loans in the Company's portfolio. For example, if
a receivable is 90 days past due, the portion of the receivable that is over 30
days past due will be placed in the 31-60 days past due category, the portion of
the receivable which is over 60 days past due will be placed in the 61-90 days
past due category and the portion of the receivable which is over 90 days past
due will be placed in the over 90 days past due category. The Company
historically used this methodology of calculating its delinquencies because of
its experience that lessees who miss a payment do not necessarily default on the
entire lease. Accordingly, the Company includes only the amount past due rather
than the entire lease receivable in each category.


<TABLE>
<CAPTION>
                                                       As of           As of
                                                   December 31       September
                                               --------------------  ---------
                                                 2000        2001      2002
                                               --------    --------   --------
    <S>                                        <C>         <C>        <C>
    Cumulative amounts billed (in thousands)   $462,011    $602,649   $625,624
    31-60 days past due                             1.9%        1.8%       4.1%
    61-90 days past due                             1.6%        1.7%       1.4%
    Over 90 days past due                          10.0%       13.4%      11.7%
                                               --------    --------   --------
       Total past due                              13.5%       16.9%      17.2%
                                               ========    ========   ========
</TABLE>


LIQUIDITY AND CAPITAL RESOURCES

GENERAL

     The Company's lease and finance business is capital-intensive and requires
access to substantial short-term and long-term credit to fund new leases, loans
and service contracts. Since inception, the Company has funded its operations
primarily through borrowings under its credit facilities, issuances of
subordinated debt and its on-balance sheet securitizations. The Company will
continue to require significant additional capital to maintain and expand its
volume of leases, loans, rentals and service contracts, as well as to fund
future acquisitions of leasing companies or portfolios.

     The Company's uses of cash include the origination and acquisition of
leases, loans, rentals and service contracts, payment of interest expenses,
repayment of borrowings under its credit facilities, subordinated debt and
securitizations, payment of selling, general and administrative expenses, income
taxes, capital expenditures, and the Company's stock repurchase program. On
October 10, 2002, the Company made a decision to temporarily suspend dealer
fundings.

     The Company utilized its credit facility to fund the origination and
acquisition of leases, loans, rentals and service contracts that satisfy the
eligibility requirements established pursuant to each facility. To date, cash
flow from its portfolio and other fees have been sufficient to repay current
amounts due under the credit facilities and subordinated debt. As of September
30, 2002, the credit facility was converted to a term loan and the Company is
currently in the process of pursuing alternative financing sources.

     At September 30, 2002, the Company was in default on one of its debt
covenants in its credit facility and securitizaton agreements. The covenant that
was in default with respect to the credit facility, requires that the Company
maintain a fixed charge ratio

                                       16

<PAGE>


in an amount not less than 130% of consolidated earnings. The covenant that was
in default with respect to the securitizaton agreements, requires that the
Company maintain a fixed charge ratio in an amount not less than 125% of
consolidated earnings. The default was a result of the $35 million additional
allowance reserved against certain dealer receivables, as well as delinquent
portfolio assets. The Company is in the process of working with its lenders to
receive a waiver for the covenant violation.

     The Company believes that the cash flow from its operations will be
sufficient to fund the Company's operations for the foreseeable future.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

     The Company has entered into various agreements, such as debt agreements,
capital lease agreements and operating lease agreements that require future
payments be made. Debt agreements include all debt outstanding under the
revolving credit line, securitizations, subordinated notes, demand notes and
other notes payable.

     At September 30, 2002 the repayment schedules for outstanding debt, minimum
lease payments under non-cancelable operating leases and future minimum lease
payments under capital leases were as follows:


For the year ended                     Operating      Capital
   December 31,           Debt           Leases       Leases        Total
------------------        ----           ------       ------        -----
       2002             $ 24,542          $ 350       $ 103       $ 24,995
       2003               83,645          1,343         267         85,255
       2004               51,147            417         169         51,733
       2005               34,515              -          54         34,569
       2006                2,600              -           -          2,600
Thereafter                   816              -           -            816
                       ----------  -------------  ----------  -------------
        Total           $197,265         $2,110        $593       $199,968
                       ==========  =============  ==========  =============

NOTE ON FORWARD-LOOKING INFORMATION

     Statements in this document that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects," and similar expressions are intended to
identify forward-looking statements. The Company cautions that a number of
important factors could cause actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company.
Such statements contain a number of risks and uncertainties, including but not
limited to: the Company's dependence on point-of-sale authorization systems and
expansion into new markets; the Company's significant capital requirements;
risks associated with economic downturns; higher interest rates; intense
competition; change in regulatory environment and risks associated with
acquisitions. Readers should not place undue reliance on forward-looking
statements, which reflect the management's view only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect subsequent events or circumstances. The Company cannot
assure that it will be able to anticipate or respond timely to changes which
could adversely affect its operating results in one or more fiscal quarters.
Results of operations in any past period should not be considered indicative of
results to be expected in future periods. Fluctuations in operating results may
result in fluctuations in the price of the Company's common stock. For a more
complete description of the prominent risks and uncertainties inherent in the
Company's business, see the risks factors described in the Company's Form S-1
Registration Statement and other documents filed from time to time with the
Securities and Exchange Commission.

                                       17

<PAGE>



ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market-Rate-Sensitive Instruments and Risk Management

     The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.

     In the normal course of operations, the Company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include country
risk, credit risk and legal risk, and are not represented in the analysis that
follows.

Interest Rate Risk Management

     The implicit yield to the Company on all of its leases, loans, rentals and
service contracts is on a fixed interest rate basis due to the leases, loans,
rentals and service contracts having scheduled payments that are fixed at the
time of origination of the lease, loan, rentals or service contract. When the
Company originates or acquires leases, loans and service contracts it bases its
pricing in part on the "spread" it expects to achieve between the implicit yield
rate to the Company on each lease, loan or service contract and the effective
interest cost it will pay when it finances such leases, loans and service
contracts through its credit facilities. Increases in the interest rates during
the term of each lease, loan or service contract could narrow or eliminate the
spread, or result in a negative spread. The Company has adopted a policy
designed to protect itself against interest rate volatility during the term of
each lease, loan or service contract.

     Given the relatively short average life of the Company's leases, loans,
rentals and service contracts, the Company's goal is to maintain a blend of
fixed and variable interest rate obligations. As of September 30, 2002, the
Company's outstanding fixed rate indebtedness, including indebtedness
outstanding under the Company's securitizations, represented 30% of the
Company's outstanding indebtedness.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures. Within 90 days before filing this
report, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Our disclosure controls and procedures are
the controls and other procedures that we designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the SEC. Richard F. Latour,
our President and Chief Executive Officer, and James R. Jackson, our Vice
President and Chief Financial Officer, reviewed and participated in this
evaluation. Based on this evaluation, Messrs. Richard F. Latour and James R.
Jackson concluded that, as of the date of their evaluation, our disclosure
controls were effective.

(b) Internal controls. Since the date of the evaluation described above, there
have not been any significant changes in our internal accounting controls or in
other factors that could significantly affect those controls.


                                       18

<PAGE>


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Management believes, after consultation with counsel, that the allegations
against the Company included in the lawsuits described below are subject to
substantial legal defenses, and the Company is vigorously defending each of the
allegations. The Company also is subject to claims and suits arising in the
ordinary course of business. At this time, it is not possible to estimate the
ultimate loss or gain, if any, related to these lawsuits, nor if any such loss
will have a material adverse effect on the Company's results of operations or
financial position.

     A. The Company filed an action in the United States District Court for the
District of Massachusetts against Sentinel Insurance Company, Ltd.,
("Sentinel"), Premier Holidays International, Inc., ("Premier") and Daniel
DelPiano ("DelPiano") arising from Premier's October 1999 default on its
repayment obligations to the Company under a Twelve Million Dollar ($12,000,000)
loan. Judgment has been entered in this case against Sentinel, which had issued
a business performance insurance policy guaranteeing repayment of the loan, in
the amount of Fourteen Million Dollars ($14,000,000). This judgment has not been
satisfied. Sentinel is currently undergoing liquidation proceedings, and a claim
in this amount has been filed with the bankruptcy court. Premier has asserted a
counterclaim against the Company for Seven Hundred Sixty Nine Million Three
Hundred Fifty Thousand dollars ($769,350,000) in actual and consequential
damages, and for Five Hundred Million Dollars ($500,000,000) in punitive
damages, plus interest, cost and attorney's fees. The counterclaim is based upon
an alleged representation by the Company that it would lend Premier an
additional Forty-Five Million Dollars ($45,000,000), when all documents
evidencing the Premier loan refer only to the Twelve Million ($12,000,000)
amount actually loaned and not repaid. The Company denies any liability on the
counterclaim, which the Company is vigorously contesting. The Company's motion
for summary judgment seeking dismissal of the counterclaim and the award of full
damages on the Company's claims was denied by Court Order, without a written
decision. Because of the uncertainties inherent in litigation, the Company
cannot predict whether the outcome will have a material adverse effect.

     B. On January 29, 2002, Leasecomm was served with an Amended Complaint
("Complaint") in an action entitled PEOPLE V. ROMA COMPUTER SOLUTIONS, INC., ET
AL., Ventura County Superior Court Case No. CIV207490. The Complaint asserts two
claims, one for violation of the California Business Professions Code Section
17500 (false advertising), and the other for violation of the California
Business and Professions Code Section 17200 (unfair or unlawful acts or
practices). The claims arise from the marketing and selling activities of other
defendants, including Roma Computer Solutions, Inc., and/or Maro Securities,
Inc. The Complaint seeks to have Leasecomm held liable for the acts of other
defendants, alleging that Leasecomm directly participated in those acts and
received proceeds and the assignment of lease contracts as a result of those
acts. The Complaint requests injunctive relief, rescission, restitution, and a
civil penalty. Because of the uncertainties inherent in litigation, the Company
cannot predict whether the outcome will have a material adverse affect.

     C. On May 8, 2000, Plaintiff Efraim Bason brought an action in the Supreme
Court of the State of New York, County of Nassau, seeking compensatory damages
in the amount of $450,000 and punitive damages under various legal theories for
Leasecomm's refusal to promptly release him from an equipment lease to which he
claims his name was forged (the "Bason Complaint"). The Bason Complaint alleged
that Leasecomm's failure to promptly release him from the lease, and subsequent
negative reports to credit agencies, ruined his credit and prevented him from
securing certain financing that he allegedly needed to purchase merchandise
which he claims he could have then re-sold at a $450,000 profit. The Company
filed a motion for summary judgment, which the Court has now granted awarding
the Company judgment. The Plaintiff has now filed an appeal to that decision. It
is anticipated that briefing will be completed, and the appeal heard, early next
year.

     D. On January 29, 2002, Leasecomm was served with an Amended Complaint
("Complaint") in an action entitled RAE LYNN COPITKA V. LEASECOMM CORP., ET AL.,
Travis County (Texas) District Court Case No. GN-102292. The Complaint asserts
that the original action, filed mid-2001 by a single plaintiff should proceed as
a class action. In the original action, Ms. Copitka sought to rescind her
finance lease with Leasecomm and to recover economic damages arising from prior
payments under the lease. Ms. Copitka alleges that her proposed class includes
all persons in Texas who have executed Leasecomm finance leases for "virtual
terminal" type credit card software during the years 1998, 1999, 2000, and 2001.
Leasecomm intends to vigorously contest both the class certification and the
substantive merits of the lawsuit. Because of the uncertainties inherent in
litigation, the Company cannot


                                       19

<PAGE>


predict whether the outcome will have a material adverse effect on the Company's
results of operations or consolidated financial position.

     E. On April 3, 2000, a purported class action suit was filed in Superior
Court of the State of California, County of San Mateo against Leasecomm and
MicroFinancial as well as a number of other defendants with whom Leasecomm and
MicroFinancial are alleged to have done business, directly or indirectly. The
complaint seeks certification of a subclass of those class members who entered
into any lease agreement contracts with Leasecomm for the purposes of financing
the goods or services allegedly purchased from other defendant entities. The
class action complaint alleges multiple causes of action, including: fraud and
deceit; negligent misrepresentation; unfair competition; false advertising;
unjust enrichment; fraud in the inducement and the inception of contract; lack
of consideration for contact; and breach of the contractual covenant of good
faith and fair dealing.

     On February 1, 2002, the parties entered into stipulation of settlement to
the class action litigation. The stipulation of settlement will be effective
only if and when it is approved by the San Mateo Superior Court as fair and
reasonable to the members of the plaintiff class and as a good faith settlement
pursuant to Section 877.6 of the California Code of Civil Procedure. Preliminary
approval has been granted by the court. It is unclear at this point how long
this process will take.

     F. On October 29, 2001, a purported class action suit was filed in Superior
Court of the State of California, County of Orange against Leasecomm and
MicroFinancial and another entity known as Prospecting Services of America, Inc.
("PSOA"). The plaintiffs purport to represent a class of customers who were
allegedly solicited by PSOA to enter into leases with Leasecomm for the lease of
a "virtual link point gateway" and "I-phone." Plaintiffs alleged that PSOA made
numerous misrepresentations and omissions during the course of solicitation for
which Leasecomm and MicroFinancial Incorporated should be responsible. On
January 25, 2002, the trial court granted the motion of Leasecomm and
MicroFinancial to stay the claims against them, on the grounds that the forum
selection clause contained in the lease agreements required plaintiffs to
litigate any claims against those entities in Massachusetts. Leasecomm has
subsequently settled this matter with court approval.

     G. On January 25, 2002, a purported class action suit was filed in Superior
Court of the State of California, County of Los Angeles against Leasecomm. The
complaint alleges that, two individuals were acting as agents of Leasecomm, and
that they solicited the plaintiff to enter into a lease agreement with
Leasecomm. The complaint seeks declaratory and injunctive relief against all
defendants based upon alleged violations of California law. The plaintiff
purports to represent two subclasses comprised of: business entities who entered
into commercial lease agreements with Leasecomm, and all California residents
who entered into lease agreements with Leasecomm for consumer goods. The suit
was fully dismissed by the Court.

     H. In October, 2002, the Company was served with a Complaint in an action
in the United States District Court for the Southern District of New York filed
by approximately 170 present and former lessees asserting individual claims. The
Complaint contains claims for violation of RICO (18 U.S.C. ss. 1964), fraud,
unfair and deceptive acts and practices, unlawful franchise offerings, and
intentional infliction of mental anguish. The claims purportedly arise from
Leasecomm's dealer relationships with Themeware, E-Commerce Exchange,
Cardservice International, Inc., and Online Exchange for the leasing of websites
and virtual terminals. The Complaint asserts that the Company is responsible for
the conduct of its dealers in trade shows, infomercials and web page
advertisements, seminars, direct mail, telemarketing, all which are alleged to
constitute unfair and deceptive acts and practices. Further, the Complaint
asserts that Leasecomm's lease contracts as well as its collection practices and
late fees are unconscionable. The Complaint seeks restitution, compensatory and
treble damages, and injunctive relief. Because of the uncertainties inherent in
litigation, we cannot predict whether the outcome will have a material adverse
effect.

     I. On March 31, 2002, plaintiffs Robert Hayden and Renono Wesley filed a
Complaint against Leasecomm Corporation alleging a violation of California
Business & Professions Code Section 17200. The Complaint was filed on behalf of
Hayden and Wesley individually, on behalf of a class of people similarly
situated, and on behalf of the general public. The case is venued in San
Francisco Superior Court. Specifically, plantiffs allege that Leasecomm's
practice of filing suits against lessees in Massachusetts courts constitutes an
unfair business practice under California law. Leasecomm intends to vigorously
defend the action. Because of the uncertainties inherent in litigation, we
cannot predict whether the outcome will have a material adverse effect.


                                       20

<PAGE>

     H. On August 22, 2002 plaintiff Aaron Cobb filed a Complaint against
Leasecomm Corporation and MicroFinancial, Inc. and another Entity known as
Galaxy Mall, Inc. alleging breach of contract; Fraud, Suppression and Deceit;
Unjust Enrichment; Conspiracy; Conversion; Theft by Deception; and violation of
Alabama Usury Laws. The Complaint was filed on behalf of Aaron Cobb
individually, and on behalf of a class of persons and entities similarly
situated in the State of Alabama. More specifically, the Plaintiff purports to
represent a class of persons and small business in the State of Alabama who
allegedly were induced to purchase services and/or goods from any of the
Defendants named in the Complaint. The case is venued in Bullock County,
Alabama. The Company intends to vigorously defend the action. Because of the
uncertainties inherent in litigation, the company cannot predict whether the
outcome will have a material adverse affect.

     Leasecomm has been served with Civil Investigative Demands by the Offices
of the Attorney General for the states of Kansas, Illinois, Florida, and Texas,
and for the Commonwealth of Massachusetts. Those Offices of the Attorney
General, in conjunction with the Northwest Region Office of the Federal Trade
Commission, the Offices of the Attorney General for North Carolina and North
Dakota, and the Ventura County, California, District Attorney's Office, have
informed Leasecomm that they are seeking to coordinate their investigations
(collectively, the "Government Investigators"). At this time, the principal
focus of the investigations appears to be software license leases (principally
virtual terminals) and leases from certain vendor/dealers whose activities
included business opportunity seminars. Leasecomm has further been informed that
the investigations cover certain lease provisions, including the forum selection
clause and language concerning the non-cancellability of the lease. In addition,
the investigations include, among other things, whether Leasecomm's lease
termination, or rollover, provisions, are legally sufficient; whether a
Leasecomm lease is an enforceable lease; whether there were potential problems
with its leases of which Leasecomm had knowledge; whether the leases are
enforceable in accordance with their terms; whether three day right of
rescission notices were required and, if required, whether proper notices were
given; whether any lease prices were unconscionable; whether the lease of a
software license is the lease of a service, not a good; whether any lease of
satellites or computers are leases to consumers which must comply with certain
consumer statutes; whether electronic fund transfer payments pursuant to a lease
violate Reg. E; whether any Leasecomm billing and collection practices or
charges are unreasonable, or constitute unfair or deceptive trade practices;
whether Leasecomm's course of dealings with its vendors/dealers makes Leasecomm
liable for any of the activities of its vendors/dealers. In April, 2002,
Leasecomm and the Government Investigators entered into provisional relief and
tolling agreements which provide for Leasecomm to take certain interim actions,
toll the running of the statute of limitations as of January 29, 2002, and
require advance notice by Leasecomm of its withdrawal from the provisional
relief agreement and advance notice by each of the Government Investigators of
its intention to commence legal action. In September, 2002, the tolling
agreement was extended.

     Since the investigations are in process, and no legal action has been
commenced against Leasecomm, there can be no assurance as to the eventual
outcome.


                                       21

<PAGE>




ITEM 5. OTHER INFORMATION

The Company's chief executive officer and chief financial officer have furnished
to the SEC the certification with respect to this Form 10-Q that is required by
Section 906 of the Sarbanes-Oxley Act of 2002.



                                       22

<PAGE>




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  The following exhibit is filed herewith:

     Exhibit 99.1   Certification of Chief Executive Officer and Chief Financial
                    Officer pursuant to 18 U.S.C. Section 1350, as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)  A form 8-K was filed on October 11, 2002 to announce Richard Latour named
     Chief Executive Officer and new business strategy to leverage technology
     and servicing platform.

     A form 8-K was filed on October 30, 2002 to comment on expected third
quarter results.


                                       23


<PAGE>


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                      MicroFinancial Incorporated

                                      By: /s/ Richard F. Latour
                                      -----------------------------------------
                                      President and Chief Executive Officer

                                      By: /s/ James R. Jackson
                                      -----------------------------------------
                                      Vice President and Chief Financial Officer

Date:  November 14, 2002


                                       24

<PAGE>


                                  CERTIFICATION

     I, Richard F. Latour, certify that:

     1.   I have reviewed this quarterly report on Form 10-Q of MicroFinancial
          Incorporated;

     2.   Based on my knowledge, this quarterly report does not contain any
          untrue statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this quarterly report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this quarterly report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the registrant as of, and for, the periods presented in
          this quarterly report;

     4.   The registrant's other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and we have:

          a)   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               quarterly report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          c)   presented in this quarterly report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed, based
          on our most recent evaluation, to the registrant's auditors and the
          audit committee of registrant's board of directors (or persons
          performing the equivalent function):

          a)   all significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b)   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

     6.   The registrant's other certifying officer and I have indicated in this
          quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly affect
          internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.



                                      /s/ RICHARD F. LATOUR
                                      ---------------------
                                      Richard F. Latour
                                      President and Chief Executive Officer

Date: November 14, 2002


                                       25

<PAGE>



                                  CERTIFICATION

     I, James R. Jackson, certify that:

     1.   I have reviewed this quarterly report on Form 10-Q of MicroFinancial
          Incorporated;

     3.   Based on my knowledge, this quarterly report does not contain any
          untrue statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this quarterly report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this quarterly report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the registrant as of, and for, the periods presented in
          this quarterly report;

     4.   The registrant's other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and we have:

          a)   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               quarterly report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          c)   presented in this quarterly report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed, based
          on our most recent evaluation, to the registrant's auditors and the
          audit committee of registrant's board of directors (or persons
          performing the equivalent function):

          a)   all significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b)   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

     7.   The registrant's other certifying officer and I have indicated in this
          quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly affect
          internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.



                                  /s/ JAMES R. JACKSON
                                  --------------------------------
                                  James R. Jackson
                                  Vice President and Chief Financial Officer

Date: November 14, 2002



                                       26