<PAGE>   1

                                    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, 1999

                                       OR

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

         For the transition period from ______ to ______

                           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 October 30, 1999, 12,856,048 shares of the registrant's common
stock were outstanding.



<PAGE>   2



                           MICROFINANCIAL INCORPORATED

                                Table of Contents
                                                                            Page
Part I                        FINANCIAL INFORMATION
  Item 1  Financial Statements:
            Consolidated Balance Sheets
              December 31, 1998 (audited) September 30, 1999 (unaudited)      3
            Consolidated Income Statements


              Three months ended September 30, 1998 and 1999 and
                nine months ended September 30, 1998 and 1999 (unaudited)     4
            Consolidated Statements of Cash Flows
              Three months ended September 30, 1998 and 1999 and
              nine months ended September 30, 1998 and 1999 (unaudited)       5
            Notes to Consolidated Financial Statements                        6

  Item 2  Management's Discussion and Analysis of Financial
            Condition and Results of Operation                               11

  Item 3  Quantitative and Qualitative Disclosures about Market Risks        16

Part II                         OTHER INFORMATION
  Item 1  Legal Proceedings                                                  18
  Item 6  Exhibits and Reports on Form 8-K                                   20

Signatures                                                                   21




<PAGE>   3

                           ITEM 1 FINANCIAL STATEMENTS

                           MICROFINANCIAL INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)


                                                   December 31,  September 30,
                                                          1998           1999
                                                      (audited)    (unaudited)
                                                      --------     -----------
                                     ASSETS

Net investment in leases and loans:
  Receivables due in installments                     $251,060       $294,630
  Estimated residual value                              17,562         19,896
  Initial direct costs                                   4,260          7,034
  Loans receivable                                      12,253         20,031
  Less:
    Advance lease payments and deposits                 (1,081)        (2,245)
    Unearned income                                    (74,520)       (91,937)
    Allowance for credit losses                        (24,850)       (26,908)
                                                      --------       --------
Net investment in leases and loans:                   $184,684       $220,501
Investment in service contracts                          8,920         13,674
Cash and cash equivalents                                6,817         12,985
Property and equipment, net                              6,747          7,726
Other assets                                             3,086          5,932
                                                      --------       --------
      Total assets                                    $210,254       $260,818
                                                      ========       ========



                       LIABILITIES, REDEEMABLE CONVERTIBLE
                    PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Notes payable                                         $130,421       $133,100
Subordinated notes payable                              24,421         10,226
Capitalized lease obligations                              774          1,385
Accounts payable                                           149             23
Dividends payable                                          346            514
Other liabilities                                        5,481          5,952
Income taxes payable                                       625             99
Deferred income taxes payable                           18,554         27,464
                                                      --------       --------
      Total liabilities                                180,771        178,763
                                                      --------       --------


Commitments and contingencies                               --             --
Redeemable convertible preferred stock (liquidation
  preference $12, at December 31, 1997 and 1998)            --             --
Stockholders' equity:
  Common stock                                              99            133
  Additional paid-in capital                             1,816         47,917
  Retained earnings                                     27,956         39,696
  Treasury stock, at cost                                 (138)        (5,572)
  Notes receivable from officers and employees            (250)          (119)
                                                      --------       --------
    Total stockholders' equity                          29,483         82,055
                                                      --------       --------
    Total liabilities and stockholders' equity        $210,254       $260,818
                                                      ========       ========



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


                                        3


<PAGE>   4


                           MICROFINANCIAL INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                   For the quarters ended                  For the 9 months ended
                                                        September 30,                           September 30,
                                                    1998             1999                   1998             1999
                                                (unaudited)      (unaudited)            (unaudited)      (unaudited)
                                                 ---------        ---------              ---------        ---------

<S>                                                <C>              <C>                    <C>              <C>
Revenues:
  Income on financing leases and loans             $11,939          $14,232                $35,285          $40,270
  Income on service contracts                          762            1,584                  1,557            4,137
  Rental income                                      4,092            5,242                 11,153           15,959
  Loss and damage waiver fees                        1,341            1,414                  4,067            4,209
  Service fees                                       1,150            2,351                  3,770            6,414
                                                   -------          -------                -------          -------
    Total revenues                                  19,284           24,823                 55,832           70,989
                                                   -------          -------                -------          -------

Expenses:
  Selling general and administrative                 4,939            6,232                 14,284           17,944
  Provision for credit losses                        4,295            5,888                 12,568           17,351
  Depreciation and amortization                      1,416            2,038                  3,867            5,493
  Interest                                           3,247            2,602                  9,198            7,587
                                                   -------          -------                -------          -------
    Total expenses                                  13,897           16,760                 39,917           48,375
                                                   -------          -------                -------          -------


Income before provision for income taxes             5,387            8,063                 15,915           22,614
Provision for income taxes                           2,171            3,322                  6,455            9,361
                                                   -------          -------                -------          -------
Net Income                                         $ 3,216          $ 4,741                $ 9,460          $13,253
                                                   =======          =======                =======          =======
Net Income per common share  basic                 $  0.33          $  0.36                $  0.96          $  1.04
                                                   =======          =======                =======          =======
Net Income per common share  diluted               $  0.32          $  0.36                $  0.94          $  1.03
                                                   =======          =======                =======          =======
Dividends per common share                         $ 0.035          $ 0.040                $ 0.100          $ 0.115
                                                   =======          =======                =======          =======
</TABLE>


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


                                        4

<PAGE>   5



                           MICROFINANCIAL INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                        For the quarters ended        For the 9 months ended
                                                                             September 30,                 September 30,
                                                                          1998           1999           1998           1999
                                                                      (unaudited)    (unaudited)    (unaudited)    (unaudited)
                                                                      --------------------------    --------------------------

<S>                                                                      <C>           <C>            <C>            <C>
Cash flows from operating activities:
     Cash received from customers                                        $36,299       $ 39,198       $102,020       $115,926
     Cash paid to suppliers and employees                                 (8,717)        (5,300)       (24,435)       (24,359)
     Interest paid                                                        (3,450)        (2,563)        (9,004)        (7,547)
     Interest received                                                       617          1,448          1,060          3,304
                                                                         -------        -------       --------       --------
          Net cash provided by operating activities                       24,749         32,783         69,641         87,324
                                                                         -------        -------       --------       --------

Cash flows from investing activities:
     Investment in leased equipment                                      (24,840)       (33,409)       (62,218)       (82,929)
     Investment in direct costs                                             (988)        (2,717)        (2,959)        (5,746)
     Investment in service contracts                                      (2,616)        (2,571)        (6,298)        (6,759)
     Investment in loans receivable                                       (2,547)          (502)        (7,657)       (11,631)
     Investment in fixed assets                                             (102)          (486)          (381)        (1,058)
     Issuance of notes from officers and employees                             0              0           (144)            (2)
     Repayment of notes from officers                                         17             26             40            132
     Investment in notes receivable                                          149           (176)             0           (593)
     Repayment of notes receivable                                         1,221             32          1,395            234
                                                                         -------        -------       --------       --------
          Net cash used in investing activities                          (29,706)       (39,803)       (78,222)      (108,352)
                                                                         -------        -------       --------       --------

Cash flows from financing activities:
     Proceeds from secured debt                                           21,991         45,204         70,485         98,475
     Repayment of secured debt                                           (18,166)       (29,994)       (55,162)       (96,569)
     Proceeds from refinancing of secured debt                            77,000        109,315        185,000        268,315
     Prepayment of secured debt                                          (77,000)      (109,315)      (185,000)      (268,315)
     Proceeds from short term demand notes payable                             0              0            180            840
     Repayment of short term demand notes payable                            (10)           (38)          (227)           (67)
     Proceeds from issuance of subordinated debt                             200              0          1,200              0
     Repayment of subordinated debt                                       (2,143)        (2,500)        (2,374)       (14,247)
     Proceeds from sale of common stock                                        0              0              0         46,116
     Proceeds from exercise of common stock options                           14              7            160             20
     Repayment of capital leases                                            (170)          (203)          (540)          (592)
     Purchase of treasury stock                                                0         (3,625)             0         (5,433)
     Payment of dividends                                                   (346)          (534)          (936)        (1,347)
                                                                         -------        -------       --------       --------
          Net cash provided by (used in) financing activities              1,370          8,317         12,786         27,196
                                                                         -------        -------       --------       --------

Net increase (decrease) in cash and cash equivalents:                     (3,587)         1,297          4,205          6,168
Cash and cash equivalents, beginning of period:                           17,044         11,688          9,252          6,817
                                                                         -------        -------       --------       --------

Cash and cash equivalents, end of period:                                $13,457       $ 12,985       $ 13,457       $ 12,985
                                                                         =======       ========       ========       ========

Reconciliation of net income to net cash provided by operating
 activities

     Net Income                                                          $ 3,216        $ 4,741       $  9,460       $ 13,253
     Adjustments to reconcile net income to cash provided by
      operating activities:
        Depreciation and amortization                                      1,416          2,038          3,867          5,493
        Provision for credit losses                                        4,295          5,888         12,568         17,351
        Recovery of equipment cost and residual value, net of revenue
          recognized Net of Interest Income                               13,674         17,021         37,532         42,184
        Increase (decrease) in current taxes                                   0            (26)             0           (526)
        Increase in deferred income taxes                                  2,170          3,120          6,407          8,909
     Change in assets and liabilities:
        Decrease (increase) in other assets                                  250            520           (414)           589
        (Decrease) increase in accounts payable                              (79)          (262)           (55)          (127)
        Increase (decrease) in accrued liabilities                          (193)          (257)           276            198
                                                                         -------        -------       --------       --------
          Net cash provided by operating activities                      $24,749       $ 32,783       $ 69,641       $ 87,324
                                                                         =======       ========       ========       ========

Cash paid for income taxes                                               $    10            $49       $     90           $846
                                                                         =======       ========       ========       ========

Supplemental disclosure of noncash activities:
     Property acquired under capital leases                              $   198          $ 384       $    412        $ 1,203
     Accrual of common stock dividends                                   $   395          $ 514       $    691          $ 514
</TABLE>


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


                                        5

<PAGE>   6



                           MICROFINANCIAL INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (tables are in thousands, except 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 finance
company that primarily leases and rents commercial "microticket" equipment and
provides other financing services in amounts generally ranging from $900 to
$10,000 with an average amount financed of approximately $1,400 and an average
lease term of 45 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 funds its operations primarily through borrowings under its credit
facilities, issuances of subordinated debt and on balance sheet securitizations.

(B) Summary of Significant Accounting Policies:

Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission for the 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 consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation of these interim results.
Inter-company accounts and transactions have been eliminated. For further
information, refer to the consolidated financial statements and notes included
in the Company's Annual Report and Form 10-K for the year ended December 31,
1998. The results for the three-month and nine-month periods ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
full year ended December 31, 1999.

The balance sheet at December 31, 1998 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31,1998.


                                        6


<PAGE>   7


Allowance for Credit Losses:

The Company maintains an allowance for credit losses on its investment in
leases, loans and service contracts 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 leases, loans and service
contracts, if any. In addition, the allowance reflects management's judgment of
the additional loss potential considering future 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 and service
contracts.

The following table sets forth the Company's allowance for credit losses as of
December 31, 1997 and, 1998 and September 30, 1999 and the related provision,
charge-offs and recoveries for the year ended December 31, 1998 and the nine
months ended September 30, 1999.


          Balance at December 31, 1997                 $26,319
          Provision for credit losses                   19,075
          Charge-offs                        28,750
          Recoveries                          8,206
                                             ------

            Charge-offs net of recoveries               20,544
                                                       -------

          Balance at December 31, 1998                 $24,850
          Provision for credit losses                   17,351
          Charge-offs                        26,654
          Recoveries                         11,361
                                             ------

            Charge-offs net of recoveries               15,293
                                                       -------

Balance at September 30, 1999                          $26,908


                                        7


<PAGE>   8


Earnings Per Share:

The Company has adopted Statement of Financial Accounting No. 128, "Earnings Per
Share." ("SFAS No.128") which specifies the computation, presentation and
disclosure requirements for net income 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. Under
SFAS No. 128, the computation of dilutive earnings per share does not assume the
issuance of common shares that have an antidilutive effect on the net income per
share.

<TABLE>
<CAPTION>

                                              For 3 months ended               For 9 months ended
                                                 September 30,                     September 30,
                                          ----------------------------      ----------------------------
                                             1998             1999             1998             1999
                                          -----------      -----------      -----------      -----------

<S>                                       <C>              <C>              <C>              <C>
Net Income                                $     3,216      $     4,741      $     9,460      $    13,253
Shares used in computation:
  Weighted average common shares
     outstanding used in computation
     of net income per common share         9,875,917       13,032,832        9,849,602       12,778,937
   Dilutive effect of redeemable
     convertible preferred stock               19,600                0           19,600                0
   Dilutive effect of common stock
     options                                  138,372           88,459          162,772          129,728
Shares used in computation of net
   income per common share -
   assuming dilution                       10,033,889       13,121,291       10,031,974       12,908,665
                                          -----------      -----------      -----------      -----------

Net income per common share               $      0.33      $      0.36      $      0.96      $      1.04
Net income per common share
      assuming dilution                   $      0.32      $      0.36      $      0.94      $      1.03
</TABLE>


Notes Payable:

On January 27, 1999 the Company amended and restated both of its revolving lines
of credit and term loan facilities whereby it may borrow a maximum of
$55,000,000 under each facility based upon qualified leases, loans and service
contracts. Outstanding borrowings with respect to the revolving line of credit
bear interest based either at Prime or London Interbank Offered Rate (LIBOR)
plus 1.75%. The prime rates at December 31, 1998 and September 30, 1999 were
7.75% and 8.25% respectively. The 90-day LIBOR rates at December 31, 1998 and
September 30, 1999 were 5.28% and 6.08% respectively.

                                        8


<PAGE>   9


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

                 December 31, 1998              September 30, 1999
                -------------------            --------------------
Type              Rate       Amount              Rate        Amount
----            -------     -------            -------      -------
                   (in thousands)                 (in thousands)

Prime           7.7500%     $ 6,515            8.2500%      $33,483
LIBOR           7.4068%      15,000            7.2500%        9,000
LIBOR           7.3939%      20,000            7.1250%        5,000
LIBOR           7.1938%      10,001            7.1625%       17,500
LIBOR           7.4103%       7,499            7.2432%       25,000
Fixed           7.7500%       3,709
                            -------                         -------

      Total Outstanding     $62,724                         $89,983
                            -------                         -------

Outstanding borrowings are collateralized by leases, loans and service contracts
pledged specifically to the financial institutions. All balances under the
revolving lines of credit will automatically convert to a term loan on July 31,
2000 and September 30, 2000, respectively, provided the lines of credit are not
renewed and no event of default exists at that date. All converted term loans
are payable over the term of the underlying leases, loans and service contracts,
but in any event not to exceed 36 monthly installments. The most restrictive
covenants of the agreement have a minimum net worth and income requirement and
limit payment of dividends to no more than 50% of the consolidated net income,
as defined, for the immediately preceding fiscal year.

Initial Public Offering:

On February 5, 1999, the Company was admitted to the New York Stock Exchange
following its initial public offering of 4 million shares of common stock at $15
per share, 600,000 of which were sold by existing shareholders. The Company's
stock trades under the ticker symbol MFI. Total costs of $1,313,891 related to
the initial public offering offset the proceeds of $51,000,000. On June 12, 1998
the Company's Board of Directors authorized a two-for-one stock split which was
effective with the initial public offering. All share and per share amounts have
been restated to reflect this stock split.

In conjunction with the initial public offering in February 1999, the Board of
Directors of the Company authorized 5,000,000 shares of preferred stock, none of
which have been issued. Shares of such preferred stock may be issued from time
to time in one or more series and with such designations, voting powers,
preferences, and relative participating optional or other special rights, and
qualifications, limitations, and restrictions on such rights as the Board of
Directors may authorize.


                                        9


<PAGE>   10


Stock Options:

Under the 1998 Equity Incentive Plan (the "1998 Plan") which was adopted on July
9, 1998 the Company had reserved 2,000,000 shares of the Company's common stock
for issuance pursuant to the 1998 Plan. On February 25, 1999, April 12, 1999 and
August 2, 1999 the Company granted a total of 750,000, 80,000 and 10,000 stock
options respectively at prices of $13.544, $13.125, and 12.063, which were the
fair market values on the date of grants, to various members of management and
board of directors. A portion of the total stock options granted on February 25,
1999 were stock options granted to the president of the Company at $13.544 which
was 110% of the fair market value on the date of grant, pursuant to the terms of
the 1998 Plan.

Dividends:

On September 21, 1999 the Company's Board of Directors approved a dividend of
$.04 per common share for all outstanding common shares as of September 30, 1999
which were paid on October 15, 1999.



                                       10


<PAGE>   11



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

Three months ended September 30, 1999 as compared to the three months ended
September 30, 1998.

Net income for the three months ended September 30, 1999 was approximately $4.7
million, an increase of $1.5 million or 47% from the three months ended
September 30, 1998. This represents diluted earnings per share for the three
months ended September 30, 1999 of $0.36 per share on weighted average
outstanding shares of 13,121,291 as compared to $0.32 per share on weighted
average outstanding shares of 10,033,889 for the three months ended September
30, 1998.

Total revenues for the three months ended September 30, 1999 were $24.8 million,
an increase of $5.5 million, or 29%, from the three months ended September 30,
1998. The increase was primarily due to an increase of $2.3 million, or 19%, in
income on financing leases and loans, $2.0 million, or 41%, in rental and
service contract income and $1.3 million, or 51%, in fee income. The increase in
income on financing leases and loans was due to the increased number of leases
and loans originated. The majority of 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 and the
increased number of service contracts originated during the third quarter. The
increase in fee income is the result of increased fees from the lessees related
to the collection and legal process employed by the Company.

Selling, general and administrative expenses increased by $1.3 million, or 26%,
for the three months ended September 30, 1999, as compared to the three months
ended September 30, 1998. Compensation and personnel related expenses increased
by $800,000, or 27%, due to an increase in overall compensation levels, an
increase in the number of employees needed to maintain the Company's portfolio,
as well as an increase of $253,000 in contract labor.

Depreciation and amortization increased by $622,000, or 44%, due to the
increased number of rental contracts and amortization of the Company's
investment in service contracts.

The Company's provision for credit losses increased by $1.6 million or 37%, for
the three months ended September 30, 1999 as compared to the three months ended
September 30, 1998. This increase is primarily a result of the Company's policy
of providing a provision for credit losses based upon the dealer fundings and
revenue recognized in any period. Dealer fundings increased by $7 million, or
24% and total revenues increased by $5.5 million, or 29% for the three months
ended September 30, 1999 as compared to the three months ended September 30,
1998.



                                       11


<PAGE>   12


Interest expense decreased by $645,000, or 20%, for the three months ended
September 30, 1999 as compared to the three months ended September 30, 1998 as a
result of the use of the initial public offering proceeds to repay a portion of
the Company's outstanding bank debt as well as a portion of the Company's junior
subordinated debt.

Dealer fundings were $36.9 million for the three months ended September 30,
1999, up $7 million, or 24% as compared to the three months ended September 30,
1998. This increase is a result of a 47% growth in the Company's Point Of Sale
business, as well as, continued growth in the Company's Non-Point Of Sale
business. Net cash provided by operating activities were $32.8 million, up by
$6.9 million, or 27%. Leases and loan receivables due in installments and
estimated residuals were up from $280.9 million in December of 1998 to $334.6
million in September of 1999, representing a 19% increase. The Company's
investment in service contracts increased by $4.8 million from $8.9 million for
the period ended December 31, 1998 to $13.7 million for the period ended
September 30, 1999.

Nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998.

Net income for the nine months ended September 30, 1999 was approximately $13.3
million, an increase of $3.8 million or 40% from the nine months ended September
30, 1998. This represents diluted earnings per share for the nine months ended
September 30, 1999 of $1.03 per share on weighted average outstanding shares of
12,908,665 as compared to $0.94 per share on weighted average outstanding shares
of 10,031,974 for the nine months ended September 30, 1998.

Total revenues for the nine months ended September 30, 1999 were $71 million, an
increase of $15 million, or 27%, from the nine months ended September 30, 1998.
The increase was primarily due to an increase of $7.4 million, or 58%, in rental
and service contract income, $5 million, or 14% in income on financing leases
and loans and $2.8 million, or 36%, in fee income. The majority of 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, as well as the acquisition of a rental portfolio from a major bank and the
increased number of service contracts originated during the third quarter. The
increase in income on financing leases and loans was due to the increased number
of leases and loans originated. The increase in fee income is the result of
increased fees to the lessees related to the collection and legal process
employed by the Company.

Selling, general and administrative expenses increased by $3.7 million, or 26%,
for the nine months ended September 30, 1999, as compared to the nine months
ended September 30, 1998. Compensation and personnel related expenses increased
by $2.1 million, or 24%, due to an increase in overall compensation levels, an
increase in the number of employees needed to maintain the Company's portfolio,
as well as an increase of $537,000 in contract labor. Rent expense increased by
$364,000, or 44%, which is a result of carrying additional office space during
the opening phase of the new facility in Woburn.

                                       12


<PAGE>   13


Depreciation and amortization increased by $1.6 million, or 42%, due to the
increased number of rental contracts and amortization of the Company's
investment in service contracts.

The Company's provision for credit losses increased by $4.8 million or 38%, for
the nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998. This increase is primarily a result of the Company's policy
of providing a provision for credit losses based upon the dealer fundings and
revenue recognized in any period. Dealer fundings increased by $24.5 million, or
32% and total revenues increased by $15.2 million, or 27% for the nine months
ended September 30, 1999 as compared to the nine months ended September 30,
1998.

Interest expense decreased by $1.6 million, or 18% for the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998 as a
result of the use of the initial public offering proceeds to repay a portion of
the Company's outstanding bank debt as well as a portion of the Company's junior
subordinated debt.

Dealer fundings were $100.9 million for the nine months ended September 30,
1999, up $24.5 million, or 32% as compared to the nine months ended September
30, 1998. This increase is a result of a 33% increase in the Company's Point Of
Sale business and the continued growth in the Company's Non-Point Of Sale
business. Net cash provided by operating activities were $87.3 million, up by
$16.5 million, or 23%.

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 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 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 and
capital expenditures.

The Company utilizes its credit facilities to fund the origination and
acquisition of leases, loans and service contracts that satisfy the eligibility
requirements established pursuant to each facility. At September 30, 1999, the
Company had an aggregate maximum of $110.0 million available for borrowing under
its two credit facilities, of which approximately $90.0 million was outstanding
as of such date. 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.

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<PAGE>   14


The Company believes that the cash flow from its operations and the amounts
available under its credit facilities will be sufficient to fund the Company's
operations for the foreseeable future. Although the Company is not currently
involved in negotiations and has no current commitments or agreements with
respect to any acquisition, to the extent that the Company successfully
consummates acquisitions, it may be necessary to finance such acquisitions
through the issuance of additional debt or equity securities, the incurrence of
indebtedness or a combination of both.


YEAR 2000

Many computer programs and microprocessors were designed and developed without
consideration of the impact of the transition to the year 2000. As a result,
these programs and microprocessors may not be able to differentiate between the
year "1900" and "2000"; the year 2000 may be recognized as the two digit number
"00". If not corrected, this could cause difficulties in obtaining accurate
system data and support.

The Company has designed and purchased numerous computer systems since its
inception. The Company's owned software and hardware is substantially Year 2000
compliant. The costs associated with such compliance will not be material to the
Company's liquidity or results of operations. The Company believes, based on
written and verbal advice from its vendors, that its critical third party
software is generally Year 2000 compliant, with minor issues, and will be
capable of functioning after December 31, 1999. However, the Company does and
will continue to interconnect certain portions of its network and systems with
other companies' networks and systems, certain of which may not be as Year 2000
compliant as those installed by the Company. While the Company has discussed
these matters with, and/or obtained written certification from, such other
companies as to their Year 2000 compliance, there can be no assurance that any
potential impact associated with incompatible systems after December 31, 1999
would not have a material adverse effect on the Company's business, financial
condition or results of operations.


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<PAGE>   15


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.




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<PAGE>   16


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.

This analysis presents the hypothetical loss in earnings, cash flows, or fair
value of the financial instrument and derivative instruments held by the Company
at September 30, 1999, that are sensitive to changes in interest rates. The
Company uses interest-rate swaps to manage the primary market exposures
associated with underlying liabilities and anticipated transactions. The Company
uses these instruments to reduce risk by creating offsetting market exposures.
The instruments held by the Company are not held for trading purposes.

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

This analysis presents the hypothetical loss in earnings of the financial
instruments and derivative instruments held by the Company at September 30, 1999
that are sensitive to changes in interest rates. The Company enters into
interest rate swaps to reduce exposure to interest-rate risk connected to
existing liabilities. The Company does not hold or issue derivative financial
instruments for trading purposes.

Because the Company's net-earnings exposure under the combined debt and
interest-rate swap was to 90-day LIBOR, the hypothetical loss was modeled by
calculating the 10 percent adverse change in 90-day LIBOR and then multiplying
it by the face amount of the debt (which equaled the face amount of the interest
rate swap).

The implicit yield to the Company on all of its leases, loans and service
contracts is on a fixed interest rate basis due to the leases, loans and service
contracts having scheduled payments that are fixed at the time of origination of
the lease, loan 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.


                                       16


<PAGE>   17


Given the relatively short average life of the Company's leases, loans and
service contracts, the Company's goal is to maintain a blend of fixed and
variable interest rate obligations. As of September 30, 1999, the Company's
outstanding fixed rate indebtedness, including indebtedness outstanding under
the Company's securitizations and indebtedness subject to the swap described
below, represented 74.6% of the Company's outstanding indebtedness. In July
1997, the Company entered into an interest rate swap agreement with one of its
banks. This agreement, which expires in July 2000, has a notional amount of
$17.5 million, which represented 17.8% of the Company's fixed rate indebtedness
outstanding at September 30, 1999. The interest rate associated with the swap is
capped at 6.6%. During the term of the swap, the Company has agreed to match the
swap amount with 90-day LIBOR loans. If at any time the 90-day LIBOR rate
exceeds the swap cap of 6.6%, the bank would pay the Company the difference.
Through September 30, 1999, the Company had entered into LIBOR loans with
interest rates ranging from 7.125% to 7.250 %. This arrangement effectively
changes the Company's floating interest rate exposure on the $17.5 million
notional amount to a fixed rate of 8.35%.

The aggregate hypothetical loss in earnings on an annual basis on the financial
instruments and derivative instruments that would have resulted from a
hypothetical increase of 10% in the 90-day LIBOR, sustained for one month, is
estimated to be $12,175.



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<PAGE>   18

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 without merit,
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.

I. On August 24, 1999, a purported class action lawsuit was filed in Middlesex
Superior Court for The Commonwealth of Massachusetts against the Company and its
wholly owned subsidiary Leasecomm Corporation ("Leasecomm").

The complaint has been amended four times, most recently the fourth Amended
Complaint and Jury Claim was to be filed on November 4, 1999 (as amended, the
"Clark Complaint").

The purported class consists of individuals and businesses that have been sued
by Leasecomm in Massachusetts court for allegedly breaching Leasecomm's Non
Cancellable Equipment Lease Agreement or Non Cancellable Lease Agreement (the
Lease Agreements") containing a particular forum selection clause. The forum
selection clause is an agreement between the parties to the Lease Agreements to
submit to the jurisdiction of the courts of The Commonwealth of Massachusetts
for the bringing of any suit or other proceeding. The purported class would be
limited to individuals and businesses that: have no place of business or
residence in New England; have been sued in a Massachusetts court for breach of
Lease Agreements; had no more than three employees as of the date of the Lease
Agreement; had been in existence for no more than three years as of the date of
the Lease Agreement; and had entered into Lease Agreements with scheduled
monthly lease payments which aggregated to less than $5,000.

The Clark Complaint alleges that enforcement of the forum selection clause is
not fair or reasonable because, among other things, litigation in Massachusetts
is prohibitively costly and time consuming for purported class members,
purported class members have no choice but to enter into the Lease Agreement
because of Leasecomm's greater bargaining power, and purported class members
allegedly have valid defenses to the claims asserted against them by Leasecomm.
The Plaintiffs seek: a declaration that the forum selection clause is not fair
or reasonable as to purported class members and that the Massachusetts courts
lack personal jurisdiction over purported class members; dismissal without
prejudice of all cases pending in Massachusetts against purported class members;
a permanent injunction preventing Leasecomm and its affiliates from bringing
suit in Massachusetts against purported class members; a permanent injunction
preventing Leasecomm or its affiliates from entering into Lease Agreements
containing the forum selection clause; unspecified monetary damages against
Leasecomm and the Company in favor of purported class members equal to double or
treble the moneys collected in

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<PAGE>   19

conjunction with lawsuits filed against purported class members in Massachusetts
courts, together with attorneys' fees and costs.

The matter is in its earliest stage and there can be no assurance as to its
eventual outcome. However, on three prior occasions Massachusetts' intermediate
appellate courts have enforced this forum selection clause.

II. On June 3, 1999 a purported class action suit was filed in Middlesex
Superior Court in The Commonwealth of Massachusetts against Leasecomm. The
complaint was amended on or about July 26, 1999 (as amended, the
"McKenzie-Pollock Complaint"). On September 3, 1999 Leasecomm removed the action
to the United States District Court for the District of Massachusetts.

The purported class consists of individuals who entered into a Lease Agreement
with Leasecomm between June 4, 1993 and the date of the McKenzie-Pollack
Complaint.

Plaintiffs allege: that Leasecomm causes individuals to enter into
non-cancellable, long term leases when there is no reasonable expectation that
most of the individuals would need or use the equipment for the duration of the
lease term; that Leasecomm conceals or misrepresents the nature of the terms of
its Lease Agreements; that the Lease Agreements are non negotiable adhesion
contracts which are oppressive and unfair; that the cost of acquiring the
equipment through Leasecomm is often double or triple the retail cost of the
equipment; that Leasecomm violated state usury laws; that Leasecomm engages in
unfair debt collection practices; that Leasecomm brings lawsuits against
purported class members in Massachusetts even though it has no jurisdiction over
them in Massachusetts courts; that Leasecomm fails to make proper service and
then files pleadings which state that proper service was made, thereby obtaining
default judgments against certain members of the purported class; that Leasecomm
conspired with its salespersons to cause members of the purported class to enter
into unconscionable leases by concealing and misrepresenting their terms; that
Leasecomm failed to comply with the Truth in Lending Act and the Massachusetts
Consumer Credit Cost Disclosure Act; and that Leasecomm has engaged in unfair
trade practices in violation of the Massachusetts consumer protection statute.

Plaintiffs and the members of the purported class seek: unspecified damages for
monetary losses allegedly sustained by them as a result of this conduct by
Leasecomm and reimbursement of costs and attorneys' fees; treble damages and
other punitive damages; rescission of the Lease Agreements, or a declaration
that they are void, and return of all moneys paid to Leasecomm; and damages for
unjust enrichment.

Leasecomm filed a motion to dismiss the McKenzie-Pollock Complaint in its
entirety on September 21, 1999, on the grounds that the plaintiffs' allegations
are legally insufficient and, in any event, should have been raised in court
proceedings which predate the commencement of this action. In response, on or
about November 10, 1999, plaintiffs filed a Motion to Dismiss Federal Claims
and to Remand to State Court. By this motion, plaintiffs (1) agree that their
Truth in Lending Act, Massachusetts Consumer Credit Cost Disclosure Act and Fair
Debt Collection Practices Act claims should be dismissed because Leasecomm
leases are not consumer transactions, and (2) seek to have the federal court
not decide the remaining grounds of Leasecomm's Motion to Dismiss and transfer
the case to the Middlesex Superior Court. Plaintiffs' motion and Leasecomm's
Motion to Dismiss are both pending, with responses to be filed.

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<PAGE>   20



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibit Index

EXHIBIT NUMBER             DESCRIPTION OF EXHIBIT
--------------             ----------------------
Exhibit 27                 Financial Data Schedule

(b) Not applicable



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<PAGE>   21

                                   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/ Peter R. Bleyleben
                                       --------------------------
                                           President and Chief Executive Officer

                                       By: /s/ Richard F. Latour
                                       -------------------------
                                           Executive Vice President, Chief
                                           Operating and Chief Financial Officer

Date:  November 12, 1999






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