United States

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

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

For the transition period from              to             

Commission file number 333-116595

LEASE EQUITY APPRECIATION FUND II, L.P.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-1056194
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

110 South Poplar Street, Suite 101, Wilmington Delaware 19801

(Address of principal executive offices)

(800) 819-5556

(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(d) of the Securities 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.    þ  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller Reporting Company  þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    þ  No

LEASE EQUITY APPRECIATION FUND II, L.P.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

		PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Balance Sheets – September 30, 2009 (unaudited) and December 31, 2008	3
	Consolidated Statements of Operations Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)	4
	Consolidated Statement of Changes in Partners’ Capital Nine Months Ended September 30, 2009 (unaudited)	5
	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2009 and 2008 (unaudited)	6
	Notes to Consolidated Financial Statements – September 30, 2009 (unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	25
ITEM 4.	Controls and Procedures	26
PART II	OTHER INFORMATION
ITEM 6.	Exhibits	27
SIGNATURES		28

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

	September 30, 2009			December 31, 2008
	(unaudited)
ASSETS
Cash	$	53		$	149
Restricted cash		22,380			29,234
Accounts receivable		149			133
Investment in leases and loans, net		190,355			265,993
Deferred financing costs, net		2,908			2,956
Other assets		608			574
	$	216,453		$	299,039
LIABILITIES AND PARTNERS’ CAPITAL
Liabilities:
Bank debt	$	177,175		$	254,744
Accounts payable and accrued expenses		452			574
Other liabilities		931			952
Derivative liabilities at fair value		6,836			11,734
Due to affiliates		20,096			11,983
Total liabilities		205,490			279,987
Commitments and contingencies
Partners’ Capital:
General partner		(345	)		(221	)
Limited partners		17,060			29,371
Accumulated other comprehensive loss		(5,752	)		(10,098	)
Total partners’ capital		10,963			19,052
	$	216,453		$	299,039

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

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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except unit and per unit data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues:
Interest on equipment financings	$	4,087		$	6,337		$	14,276		$	20,414
Rental income		652			983			2,168			3,467
(Losses) gains on sales of equipment and lease dispositions, net		(255	)		911			(405	)		1,454
Other		451			602			1,312			1,839
		4,935			8,833			17,351			27,174
Expenses:
Interest expense		3,295			4,460			10,089			13,916
Depreciation on operating leases		510			892			1,786			2,991
Provision for credit losses		4,335			3,951			8,742			7,459
General and administrative expenses		529			703			2,104			2,150
Administrative expenses reimbursed to affiliate		547			732			1,923			1,938
Management fees to affiliate		695			922			2,281			2,885
		9,911			11,660			26,925			31,339
Net loss	$	(4,976	)	$	(2,827	)	$	(9,574	)	$	(4,165	)
Weighted average number of limited partner units outstanding during the period		592,809			595,065			593,082			596,115
Net loss per weighted average limited partner unit	$	(8.31	)	$	(4.70	)	$	(15.98	)	$	(6.92	)

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

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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Consolidated Statement of Changes in Partners’ Capital

For the Nine Months Ended September 30, 2009

(in thousands, except unit data)

(unaudited)

	General Partner			Limited Partners					Accumulated Other Comprehensive			Total Partners’			Comprehensive
	Amount			Units		Amount			(Loss) Income			Capital			(Loss) Income
Balance, January 1, 2009	$	(221	)	593,694		$	29,371		$	(10,098	)	$	19,052
Cash distributions		(28	)	—			(2,756	)		—			(2,784	)
Redemptions of limited partner units		—		(885	)		(77	)		—			(77	)
Net loss		(96	)	—			(9,478	)		—			(9,574	)	$	(9,574	)
Unrealized gains on financial derivatives		—		—			—			4,632			4,632			4,632
Amortization of gains on financial derivatives		—		—			—			(286	)		(286	)		(286	)
Balance, September 30, 2009	$	(345	)	592,809		$	17,060		$	(5,752	)	$	10,963		$	(5,228	)

The accompanying notes are an integral part of this consolidated financial statement.

5

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(9,574	)	$	(4,165	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Losses (gains) on sales of equipment and lease dispositions, net		405			(1,454	)
Depreciation on operating leases		1,786			2,991
Provision for credit losses		8,742			7,459
Amortization of deferred financing costs		1,006			473
Amortization of gains on financial derivative		(286	)		(286	)
Changes in operating assets and liabilities:
Accounts receivable		(16	)		132
Other assets		(300	)		359
Accounts payable and accrued expenses and other liabilities		(143	)		235
Due to affiliates, net		8,113			6,098
Net cash provided by operating activities		9,733			11,842
Cash flows from investing activities:
Purchases of leases and loans		(7,696	)		(96,871	)
Proceeds from leases and loans		71,802			92,545
Proceeds from sale of leases to third parties		—			35,551
Security deposits returned, net of collected		599			2,159
Net cash provided by investing activities		64,705			33,384
Cash flows from financing activities:
Borrowings of bank debt		6,656			68,015
Repayment of bank debt		(84,225	)		(109,397	)
Decrease in restricted cash		6,854			796
Increase in deferred financing costs		(958	)		(760	)
Redemption of Limited Partners’ capital		(77	)		(340	)
Cash distributions to partners		(2,784	)		(3,583	)
Net cash used in financing activities		(74,534	)		(45,269	)
Decrease in cash		(96	)		(43	)
Cash, beginning of period		149			259
Cash, end of period	$	53		$	216

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

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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Lease Equity Appreciation Fund II, L.P. (the “Fund”) is a Delaware limited partnership formed on March 30, 2004 by its General Partner, LEAF Financial Corporation (the “General Partner”). The General Partner is a majority owned indirect subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. The Fund received its minimum subscription proceeds and it broke escrow on April 14, 2005. On October 13, 2006, the Fund reached its maximum subscription of 600,000 limited partnership units ($59.9 million).

The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.

As of September 30, 2009, in addition to its 1% general partnership interest, the General Partner invested $874,000 for a 1.6% limited partnership interest in the Fund. The Fund is managed by the General Partner.

The consolidated financial statements and notes thereto as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for the nine months ended September 30, 2009 may not necessarily be indicative of the results of operations for the full year ending December 31, 2009.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries, LEAF Fund II, LLC, and LEAF II Receivables Funding, LLC. All intercompany accounts and transactions have been eliminated in consolidation.

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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Newly Adopted Accounting Principles

In April 2009, the Financial Accounting Standards Board (“FASB”) issued guidance relating to subsequent events and established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. The Fund adopted this guidance during the quarter ended June 30, 2009.

In April 2009, the FASB issued amended guidance relating to interim disclosures about the fair value of financial instruments. The amended guidance requires disclosures about fair value of financial instruments in interim as well as in annual financial statements and requires those disclosures in summarized financial information at interim reporting periods. The adoption of the amended guidance had no impact on the Fund’s consolidated financial position or results of operations.

NOTE 3 – INVESTMENT IN LEASES AND LOANS

The Fund’s investment in leases and loans, net, consists of the following (in thousands):

	September 30, 2009			December 31, 2008
Direct financing leases	$	152,646		$	212,536
Loans		39,994			52,461
Operating leases		4,965			6,766
		197,605			271,763
Allowance for credit losses		(7,250	)		(5,770	)
	$	190,355		$	265,993

The components of direct financing leases and loans are as follows (in thousands):

	September 30, 2009						December 31, 2008
	Leases			Loans			Leases			Loans
Total future minimum payments	$	169,943		$	47,378		$	238,338		$	63,272
Unearned income		(20,598	)		(7,201	)		(29,722	)		(10,206	)
Residuals, net of unearned residual income		5,123			—			6,105			—
Security deposits		(1,822	)		(183	)		(2,185	)		(605	)
	$	152,646		$	39,994		$	212,536		$	52,461

8

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

NOTE 3 – INVESTMENT IN LEASES AND LOANS – (Continued)

The Fund’s investment in operating leases, net, consists of the following (in thousands):

	September 30, 2009			December 31, 2008
Equipment	$	13,831		$	15,683
Accumulated depreciation		(8,765	)		(8,832	)
Security deposits		(101	)		(85	)
	$	4,965		$	6,766

The following is a summary of the Fund’s allowance for credit losses (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Allowance for credit losses, beginning of period	$	7,170		$	1,710		$	5,770		$	1,960
Provision for credit losses		4,335			3,951			8,742			7,459
Charge-offs		(4,479	)		(2,298	)		(7,712	)		(6,264	)
Recoveries		224			337			450			545
Allowance for credit losses, end of period	$	7,250		$	3,700		$	7,250		$	3,700

The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due (“non-accrual”). As of September 30, 2009 and December 31, 2008, the Fund had $18.7 million and $15.2 million, respectively, of leases and loans on non-accrual status.

9

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

NOTE 4 – BANK DEBT

The Fund’s bank debt consists of the following (in thousands):

			September 30, 2009
	Type	Maturity Date	Facility Amount		Amount Outstanding		Amount Available (1)		Interest rate per annum adjusted for swaps (2)		December 31, 2008 Outstanding Balance
Term Securitization – Class A-2	Term	January 2010	$	—	$	—	$	—	—		$	8,671
Term Securitization – Class A-3	Term	July 2012		61,593		61,593		—	5.6	%		101,320
Term Securitization – Class B	Term	March 2015		14,529		14,529		—	6.7	%		14,530
WestLB	Revolving	(3)		125,000		101,053		23,947	5.7	%		130,223
			$	201,122	$	177,175	$	23,947			$	254,744

(1) Availability under this credit facility is subject to having sufficient eligible leases or loans (as defined in the respective agreements) to pledge as collateral and compliance with the borrowing base formula.

(2) To mitigate fluctuations in interest rates, the Fund entered into interest rate swap agreements. The interest rate swap agreements terminate on various dates and fix the interest rate. This rate reflects the weighted average fixed rate.

(3) This facility matures on November 30, 2009. The Fund is currently negotiating a renewal which is expected to extend the maturity to June 2010 and, if extended, could be renewable for an additional one year period. If the WestLB facility is not extended at the time of maturity, the Fund would not be required to make full repayment at that time. Rather, the Fund would repay the outstanding debt as payments are received on the underlying leases and loans pledged as collateral.

In June 2009, the Fund agreed to reduce the WestLB facility amount from $150 million to $125 million. This facility, which was to mature in June 2009, has been extended until November 30, 2009 while the Fund negotiates the terms of the one-year renewal. The Fund expects that as part of the renewal terms, it will agree to reduce its leverage, pay a higher interest rate on any new borrowings subsequent to September 30, 2009 and pay an amendment fee. The interest rate is expected to remain unchanged for the Fund’s existing borrowings under the debt facility, which are calculated at LIBOR plus 0.95% per annum. New borrowings under the facility are expected to be at a rate of LIBOR plus 2.50% per annum. As of September 30, 2009, interest rate swap agreements fix the interest rate on this facility at 5.69% on a weighted average basis. Interest and principal are due as payments are received under the leases and loans.

As of September 30, 2009, $191.5 million of leases and loans and $21.6 million of restricted cash were pledged as collateral under the Fund’s credit facilities. Recourse under these facilities is limited to the amount of collateral pledged.

The Fund has been in discussions, which are ongoing, with WestLB to renew and modify certain of its loan covenants. As of September 30, 2009, the Fund was in compliance with the covenants under its debt facilities. However, as of October 31, 2009, the Fund was not in compliance with the managed annualized default ratio under the WestLB loan agreement. In addition, during the month of October 2009, the portfolio delinquency rate increased and, as a result of such increase, additional principal payments will become due and payable on November 21, 2009 if the Fund does not receive waiver described below. The Fund does not expect to have the ability to fund such principal payments, which would result in an event of default under the WestLB facility. As of October 31, 2009, $97.1 million was outstanding under the WestLB Facility. Recourse under the WestLB facility is limited to the amount of collateral pledged, which was $111.0 million as of October 31, 2009.

The Fund has requested a waiver from WestLB with respect to the managed annualized default ratio and portfolio delinquency rate covenants and continues the negotiations to renew and amend the loan agreement. Although the Fund expects to obtain such waiver and to modify the covenants of its loan agreement, there can be no assurance that such waiver or amendment will be executed. If not executed, all amounts owed under the WestLB facility could become immediately due and payable if the bank declares a default, which could also create defaults under other debt facilities.

Debt repayments

Annual principal payments on the Fund’s aggregate borrowings over the next five years ended September 30 and thereafter, are as follows (in thousands):

2010	$	74,253
2011		50,702
2012		30,221
2013		15,369
2014		5,441
Thereafter		1,189
	$	177,175

10

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

NOTE 5 – DERIVATIVE INSTRUMENTS

The majority of the Fund’s assets and liabilities are financial contracts with fixed and variable rates. Any mismatch between the repricing and maturity characteristics of the Fund’s assets and liabilities exposes it to interest rate risk when interest rates fluctuate. For example, the Fund’s assets are structured on a fixed-rate basis, but since funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to a certain degree of risk if interest rates rise which in turn will increase the Fund’s borrowing costs. In addition, when the Fund acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost the Fund will pay when it funds those loans. Increases in interest rates that increase the Fund’s permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this spread.

To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps. For derivatives designated and qualifying as cash flow hedges, the effective portion of changes in fair value of those derivatives are recorded in accumulated other comprehensive loss and are subsequently reclassified into earnings when the hedged forecasted interest payments are recognized in earnings. For derivatives that are undesignated, changes in the fair value of those derivatives are recorded directly to earnings as they occur. The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. The Fund has agreements with certain of its derivative counterparties that incorporates the loan covenant provisions of the Fund’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Fund being in default on any derivative instrument obligations covered by the agreement. As of September 30, 2009, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $7.1 million. As of September 30, 2009, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at September 30, 2009, it could have been required to settle its obligations under the agreements at their termination value of $7.1 million.

Before entering into a derivative transaction for hedging purposes, the Fund determines whether a high degree of initial effectiveness exists between the change in the value of the hedged forecasted transactions and the change in the value of the derivative from a movement in interest rates. High effectiveness means that the change in the value of the derivative is expected to provide a high degree of offset against changes in the value of the hedged forecasted transactions caused by changes in interest rate risk. The Fund measures the effectiveness of each cash flow hedge throughout the hedge period. Any hedge ineffectiveness on cash flow hedging relationships, as defined by U.S. GAAP is recognized in the consolidated statements of operations.

There can be no assurance that the Fund’s hedging strategies or techniques will be effective, that profitability will not be adversely affected during any period of change in interest rates or that the costs of hedging will not exceed the benefits.

11

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

NOTE 5 – DERIVATIVE INSTRUMENTS – (Continued)

At September 30, 2009, the Fund has 21 interest rate swaps which terminate on various dates ranging from September 2011 to August 2015. The following tables present the fair value of the Fund’s derivative financial instruments as well as their classification on the consolidated balance sheet as of September 30, 2009 and on the consolidated statement of operations for the three and nine months ended September 30, 2009 (in thousands):

	Notional Amount		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate swap contracts	$	162,805	Derivative liabilities at fair value	$	(7,116	)
Derivatives not designated as hedging instruments			Derivative liabilities at fair value	$	280

	Amount of Gain or Loss Recognized in OCI on Derivatives (Effective Portion)				Location and Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
	Three Months Ended		Nine Months Ended			Three Months Ended			Nine Months Ended
Derivatives Designated as Cash Flow Hedging Relationships	September 30, 2009					September 30, 2009
Interest rate products	$	1,045	$	2,517	Interest expense	$	(2,036	)	$	(6,863	)

The Fund terminated interest rate swap agreements with WestLB and Merrill Lynch with total underlying notional amounts of $298.8 million in connection with the term securitization. The Fund terminated these agreements simultaneously with the 2007 term securitization resulting in a gain of $2.3 million which was recorded in other comprehensive income at September 30, 2007. The Fund is amortizing the gain to interest expense over the remaining term of the terminated swap agreements. For the three and nine months ended September 30, 2009, $95,000 and $286,000, respectively, was recognized into interest expense. As of September 30, 2009, the unamortized balance of $1.4 million is included in accumulated other comprehensive loss.

Assuming market rates remain constant with the rates as of September 30, 2009, $5.2 million of the $7.1 million in accumulated other comprehensive loss is expected to be charged to earnings over the next 12 months.

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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

NOTE 6 – FAIR VALUE MEASUREMENT

For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates.

It is not practicable for the Fund to estimate the fair value of the Fund’s loans. They are comprised of a large number of transactions with commercial customers in different businesses, and may be secured by liens on various types of equipment and may be guaranteed by third parties and cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyer’s assessment of the transaction’s credit quality, collateral value, guarantees, payment history, yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Fund’s and the buyer’s views of economic and industry conditions, the Fund’s and the buyer’s tax considerations, and other factors.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

• Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

• Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

• Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

NOTE 6 – FAIR VALUE MEASUREMENT – (Continued)

Assets and liabilities measured at fair value on a recurring basis include the following as of September 30, 2009 (in thousands):

	Fair Value Measurements Using							Liabilities At Fair Value
	Level 1		Level 2			Level 3
Interest Rate Swaps	$	—	$	(6,836	)	$	—	$	(6,836	)

NOTE 7 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES

The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Acquisition fees	$	—	$	899	$	123	$	1,802
Management fees		695		922		2,281		2,885
Administrative expenses		547		732		1,923		1,938

Acquisition Fees. The General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.

Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% or 2% of gross rental payments for operating leases or full payout leases, respectively, or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.0% of their capital contributions, as adjusted by distributions deemed to be a return of capital.

Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.

Due to Affiliates. Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

In connection with a sale of leases and loans to a third party, the Fund agreed to repurchase delinquent leases up to a maximum of 7.5% of total proceeds received from the sale (“Repurchase Liability”). The Fund’s maximum remaining Repurchase Liability at September 30, 2009 is $21,000. The Fund has recorded a liability of $418,000 to reflect the estimate of losses it expects to incur on assets repurchased. This liability is included in other liabilities in the consolidated balance sheets.

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LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

NOTE 9 – SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through November 16, 2009, the date which these financial statements were issued and filed with the SEC, and determined that there have not been any other events that have occurred that would require adjustments to or additional disclosure in the unaudited consolidated financial statements.

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

When used in this Form 10-Q, the words “believes” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in other documents filed with Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Overview

We are a Delaware limited partnership formed on March 30, 2004 by our General Partner, LEAF Financial Corporation (our “General Partner”). Our General Partner is a majority owned indirect subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. We received our minimum subscription proceeds and we broke escrow on April 14, 2005. On October 13, 2006, we reached our maximum subscription of 600,000 limited partner units ($59.9 million).

We acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from our General Partner. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no difference to us between a secured loan and a full payout equipment lease. We finance business-essential equipment including, but not limited to computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:

• 500 or fewer employees;

• $1.0 billion or less in total assets; or

• $100.0 million or less in total annual sales.

Our principal objective is to generate regular cash distributions to our limited partners.

Our leases consist of direct financing and operating leases as defined by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under the direct financing method of accounting, interest income (the excess of the aggregate future rentals and estimated unguaranteed residuals upon expiration of the lease over the related equipment cost) is recognized over the life of the lease using the interest method. Under the operating method, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over its estimated useful life. Rental income on operating leases consists primarily of monthly periodic rentals due under the terms of the leases. Generally, during the lease terms of existing operating leases, we will not recover all of the cost and related expenses of rental equipment and, therefore, we are prepared to remarket the equipment in future years. When a lease or loan is 90 days or more delinquent, the lease or loan is classified as being on non-accrual and we do not recognize interest income on that lease or loan until the lease or loan becomes less than 90 days delinquent.

As further discussed in the “Finance Receivables and Asset Quality” section below, the current economic recession in the United States has adversely affected our operations as a result of higher delinquencies and it may continue to do so until the economy recovers.

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Finance Receivables and Asset Quality

Information about our portfolio of leases and loans is as follows (dollars in thousands):

	September 30, 2009			December 31, 2008
Investment in leases and loans, net	$	190,355		$	265,993
Number of contracts		19,000			21,400
Number of individual end users (a)		16,300			18,600
Average original equipment cost	$	27.2		$	25.5
Average initial term (in months)		62			55
States accounting for more than 10% of lease and loan portfolio:
California		13	%		13	%
Types of equipment accounting for 10% or more of commercial finance assets portfolio:
Industrial equipment		27	%		26	%
Medical equipment		18	%		18	%
Office equipment		11	%		10	%
Types of equipment accounting for 10% or more of commercial finance assets portfolio:
Services		45	%		44	%
Retail Trade		13	%		12	%
Manufacturing		12	%		11	%

(a) Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 1% of our portfolio based on original cost of the equipment.

As of September 30, 2009, the average original equipment cost increased as compared to December 31, 2008 as a result of an increase in the average original equipment cost of leases acquired from our General Partner in 2009.

We utilize debt in addition to our equity to fund the acquisitions of lease portfolios. As of September 30, 2009 and December 31, 2008, our outstanding debt was $177.2 million and $254.7 million, respectively.

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The performance of our lease and loan portfolio is a measure of our General Partner’s underwriting and collection standards, skills, policies and procedures and is an indication of asset quality. The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):

	As of and for the Nine Months Ended September 30,											As of and for the Year Ended December 31,
	2009			2008			Change					2008
							$			%
Investment in direct financing leases and loans before allowance for credit losses	$	192,640		$	299,228		$	(106,588	)	(36	)%	$	264,997
Weighted average investment in direct financing leases and loans before allowance for credit losses		231,308			314,753			(83,445	)	(27	)%		305,453
Allowance for credit losses		7,250			3,700			3,550		96	%		5,770
Non-performing assets		18,725			12,226			6,499		53	%		15,224
Charge-offs, net of recoveries	$	7,262		$	5,719		$	1,543		27	%	$	7,318
As a percentage of finance receivables:
Allowance for credit losses		3.76	%		1.24	%							2.18	%
Non-performing assets		9.72	%		4.09	%							5.74	%
As a percentage of weighted average finance receivables: Charge-offs, net of recoveries		3.14	%		1.82	%							2.40	%

We manage our credit risk by adhering to strict credit policies and procedures, and closely monitoring our receivables. Our General Partner, the servicer of our leases and loans, has responded to the current economic recession by increasing the number of employees in its collection department and it has implemented earlier intervention techniques in collection procedures. Our General Partner has also increased its credit standards and limited the amount of business we do with respect to certain industries, geographic locations and equipment types. Because of the current scarcity of credit available to small and mid-size businesses we have been able to increase our credit standards without reducing the rates we charge on our leases and loans.

Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge off. Our policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.

The current economic recession in the United States has adversely affected our operations as a result of higher delinquencies and it may continue to do so until the economy recovers. The increase in delinquencies, as well as the current economic trends, has caused us to conclude that a greater allowance for credit loss is necessary. In addition, our non-performing assets have increased due to the increase in customers who are more than ninety days delinquent at September 30, 2009, compared to September 30, 2008.

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The equipment we finance includes computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on financing equipment used by small to mid-size businesses, and our General Partner anticipates that the recession will make it more difficult for some of our customers to make payments on their financings with us on a timely basis, which could result in higher delinquencies.

Our net charge-offs increased in the nine months ended September 30, 2009 compared to 2008 due to the aging of our portfolio of leases and loans as well as the current economic recession as discussed above.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and costs and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including estimated unguaranteed residual values of leased equipment, the allowance for credit losses, impairment of long-lived assets, the accrued repurchase liability and for the fair value and effectiveness of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for the year ended December 31, 2008 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

Results of Operations

Three Months Ended September 30, 2009 compared to the Three Months Ended September 30, 2008

The following summarizes our results of operations for the three months ended September 30, 2009 and 2008 (dollars in thousands):

							Increase (Decrease)
	2009			2008			$			%
Revenues:
Interest on equipment financings	$	4,087		$	6,337		$	(2,250	)	(36	)%
Rental income		652			983			(331	)	(34	)%
(Losses) gains on sales of equipment and lease dispositions, net		(255	)		911			(1,166	)	(128	)%
Other		451			602			(151	)	(25	)%
		4,935			8,833			(3,898	)	(44	)%
Expenses:
Interest expense		3,295			4,460			(1,165	)	(26	)%
Depreciation on operating leases		510			892			(382	)	(43	)%
Provision for credit losses		4,335			3,951			384		10	%
General and administrative expenses		529			703			(174	)	(25	)%
Administrative expenses reimbursed to affiliate		547			732			(185	)	(25	)%
Management fees to affiliate		695			922			(227	)	(25	)%
		9,911			11,660			(1,749	)	(15	)%
Net loss	$	(4,976	)		(2,827	)	$	(2,149	)	(76	)%

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The decrease in total revenues was primarily attributable to the following:

• a decrease in interest on equipment financings. Our weighted average net investment in financing assets decreased to $207.8 million for the three months ended September 30, 2009 as compared to $298.7 million for the three months ended September 30, 2008, a decrease of $90.9 million (30%).

• a decrease in rental income which was principally the result of a decrease in our investment in operating leases in the 2009 period compared to the 2008 period.

• an increase in losses on sales of equipment. (Losses) gains on sales of equipment may vary significantly from period to period.

• a decrease in other income, which consists primarily of late fee income.

The decrease in total expenses was primarily attributable to the following:

• a decrease in interest expense due to a decrease in average debt outstanding, partially offset by an increase in interest cost. Weighted average borrowings for the three months ended September 30, 2009 and 2008 were $190.9 million and $293.6 million, respectively, at an effective interest rate of 6.9% and 6.1%, respectively.

• a decrease in depreciation on operating leases directly related to a decrease in our investment in operating leases.

• a decrease in general and administrative expenses and administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio, partially offset by the hiring of additional collection personnel by our General Partner to attempt to control the impact on delinquencies resulting from the economic recession in the United States, and increased legal costs associated with collection efforts.

• a decrease in management fees attributable to the decrease in our portfolio of equipment financing assets, since management fees are paid based on lease payments received.

These decreases were partially offset by:

• an increase in our provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. Our allowance for credit losses has increased to $7.3 million as of September 30, 2009 compared to $3.7 million as of September 30, 2008 due to the impact of the economic recession in the United States on our customers’ ability to make payments on their leases and loans, which resulted in an increase in non-performing assets as a percentage of finance receivables to 9.72% as of September 30, 2009 as compared to 5.74% as of December 31, 2008 and 4.09% as of September 30, 2008.

The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2009 and 2008 was $(8.31) and $(4.70), respectively, based on a weighted average number of limited partner units outstanding of 592,809 and 595,065, respectively.

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Nine Months Ended September 30, 2009 compared to the Nine Months Ended September 30, 2008

The following summarizes our results of operations for the nine months ended September 30, 2009 and 2008 (dollars in thousands):

							Increase (Decrease)
	2009			2008			$			%
Revenues:
Interest on equipment financings	$	14,276		$	20,414		$	(6,138	)	(30	)%
Rental income		2,168			3,467			(1,299	)	(37	)%
(Losses) gains on sales of equipment and lease dispositions, net		(405	)		1,454			(1,859	)	(128	)%
Other		1,312			1,839			(527	)	(29	)%
		17,351			27,174			(9,823	)	(36	)%
Expenses:
Interest expense		10,089			13,916			(3,827	)	(28	)%
Depreciation on operating leases		1,786			2,991			(1,205	)	(40	)%
Provision for credit losses		8,742			7,459			1,283		17	%
General and administrative expenses		2,104			2,150			(46	)	(2	)%
Administrative expenses reimbursed to affiliate		1,923			1,938			(15	)	(1	)%
Management fees to affiliate		2,281			2,885			(604	)	(21	)%
		26,925			31,339			(4,414	)	(14	)%
Net loss	$	(9,574	)	$	(4,165	)	$	(5,409	)	(130	)%

The decrease in total revenues was primarily attributable to the following:

• a decrease in interest on equipment financings. Our weighted average net investment in financing assets decreased to $231.3 million for the nine months ended September 30, 2009 as compared to $314.8 million for the nine months ended September 30, 2008, a decrease of $83.5 million (27%).

• a decrease in rental income which was principally the result of a decrease in our investment in operating leases in the 2009 period compared to the 2008 period.

• an increase in losses on sales of equipment. (Losses) gains on sales of equipment may vary significantly from period to period.

• a decrease in other income, which consists primarily of late fee income.

The decrease in total expenses was primarily attributable to the following:

• a decrease in interest expense due to a decrease in average debt outstanding, partially offset by an increase in interest cost. Weighted average borrowings for the nine months ended September 30, 2009 and 2008 were $217.2 million and $309.6 million, respectively, at an effective interest rate of 6.2% and 6.0%, respectively.

• a decrease in depreciation on operating leases directly related to a decrease in our investment in operating leases.

• a decrease in general and administrative expenses and administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio, partially offset by the hiring of additional collection personnel by our General Partner to attempt to control the impact on delinquencies resulting from the economic recession in the United States, and increased legal costs associated with collection efforts.

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• a decrease in management fees attributable to the decrease in our portfolio of equipment financing assets, since management fees are paid based on lease payments received.

These decreases were partially offset by:

• an increase in our provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. Our allowance for credit losses has increased to $7.3 million as of September 30, 2009 compared to $3.7 million as of September 30, 2008 due to the impact of the economic recession in the United States on our customers’ ability to make payments on their leases and loans, which resulted in an increase in non-performing assets as a percentage of finance receivables to 9.72% as of September 30, 2009 as compared to 5.74% as of December 31, 2008 and 4.09% as of September 30, 2008.

The net loss per limited partner unit, after the net loss income allocated to our General Partner, for the nine months ended September 30, 2009 and 2008 was $(15.98) and $(6.92), respectively, based on a weighted average number of limited partner units outstanding of 593,082 and 596,115, respectively.

Liquidity and Capital Resources

Our major sources of liquidity are obtained by the collection of lease payments after payments of debt principal and interest on debt. Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners. In addition to cash generated from operations, we plan to meet our cash requirements through borrowings from credit facilities.

The following table sets forth our sources and uses of cash for the periods indicated (in thousands):

	Nine Months Ended September 30,
	2009			2008
Net cash provided by operating activities	$	9,733		$	11,842
Net cash provided by investing activities		64,705			33,384
Net cash used in financing activities		(74,534	)		(45,269	)
Decrease in cash	$	(96	)	$	(43	)

Partners’ distributions paid for the nine months ended September 30, 2009 and 2008 were $2.8 million and $3.6 million, respectively. Prior to August 1, 2009, distributions to limited partners were 8.0% of invested capital.

In August 2009, we suspended monthly distributions to our partners in order to increase liquidity to enable us to renew our WestLB debt agreement. We are currently in discussions with WestLB to minimize the cash required to renew the debt agreement and to provide relief on certain portfolio performance covenants. We expect to resume distributions to our partners in the first quarter of 2010. Until such time that distributions resume, our partnership agreement prohibits us from acquiring additional leases and loans and from paying asset management fees to our General Partner.

Cash decreased by $96,000 primarily due to net debt repayments of $77.6 million and distributions to our partners of $2.8 million, partially offset by net purchases of and proceeds from leases and loans of $64.1 million, a decrease in restricted cash of $6.9 million and an increase in amounts due to affiliates of $8.1 million. As a result of increased delinquencies, the amount of eligible leases and loans to pledge as collateral was reduced, resulting in a net debt repayment in 2009.

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Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our credit facilities as of September 30, 2009 are as follows (in thousands):

	Type	Maturity Date	Facility Amount		Amount Outstanding		Amount Available
Term Securitization – Class A-3 (1)	Term	July 2012	$	61,593	$	61,593	$	—
Term Securitization – Class B (1)	Term	March 2015		14,529		14,529		—
WestLB (2)	Revolving	(3)		125,000		101,053		23,947
			$	201,122	$	177,175	$	23,947

(1) The original amount borrowed at June 2007 was $276.8 million. A term note securitization is a one-time funding that pays down over time without any ability for us to draw down additional amounts.

(2) Availability under this credit facility is subject to having sufficient eligible leases or loans (as defined by the agreement) to pledge as collateral and compliance with the borrowing base formula.

(3) This facility matures on November 30, 2009. We are currently negotiating a renewal which is expected to extend the maturity to June 2010 and if extended, could be renewable for an additional one year period. If the WestLB facility is not extended at the time of maturity, we would not be required to make full repayment at that time. Rather, we would repay the outstanding debt as payments are received on the underlying leases and loans pledged as collateral.

Recourse under these facilities is limited to the amount of collateral pledged. As of September 30, 2009, $191.5 million of leases and loans and $21.6 million of restricted cash were pledged as collateral under our credit facilities.

In June 2009, we agreed to reduce the WestLB facility amount from $150 million to $125 million. This facility, which was to mature in June 2009, has been extended until November 30, 2009 while we negotiate the terms of the one-year renewal. We expect that as part of the renewal terms, we will agree to reduce our leverage, pay a higher interest rate on any new borrowings subsequent to September 30, 2009 and pay an amendment fee. The interest rate is expected to remain unchanged for our existing borrowings under the debt facility, which are calculated at LIBOR plus 0.95% per annum. New borrowings under the facility are expected to be at a rate of LIBOR plus 2.50% per annum. As of September 30, 2009, interest rate swap agreements fix the interest rate on this facility at 5.69% on a weighted average basis. Interest and principal are due as payments are received under the leases and loans.

We are subject to certain financial covenants related to our debt facilities. These covenants are related to such things as minimum tangible net worth, maximum leverage ratios and portfolio delinquency. The minimum tangible net worth covenants measure our equity adjusted for intangibles and amounts due to our General Partner. The maximum leverage covenants restrict the amount we can borrow based on a ratio of our total debt compared to our net worth. The portfolio performance covenants generally provide that we would be in default if a certain percentage of our portfolio of leases and loans are delinquent beyond specified grace periods.

In addition, our debt facilities include financial covenants covering affiliated entities responsible for servicing our portfolio. These covenants exist to provide the lenders with information about the financial viability of the entities that service our portfolio. These entities include our General Partner and certain other affiliates involved in the sourcing and servicing of our portfolio. These covenants are similar in nature to the covenants discussed above that are applicable to us, and are related to such things as the entity’s minimum tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance of the debt terms of all of our General Partner’s managed entities.

We have been in discussions, which are ongoing, with WestLB to renew and modify certain of our loan covenants. As of September 30, 2009, we were in compliance with the covenants under our debt facilities. However, as of October 31, 2009, we were not in compliance with the managed annualized default ratio under the WestLB loan agreement. In addition, during the month of October 2009, the portfolio delinquency rate increased and, as a result of such increase, additional principal payments will become due and payable on November 21, 2009 if we do not receive the waiver described below. We do not expect to have the ability to fund such principal payments, which would result in an event of default under the WestLB facility. As of October 31, 2009, $97.1 million was outstanding under the WestLB facility. Recourse under the WestLB facility is limited to the amount of collateral pledged, which was $111.0 million as of October 31, 2009.

We have requested a waiver from WestLB with respect to the managed annualized default ratio and portfolio delinquency rate covenants and we continue negotiations to renew and amend the loan agreement. Although we expect to obtain such waiver and to modify the covenants of our loan agreement, there can be no assurance that such waiver or amendment will be executed. If not executed, all amounts owed under the WestLB facility could become immediately due and payable if the bank declares a default, which could also create defaults under other debt facilities.

        If we do not obtain the waiver discussed above or meet the requirements of our other debt covenants in the future, a default could occur that would have an adverse effect on our operations and could force us to liquidate all or a portion of our portfolio securing our debt facilities. If required, a sale of a portfolio, or any portion thereof, could be at prices lower than its carrying value, which could result in losses and reduce our income and distributions to our partners.

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We use debt to acquire leases and loans. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent we must repay our lender, even though our customer has not paid us. Higher than expected lease and loan defaults will reduce our liquidity.

Our liquidity has been and could be further adversely affected by higher than expected equipment lease defaults, which results in a loss of revenues. These losses also affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. In evaluating our allowance for losses on uncollectible leases, we consider our contractual delinquencies, economic conditions and trends, lease portfolio characteristics and our General Partner’s management’s prior experience with similar lease assets. At September 30, 2009, our credit evaluation indicated a need for an allowance for credit losses of $7.3 million. As our lease portfolio ages, and if the economy in the United States deteriorates even further or the recession continues for a substantial period of time, we anticipate the need to increase our allowance for credit losses.

The current tightening of the credit markets has and may continue to adversely affect our liquidity, particularly our ability to obtain debt financing needed to execute our investment strategies. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If our banks do not renew a revolving facility upon maturity, the debt facility would convert to a term facility and we would not be able to borrow additional amounts under the line of credit. A term debt facility is a loan that is contractually repaid over a period of time. If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.

To date, we have been successful in either extending or refinancing our credit facilities prior to their maturities; however, there can be no assurance that we will be able to continue to do so, as such activities are dependent on many factors beyond our control, including general economic and credit conditions. We continue to seek additional sources of financing, including expanded bank financing and use of joint venture strategies that will enable us to originate investments and generate income while preserving capital. We expect that future financings may be at higher interest rates with lower leverage. As a result, our profitability may be negatively impacted if we are unable to increase our lease and loan rates to offset increases in borrowing rates.

Contractual Obligations and Commercial Commitments

The following table sets forth our obligations and commitments as of September 30, 2009 (in thousands):

			Payments Due by Period
	Total		Less than 1 Year		1 – 3 Years		4 – 5 Years		After 5 Years
Bank debt (1)	$	177,175	$	74,253	$	80,923	$	20,810	$	1,189

¹⁾ To mitigate interest rate risk on the variable rate debt, we employ a hedging strategy using derivative financial instruments, such as interest rate swaps, which fix the weighted average interest rates. Not included in the table above are estimated interest payments calculated at rates in effect at September 30, 2009: Less than 1 year: $8.8 million; 1-3 years: $9.0 million; 4-5 years: $4.1 million; and after 5 years: $1.2 million. The fair value of the swap liability as of September 30, 2009 is $6.8 million.

The above table does not include expected payments related to the Repurchase Liability (defined below) as of September 30, 2009. In connection with a sale of leases and loans to a third party, we agreed to repurchase delinquent leases up to maximum of 7.5% of total proceeds received from the sale (the “Repurchase Liability”). Our maximum remaining Repurchase Liability at September 30, 2009 is $21,000.

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Legal Proceedings

We are a party to various routine legal proceedings arising in the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of losses arising from changes in values of financial instruments. We are exposed to market risks associated with changes in interest rates and our earnings may fluctuate with changes in interest rates. The lease assets we purchase are almost entirely fixed-rate. Accordingly, we seek to finance these assets with fixed interest rate debt. At September 30, 2009, our outstanding bank debt totaled $177.2 million which consisted of variable rate debt. To mitigate interest rate risk on the variable rate bank debt, we employ a hedging strategy using derivative financial instruments such as interest rate swaps, which fixes the weighted average interest rates at 5.7% for the WestLB and Series 2007-term securitization debt facilities. At September 30, 2009, the notional amount of the 21 interest rate swaps was $162.8 million. The interest rate swap agreements terminate on various dates ranging from September 2011 to August 2015.

The following sensitivity analysis table shows, at September 30, 2009, the estimated impact on the fair value of our interest rate-sensitive investments and liabilities of changes in interest rates, assuming rates instantaneously fall 100 basis points and rise 100 basis points (dollars in thousands):

	Interest rates fall 100 basis points			Unchanged			Interest rates rise 100 basis points
Hedging instruments
Fair value	$	(8,873	)	$	(6,836	)	$	(5,213	)
Change in fair value	$	(2,037	)				$	1,623
Change as a percent of fair value		30	%					(24	)%

It is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 100 basis points from current levels. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our partners.

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ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 6 – EXHIBITS

Exhibit No.	Description
3.1	Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (1)
3.2	Amended Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (2)
3.3	Amended and Restated Agreement of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (3)
4.1	Forms of letters sent to limited partners confirming their investment (1)
10.1	Seventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (4)
10.2	Eighth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (4)
10.3	Ninth Amendment to WestLB AG, New York Branch, Secured Loan Agreement
10.4	Tenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement
10.5	Eleventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Filed previously on June 17, 2004 as an exhibit to our Registration Statement and by this reference incorporated herein.

(2) Filed previously on September 7, 2004 in Pre-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.

(3) Filed previously on December 27, 2005 as Appendix A Post-Effective Amendment No. 1 to our Registration Statement and by this reference incorporated herein.

(4) Filed previously as an exhibit to Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	LEASE EQUITY APPRECIATION FUND II, L.P
	By:	LEAF Financial Corporation its General Partner
November 16, 2009	/s/ Crit DeMent
	CRIT DEMENT
	Chairman and Chief Executive Officer
November 16, 2009	/s/ Robert K. Moskovitz
	ROBERT K. MOSKOVITZ
	Chief Financial Officer and Chief Accounting Officer

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