10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file no. 1-14771

MicroFinancial Incorporated

(Exact name of Registrant as Specified in its Charter)

Massachusetts	04-2962824
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10M Commerce Way, Woburn, MA	01801 (Zip Code)
(Address of Principal Executive Offices)

Registrant’s telephone number, Including Area Code:

(781) 994-4800

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Shares, $0.01 par value per share	American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No  þ

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.  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o     Accelerated Filer o     Non-Accelerated Filer þ

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2006, the last day of the registrant’s most recently completed second fiscal quarter, was approximately $30,044,000, computed by reference to the closing price of such stock as of such date.

As of March 15, 2007, 13,891,596 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s proxy statement to be filed pursuant to Regulation 14A within 120 days after the Registrant’s fiscal year end of December 31, 2006, are incorporated by reference in Part III hereof.

Table of Contents

			Page
Description			Number
PART I
	Item 1.	Business		2
	Item 1A.	Risk Factors		6
	Item 2.	Properties		11
	Item 3.	Legal Proceedings		11
	Item 4.	Submission of Matters to a Vote of Security Holders		12
PART II
	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		12
	Item 6.	Selected Financial Data		14
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Including Selected Quarterly Financial Data (Unaudited)		16
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		28
	Item 8.	Financial Statements and Supplementary Data		28
	Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		28
	Item 9A.	Controls and Procedures		28
	Item 9B.	Other Information		28
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		28
	Item 11.	Executive Compensation		29
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		29
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		29
	Item 14.	Principal Accountant Fees and Services		29
PART IV
	Item 15.	Exhibits and Financial Statement Schedules		30
SIGNATURES				33
EX-3.2 Restated Bylaws, as amended
EX-10.6.3 Form of incentive stock option agreement
EX-10.6.4 Form of non-qualified stock option agreement
EX-10.8 Amended and Restated Employment Agreement
EX-21.1 Subsidiaries of Registrant
EX-23.1 Consent of Independent Registered Public Accounting Firm
EX-31.1 Section 302 Certification of C.E.O.
EX-31.2 Section 302 Certification of C.F.O.
EX-32.1 Section 906 Certification of C.E.O.
EX-32.2 Section 906 Certification of C.F.O.

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PART I

Item 1.   Business

General

MicroFinancial Incorporated (referred to as “MicroFinancial,” “we,” “us” or “our”) was formed as a Massachusetts corporation on January 27, 1987. We operate primarily through our wholly-owned subsidiaries, TimePayment Corp. and Leasecomm Corporation. TimePayment is a specialized commercial finance company that leases and rents “microticket” equipment and provides other financing services. TimePayment commenced originating leases in July 2004. Leasecomm started originating leases in January 1986 and in October 2002 suspended virtually all originations due to a lack of financing. The average amount financed by TimePayment in 2006 was approximately $5,900 while Leasecomm historically financed contracts averaging approximately $1,900. We have used proprietary software in developing a sophisticated, risk-adjusted pricing model and in automating our credit approval and collection systems, including a fully-automated Internet-based application, credit scoring and approval process.

We provide financing alternatives to a wide range of lessees ranging from start-up businesses to established businesses. We primarily lease and rent low-priced commercial equipment, which is used by these lessees in their daily operations. We do not market our services directly to lessees. We source our leasing transactions through a nationwide network of equipment vendors, independent sales organizations and brokers (“dealers”).

TimePayment finances a wide variety of products with no single product representing more than 30% of its portfolio. However, the majority of our portfolio, based on the number of contracts, consists of contracts originated by Leasecomm for authorization systems for point-of-sale (“POS”), card-based payments by debit, credit, gift and charge cards. POS authorization systems require the use of a POS terminal capable of reading a cardholder’s account information from the card’s magnetic strip and combining this information with the amount of the sale entered via a POS terminal keypad, or POS software used on a personal computer to process a sale. The terminal electronically transmits this information over a communications network to a computer data center and then displays the returned authorization or verification response on the POS terminal.

Historically, we have depended heavily on external financing to fund new leases and contracts. In September 2002, our then-existing credit facility failed to renew. As a result, in October 2002, we were forced to suspend virtually all contract originations until a source of funding was obtained or the senior credit facility was paid in full. In June 2004, MicroFinancial secured a $10 million credit facility, comprised of a one-year $8 million line of credit and a $2 million three-year subordinated note which allowed us to resume originations. In conjunction with raising new capital, we also formed a wholly-owned operating subsidiary, TimePayment Corp. In September 2004, MicroFinancial secured a three-year, $30 million, senior secured revolving line of credit from CIT Commercial Services, a unit of CIT Group. This line of credit replaced the $8 million line of credit under more favorable terms and conditions. In addition, we retired the outstanding debt with the former bank group. In the near term, we expect to finance our business with cash on hand and our line of credit with CIT. We do not expect to renew the CIT line of credit in September 2007 and are currently exploring new financing options.

Leasing, Servicing and Financing Programs

We originate leases for products that typically have limited distribution channels and high selling costs. We facilitate sales of such products by allowing dealers to make them available to their customers for a small monthly lease payment rather than a higher initial purchase price. We primarily lease and rent low-priced commercial equipment to small merchants. The majority of our portfolio is currently for POS authorization systems; however, we currently lease a wide variety of other equipment including advertising and display equipment, security equipment, coffee machines, paging systems, water coolers and restaurant equipment. In addition, we have acquired service contracts and contracts in certain other financing markets. We opportunistically seek to enter other financing markets.

Our consumer financings include acquiring service contracts from dealers that primarily provide residential security monitoring services, as well as consumer leases for a wide range of consumer products.

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Since resuming originations in June 2004 we have originated and continue to service contracts in all 50 states and the District of Columbia. As of both December 31, 2005 and 2006, leases in California, Florida, Texas, Massachusetts and New York accounted for approximately 40% of our portfolio. Only California accounted for more than 10% of the total portfolio as of December 31, 2005 at approximately 14%. As of December 31, 2006, California, Florida, New York and Texas accounted for approximately 13%, 11%, 8%, and 7%, respectively, of the total portfolio. None of the remaining states other than those listed above accounted for more than 4% of such total.

Terms of Equipment Leases

Substantially all equipment leases originated or acquired by us are non-cancelable. We generally originate leases on transactions referred to us by a dealer where we buy the underlying equipment from the referring dealer upon funding the approved application. Leases are structured with limited recourse to the dealer, with risk of loss in the event of default by the lessee residing with us in most cases. We perform all the processing, billing and collection functions under our leases.

During the term of a typical lease, we receive payments sufficient, in the aggregate, to cover our borrowing cost, the cost of the underlying equipment, and to provide us with an appropriate profit. Throughout the term of the lease, we charge late fees, prepayment penalties, loss and damage waiver fees and other service fees, when applicable. Initial terms of our leases generally range from 12 to 60 months, with an average initial term of 45 months as of December 31, 2006.

The terms and conditions of all of our leases are substantially similar. In most cases, the contracts require lessees to: (i) maintain, service and operate the equipment in accordance with the manufacturer’s and government-mandated procedures; (ii) insure the equipment against property and casualty loss; (iii) pay all taxes associated with the equipment; and (iv) make all scheduled contract payments regardless of the performance of the equipment. Our standard lease forms provide that in the event of a default by the lessee, we can require payment of liquidated damages and can seize and remove the equipment for sale, refinancing or other disposal at our discretion. Any additions, modifications or upgrades to the equipment, regardless of the source of payment, are automatically incorporated into, and deemed a part of, the equipment financed.

We seek to protect ourselves from credit exposure relating to dealers by entering into limited recourse agreements with our dealers, under which the dealer agrees to reimburse us for defaulted contracts under certain circumstances, primarily upon evidence of dealer errors or misrepresentations in originating a lease or contract.

Residual Interests in Underlying Equipment

We typically own a residual interest in the equipment covered by our leases. The value of such interest is estimated at inception of the lease based upon our estimate of the fair market value of the asset at lease maturity. At the end of the lease term, the lessee has the option to buy the equipment at a price quoted by us, return the equipment or continue to rent the equipment on a month-to-month basis. If the equipment is returned, we may either sell the equipment, or place it into our used equipment rental or leasing program.

Service Contracts

In a typical transaction for the acquisition of service contracts, a homeowner will purchase a security system and simultaneously sign a contract with the dealer for the monitoring of that system for a monthly fee. The dealer will then sell the right to payment under that contract to us for a multiple of the monthly payments. We contract with third party monitoring stations to perform the monitoring service and we perform all the processing, billing and collection functions under these contracts.

Dealers

We provide financing to obligors under microticket leases and contracts through a nationwide network of equipment vendors, independent sales organizations and brokers. Historically, we had over 1,000 different dealers originating leases and contracts on a regular basis. When we suspended nearly all of our contract originations in October 2002, the number of dealers we utilized for the limited number of contracts we were able to originate

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declined substantially. As we began to originate more contracts following the establishment of our line of credit with CIT in September 2004, we also began to expand the number of dealers in our network. During the year ended December 31, 2004 our top four dealers accounted for 65.09% of the leases originated at 21.84%, 16.83%, 15.71%, and 10.71%, respectively. During the year ended December 31, 2005 our top three dealers accounted for 47.29% of the leases originated at 26.61%, 10.64% and 10.04%, respectively. During the year ended December 31, 2006 our top dealer accounted for 13.91% of the leases originated.

We do not sign exclusive agreements with our dealers.  Dealers interact directly with potential lessees and typically market not only their products and services, but also the financing arrangements offered through us.

Use of Technology

Our business is operationally intensive, due in part to the small average amount financed. Accordingly, technology and automated processes are critical in keeping servicing costs to a minimum while providing quality customer service.

We have developed TimePaymentDirect, an Internet-based application processing, credit approval and dealer information tool. Using TimePaymentDirect, a dealer can input an application and obtain almost instantaneous approval automatically over the Internet, all without any contact with our employees. We also offer InstaleaseR, a program that allows a dealer to submit applications to us by telephone, telecopy or e-mail, receive approval, and complete a sale from a lessee’s location. By assisting the dealers in providing timely, convenient and competitive financing for their equipment or service contracts and offering dealers a variety of value-added services, we simultaneously promote equipment and service contract sales and the utilization of TimePayment as the preferred finance provider, thus differentiating us from our competitors.

We have used our proprietary software to develop a multidimensional credit-scoring model which generates pricing of our leases and contracts commensurate with the risk assumed. This software does not produce a binary “yes or no” decision, but rather, for a “yes” decision, determines the price at which the lease or contract might be profitably underwritten. We use credit scoring in most, but not all, of our credit decisions.

Underwriting

The nature of our business requires that the underwriting process perform two levels of review: the first focused on the ultimate end-user of the equipment or service and the second focused on the dealer. The approval process begins with the submission by telephone, facsimile or electronic transmission of a credit application by the dealer. Upon submission, we either manually or through TimePaymentDirect conduct our own independent credit investigation of the lessee using our proprietary database and recognized commercial credit reporting agencies such as Dun & Bradstreet, Paynet and Experian. Our software evaluates this information on a two-dimensional scale, examining both credit depth (how much information exists on an applicant) and credit quality (credit performance, including past payment history). We analyze both the quality and amount of credit history available with respect to both obligors and dealers to assess the credit risk. We use this information to underwrite a broad range of credit risks and provide financing in situations where our competitors may be unwilling to provide such financing. The credit-scoring model is complex and automatically adjusts for different transactions. In situations where the amount financed is over $7,500, we may go beyond our own data base and recognized commercial credit reporting agencies to obtain information from less readily available sources such as banks. In certain instances, we will require the lessee to provide verification of employment and salary.

The second aspect of the credit decision involves an assessment of the originating dealer. Dealers undergo both an initial screening process and ongoing evaluation, including an examination of dealer portfolio credit quality and performance, lessee complaints, cases of fraud or misrepresentation, aging studies, number of applications and conversion rates for applications. This ongoing assessment enables us to manage our dealer relationships, including ending relationships with poorly performing dealers.

Upon credit approval, we require receipt of a signed lease on our standard or other pre-approved lease form. After the equipment is shipped and installed, the dealer invoices us and we verify that the lessee has received and accepted the equipment. Upon the completion of a satisfactory verification with the lessee, the lease is forwarded to

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our funding and documentation department for payment to the dealer and the establishment of the accounting and billing procedures for the transaction.

Bulk and Portfolio Acquisitions

In addition to originating leases through our dealer relationships, we have also purchased lease portfolios from dealers. While certain of these leases may not have met our underwriting standards at inception, we will purchase the leases once the lessee demonstrates a satisfactory payment history. We prefer to acquire these smaller lease portfolios in situations where the seller will continue to act as a dealer following the acquisition.

Servicing and Collections

We perform all the servicing functions on our leases and contracts through our automated servicing and collection system. Servicing responsibilities generally include billing, processing payments, remitting payments to dealers, paying taxes and insurance and performing collection and liquidation functions.

Our automated lease administration system handles application tracking, invoicing, payment processing, automated collection queuing, portfolio evaluation and report writing. The system is linked with our bank accounts for payment processing and also provides for direct withdrawal of lease and contract payments from a lessee’s bank account. We monitor delinquent accounts using our automated collection process. We use several computerized processes in our customer service and collection efforts, including the generation of daily priority call lists and scrolling for daily delinquent account servicing, generation and mailing of delinquency letters, and routing of incoming customer service calls to appropriate employees with instant computerized access to account details. Our collection efforts include sending collection letters, making collection calls, reporting delinquent accounts to credit reporting agencies, and litigating delinquent accounts when necessary to obtain and enforce judgments.

Competition

The microticket leasing and financing industry is highly competitive. We compete for customers with a number of national, regional and local banks and finance companies. Our competitors also include equipment manufacturers that lease or finance the sale of their own products. While the market for microticket financing has traditionally been fragmented, we could also be faced with competition from small- or large-ticket leasing companies that could use their expertise in those markets to enter and compete in the microticket financing market. Our competitors include larger, more established companies, some of which may possess substantially greater financial, marketing and operational resources than us, including a lower cost of funds and access to capital markets and other funding sources, which may be unavailable to us.

Employees

As of December 31, 2006, we had 67 full-time employees, of whom 20 were engaged in sales and underwriting activities and dealer service, 25 were engaged in servicing and collection activities, and 22 were engaged in general administrative activities. We believe that our relationship with our employees is good. None of our employees are members of a collective bargaining unit in connection with their employment with us.

Executive Officers

Name and Age of Executive Officers	Title
Richard F. Latour, 53	Director, President, Chief Executive Officer, Treasurer, Secretary and Clerk
James R. Jackson, Jr., 45	Vice President and Chief Financial Officer
Steven J. LaCreta, 47	Vice President, Lessee Relations and Legal
Stephen J. Constantino, 41	Vice President, Human Resources
Thomas Herlihy, 48	Vice President, Sales and Marketing, of TimePayment Corp.

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Backgrounds of Executive Officers

Richard F. Latour has served as our President, Chief Executive Officer, Treasurer, Clerk and Secretary since October 2002 and as President, Chief Operating Officer, Treasurer, Clerk and Secretary, as well as a director of the Corporation, since February 2002. From 1995 to January 2002, he served as Executive Vice President, Chief Operating Officer, Chief Financial Officer, Treasurer, Clerk and Secretary. From 1986 to 1995 Mr. Latour served as Vice President of Finance and Chief Financial Officer. Prior to joining us, Mr. Latour was Vice President of Finance for eleven years with Trak Incorporated, an international manufacturer and distributor of consumer goods, where he was responsible for all financial and operational functions. Mr. Latour earned a B.S. in accounting from Bentley College in Waltham, Massachusetts.

James R. Jackson Jr. has served as our Vice President and Chief Financial Officer since April 2002. Prior to joining us, from 1999 to 2001, Mr. Jackson was Vice President of Finance for Deutsche Financial Services Technology Leasing Group. From 1992 to 1999, Mr. Jackson held positions as Manager of Pricing and Structured Finance and Manager of Business Planning with AT&T Capital Corporation.

Steven J. LaCreta has served as our Vice President, Lessee Relations and Legal since May 2005. From May 2000 to May 2005, Mr. LaCreta served as Vice President, Lessee Relations. From November 1996 to May 2000, Mr. LaCreta served as our Director of Lessee Relations. Prior to joining us, Mr. LaCreta was a Leasing Collection Manager with Bayer Corporation.

Stephen J. Constantino has served as our Vice President, Human Resources since May 2000. From 1994 to May 2000, Mr. Constantino served as our Director of Human Resources. From 1992 to 1994, Mr. Constantino served as our Controller. From 1991 to 1992, Mr. Constantino served as our Accounting Manager.

Thomas Herlihy has served as Vice President, Sales and Marketing, of our operating subsidiary, TimePayment Corp. since May 2005. From 2004 to March 2005, Mr. Herlihy served as General Manager of US Express Leasing and from 2000 to 2003, Mr. Herlihy served as Executive Vice President of ABB Business Finance. From 1989 to 2000, Mr. Herlihy served as Senior Vice President of AT&T Capital and its successor companies.

Availability of Information

We maintain an Internet website at http://www.microfinancial.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as Section 16 reports on Form 3, 4, or 5, are available free of charge on this site as soon as is reasonably practicable after we file or furnish these reports with the Securities and Exchange Commission (“SEC”). Our Guidelines on Corporate Governance, our Code of Business Conduct and Ethics and the charters for the Audit Committee, Nominating and Corporate Governance Committee, Compensation and Benefits Committee, Credit Policy Committee and Strategic Planning Committee of our Board of Directors are also available on our Internet site. The Guidelines, Code of Ethics and charters are also available in print to any shareholder upon request. Requests for such documents should be directed to Richard F. Latour, Chief Executive Officer, at 10M Commerce Way, Woburn, Massachusetts 01801. Our Internet site and the information contained therein or connected thereto are not incorporated by reference into this Form 10-K. Our filings with the SEC are also available on the SEC’s website at http://www.sec.gov.

Item 1A.   Risk Factors

Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other periodic statements we make.

We depend on external financing to fund leases and contracts, and adequate financing may not be available to us in amounts, together with our cash flow, sufficient to originate new leases.

Our lease and finance business is capital-intensive and requires access to substantial short-term and long-term credit to fund leases and contracts. We will continue to require significant additional capital to maintain and expand our funding of leases and contracts, as well as to fund any future acquisitions of leasing companies or portfolios.

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As of September 30, 2002, our $192 million credit facility failed to renew and consequently, we were forced to suspend substantially all origination activity in October 2002. In June 2004, we secured a one-year $8 million line of credit and a $2 million three-year subordinated note that enabled us to resume originations. On September 29, 2004, we secured a three-year, $30 million, senior secured revolving line of credit from CIT Commercial Services, a unit of CIT Group. The CIT line of credit replaced the one-year $8 million line of credit under more favorable terms and conditions. In addition, it retired the outstanding debt with our former lenders. We do not expect to renew the CIT line of credit in September 2007 and are currently exploring new financing options. We cannot guarantee that we will find new financing on acceptable terms.

Our uses of cash include the origination and acquisition of leases and contracts, payment of interest and principal on borrowings, payment of selling, general and administrative expenses, income taxes and capital expenditures. Any default or other interruption of our external funding could have a material negative effect on our ability to fund new leases and contracts, and could, as a consequence, have an adverse effect on our financial results.

The delay in originations caused by our former credit facility’s failure to renew in 2002 has decreased the size of our portfolio and may continue to adversely affect our financial performance.

As a result of the failure of our old credit facility to renew, in October 2002, we were forced to suspend virtually all contract originations until we obtained a source of funding or the senior credit facility was paid in full. During 2003, we were able to fund a very limited number of new contracts using our free cash flow. For example, total revenues for the year ended December 31, 2004 were $60.4 million, a decrease of $31.2 million, or 34.1%, from the year ended December 31, 2003. The overall decrease in revenue was due to the decrease in the overall size of our portfolio of leases, rentals and service contracts as a direct result of our decision to cease originations. Our credit facilities entered into in June and September 2004 enabled us to resume contract originations. The absence of contract originations from October 2002 to June 2004 has had a continuing affect on our portfolio and financial performance. It will take some time to bring our portfolio to the point where it was when we suspended originations.

In addition, after we ceased funding originations in 2002, we were required to terminate a number of our sales, sales support and credit personnel. As we have made progress in originating contracts in light of our new credit facilities, we face challenges in rebuilding those competencies through new hires. This illustrates how disruptions to our financing and origination capabilities can have long-lasting effects on our financial condition that extend beyond the resumption of originations.

We are vulnerable to changes in the demand for the types of systems we lease or price reductions in such systems.

The majority of our portfolio is comprised of authorization systems for point-of-sale (“POS”), card-based payments by, for example, debit, credit, gift and charge cards. We currently lease a wide variety of other equipment including advertising and display equipment, coffee machines, security equipment, paging systems, water coolers and restaurant equipment. Reduced demand for financing of these types of equipment, in particular POS authorization systems, could adversely affect our lease origination volume, which in turn could have a material adverse effect on our business, financial condition and results of operations. Technological advances may lead to a decrease in the price of these types of systems or equipment and a consequent decline in the need for financing of such equipment. In addition, for POS authorization systems, business and technological changes could change the manner in which POS authorization is obtained. These changes could reduce the need for outside financing sources that would reduce our lease financing opportunities and origination volume in such products.

In the event that demand for financing POS authorization systems or other types of equipment that we lease declines, we will need to expand our efforts to provide lease financing for other products. There can be no assurance, however, that we will be able to do so successfully. Because many dealers specialize in particular products, we may not be able to capitalize on our current dealer relationships in the event we shift our business focus to originating leases of other products. Our failure to successfully enter into new relationships with dealers of other products or to extend existing relationships with such dealers in the event of reduced demand for financing of the systems and equipment we currently lease would have a material adverse effect on us.

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Even if we have adequate financing, our expansion strategy may be affected by our limited sources for originations and our inexperience with leasing new products.

Our revenue growth since the third quarter of 2002 has been severely affected by the failure of our former credit facility to renew and the lack of financing until June 2004. Even with our line of credit, our principal growth strategy of expansion into new products and markets may be adversely affected by (i) our inability to re-establish old sources or cultivate new sources of originations and (ii) our inexperience with products with different characteristics from those we currently offer, including the type of obligor and the amount financed.

New Sources.  A majority of our leases and contracts were historically originated through a network of dealers that deal exclusively in POS authorization systems. We are currently unable to capitalize on these relationships to originate leases for products other than POS authorization systems. In addition, we lost contact with some of our old sources during the period we suspended originations. Some of these dealers have found other financing sources. We may face difficulties in re-establishing our relationships with such sources. Our failure to develop additional relationships with dealers of products, which we lease or seek to lease, would hinder our growth strategy.

New Products.  Our existing portfolio primarily consists of leases to owner-operated or other small commercial enterprises with little business history and limited or challenged personal credit history. These leases are characterized by small average monthly payments for equipment with limited residual value at the end of the lease term. Our ability to successfully underwrite new products with different characteristics is highly dependent on our ability (i) to successfully analyze the credit risk associated with the users of such products so as to appropriately apply our risk-adjusted pricing and (ii) to utilize our proprietary software to efficiently service and collect on our portfolio. We can give no assurance that we will be able to successfully manage these credit risk issues, which could have a material adverse effect on us.

We experience a significant rate of default under our leases, and a higher than expected default rate would have an adverse affect on our cash flow and earnings.

The credit characteristics of our lessee base correspond to a high incidence of delinquencies, which in turn may lead to significant levels of defaults. The credit profile of our lessees heightens the importance of both pricing our leases and contracts for the risk assumed, as well as maintaining an adequate allowance for losses. Significant defaults by lessees in excess of those we anticipate in setting our prices and allowance levels may adversely affect our cash flow and earnings. Reduced cash flow and earnings could limit our ability to repay debt and obtain financing, which could have a material adverse effect on our business, financial condition and results of operations.

In addition to our usual practice of originating leases through our dealer relationships, from time to time we have purchased lease portfolios from dealers. While certain of these leases at inception would not have met our underwriting standards, we will purchase leases once the lessee demonstrates a payment history. We prefer to acquire these smaller lease portfolios in situations where the company selling the portfolio will continue to act as a dealer following the acquisition.

We may face adverse consequences of litigation, including consequences of using litigation as part of our collection policy.

Our use of litigation as a means of collection of unpaid receivables exposes us to counterclaims on our suits for collection, to class action lawsuits and to negative publicity surrounding our leasing and collection policies. We have been a defendant in attempted class action suits as well as counterclaims filed by individual obligors in attempts to dispute the enforceability of the lease or contract. This type of litigation may be time consuming and expensive to defend, even if not meritorious, may result in the diversion of management time and attention, and may subject us to significant liability for damages or result in invalidation of our proprietary rights. We believe our collection policies and use of litigation comply fully with all applicable laws. Because of our persistent enforcement of our leases and contracts through the use of litigation, we may have created ill will toward us on the part of certain lessees and other obligors who were defendants in such lawsuits. Our litigation strategy has also generated adverse publicity in certain circumstances. Adverse publicity could negatively impact public perception of our business and may materially impact the price of our common stock. In addition to legal proceedings that may arise out of our

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collection activities, we may face other litigation arising in the ordinary course of business. Any of these factors could adversely affect our business, financial condition and results of operations.

Increased interest rates may make our leases or contracts less profitable.

Since we generally fund our leases and contracts through our credit facilities or from working capital, our operating margins could be adversely affected by an increase in interest rates. The implicit yield on all of our leases and contracts is fixed due to the leases and contracts having scheduled payments that are fixed at the time of origination. When we originate or acquire leases or contracts, we base our pricing in part on the “spread” we expect to achieve between the implicit yield on each lease or contract and the effective interest cost we expect to pay when we finance such leases and contracts. Increases in interest rates during the term of each lease or contract could narrow or eliminate the spread, or result in a negative spread, to the extent such lease or contract was financed with variable-rate funding. We may undertake to hedge against the risk of interest rate increases, based on the size and interest rate profile of our portfolio. Such hedging activities, however, would limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. In addition, our hedging activities may not protect us from interest rate-related risks in all interest rate environments. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

An economic downturn may cause an increase in defaults under our leases and lower demand for the commercial equipment we lease.

An economic downturn could result in a decline in the demand for some of the types of equipment or services we finance, which could lead to additional defaults and a decline in originations. An economic downturn may slow the development and continued operation of small commercial businesses, which are the primary market for POS authorization systems and the other commercial equipment leased by us. Such a downturn could also adversely affect our ability to obtain capital to fund lease and contract originations or acquisitions, or to complete securitizations. In addition, such a downturn could result in an increase in delinquencies and defaults by our lessees and other obligors, which could have an adverse effect on our cash flow and earnings, as well as on our ability to securitize leases. These factors could have a material adverse effect on our business, financial condition and results of operations.

Additionally, as of both December 31, 2005 and 2006, leases in California, Florida, Texas, Massachusetts and New York accounted for approximately 40% of our portfolio. Economic conditions in these states may affect the level of collections from, as well as delinquencies and defaults by, these obligors.

We face intense competition, which could cause us to lower our lease rates, hurt our origination volume and strategic position and adversely affect our financial results.

The microticket leasing and financing industry is highly competitive. We compete for customers with a number of national, regional and local banks and finance companies. Our competitors also include equipment manufacturers that lease or finance the sale of their own products. While the market for microticket financing has traditionally been fragmented, we could also be faced with competition from small- or large-ticket leasing companies that could use their expertise in those markets to enter and compete in the microticket financing market. Our competitors include larger, more established companies, some of which may possess substantially greater financial, marketing and operational resources than us, including lower cost of funds and access to capital markets and other funding sources, which may be unavailable to us. If a competitor were to lower their lease rates, we could be forced to follow suit or be unable to regain origination volume, either of which would have a material adverse effect on our business, financial condition and results of operations. In addition, competitors may seek to replicate the automated processes used by us to monitor dealer performance, evaluate lessee credit information, appropriately apply risk-adjusted pricing, and efficiently service a nationwide portfolio. The development of computer software similar to that developed by us may jeopardize our strategic position and allow our competitors to operate more efficiently than we do.

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Government regulation could restrict our business.

Our leasing business is not currently subject to extensive federal or state regulation. While we are not aware of any proposed legislation, the enactment of, or a change in the interpretation of, certain federal or state laws affecting our ability to price, originate or collect on receivables (such as the application of usury laws to our leases and contracts) could negatively affect the collection of income on our leases and contracts, as well as the collection of fee income. Any such legislation or change in interpretation, particularly in Massachusetts, whose laws govern the majority of our leases and contracts, could have a material adverse effect on our ability to originate leases and contracts at current levels of profitability, which in turn could have a material adverse effect on our business, financial condition or results of operations.

The Sarbanes-Oxley Act of 2002 requires companies such as us that are not accelerated filers to comply with more stringent internal control system and monitoring requirements beginning in 2007. Compliance with this new requirement may place an expensive burden and significant time constraint on us.

We may face risks in acquiring other portfolios and companies, including risks relating to how we finance any such acquisition or how we are able to assimilate any portfolios or operations we acquire.

A portion of our growth strategy depends on the consummation of acquisitions of leasing companies or portfolios. Our inability to identify suitable acquisition candidates or portfolios, or to complete acquisitions on favorable terms, could limit our ability to grow our business. Any major acquisition would require a significant portion of our resources. The timing, size and success, if at all, of our acquisition efforts and any associated capital commitments cannot be readily predicted. We may finance future acquisitions by using shares of our common stock, cash or a combination of the two. Any acquisition we make using common stock would result in dilution to existing stockholders. If the common stock does not maintain a sufficient market value, or if potential acquisition candidates are otherwise unwilling to accept common stock as part or all of the consideration for the sale of their businesses, we may be required to utilize more of our cash resources, if available, or to incur additional indebtedness in order to initiate and complete acquisitions. Additional debt, as well as the potential amortization expense related to goodwill and other intangible assets incurred as a result of any such acquisition, could have a material adverse effect on our business, financial condition or results of operations. In addition, certain of our credit facilities contain covenants that do not permit us to merge or consolidate into or with any other person or entity, issue any shares of our capital stock if, after giving effect to such issuance, certain shareholders cease to own or control specified percentages of our voting capital stock, create or acquire any subsidiaries other than certain permitted special purpose subsidiaries, or implement certain changes to our board of directors. These provisions could prevent us from making an acquisition using shares of our common stock as consideration.

We also may experience difficulties in the assimilation of the operations, services, products and personnel of acquired companies, an inability to sustain or improve the historical revenue levels of acquired companies, the diversion of management’s attention from ongoing business operations, and the potential loss of key employees of such acquired companies. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

If we were to lose key personnel, our operating results may suffer or it may cause a default under our debt facilities.

Our success depends to a large extent upon the abilities and continued efforts of Richard Latour, President and Chief Executive Officer and James R. Jackson, Jr., Vice President and Chief Financial Officer, and our other senior management. We have entered into employment agreements with Mr. Latour and Mr. Jackson, as well as other members of our senior management. The loss of the services of one or more of the key members of our senior management before we are able to attract and retain qualified replacement personnel could have a material adverse effect on our financial condition and results of operations. In addition, under our credit facilities, an event of default would arise if Mr. Latour or Mr. Jackson were to leave their positions as our Chief Executive Officer or Chief Financial Officer, respectively, unless a suitable replacement were appointed within 60 days. Our failure to comply with these provisions could have a material adverse effect on our business, financial condition or results of operations.

10

Certain provisions of our articles and bylaws may have the effect of discouraging a change in control or acquisition of the company.

Our restated articles of organization and restated bylaws contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals that a stockholder might consider favorable, including (i) provisions authorizing the issuance of “blank check” preferred stock, (ii) providing for a Board of Directors with staggered terms, (iii) requiring super-majority or class voting to effect certain amendments to the articles and bylaws and to approve certain business combinations, (iv) limiting the persons who may call special stockholders’ meetings and (v) establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholders’ meetings. In addition, certain provisions of Massachusetts law to which we are subject may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal.

Our stock price may be volatile, which could limit our access to the equity markets and could cause you to incur losses on your investment.

If our revenues do not grow or grow more slowly than we anticipate, or if operating expenditures exceed our expectations or cannot be adjusted accordingly, the market price of our common stock could be materially and adversely affected. In addition, the market price of our common stock has been in the past and could in the future be materially and adversely affected for reasons unrelated to our specific business or results of operations. General market price declines or volatility in the future could adversely affect the price of our common stock. In addition, short-term trading strategies of certain investors can also have a significant effect on the price of specific securities. In addition, the trading price of the common stock may be influenced by a number of factors, including the liquidity of the market for the common stock, investor perceptions of us and the equipment financing industry in general, variations in our quarterly operating results, interest rate fluctuations and general economic and other conditions. Moreover, the stock market has experienced significant price and value fluctuations, which have not necessarily been related to corporate operating performance. The volatility of the stock market could adversely affect the market price of our common stock and our ability to raise funds in the public markets.

There is no assurance that we will continue to pay dividends on our common stock in the future.

During the fourth quarter of 2002, our Board of Directors suspended the payment of dividends on our common stock to comply with our banking agreements and we paid no dividends in the years ended December 31, 2003 and 2004. During 2005, we declared dividends of $0.05 per share payable to shareholders of record on each of February 9, 2005, April 29, 2005, July 27, 2005, October 27, 2005 and December 28, 2005, and a special dividend of $0.25 per share payable to shareholders of record on January 31, 2006. During 2006, we declared dividends of $0.05 per share payable to shareholders of record on each of March 31, 2006, June 30, 2006, September 29, 2006 and December 29, 2006. Future dividend payments are subject to ongoing review and evaluation by our Board of Directors. The decision as to the amount and timing of future dividends we may pay, if any, will be made in light of our financial condition, capital requirements and growth plans, as well as our external financing arrangements and any other factors our Board of Directors may deem relevant. We can give no assurance as to the amount and timing of the payment of future dividends.

Item 2.   Properties

At December 31, 2006, our corporate headquarters and operations center occupied approximately 24,400 square feet of office space at 10M Commerce Way, Woburn, Massachusetts 01801. The lease for this space expires on December 31, 2010.

Item 3.   Legal Proceedings

We are 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 our results of operations or financial position.

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In October 2003, we were served with a purported class action complaint filed in United States District Court for the District of Massachusetts alleging violations of the federal securities laws. The purported class would have consisted of all persons who purchased our securities between February 5, 1999 and October 30, 2002. The Complaint asserted that during this period we made a series of materially false or misleading statements about our business, prospects and operations, including with respect to certain lease provisions, our course of dealings with our vendor/dealers, and our reserves for credit losses. In April 2004, an Amended Class Action Complaint was filed which added additional defendants and expanded upon the prior allegations with respect to us. We filed a Motion to Dismiss the Amended Complaint. On June 13, 2006, the Court granted our Motion to Dismiss the Amended Complaint with Prejudice. On July 12, 2006, the plaintiffs filed an appeal. On December 6, 2006, the parties filed an Agreement of Dismissal whereby the plaintiffs voluntarily agreed to dismiss their appeal with prejudice and without payment by us.

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

No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2006.

PART II

Item 5.   Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

Our common stock, par value $0.01 per share is currently listed on the American Stock Exchange under the symbol “MFI.” Our common stock was previously listed on the New York Stock Exchange under the symbol “MFI” through the close of business on January 16, 2006. The following chart shows the high and low sales price of our common stock in each quarter over the past two fiscal years.

	2005								2006
	First		Second		Third		Fourth		First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter
Stock Price
High	$	5.00	$	4.77	$	4.74	$	4.20	$	3.95	$	3.89	$	3.49	$	3.89
Low	$	3.61	$	2.76	$	3.54	$	3.10	$	3.26	$	3.20	$	3.01	$	3.12

Holders

At March 15, 2007, there were approximately 39 stockholders of record of our common stock. However, many holders’ shares are listed under their brokerage firms’ names. We estimate the number of beneficial shareholders to be approximately 1,000.

Dividends

During the fourth quarter of 2002, our Board of Directors suspended the payment of dividends to comply with our banking agreements and we paid no dividends during the years ended December 31, 2003 and 2004.

During 2005, we declared dividends of $0.05 per share payable to shareholders of record on each of February 9, 2005, April 29, 2005, July 27, 2005, October 27, 2005 and December 28, 2005, and a special dividend of $0.25 per share payable to shareholders of record on January 31, 2006.

During 2006, we declared dividends of $0.05 per share payable to shareholders of record on each of March 31, 2006, June 30, 2006, September 29, 2006 and December 29, 2006.

Future dividend payments are subject to ongoing review and evaluation by our Board of Directors. The decision as to the amount and timing of future dividends, if any, will be made in light of our financial condition, capital requirements and growth plans, as well as our external financing arrangements and any other factors our Board of Directors may deem relevant. We can give no assurance as to the amount and timing of future dividends.

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Performance Graph

The following graph compares our cumulative total stockholder return since December 31, 2001 with the NYSE Composite Stock Index, the American Stock Exchange Composite Stock Index and the S&P 400 Mid-Cap Financials Index. Both the NYSE and American Stock Exchange Composite Stock Indices are presented here because we moved our listing from the New York Stock Exchange to the American Stock Exchange in January 2006. Cumulative total stockholder return shown in the performance graph is measured assuming an initial investment of $100 on December 31, 2001 and the reinvestment of dividends. The historic stock price performance information shown in this graph may not be indicative of current stock price levels or future stock price performance.

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2006

The information under the caption “Performance Graph” above is not deemed to be “filed” as part of this Annual Report, and is not subject to the liability provisions of Section 18 of the Securities Exchange Act of 1934. Such information will not be deemed to be incorporated by reference into any filing we make under the Securities Act of 1933 unless we explicitly incorporate it into such a filing at the time.

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Item 6.   Selected Financial Data

The following tables set forth selected consolidated financial and operating data for the periods and at the dates indicated. The selected consolidated financial data were derived from our financial statements and accounting records. The data presented below should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.

	Year Ended December 31,
	2002			2003			2004			2005			2006
	(Dollars in thousands, except share and per share data)
Income Statement Data:
Revenues:
Income on financing leases	$	53,012		$	30,904		$	11,970		$	4,140		$	3,917
Rental income		37,154			34,302			31,009			25,359			20,897
Income on service contracts		9,734			8,593			5,897			3,467			1,870
Other income(1)		26,922			17,775			11,491			6,318			5,758
Total revenues		126,822			91,574			60,367			39,284			32,442
Expenses:
Selling, general and administrative		45,535			33,856			26,821			20,884			14,499
Provision for credit losses		88,948	(2)		59,758			47,918			10,468			6,985
Depreciation and amortization		18,385			16,592			14,010			9,497			5,326
Interest		10,787			7,515			2,283			1,148			162
Total expenses		163,655			117,721			91,032			41,997			26,972
Income (loss) before provision (benefit) for income taxes		(36,833	)		(26,147	)		(30,665	)		(2,713	)		5,470
Provision (benefit) for income taxes		(14,735	)		(10,460	)		(20,449	)(3)		(1,053	)		1,555
Net income (loss)	$	(22,098	)	$	(15,687	)	$	(10,216	)	$	(1,660	)	$	3,915
Net income (loss) per common share:
Basic	$	(1.72	)	$	(1.20	)	$	(0.77	)	$	(0.12	)	$	0.28
Diluted		(1.72	)		(1.20	)		(0.77	)		(0.12	)		0.28
Weighted-average shares:
Basic		12,821,946			13,043,744			13,182,833			13,567,640			13,791,403
Diluted		12,821,946			13,043,744			13,182,833			13,567,640			13,958,759
Dividends declared per common share	$	0.15		$	—		$	—		$	0.50		$	0.20

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	December 31,
	2002			2003			2004			2005			2006
	(Dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	5,494		$	6,533		$	9,709		$	32,926		$	28,737
Restricted cash		18,516			2,376			—			—			—
Gross investment in leases(4)		367,173			194,898			69,181			33,004			44,314
Unearned income		(67,574	)		(23,729	)		(6,313	)		(3,658	)		(13,682	)
Allowance for credit losses		(69,294	)		(43,011	)		(14,963	)		(8,714	)		(5,223	)
Investment in service contracts, net		14,463			8,844			4,777			1,626			613
Investment in rental contracts, net		5,633			3,758			1,785			3,025			313
Total assets		295,085			156,414			71,270			65,188			59,721
Notes payable		168,927			58,843			34			161			5
Subordinated notes payable		3,262			3,262			4,589			2,602			—
Total liabilities		208,482			85,148			9,177			10,501			3,585
Total stockholders’ equity		86,603			71,266			62,093			54,687			56,136

	December 31,
	2002			2003			2004			2005			2006
	(Dollars in thousands, except statistical data)
Other Data:
Operating Data:
Value of leases originated(5)	$	111,829		$	3,429		$	920		$	7,296		$	33,343
Value of service contracts acquired(6)		6,773			—			—			—			—
Value of rental contracts originated		677			157			77			1,731			—
Dealer funding(7)		74,000			1,600			668			6,364			21,498
Average yield on leases(8)		36.9	%		32.5	%		30.1	%		30.6	%		30.0	%
Cash Flows From (Used In):
Operating activities	$	120,628		$	98,052		$	58,694		$	35,228		$	26,870
Investing activities		(80,141	)		(2,839	)		(813	)		(6,978	)		(22,114	)
Financing activities		(35,139	)		(94,174	)		(54,705	)		(5,033	)		(8,945	)
Net change in cash and cash equivalents	$	5,348		$	1,039		$	3,176		$	23,217		$	(4,189	)
Selected Ratios:
Return on average assets		(6.73	)%		(6.95	)%		(8.98	)%		(2.43	)%		6.27	%
Return on average stockholders’ equity		(22.42	)		(19.87	)		(15.32	)		(2.84	)		7.07
Operating margin(9)		41.09			36.70			28.58			19.74			38.39
Credit Quality Statistics:
Net charge-offs	$	65,081		$	86,041		$	75,967		$	16,717		$	10,476
Net charge-offs as a percentage of average gross investment(10)		15.60	%		29.40	%		54.71	%		30.79	%		26.34	%
Provision for credit losses as a percentage of average gross investment(10)		21.32			20.42			34.51			19.28			17.56
Allowance for credit losses as a percentage of gross investment(11)		18.16			21.11			20.23			25.16			11.63

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(1)	Includes loss and damage waiver fees, service fees, interest income, and miscellaneous revenue.
(2)	Includes a provision of $35 million to reserve against certain dealer receivables as well as delinquent portfolio assets. In the past, some dealer receivables had been offset against the funding of new contracts. When we suspended the funding of new contracts, we felt that the collection of these receivables would be more difficult. Although we continued to pursue collections on these accounts, we believed that the cost associated with legal enforcement would outweigh the benefits realized.
(3)	Includes an income tax benefit of $7.9 million that resulted from a reduction in our estimate of certain tax liabilities.
(4)	Consists of receivables due in installments and estimated residual value.
(5)	Represents the amount paid to dealers upon funding of leases plus the associated unearned income.
(6)	Represents the amount paid to dealers upon the acquisition of service contracts.
(7)	Represents the amount paid to dealers upon funding of leases and contracts.
(8)	Represents the aggregate of the implied interest rate on each lease originated during the period weighted by the amount funded.
(9)	Represents income before provision (benefit) for income taxes and provision for credit losses as a percentage of total revenues.

(10)	Represents a percentage of average gross investment in leases and net investment in service contracts.
(11)	Represents allowance for credit losses as a percentage of gross investment in leases and net investment in service contracts.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations, Including Selected Quarterly Financial Data (Unaudited)

The following discussion includes forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). When used in this discussion, the words “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “continue,” “plan” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things, those associated with:

•  our dependence on point of sale authorization systems, expansion into new markets and the development of a sizeable dealer base;

•  our significant capital requirements;

•  our ability or inability to obtain the financing we need, or to use internally generated funds, in order to continue originating contracts;

•  the risks of defaults on our leases;

•  possible adverse consequences associated with our collection policy;

•  the effect of higher interest rates on our portfolio;

•  increasing competition;

•  increased governmental regulation of the rates and methods we use in financing and collecting on our leases and contracts;

•  acquiring other portfolios or companies;

•  dependence on key personnel;

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•  adverse results in litigation and regulatory matters, or promulgation of new or enhanced legislation or regulations; and

•  general economic and business conditions.

The risk factors above and those under “Risk Factors” beginning on page 6, as well as any other cautionary language included herein, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we described in our forward-looking statements. Many of these factors are significantly beyond our control. We expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained herein will in fact transpire.

Overview

We are a specialized commercial finance company that provides “microticket” equipment leasing and other financing services. The average amount financed by TimePayment during 2006 was approximately $5,900 while Leasecomm historically financed contracts averaging approximately $1,900. Our portfolio consists of point-of-sale (“POS”) authorization systems and other small business equipment leased or rented to small commercial enterprises.

We derive the majority of our revenues from leases originated and held by us, payments on service contracts, rental contracts and fee income. Historically, we funded the majority of our leases and contracts through our revolving-credit loans, term loans and on-balance sheet securitizations, and to a lesser extent our subordinated debt program and internally generated funds. Between October 2002 and June 2004, an interruption in our financing sources had a significant impact on our ability to originate contracts. As of September 30, 2002, our then-existing credit facility failed to renew and we began paying down the debt. In April 2003, we entered into a long-term agreement with our lenders which waived certain covenant defaults and required us to repay the credit facility over a 22-month term at an interest rate of prime plus 2.0%. We also received a waiver for the covenant violations in the securitization agreement and amended the securitization agreement to conform its covenants to the covenants in the senior credit facility. In October 2002, we were forced to suspend virtually all contract originations until a new source of financing could be obtained or until such time as the credit facility had been paid in full.

In June 2004, we secured a one-year $8 million line of credit and a $2 million three-year subordinated note that allowed us to resume microticket contract originations. In conjunction with raising new capital, we also formed a new wholly-owned operating subsidiary, TimePayment Corp. On September 29, 2004, we secured a three-year, $30 million, senior secured revolving line of credit from CIT Commercial Services, a unit of CIT Group. The CIT line of credit replaced the $8 million line of credit obtained in June 2004 under more favorable terms and conditions. In addition, we used the proceeds from the CIT line of credit to retire the existing debt with the former bank group. During the year ended December 31, 2005, we began to actively increase our industry presence with a more focused and targeted sales and marketing effort. We continue to invest capital to build an infrastructure to support our sales and marketing initiatives, and have brought in experienced sales and marketing management to spearhead the effort. We are currently exploring financing options to replace the CIT line of credit, which expires in September 2007.

In a typical lease transaction, we originate a lease through our nationwide network of equipment vendors, independent sales organizations and brokers. Upon our approval of a lease application and verification that the lessee has received the equipment and signed the lease, we pay the dealer for the cost of the equipment, plus the dealer’s profit margin. In a typical transaction for the acquisition of service contracts, a homeowner purchases a security system and simultaneously signs a contract with the dealer for the monitoring of that system for a monthly fee. Upon approval of the monitoring application and verification with the homeowner that the system is installed, we purchase the right to the payment stream under that monitoring contract at a negotiated multiple of the monthly payments from the dealer.

Substantially all leases originated or acquired by us are non-cancelable. During the term of the lease, we are scheduled to receive payments sufficient to cover our borrowing costs, the cost of the underlying equipment and

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provide us with an appropriate profit. We enhance the profitability of our leases and contracts by charging late fees, prepayment penalties, loss and damage waiver fees and other service fees, when applicable. Collection fees are imposed based on our estimate of the costs of collection. We only impose late fees on the first four months of late payments and are prohibited from imposing compound late fees or from assessing late fees as a percentage of the total outstanding late payments including outstanding late fees. The loss and damage waiver fees are charged if a customer fails to provide proof of insurance and are reasonably related to the cost of replacing the lost or damaged equipment or product. The initial non-cancelable term of the lease is equal to or less than the equipment’s estimated economic life and often provides us with additional revenues based on the residual value of the equipment at the end of the lease. Initial terms of the leases in our portfolio generally range from 12 to 60 months, with an average initial term of 45 months as of December 31, 2006.

Critical Accounting Policies

We consider certain of our accounting policies to be the most critical to our financial condition and results of operations in the sense that they involve the most complex or subjective decisions or assessments. We have identified our most critical accounting policies as those policies related to revenue recognition, the allowance for credit losses, income taxes and accounting for share-based compensation. These accounting policies are discussed below as well as within the notes to our consolidated financial statements.

Revenue Recognition

Our lease contracts are accounted for as financing leases. At origination, we record the gross lease receivable, the estimated residual value of the leased equipment, initial direct costs incurred and the unearned lease income. Unearned lease income is the amount by which the gross lease receivable plus the estimated residual value exceeds the cost of the equipment. Unearned lease income and initial direct costs incurred are amortized over the related lease term using the interest method. Amortization of unearned lease income and initial direct costs is suspended if, in our opinion, full payment of the contractual amount due under the lease agreement is doubtful. In conjunction with the origination of leases, we may retain a residual interest in the underlying equipment upon termination of the lease. The value of such interest is estimated at inception of the lease and evaluated periodically for impairment. At the end of the lease term, the lessee has the option to buy the equipment at a price quoted by us, return the equipment or continue to rent the equipment on a month-to-month basis. If the lessee continues to rent the equipment, we record our investment in the rental contract at its estimated residual value. Rental revenue and depreciation are recognized based on the methodology described below. Other revenues such as loss and damage waiver fees and service fees relating to the leases and contracts are recognized as they are earned.

Our investments in cancelable service contracts are recorded at cost and amortized over the expected life of the contract. Income on service contracts from monthly billings is recognized as the related services are provided. Our investment in rental contracts is either recorded at estimated residual value and depreciated using the straight-line method over a period of 12 months or at the acquisition cost and depreciated using the straight line method over a period of 36 months. Rental income from monthly billings is recognized as the customer continues to rent the equipment. We periodically evaluate whether events or circumstances have occurred that may affect the estimated useful life or recoverability of our investments in service and rental contracts.

Allowance for Credit Losses

We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Given the nature of the “microticket” market and the individual size of each transaction, we do not have a formal credit review committee to review individual transactions. Rather, we developed a sophisticated, risk-adjusted pricing model and have automated the credit scoring, approval and collection processes. We believe that with the proper risk-adjusted pricing model, we can grant credit to a wide range of applicants provided we have priced appropriately for the associated risk. As a result of approving a wide range of credits, we experience a relatively high level of delinquency and write-offs in our portfolio. We periodically review the credit scoring and approval process to ensure that the automated system is making appropriate credit decisions. Given the nature of the “microticket” market and the individual size of each transaction, we do not evaluate transactions individually for the purpose of developing and

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determining the adequacy of the allowance for credit losses. Contracts in our portfolio are not re-graded subsequent to the initial extension of credit and the allowance is not allocated to specific contracts. Rather, we view the contracts as having common characteristics and maintain a general allowance against our entire portfolio utilizing historical collection statistics as the basis for the amount.

We have adopted a consistent, systematic procedure for establishing and maintaining an appropriate allowance for credit losses for our microticket transactions. We review, on a static pool basis, the collection experience on various months’ originations and the recoveries made on accounts written off. The results of these static pool analyses reflect our actual historical collection experience. We then consider current delinquency statistics, credit scores of the lessees, current economic conditions, and other relevant factors which might affect the performance of our portfolio. The combination of historical experience, credit scores, delinquency levels, and the review of current factors provide the basis for our analysis of the adequacy of the allowance for credit losses. We take charge-offs against our receivables when such receivables are 360 days past due and no contact has been made with the lessee for 12 months. Historically, the typical monthly payment under our microticket leases has been small and as a result, our experience is that lessees will pay past due amounts later in the process because of the small amount necessary to bring an account current.

Income Taxes

Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against net deferred tax assets. The process involves summarizing temporary differences resulting from the different treatment of items, such as leases, for tax and accounting purposes. In addition, our income tax calculations involve the application of complex tax regulations in a multitude of jurisdictions. Differences between the basis of assets and liabilities result in deferred tax assets and liabilities, which are recorded on the balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income or tax carry-back availability and to the extent management believes recovery is more likely than not, a valuation allowance is unnecessary.

Share-Based Compensation

As of January 1, 2005, we adopted SFAS 123(R), which requires the measurement of compensation cost for all outstanding unvested share-based awards at fair value and recognition of compensation over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We estimate the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R), SEC Staff Accounting Bulletin No. 107 and our prior period pro forma disclosures of net earnings, including stock-based compensation (determined under a fair value method as prescribed by SFAS 123). Key input assumptions used to estimate the fair value of stock options include the expected option term, volatility of our stock, the risk-free interest rate and our dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us under SFAS 123(R).

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Results of Operations

Revenues

	2004		Change			2005		Change			2006
	(In thousands)
Income on financing leases	$	11,970		(65.4	)%	$	4,140		(5.4	)%	$	3,917
Rental income		31,009		(18.2	)		25,359		(17.6	)		20,897
Income on service contracts		5,897		(41.2	)		3,467		(46.1	)		1,870
Loss and damage waiver fees		4,016		(28.7	)		2,863		(33.8	)		1,895
Service fees and other		7,444		(60.3	)		2,953		(17.1	)		2,448
Interest income		31		1,519.4			502		181.9			1,415
Total revenues	$	60,367		(34.9	)%	$	39,284		(17.4	)%	$	32,442

Our lease contracts are accounted for as financing leases. At origination, we record the gross lease receivable, the estimated residual value of the leased equipment, initial direct costs incurred and the unearned lease income. Unearned lease income is the amount by which the gross lease receivable plus the estimated residual value exceeds the cost of the equipment. Unearned lease income and initial direct costs incurred are amortized over the related lease term using the interest method. Other revenues such as loss and damage waiver fees, service fees relating to the leases and contracts, and rental revenues are recognized as they are earned.

Total revenues for the year ended December 31, 2006 were $32.4 million, a decrease of $6.8 million, or 17.4%, from the year ended December 31, 2005. The decline in revenue included decreases of $4.5 million or 17.6% in rental income, $1.6 million or 46.1% in income on service contracts and $968,000 or 33.8% in loss and damage waiver fees. Income on financing leases also declined by $223,000 or 5.4%. The decrease in income on financing leases improved significantly from the 65.4% decrease in 2005 as a result of our recent increase in originations. The overall decrease in revenue is primarily due to the decrease in the size of our portfolio of rental and service contracts that resulted from the lack of financing between October 2002 and June 2004. Offsetting these decreases was a $913,000 increase in interest income on our cash and cash equivalents. Revenues are expected to remain at current levels until originations begin to outpace the rate of attrition of contracts in the existing portfolio.

Total revenues for the year ended December 31, 2005, were $39.3 million, a decrease of $21.1 million, or 34.9%, from the year ended December 31, 2004, due primarily to decreases of $7.8 million, or 65.4%, in income on financing leases and $4.5 million, or 60.3%, in service fees and other income. In addition, rental revenue decreased $5.7 million or 18.2% and income on service contracts decreased $2.4 million, or 41.2%, as compared to such amounts in the prior year. The decrease in income on financing leases was due to the decreased number of leases originated as a result of our suspending the funding of new contracts in 2002 when our lenders did not renew our revolving credit facility. The decrease in service fees and other income was the result of decreased fees from the lessees related to our collection process. The decrease in rental and service contract income was a result of a decreased number of lessees that continued to rent their equipment beyond their original lease term, and decreased originations in rental and service contracts.

Selling, General and Administrative

	2004			Change			2005			Change			2006
	(In thousands)
Selling, general and administrative	$	26,821			(22.1	)%	$	20,884			(30.6	)%	$	14,499
As a percent of revenue		44.4	%					53.2	%					44.7	%

Our selling, general and administrative (“SG&A”) expenses include costs of maintaining corporate functions such as accounting, finance, collections, legal, human resources, sales and underwriting, and information systems. SG&A expenses also include commissions, service fees and other marketing costs associated with our portfolio of leases and rental contracts. SG&A expenses decreased by $6.4 million, or 30.6%, for the year ended December 31, 2006, as compared to the year ended December 31, 2005. The decrease was primarily driven by a reduction in personnel-related expenses of approximately $2.0 million, as management reduced headcount from 87 to 67, and

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decreases of $1.6 million in collection expenses and $1.6 million in professional fees. The expense reductions resulted from the decrease in the overall size of our portfolio, an improvement in the credit quality of our portfolio, the settlement of outstanding litigation and our cost control efforts.

SG&A expenses decreased by $5.9 million, or 22.1%, for the year ended December 31, 2005, as compared to the year ended December 31, 2004. The decrease was primarily driven by a reduction in debt closing expenses and bank charges of $1.4 million, a decrease of $1.8 million in collection expenses, a decrease of $554,000 in cost of goods sold, a decrease of $649,000 in insurance expense and a decrease of $738,000 in sales programs and inventory services expenses. Also included in the expense reduction was a credit of approximately $700,000 relating to the favorable settlement of a disputed liability related to a previous acquisition. Despite a reduction in headcount from 103 at December 31, 2004 to 87 at December 31, 2005, personnel-related expenses increased by $183,000 as cost reductions achieved were offset by $1.0 million in non-cash compensation expense related to the adoption of SFAS 123(R). The expense reductions were achieved as a result of the decrease in the overall size of our portfolio of leases, rentals and service contracts and as a result of our continuing efforts to align our infrastructure with existing business conditions.

Provision for Credit Losses

	2004			Change			2005			Change			2006
	(In thousands)
Provision for credit losses	$	47,918			(78.2	)%	$	10,468			(33.3	)%	$	6,985
As a percent of revenue		79.4	%					26.6	%					21.5	%

We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Our provision for credit losses decreased by $3.5 million, or 33.3%, for the year ended December 31, 2006, as compared to the year ended December 31, 2005, while net charge-offs decreased 37.3% to $10.5 million. The provision was based on providing a general allowance against leases funded during the year and our analysis of actual and expected losses in our portfolio as a whole.

Our provision for credit losses decreased by $37.5 million, or 78.2%, for the year ended December 31, 2005, as compared to the year ended December 31, 2004, while net charge-offs decreased 78.0% to $16.7 million. The provision was based on our historical policy of providing a provision for credit losses based upon dealer funding and revenue recognized in the period, as well as taking into account actual and expected losses in the portfolio as a whole and the relationship of the allowance to our net investment in leases, service contracts and rental contracts.

Depreciation and Amortization

	2004			Change			2005			Change			2006
	(In thousands)
Depreciation — fixed assets	$	801			(48.8	)%	$	410			(50.7	)%	$	202
Depreciation — rental equipment		9,142			(35.1	)		5,936			(30.8	)		4,108
Amortization — service contracts		4,067			(22.5	)		3,151			(67.8	)		1,016
Total depreciation and amortization	$	14,010			(32.2	)%	$	9,497			(43.9	)%	$	5,326
As a percent of revenue		23.2	%					24.2	%					16.4	%

Depreciation and amortization expense consists of depreciation on fixed assets and rental equipment, and the amortization of service contracts. Fixed assets are recorded at cost and depreciated over their expected useful lives. Certain rental contracts are originated as a result of the renewal provisions of our lease agreements where at the end of the lease term, the customer may elect to continue to rent the leased equipment on a month-to-month basis. The rental equipment is recorded at its residual value and depreciated over a term of 12 months. This term represents the estimated life of a previously leased piece of equipment and is based upon our historical experience. In the event the contract terminates prior to the end of the 12 month period, the remaining net book value is expensed.

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We also offer a financial product where the customer may sign a rental agreement, which allows the customer, assuming the contract is current and no event of default exists, to terminate the contract at any time by returning the equipment and providing us with 30 days notice. These assets are recorded at cost and depreciated over an estimated life of 36 months. This term is based upon our historical experience. In the event that the contract terminates prior to the end of the 36 month period, the remaining net book value is expensed.

Service contracts are recorded at cost and amortized over their estimated life of 84 months. In a typical service contract acquisition, a homeowner will purchase a home security system and simultaneously sign a contract with the security dealer for monthly monitoring of the system. The security dealer will then sell the rights to that monthly payment to us. We perform all of the processing, billing, collection and administrative work on the service contract. The estimated life of 84 months for service contracts is based upon the expected life of such contracts in the security monitoring industry and our historical experience. In the event the contract terminates prior to the end of the 84 month term, the remaining net book value is expensed.

Depreciation expense on rentals decreased by $1.8 million, or 30.8% and amortization of service contracts decreased by $2.1 million, or 67.8%, for the year ended December 31, 2006, as compared to the year ended December 31, 2005. Depreciation and amortization expense is expected to continue to decline in 2007 as the carrying value of our rental equipment and service contracts decreased from $4.7 million at December 31, 2005 to $926,000 at December 31, 2006. Depreciation on property and equipment decreased by $208,000, or 50.7%, for the year ended December 31, 2006, as compared to the year ended December 31, 2005.

For the year ended December 31, 2005 as compared to the year ended December 31, 2004, depreciation related to rental equipment decreased by $3.2 million, or 35.1% and amortization related to service contracts decreased by $916,000, or 22.5%. The decrease in depreciation and amortization can be attributed to the decrease in the overall size of our portfolio of rental equipment and service contracts. Depreciation on our property and equipment decreased by $391,000, or 48.8%, for the year ended December 31, 2005, as compared to the year ended December 31, 2004.

Interest Expense

	2004			Change			2005			Change			2006
	(In thousands)
Interest	$	2,283			(49.7	)%	$	1,148			(85.9	)%	$	162
As a percent of revenue		3.8	%					2.9	%					0.5	%

We pay interest on borrowings under our senior credit facility and subordinated debt. Interest expense decreased by $986,000, or 85.9%, for the year ended December 31, 2006, as compared to the year ended December 31, 2005. This decrease resulted primarily from our decreased level of borrowings. At December 31, 2006, we had notes payable of $5,000 and our subordinated debt was paid in full, compared to $2.8 million in debt at December 31, 2005.

Interest expense decreased by $1.1 million, or 49.7%, for the year ended December 31, 2005, as compared to the year ended December 31, 2004. This decrease resulted primarily from our decreased level of borrowings. At December 31, 2005, we had notes payable of $161,000 and subordinated debt of $2.6 million, compared to $4.6 million in debt at December 31, 2004.

Provision (Benefit) for Income Taxes

	2004			Change			2005			Change			2006
	(In thousands)
Provision (benefit) for income taxes	$	(20,449	)		(94.9	)%	$	(1,053	)		247.6	%	$	1,555
As a percent of revenue		33.9	%					2.7	%					4.8	%

The provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets, involves summarizing temporary differences resulting from the different treatment of items, such as leases, for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are recorded on the balance sheet. We must then assess the likelihood that deferred tax assets

22

will be recovered from future taxable income or tax carry-back availability and to the extent we believe recovery is more likely than not, a valuation allowance is unnecessary.

The provision (benefit) for income taxes increased by $2.6 million, or 247.6%, for the year ended December 31, 2006, as compared to the year ended December 31, 2005. This increase resulted primarily from the $8.2 million increase in income before income taxes.

Benefit for income taxes decreased by $19.4 million, or 94.9%, for the year ended December 31, 2005, as compared to the year ended December 31, 2004. This decrease resulted primarily from a corresponding decrease in the Company’s loss before benefit for income taxes and the prior year $7.9 million reduction in tax liabilities.

Our 1997 through 2003 tax years were audited by the Internal Revenue Service. As part of the audit, the Internal Revenue Service Agent had proposed several adjustments to our federal income tax returns that would have required us to pay the IRS an amount between $8.0 and $10.0 million. Such payments would have been offset by an adjustment to our deferred tax asset as the amount would likely have been recoverable in future periods. We filed a formal protest under the appeals process challenging these adjustments and reached a final settlement in December 2006 which required us to pay $31,000 in additional taxes and $9,000 in interest.

Other Operating Data

Dealer fundings were $21.5 million during the year ended December 31, 2006, an increase of $15.1 million, or 237.8%, compared to the year ended December 31, 2005. This increase is a result of our continuing effort to increase originations through business development efforts that include increasing the size of our vendor base and sourcing a larger number of applications from those vendors. We funded these contracts using cash provided by operating activities. Receivables due in installments, estimated residual values, investment in service contracts, and investment in rental equipment increased from $45.9 million at December 31, 2005 to $52.3 million at December 31, 2006, an increase of $6.4 million, or 14.0%. Unearned income increased by $10.0 million, or 274.0%, from $3.7 million at December 31, 2005 to $13.7 million at December 31, 2006. This increase was due to the $21.5 million in originations in 2006. Net cash provided by operating activities decreased by $8.4 million, or 23.8%, to $26.9 million during the year ended December 31, 2006, from the year ended December 31, 2005, because of the decrease in the size of our overall portfolio.

Dealer fundings were $6.4 million during the year ended December 31, 2005, an increase of $5.7 million, or 852.7%, compared to the year ended December 31, 2004. This increase was a result of our resuming contract originations in July 2004 and our continuing efforts to increase originations during 2005 through business development efforts that included increasing the size of the vendor base and sourcing a larger number of applications from those vendors. We funded these contracts using cash provided by operating activities. Receivables due in installments, estimated residual values, investment in service contracts, and investment in rental equipment also decreased from $85.0 million at December 31, 2004 to $45.9 million at December 31, 2005, representing a decrease of $39.1 million, or 46.0%. Unearned income decreased by $2.7 million, or 42.1%, from $6.3 million at December 31, 2004 to $3.7 million at December 31, 2005. This decrease was primarily due to continued amortization of existing leases partially offset by the unearned income on the $6.4 million of lease originations in 2005. Net cash provided by operating activities decreased by $23.6 million, or 40.1%, to $35.2 million during the year ended December 31, 2005, from the year ended December 31, 2004, because of the decrease in the size of our overall portfolio.

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Selected Quarterly Data

The following is a summary of our unaudited quarterly results of operations for 2005 and 2006. This unaudited quarterly information was prepared on the same basis as the audited Consolidated Financial Statements and, in the opinion of our management, reflects all necessary adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the information for the periods presented. The quarterly operating results are not necessarily indicative of future results of operations, and you should read them in conjunction with the audited Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.

	2005											2006
	First			Second			Third		Fourth			First			Second		Third		Fourth
	Quarter			Quarter			Quarter		Quarter			Quarter			Quarter		Quarter		Quarter
Revenues:
Income on leases	$	1,508		$	1,103		$	832	$	697		$	672		$	724	$	1,007	$	1,514
Rental income		6,429			6,431			6,469		6,030			5,721			5,594		5,121		4,461
Income on service contracts		1,088			938			792		649			555			488		435		392
Loss and damage waiver fees		819			751			681		612			551			493		431		420
Service fees and other		985			859			439		670			1,103	(1)		535		437		373
Interest income		32			88			156		226			315			323		411		366
Total revenues		10,861			10,170			9,369		8,884			8,917			8,157		7,842		7,526
Expenses:
Selling, general and administrative		6,348			5,889			4,461		4,185			4,207			3,926		3,312		3,054
Provision for credit losses		5,810			1,484			1,576		1,598			1,610			1,627		1,887		1,861
Depreciation and amortization		2,484			2,465			2,465		2,083			1,765			1,674		1,195		692
Interest		205			578			203		162			81			31		23		27
Total expenses		14,847			10,416			8,705		8,028			7,663			7,258		6,417		5,634
Income (loss) before provision (benefit) for income taxes		(3,986	)		(246	)		664		856			1,254			899		1,425		1,892
Provision (benefit) for income taxes		(1,322	)		(20	)		310		(21	)		490			361		573		131	(2)
Net income (loss)	$	(2,664	)	$	(226	)	$	354	$	877		$	764		$	538	$	852	$	1,761
Net income (loss) per common share — basic	$	(0.20	)	$	(0.02	)	$	0.03	$	0.06		$	0.06		$	0.04	$	0.06	$	0.13
Net income (loss) per common share — diluted		(0.20	)		(0.02	)		0.03		0.06			0.05			0.04		0.06		0.13
Dividends declared per common share		0.10			—			0.10		0.30			0.05			0.05		0.05		0.05
Dividends paid per common share		0.05			0.05			0.05		0.05			0.30			0.05		0.05		0.05

(1)	Includes a $212,000 gain on the sale of rental contracts.
(2)	Includes a net benefit of $385,000 resulting from the settlement of the IRS audit.

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Exposure to Credit Losses

The amounts in the table below represent the balance of delinquent receivables on an exposure basis for all leases, rental contracts and service contracts in our portfolio as of December 31, 2004, 2005 and 2006. An exposure basis aging classifies the entire receivable based on the invoice that is the most delinquent. For example, in the case of a rental or service contract, if a receivable is 90 days past due, all amounts billed and unpaid are placed in the over 90 days past due category. In the case of lease receivables, where the minimum contractual obligation of the lessee is booked as a receivable at the inception of the lease, if a receivable is 90 days past due, the entire receivable, including all amounts billed and unpaid as well as the minimum contractual obligation yet to be billed, will be placed in the over 90 days past due category. The recent improvement in our aging exposure is due to the increase in lease originations in 2006 and an overall improvement in the credit quality of our portfolio.

	December 31, 2004				December 31, 2005				December 31, 2006
	(Dollars in thousands)
Current	$	19,945	33.4	%	$	8,486	29.1	%	$	29,027	71.8	%
31-60 days past due		1,079	1.8			637	2.2			1,607	4.0
61-90 days past due		987	1.7			601	2.1			825	2.0
Over 90 days past due		37,668	63.1			19,415	66.6			8,996	22.2
Receivables due in installments	$	59,679	100.0	%	$	29,139	100.0	%	$	40,455	100.0	%

Liquidity and Capital Resources

General

Our lease and finance business is capital-intensive and requires access to substantial short-term and long-term credit to fund lease originations. Since inception, we have funded our operations primarily through borrowings under our credit facilities, on-balance sheet securitizations, the issuance of subordinated debt, free cash flow and our initial public offering completed in February 1999. We will continue to require significant additional capital to maintain and expand our funding of leases and contracts, as well as to fund any future acquisitions of leasing companies or portfolios. In the near term, we expect to finance our business utilizing the cash on hand and our line of credit which matures in September 2007. Additionally, our uses of cash include the payment of interest and principal on borrowings, selling, general and administrative expenses, income taxes and capital expenditures.

For the year ended December 31, 2004, our primary source of liquidity was cash provided by operating activities due to the unavailability of a credit facility between October 2002 and June 2004. See “Overview” above. We generated cash flow from operations of $26.9 million for the year ended December 31, 2006, $35.2 million for the year ended December 31, 2005 and $58.7 million for the year ended December 31, 2004.

We used net cash in investing activities of $22.1 million for the year ended December 31, 2006, $7.0 million for the year ended December 31, 2005 and $813,000 for the year ended December 31, 2004. Investing activities primarily relate to the origination of leases and the increase in cash used is consistent with our recent sales and marketing efforts.

Net cash used in financing activities was $8.9 million for the year ended December 31, 2006, $5.0 million for the year ended December 31, 2005 and $54.7 million for the year ended December 31, 2004. Financing activities include borrowings and repayments on our various financing sources. We repaid debt of $2.9 million during the year ended December 31, 2006, $1.9 million during the year ended December 31, 2005 and $70.3 million during the year ended December 31, 2004. In addition, we paid dividends of $6.2 million in the year ended December 31, 2006 and $2.7 million in the year ended December 31, 2005.

We believe that cash flows from our existing portfolio, cash on hand and available borrowings on the existing credit facility will be sufficient to support our operations and lease origination activity in the near term. We do not expect to renew our current revolving credit facility in September 2007 and are currently exploring new financing options.

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Borrowings

We utilize our credit facilities to fund the origination and acquisition of leases that satisfy the eligibility requirements established pursuant to each facility. Borrowings outstanding consist of the following:

	December 31, 2005			December 31, 2006
											Maximum
	Amounts		Interest	Amounts		Interest			Unused		Facility
	Outstanding		Rate	Outstanding		Rate			Capacity		Amount
	(Dollars in thousands)
Revolving credit facility(1)	$	161	8.75%	$	5		9.75	%	$	29,995	$	30,000
Subordinated notes payable		2,602	8.00-12.5%		—		—			—		—
	$	2,763		$	5				$	29,995	$	30,000

(1) The unused capacity is subject to limitations based on lease eligibility and the borrowing base formula

On September 29, 2004, we entered into a three-year senior secured revolving line of credit with CIT Commercial Services, a unit of CIT Group (CIT), where we may borrow a maximum of $30 million based upon qualified lease receivables. Outstanding borrowings bear interest at prime plus 1.5% for prime rate loans or at the 90-day London Interbank Offered Rate (LIBOR) plus 4.0% for LIBOR loans. If a LIBOR loan is not renewed at maturity it automatically converts into a prime rate loan. The prime rates at December 31, 2005 and 2006 were 7.25% and 8.25%, respectively. The 90-day LIBOR rates at December 31, 2005 and 2006 were 4.53% and 5.36%, respectively. As of December 31, 2006, based on lease eligibility and the borrowing base formula, we had $20.8 million in excess availability on the CIT line of credit. As noted above, we do not expect to renew the CIT line of credit in September 2007 and are currently exploring new financing options.

Prior to obtaining the $30 million CIT line of credit, we had borrowings outstanding under a $192 million senior credit facility with a group of financial institutions, which failed to renew in September 2002. While cash flows from our portfolio were sufficient to repay borrowings under the $192 million senior credit facility, we were forced to suspend virtually all contract originations until a new source of liquidity was obtained. As of December 31, 2004, the loan under the $192 million senior credit facility had been fully repaid.

We have periodically financed our lease and service contracts through securitizations using special purpose entities. The assets of these special purpose entities are not available to pay our other creditors. However, the special purpose entities are included in our consolidated financial statements under generally accepted accounting principles. As a result, such assets and the related liabilities remained on our balance sheet and did not receive gain on sale treatment. The amounts borrowed under our securitization agreements were fully repaid as of December 31, 2004 and the special purpose entities associated with these agreements were subsequently dissolved.

Financial Covenants

Our CIT line of credit has financial covenants that we must comply with in order to obtain funding through the facility and to avoid an event of default. As of December 31, 2005 and 2006, we believe that we were in compliance with all covenants in our borrowing relationship.

Contractual Obligations and Lease Commitments

Contractual Obligations

We have entered into various agreements, such as debt and operating lease agreements that require future payments. At December 31, 2006, the $5,000 of outstanding borrowings on the revolving credit facility is due in September 2007 and our future minimum lease payments under non-cancelable operating leases are $237,000 in 2007, $237,000 in 2008, $237,000 in 2009 and $237,000 in 2010.

Lease Commitments

We accept lease applications on daily basis and have a pipeline of applications that have been approved, where a lease has not been originated. Our commitment to lend does not become binding until all of the steps in the lease

26

origination process have been completed, including but not limited to the receipt of a complete and accurate lease document, all required supporting information and successful verification with the lessee. Since we fund on the same day a lease is successfully verified, we have no firm outstanding commitments to lend.

Market Risk and Financial Instruments

The following discussion about our risk management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In the normal course of operations, we also face risks that are either non-financial or non-quantifiable. Such risks principally include credit risk and legal risk, and are not represented in the analysis that follows.

The implicit yield on all of our leases and contracts is on a fixed interest rate basis due to the leases and contracts having scheduled payments that are fixed at the time of origination. When we originate or acquire leases or contracts, we base our pricing in part on the spread we expect to achieve between the implicit yield on each lease or contract and the effective interest rate we expect to incur in financing such lease or contract through our credit facility. Increases in interest rates during the term of each lease or contract could narrow or eliminate the spread, or result in a negative spread. We have adopted a policy designed to protect us against interest rate volatility during the term of each lease or contract.

Given the relatively short average life of our leases and contracts, our goal is to maintain a blend of fixed and variable interest rate obligations which limits our interest rate risk. As of December 31, 2006, we have repaid all of our fixed-rate subordinated debt and had only $5,000 of outstanding variable interest rate obligations.

Our CIT line of credit bears interest at rates which fluctuate with changes in the prime rate or the 90-day LIBOR; therefore, our interest expense is sensitive to changes in market interest rates. The effect of a 10% adverse change in market interest rates, sustained for one year, on our interest expense would be immaterial.

We maintain an investment portfolio in accordance with our investment policy guidelines. The primary objectives of the investment guidelines are to preserve capital, maintain sufficient liquidity to meet our operating needs, and to maximize return. We minimize investment risk by limiting the amount invested in any single security and by focusing on conservative investment choices with short terms and high credit quality standards. We do not use derivative financial instruments or invest for speculative trading purposes.

Recently Issued Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 156, Accounting for Servicing of Financial Assets — An Amendment of FASB Statement No. 140. Among other requirements, Statement No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract related to (a) the sale of financial assets, (b) a transfer to a qualifying special-purpose entity in a securitization where the resulting retained securities are classified as available-for-sale or trading securities or (c) an acquisition or assumption of an obligation to service a financial asset of a third party. Statement 156 is effective as of the beginning of fiscal years that begin after September 15, 2006. We believe that the adoption of this standard will not have a material impact on our consolidated financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. The new standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position is based on whether it is more likely than not that a tax position will be sustained upon examination based on its technical merits and measured at the largest amount of benefit that is more likely than not. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of

27

retained earnings. We believe that the adoption of this standard will not have a material impact on our consolidated financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) regarding the process of quantifying financial statement misstatements. SAB 108 states that registrants should use both a balance sheet and an income statement approach when quantifying and evaluating the materiality of a misstatement. SAB 108 contains guidance on correcting errors under the dual approach and transition guidance for correcting errors. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. SAB 108 did not have a material effect on our current or previously issued financial statements.

See Note B of the notes to the consolidated financial statements included herein for a discussion of the impact of the adoption of SFAS No. 123(R), Share-Based Payment, effective January 1, 2005.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

See Item 7, under the caption Market Risk and Financial Instruments.

Item 8.   Financial Statements and Supplementary Data

Our Financial Statements, together with the related report of our Independent Registered Public Accounting Firm, appear on pages F-1 through F-21 of this Form 10-K.

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

Not applicable.

Item 9A.   Controls and Procedures

Disclosure controls and procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Internal controls

During the fourth quarter of our fiscal year ended December 31, 2006, no changes were made in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information

Not applicable.

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

The sections, “Section 16(a) Beneficial Ownership Reporting Compliance,” “Governance of the Corporation” and “Proposal 1 — Election of Directors,” included in our proxy statement for the 2007 Special Meeting in Lieu of Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2007, are hereby incorporated by reference.

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Item 11.   Executive Compensation

The sections, “Compensation of Executive Officers,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Governance of the Corporation” included in our proxy statement for the 2007 Special Meeting in Lieu of Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2007, are hereby incorporated by reference.

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

The section “Security Ownership of Certain Beneficial Owners and Management,” included in our proxy statement for the 2007 Special Meeting in Lieu of Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2007, is hereby incorporated by reference.

Item 13.   Certain Relationships and Related Transactions and Director Independence

The section “Governance of the Corporation” included in our proxy statement for the 2007 Special Meeting in Lieu of Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2007, is hereby incorporated by reference.

Item 14.   Principal Accountant Fees and Services

The section “Proposal 2 — Ratification of the Selection of MicroFinancial’s Independent Registered Public Accounting Firm,” included in our proxy statement for the 2007 Special Meeting in Lieu of Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2007, is hereby incorporated by reference.

29

PART IV

Item 15.   Exhibits and Financial Statement Schedules

(a) (1)  Financial Statements

Our Financial Statements, together with the related report of the Independent Registered Public Accounting Firm, appear at pages F-1 through F-21 of this Form 10-K

(2) None

(3) Exhibits Index

Exhibit
Number			Description
	3	.1	Restated Articles of Organization, as amended. Incorporated by reference to the Exhibit with the same exhibit number in the Registrant’s Registration Statement on Form S-1 (Registration Statement No. 333-56639) filed with the Securities and Exchange Commission on June 9, 1998.
	3	.2†	Restated Bylaws, as amended.
	10	.1	Warrant Purchase Agreement dated April 14, 2003 among the Company, Fleet National Bank, as agent, and the other Lenders named therein. Incorporated by reference to Exhibit 10.2 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2003.
	10	.2	Form of Warrants to purchase Common Stock of the Company issued April 14, 2003, together with schedule of warrant holders. Incorporated by reference to Exhibit 10.3 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2003.
	10	.3	Co-Sale Agreement dated April 14, 2003 among the Company, Peter R. Bleyleben, Torrence C. Harder, Brian E. Boyle, Richard F. Latour, Alan J. Zakon, and James R. Jackson, Jr., and the Lenders named therein. Incorporated by reference to Exhibit 10.4 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2003.
	10	.4	Registration Rights Agreement dated April 14, 2003 among the Company and the Lenders named therein. Incorporated by reference to Exhibit 10.5 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2003.
	10	.5.1	Commercial Lease, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated. Incorporated by reference to Exhibit 10.25 in the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 (Registration Statement No. 333-56639) filed with the Securities and Exchange Commission on January 11, 1999.
	10	.5.2	Amendment to Lease #1, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated. Incorporated by reference to Exhibit 10.26 in the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 (Registration Statement No. 333-56639) filed with the Securities and Exchange Commission on January 11, 1999.
	10	.5.3	Lease Extension for the facility at 10-M Commerce Way, Woburn, MA dated September 16, 2003 among MicroFinancial Incorporated and Cummings Properties, LLC. Incorporated by reference to Exhibit 10.1 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2003.
	10	.5.4	Lease Extension #2 for the facility at 10-M Commerce Way, Woburn, MA dated July 15, 2005 among MicroFinancial Incorporated and Cummings Properties, LLC. Incorporated by reference to Exhibit 10.1 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005.
	10	.6.1*	1998 Equity Incentive Plan. Incorporated by reference to Exhibit 10.12 in the Registrant’s Amendment No. 2 to Registration Statement on Form S-1 (Registration Statement No. 333-56639) filed with the Securities and Exchange Commission on January 11, 1999.
	10	.6.2*	Forms of Restricted Stock Agreement grant under 1998 Equity Incentive Plan. Incorporated by reference to Exhibit 10.27 in the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2004.
	10	.6.3*†	Form of incentive stock option agreement under 1998 Equity Incentive Plan.
	10	.6.4*†	Form of non-qualified stock option agreement under 1998 Equity Incentive Plan.

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Exhibit
Number			Description
	10	.7*	Second Amended and Restated Employment Agreement between the Company and Peter R. Bleyleben dated July 15, 2005. Incorporated by reference to Exhibit 10.2 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005.
	10	.8*†	Amended and Restated Employment Agreement between the Company and Richard F. Latour dated March 15, 2004.
	10	.9*	Employment Agreement between the Company and James R. Jackson, Jr. dated May 4, 2005. Incorporated by reference to Exhibit 10.3 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005.
	10	.10*	Employment Agreement between the Company and Stephen Constantino dated May 4, 2005. Incorporated by reference to Exhibit 10.4 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005.
	10	.11*	Employment Agreement between the Company and Steven LaCreta dated May 4, 2005. Incorporated by reference to Exhibit 10.5 in the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005.
	10	.12	Warrant Certificate to purchase 100,000 shares of Common Stock, dated June 10, 2004 issued to Acorn Capital Group, LLC by MicroFinancial Incorporated. Incorporated by reference to Exhibit 10.9 of the Registrant’s Form 8-K filed on June 15, 2004.
	10	.13	Registration Rights Agreement dated June 10, 2004 by and among MicroFinancial Incorporated, Acorn Capital Group, LLC and Ampac Capital Solutions, LLC. Incorporated by reference to Exhibit 10.12 of the Registrant’s Form 8-K filed on June 15, 2004.
	10	.14	Revolving Credit Agreement dated as of September 29, 2004, by and among Leasecomm Corporation and TimePayment Corp. LLC, as Borrowers, MicroFinancial Incorporated, The CIT Group/Commercial Services, Inc., as Agent, and the other financial institutions from time to time party thereto, as Lenders. Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.15	$30,000,000 Revolving Credit Note, dated as of September 29, 2004, issued by Leasecomm Corporation and TimePayment Corp. LLC and payable to the order of The CIT Group/Commercial Services, Inc. Incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.16	Guaranty dated as of September 29, 2004, by MicroFinancial Incorporated in favor of The CIT Group/Commercial Services, Inc., as Agent. Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.17	Pledge Agreement, dated as of September 29, 2004, by and between MicroFinancial Incorporated and The CIT Group/Commercial Services, Inc., as Secured Party, on behalf of the Lenders. Incorporated by reference to Exhibit 10.4 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.18	Security Agreement dated as of September 29, 2004, by and among Leasecomm Corporation, TimePayment Corp. LLC and The CIT Group/Commercial Services, Inc., as Agent. Incorporated by reference to Exhibit 10.5 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.19	Intellectual Property Security Agreement dated as of September 29, 2004, by and among Leasecomm Corporation, TimePayment Corp. LLC and The CIT Group/Commercial Services, Inc., as Agent. Incorporated by reference to Exhibit 10.6 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.20	Revolving Credit Assignment of Leases dated as of September 29, 2004, by and among Leasecomm Corporation, TimePayment Corp. LLC and The CIT Group/Commercial Services, Inc., as Agent. Incorporated by reference to Exhibit 10.7 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.21	Warrant Purchase Agreement, dated as of September 29, 2004, by and between MicroFinancial Incorporated and The CIT Group/Commercial Services, Inc., as Investor. Incorporated by reference to Exhibit 10.8 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.22	Warrant Certificate, dated as of September 29, 2004, for the purchase of 50,000 shares of common stock, issued by MicroFinancial Incorporated in favor of The CIT Group/Commercial Services, Inc. Incorporated by reference to Exhibit 10.9 of the Registrant’s Form 8-K filed on October 4, 2004.
	10	.23	Registration Rights Agreement dated as of September 29, 2004, by and between MicroFinancial Incorporated and The CIT Group/Commercial Services, Inc., as Holder. Incorporated by reference to Exhibit 10.10 of the Registrant’s Form 8-K filed on October 4, 2004.

31

Exhibit
Number			Description
	10	.24.1	Warrant Certificate, dated as of September 29, 2004 for the purchase of 75,000 shares of common stock, issued by MicroFinancial Incorporated in favor of Stonebridge Associates, LLC. Incorporated by reference to Exhibit 10.11 of the Registrant’s Form 10-Q filed on November 15, 2004.
	10	.25.2	Amendment to Warrant Certificate, dated as of September 29, 2004 for the purchase of 75,000 shares of common stock, issued by MicroFinancial Incorporated in favor of Stonebridge Associates, LLC. Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on December 2, 2004.
	21	.1†	Subsidiaries of Registrant
	23	.1†	Consent of Vitale, Caturano & Company, Ltd.
	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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2†	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

†	Filed herewith.
*	Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Report.

(b) See (a) (3) above.

(c) None.

32

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MicroFinancial Incorporated

By:  /s/  Richard F. Latour

President and Chief Executive Officer

By:  /s/  James R. Jackson Jr.

Vice President and Chief Financial Officer

Date: March 27, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/  Peter R. Bleyleben Peter R. Bleyleben	Chairman of the Board of Directors	March 27, 2007
/s/  Richard F. Latour Richard F. Latour	President, Chief Executive Officer, Treasurer, Clerk, Secretary and Director	March 27, 2007
/s/  James R. Jackson Jr. James R. Jackson Jr.	Vice President and Chief Financial Officer	March 27, 2007
/s/  Brian E. Boyle Brian E. Boyle	Director	March 27, 2007
/s/  John W. Everets John W. Everets	Director	March 27, 2007
/s/  Torrence C. Harder Torrence C. Harder	Director	March 27, 2007
/s/  Fritz Von Mering Fritz Von Mering	Director	March 27, 2007
/s/  Alan J. Zakon Alan J. Zakon	Director	March 27, 2007

33

MICROFINANCIAL INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 2005 and 2006	F-3
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2005 and 2006	F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2004, 2005 and 2006	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006	F-6
Notes to Consolidated Financial Statements	F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
MicroFinancial Incorporated:

We have audited the accompanying consolidated balance sheets of MicroFinancial Incorporated and its subsidiaries (the “Company”) as of December 31, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2004, 2005 and 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2006, and the results of their operations and their cash flows for the years ended December 31, 2004, 2005 and 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note B, the Company adopted SFAS No. 123(R), “Share-Based Payment,” effective January 1, 2005.

/s/  Vitale, Caturano & Company, Ltd.

Boston, MA

January 26, 2007

F-2

MICROFINANCIAL INCORPORATED

CONSOLIDATED BALANCE SHEETS

	December 31,
	2005			2006
	(In thousands,
	except share
	and per share data)
ASSETS
Cash and cash equivalents	$	32,926		$	28,737
Net investment in leases:
Receivables due in installments		29,139			40,455
Estimated residual value		3,865			3,859
Initial direct costs		98			302
Less:
Advance lease payments and deposits		(35	)		(50	)
Unearned income		(3,658	)		(13,682	)
Allowance for credit losses		(8,714	)		(5,223	)
Net investment in leases		20,695			25,661
Investment in service contracts, net		1,626			613
Investment in rental contracts, net		3,025			313
Property and equipment, net		587			655
Other assets		1,447			652
Deferred income taxes, net		4,882			3,090
Total assets	$	65,188		$	59,721
LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable	$	161		$	5
Subordinated notes payable		2,602			—
Accounts payable		1,099			1,038
Dividends payable		4,114			691
Other liabilities		2,094			1,110
Income taxes payable		431			741
Total liabilities		10,501			3,585
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued at December 31, 2005 and 2006		—			—
Common stock, $.01 par value; 25,000,000 shares authorized; 13,713,899 and 13,811,442 shares issued and outstanding at December 31, 2005 and 2006, respectively		137			138
Additional paid-in capital		43,839			44,136
Retained earnings		10,711			11,862
Total stockholders’ equity		54,687			56,136
Total liabilities and stockholders’ equity	$	65,188		$	59,721

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

F-3

MICROFINANCIAL INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2004			2005			2006
	(In thousands, except share and per share data)
Revenues:
Income on financing leases	$	11,970		$	4,140		$	3,917
Rental income		31,009			25,359			20,897
Income on service contracts		5,897			3,467			1,870
Loss and damage waiver fees		4,016			2,863			1,895
Service fees and other		7,444			2,952			2,448
Interest income		31			503			1,415
Total revenues		60,367			39,284			32,442
Expenses:
Selling, general and administrative		26,821			20,884			14,499
Provision for credit losses		47,918			10,468			6,985
Depreciation and amortization		14,010			9,497			5,326
Interest		2,283			1,148			162
Total expenses		91,032			41,997			26,972
Income (loss) before provision (benefit) for income taxes		(30,665	)		(2,713	)		5,470
Provision (benefit) for income taxes		(20,449	)		(1,053	)		1,555
Net income (loss)	$	(10,216	)	$	(1,660	)	$	3,915
Net income (loss) per common share — basic	$	(0.77	)	$	(0.12	)	$	0.28
Net income (loss) per common share — diluted	$	(0.77	)	$	(0.12	)	$	0.28
Weighted average shares outstanding — basic		13,182,833			13,567,640			13,791,403
Weighted average shares outstanding — diluted		13,182,833			13,567,640			13,958,759
Dividends declared per common share	$	—		$	0.50		$	0.20

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

F-4

MICROFINANCIAL INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2004, 2005 and 2006

							Additional															Total
	Common Stock						Paid-In			Retained			Treasury Stock						Deferred			Stockholders’
	Shares			Amount			Capital			Earnings			Shares			Amount			Compensation			Equity
	(In thousands, except share data)
Balance at December 31, 2003		13,410,646		$	134		$	44,245		$	29,402			234,230		$	(2,515	)	$	—		$	71,266
Restricted stock granted		—			—			79			—			—			—			(79	)		—
Amortization of unearned compensation		2,500			—			—			—			—			—			28			28
Treasury stock issued		—			—			(68	)		—			(6,250	)		68			—			—
Reclassification of treasury stock		(227,980	)		(2	)		(2,445	)		—			(227,980	)		2,447			—			—
Warrants issued		—			—			1,015			—			—			—			—			1,015
Net loss		—			—			—			(10,216	)		—			—			—			(10,216	)
Balance at December 31, 2004		13,185,166			132			42,826			19,186			—			—			(51	)		62,093
Affect of adoption of SFAS No. 123(R)		—			—			(51	)		—			—			—			51			—
Option exercises		432,500			4			(4	)		—			—			—			—			—
Warrant exercises		322,938			3			776			—			—			—			—			779
Restricted stock granted		13,912			—			63			—			—			—			—			63
Stock-based compensation		—			—			842			—			—			—			—			842
Amortization of unearned compensation		5,000			—			15			—			—			—			—			15
Purchase and retirement of stock		(245,617	)		(2	)		(646	)		—			—			—			—			(648	)
Common stock dividends ($0.50 per share)		—			—			—			(6,815	)		—			—			—			(6,815	)
Tax benefit on stock options		—			—			18			—			—			—			—			18
Net loss		—			—			—			(1,660	)		—			—			—			(1,660	)
Balance at December 31, 2005		13,713,899			137			43,839			10,711			—			—			—			54,687
Warrant exercises		13,983			—			—			—			—			—			—			—
Stock issued for accrued compensation		56,141			1			199			—			—			—			—			200
Restricted stock granted		16,169			—			51			—			—			—			—			51
Stock-based compensation		—			—			10			—			—			—			—			10
Amortization of unearned compensation		11,250			—			37			—			—			—			—			37
Common stock dividends ($0.20 per share)		—			—			—			(2,764	)		—			—			—			(2,764	)
Net income		—			—			—			3,915			—			—			—			3,915
Balance at December 31, 2006		13,811,442		$	138		$	44,136		$	11,862			—		$	—		$	—		$	56,136

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

F-5

MICROFINANCIAL INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2004			2005			2006
	(In thousands)
Cash flows from operating activities:
Cash received from customers	$	85,000		$	55,231		$	39,790
Cash paid to suppliers and employees		(26,373	)		(20,066	)		(13,762	)
Cash (paid) received for income taxes		2,404			102			(453	)
Interest paid		(2,364	)		(542	)		(120	)
Interest received		27			503			1,415
Net cash provided by operating activities		58,694			35,228			26,870
Cash flows from investing activities:
Investment in lease contracts		(714	)		(6,364	)		(21,498	)
Investment in direct costs		—			(59	)		(345	)
Investment in property and equipment		(99	)		(555	)		(271	)
Net cash used in investing activities		(813	)		(6,978	)		(22,114	)
Cash flows from financing activities:
Proceeds from secured debt		11,419			262			179
Repayment of secured debt		(69,978	)		(135	)		(335	)
Repayment of short-term demand notes payable		(250	)		—			—
Proceeds from issuance of subordinated debt		2,000			—			—
Repayment of subordinated debt		(110	)		(1,771	)		(2,602	)
Decrease in restricted cash		2,376			—			—
Repayment of capital leases		(162	)		(41	)		—
Purchase and retirement of stock		—			(648	)		—
Payment of dividends		—			(2,700	)		(6,187	)
Net cash used in financing activities		(54,705	)		(5,033	)		(8,945	)
Net change in cash and cash equivalents		3,176			23,217			(4,189	)
Cash and cash equivalents, beginning		6,533			9,709			32,926
Cash and cash equivalents, ending	$	9,709		$	32,926		$	28,737
Reconciliation of net income (loss) to net cash provided by operating activitites:
Net income (loss)	$	(10,216	)	$	(1,660	)	$	3,915
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of unearned income, net of initial direct costs		(11,970	)		(4,140	)		(3,917	)
Depreciation and amortization		14,010			9,497			5,326
Provision for credit losses		47,918			10,468			6,985
Recovery of equipment cost and residual value		39,522			20,755			12,309
Stock-based compensation expense		—			1,088			255
Amortization of unearned compensation		28			15			37
Non-cash interest expense		194			606			46
Changes in assets and liabilities:
Increase (decrease) in income taxes payable		(7,789	)		431			310
Decrease (increase) in deferred income taxes		(11,255	)		(1,382	)		1,792
Decrease in other assets		736			1,053			678
Decrease in accounts payable		(712	)		(1,375	)		(61	)
Decrease in other liabilities		(1,772	)		(128	)		(805	)
Net cash provided by operating activities	$	58,694		$	35,228		$	26,870
Supplemental disclosure of non-cash activities:
Fair market value of stock issued for compensation	$	79		$	63		$	251
Fair market value of warrants issued		1,015			—			—
Warrants exercised by cancellation of debt		—			779			—
Reclassification of treasury stock to additional paid-in capital		2,447			—			—

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

F-6

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tables in thousands, except share and per share data)

A.   Nature of Business

MicroFinancial Incorporated (referred to as “MicroFinancial,” “we,” “us” or “our”) operates primarily through its wholly-owned subsidiaries, TimePayment Corp. and Leasecomm Corporation. TimePayment is a specialized commercial finance company that leases and rents “microticket” equipment and provides other financing services. The average amount financed by TimePayment during 2006 was approximately $5,900 while Leasecomm historically financed contracts of approximately $1,900. We primarily source our originations through a nationwide network of independent equipment vendors, sales organizations and other dealer-based origination networks. We fund our operations through cash provided by operating activities and borrowings under our line of credit.

Net losses incurred by us during the third and fourth quarters of 2002 caused us to be in default of certain debt covenants in our credit facility and securitization agreements. As a result, in September 2002, our credit facility failed to renew and we were forced to suspend substantially all origination activity. In June 2004, we secured a one-year $8 million line of credit and a $2 million three-year subordinated note that enabled us to resume contract originations. In conjunction with raising new capital, we also formed a wholly-owned operating subsidiary, TimePayment Corp. On September 29, 2004, we secured a three-year, $30 million, senior secured revolving line of credit from CIT Commercial Services, a unit of CIT Group. The CIT line of credit replaced the $8 million line of credit under more favorable terms and conditions including, but not limited to, pricing at prime plus 1.5% or at the 90-day LIBOR plus 4%. In addition, we used the proceeds from the CIT line of credit to retire the outstanding debt with the former bank group.

We have also continued to take steps to reduce overhead, including a reduction in headcount from 203 employees at December 31, 2002 to 87 employees at December 31, 2005. During the year ended December 31, 2006 our employee headcount was decreased to 67 in a continued effort to maintain an infrastructure that is aligned with current business conditions.

B.   Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of MicroFinancial and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. We operate in one principal business segment, the leasing and renting of equipment and other financing services.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Significant areas requiring the use of management estimates are revenue recognition, the allowance for credit losses, share-based payments and income taxes. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider all highly liquid instruments purchased with original maturities of less than three months to be cash equivalents. Cash equivalents consist principally of overnight investments, collateralized repurchase agreements, commercial paper, certificates of deposit and US government and agency securities.

F-7

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Cash

As part of our servicing obligation under the securitization agreements, we collected cash receipts for financing contracts that had been pledged to special purpose entities. These collections were segregated into separate accounts for the benefit of the entities to which the related contracts were pledged or sold and were remitted to such entities on a weekly basis. These restrictions expired in 2004 after the securitization notes were repaid.

Leases and Revenue Recognition

Our lease contracts are accounted for as financing leases. At origination, we record the gross lease receivable, the unguaranteed residual value of the leased equipment, the initial direct costs incurred and the unearned lease income. Unearned lease income is the amount by which the gross lease receivable plus the estimated residual value exceeds the cost of the equipment. Unearned lease income and initial direct costs incurred are amortized over the related lease term using the effective interest method, which results in a level rate of return on the net investment in leases. Unamortized unearned lease income and initial direct costs are written off if, in the opinion of management, the lease agreement is determined to be impaired.

In conjunction with the origination of leases, we may retain a residual interest in the underlying equipment upon termination of the lease. The value of such interest is estimated at inception of the lease and evaluated periodically for impairment. Impairment is recognized when cash flows expected to be realized subsequent to the end of the lease are expected to be less than the residual value recorded. Other revenues, such as loss and damage waiver fees and other service fees relating to leases, service contracts and rental contracts are recognized as they are earned. Sales taxes and property taxes collected from customers and remitted to governmental authorities are not included in revenues.

Allowance for Credit Losses

We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses on our portfolio. Given the nature of the “microticket” market and the individual size of each transaction, the business does not warrant the creation of a formal credit review committee to review individual transactions. Rather, we developed a sophisticated, risk-adjusted pricing model and automated the credit scoring, approval and collection processes. We believe that with the proper risk-adjusted pricing model, we can grant credit to a wide range of applicants provided that we price appropriately for the associated risk. As a result of approving a wide range of credits, we experience a relatively high level of delinquency and write-offs in our portfolio. We periodically review the credit scoring and approval process to ensure that the automated system is making appropriate credit decisions. Given the nature of the “microticket” market and the individual size of each transaction, we do not evaluate transactions individually for the purpose of determining the adequacy of the allowance for credit losses. Contracts in our portfolio are not re-graded subsequent to the initial extension of credit and the allowance is not allocated to specific contracts. Rather, we view the contracts as having common characteristics and we maintain a general allowance against our entire portfolio utilizing historical collection statistics as the basis for the amount.

We have adopted a consistent, systematic procedure for establishing and maintaining an appropriate allowance for credit losses for our “microticket” transactions. We review, on a static pool basis, the collection experience on various months’ originations and the recoveries made on accounts written off. The results of these static pool analyses reflect our actual historical collection experience. We then consider current delinquency statistics, credit scores of the lessees, current economic conditions and other relevant factors which might affect the performance of our portfolio. The combination of historical experience, credit scores, delinquency levels, and the review of current factors provide the basis for our analysis of the adequacy of the allowance. We take charge-offs against our receivables when such receivables are 360 days past due and no contact has been made with the lessee for 12 months. However, collection efforts continue and we recognize recoveries in future periods when cash is received.

F-8

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Investment in Service Contracts

Our investment in cancelable service contracts on home and business security systems is recorded at cost and amortized over the seven year expected life of the contracts. Income on service contracts is recognized monthly as the related services are provided.

At December 31, 2005 and 2006, our investment in service contracts consisted of the following:

	December 31,
	2005			2006
Gross investment in service contracts	$	5,302		$	3,418
Less accumulated amortization		(3,676	)		(2,805	)
Investment in service contracts, net	$	1,626		$	613

Amortization expense on service contracts totaled $4,067,000, $3,151,000 and $1,016,000 for the years ended December 31, 2004, 2005 and 2006, respectively. Upon retirement or other disposition, the cost and related accumulated amortization are removed from the accounts and any resulting gain or loss is reflected in income. We periodically evaluate whether events or circumstances have occurred that may affect the estimated useful life or recoverability of our investment in service contracts.

Investment in Rental Contracts

Our investment in rental contracts is either recorded at estimated residual value for converted leases and depreciated using the straight-line method over a period of twelve months or at the acquisition cost and depreciated using the straight line method over an estimated life of three years. Rental equipment consists of low-priced commercial equipment, including point-of-sale authorization systems and a wide variety of other equipment with similar characteristics.

At December 31, 2005 and 2006, our investment in rental contracts consisted of the following:

	December 31,
	2005			2006
Gross investment in rental contracts	$	11,258		$	7,387
Less accumulated depreciation		(8,233	)		(7,074	)
Investment in rental contracts, net	$	3,025		$	313

Depreciation expense on rental contracts totaled $9,142,000, $5,936,000 and $4,108,000 for the years ended December 31, 2004, 2005 and 2006, respectively. Upon retirement or other disposition, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. We periodically evaluate whether events or circumstances have occurred that may affect the estimated useful life or recoverability of the investment in rental contracts.

During the third quarter of 2005, we sold Transaction Enabling Systems, a limited liability company that we acquired in January 2001. The sale consisted of approximately 1,100 rental contracts each with monthly payments of $25. The sale allowed us to reverse a previously disputed liability of approximately $776,000, which was recorded as a reduction of selling, general and administrative expenses.

In January 2006, a dealer elected to repurchase $1,620,000 of rental contracts with a net book value of $1,303,000. We recorded a net gain on the sale of approximately $212,000 in January 2006 as we have no remaining obligations or interest in the contracts.

F-9

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment

Office and computer equipment are recorded at cost and depreciated using the straight-line method over estimated lives of three to five years. Leasehold improvements are amortized over the shorter of the life of the lease or the estimated life of the improvement. Upon retirement or other disposition, the cost and related accumulated depreciation of the assets are removed from the accounts and any resulting gain or loss is reflected in income.

Fair Value of Financial Instruments

For financial instruments including cash and cash equivalents, net investment in leases, accounts payable, and other liabilities, we believe that the carrying amount approximates fair value.

Debt Issue Costs

Costs incurred in securing financing are capitalized and amortized over the term of the financing.

Income Taxes

Deferred income taxes are determined under the asset/liability method. Differences between the financial statement and tax bases of assets and liabilities are measured using the currently enacted tax rates expected to be in effect when these differences reverse. Deferred tax expense is the result of changes in the liability for deferred taxes. The principal differences between assets and liabilities for financial statement and tax return purposes are the treatment of leased assets, accumulated depreciation and provisions for credit losses. The deferred tax liability is reduced by loss carry-forwards and alternative minimum tax credits available to reduce future income taxes. In addition, management must assess the likelihood that deferred tax assets will be recovered from future taxable income or tax carry-back availability and determine the need for a valuation allowance.

Reclassification of Prior Year Balances

Certain reclassifications have been made to prior years’ consolidated financial statements to conform to the current year’s presentation. In the statements of operations for the years ended December 31, 2004 and 2005, interest income has been reclassified as a separate line item and in the December 31, 2005 balance sheet; $132,000 of inventory (returned equipment) was reclassified from property and equipment to other assets.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share gives effect to all potentially dilutive common shares outstanding during the period. The computation of diluted net income (loss) per share does not assume the issuance of common shares that have an antidilutive effect on net income (loss) per common share. At December 31, 2004, 1,675,000 options, 663,035 warrants, and 16,250 unvested shares of restricted stock were excluded from the computation of diluted net loss per share because their effect was antidilutive. At December 31, 2005, 1,242,500 options, 335,957 warrants, and 11,250 unvested shares of restricted stock were excluded from the computation of diluted net loss per share because their effect was antidilutive. At December 31, 2006, 1,075,000 options and 175,000 warrants were excluded from the computation of diluted net income per share because their effect was antidilutive.

F-10

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31,
	2004			2005			2006
Net income (loss)	$	(10,216	)	$	(1,660	)	$	3,915
Weighted-average shares outstanding used in computation of net income (loss) per share — basic		13,182,833			13,567,640			13,791,403
Dilutive effect of options, warrants and restricted stock		—			—			167,356
Shares used in computation of net income (loss) per common share — assuming dilution		13,182,833			13,567,640			13,958,759
Net income (loss) per common share — basic	$	(0.77	)	$	(0.12	)	$	0.28
Net income (loss) per common share — diluted	$	(0.77	)	$	(0.12	)	$	0.28

Stock-Based Employee Compensation

All stock options issued to directors and employees have an exercise price not less than the fair market value of our common stock on the date of grant and under the intrinsic-value method, there was no compensation expense recorded in our financial statements through December 31, 2004. Prior to 2005, we followed the disclosure-only requirements of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 required that compensation under a fair value method be determined and disclosed in a pro forma effect on earnings and earnings per share. Prior to 2005, we accounted for stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The amortization of unearned compensation expense relating to restricted stock awards is reflected in net income (loss). Prior to 2005, no other stock-based employee compensation cost was reflected in net income (loss), as either all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant or options granted that result in variable compensation costs had an exercise price greater than the fair market value of the underlying common stock on December 31, 2004.

Effective January 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment.  SFAS 123(R) requires us to recognize the compensation cost related to share-based payment transactions with employees in the financial statements. The compensation cost is measured based upon the fair value of the instrument issued. Share-based compensation transactions with employees covered by SFAS 123(R) include share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Under the modified prospective method of adoption, compensation cost was recognized during the years ended December 31, 2005 and 2006 for stock options. The modified prospective application transition method requires the application of this standard to:

•  All new awards issued after the effective date;

•  All modifications, repurchases or cancellations of existing awards after the effective date; and

•  Unvested awards at the effective date.

F-11

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For unvested awards, the compensation cost related to the remaining required service period that was not rendered upon the adoption date was determined by the compensation cost calculated for either recognition or pro forma disclosure under SFAS 123. Results for years prior to 2005 have not been restated. The following table illustrates the effect on net loss and net loss per share as if we had applied the fair value based method to all outstanding and unvested awards for the year ended December 31, 2004.

	2004
Net loss, as reported	$	(10,216	)
Add: Stock-based employee compensation expense included in reported net loss		28
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(877	)
Pro forma net loss	$	(11,065	)
Net loss per share:
As reported — basic and diluted	$	(0.77	)
Pro forma — basic and diluted	$	(0.84	)

Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 156, Accounting for Servicing of Financial Assets — An Amendment of FASB Statement No. 140. Among other requirements, Statement No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract related to (a) the sale of financial assets, (b) a transfer to a qualifying special-purpose entity in a securitization where the resulting retained securities are classified as available-for-sale or trading securities or (c) an acquisition or assumption of an obligation to service a financial asset of a third party. Statement 156 is effective as of the beginning of fiscal years that begin after September 15, 2006. We believe that the adoption of this standard will not have a material impact on our consolidated financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. The new standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position is based on whether it is more likely than not that a tax position will be sustained upon examination based on its technical merits and measured at the largest amount of benefit that is more likely than not. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings. We believe that the adoption of this standard will not have a material impact on our consolidated financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) regarding the process of quantifying financial statement misstatements. SAB 108 states that registrants should use both a balance sheet and an income statement approach when quantifying and evaluating the materiality of a misstatement. SAB 108 contains guidance on correcting errors under the dual approach and transition guidance for correcting errors. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. SAB 108 did not have a material effect on our current or previously issued financial statements.

F-12

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

C.   Net Investment in Leases

At December 31, 2006, future minimum payments on our lease receivables are as follows:

Year Ending December 31,
2007	$	19,034
2008		10,013
2009		6,784
2010		3,420
2011		1,204
Total	$	40,455

At December 31, 2006, the weighted-average remaining life of the leases in our portfolio is approximately 38 months and the weighted-average implicit rate of interest is approximately 29.7%.

A summary of the activity in our allowance for credit losses is as follows:

	Year Ended December 31,
	2004			2005			2006
Allowance for credit losses, beginning	$	43,011		$	14,963		$	8,714
Provision for credit losses		47,918			10,468			6,985
Charge-offs		(81,763	)		(22,806	)		(16,069	)
Recoveries		5,797			6,089			5,593
Allowance for credit losses, ending	$	14,963		$	8,714		$	5,223

A summary of the changes in estimated residual value is as follows:

	Year Ended December 31,
	2004			2005			2006
Estimated residual value, beginning	$	19,110		$	9,502		$	3,865
Lease originations		92			710			2,954
Terminations		(9,700	)		(6,347	)		(2,960	)
Estimated residual value, ending	$	9,502		$	3,865		$	3,859

Originations represent the residual value capitalized upon origination of leases and terminations represent the residual value deducted upon the termination of a lease that (i) is bought out during or at the end of the lease term, (ii) has completed its original lease term and converted to an extended rental contract or (iii) has been charged off by us.

F-13

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

D.   Property and Equipment

At December 31, 2005 and 2006, our property and equipment consisted of the following:

	December 31,
	2005			2006
Computer equipment	$	5,190		$	4,184
Office equipment		1,184			691
Leasehold improvements		349			263
Total		6,723			5,138
Less accumulated depreciation and amortization		(6,136	)		(4,483	)
Net	$	587		$	655

Depreciation and amortization expense on property and equipment totaled $801,000, $410,000 and $202,000 for the years ended December 31, 2004, 2005 and 2006, respectively. Total depreciation and amortization expense for property and equipment, service contracts and rental contracts was $14,010,000, $9,497,000 and $5,326,000 for the years ended December 31, 2004, 2005 and 2006, respectively.

E.   Notes Payable and Subordinated Debt

At December 31, 2005 and 2006, our notes payable and subordinated debt consisted of the following:

	December 31,
	2005		2006
Credit facility — CIT	$	161	$	5
Subordinated notes		2,602		—
Total	$	2,763	$	5

Notes Payable

On September 29, 2004, we entered into a three-year senior secured revolving line of credit with CIT Commercial Services, a unit of CIT Group (“CIT”), where we may borrow a maximum of $30 million based upon qualified lease receivables. Outstanding borrowings bear interest at prime plus 1.5% or at the 90-day London Interbank Offered Rate (LIBOR) plus 4.0%. If a LIBOR loan is not renewed at maturity it automatically converts into a prime rate loan. The prime rates at December 31, 2005 and 2006 were 7.25% and 8.25%, respectively. The 90-day LIBOR rates at December 31, 2005 and 2006 were 4.53% and 5.36%, respectively. As of December 31, 2005 and 2006, the interest rate on the CIT line of credit was 8.75% and 9.75%, respectively, and we were in compliance with all covenants under the CIT credit facility.

In connection with the CIT line of credit, we issued warrants to CIT to purchase 50,000 shares of our common stock at an exercise price of $0.825 per share which expire on June 10, 2007. The fair market value of the warrants, as determined using the Black-Scholes option-pricing model, was accounted for as additional paid-in capital and debt issue costs. The resulting debt issue cost of $139,000 is being amortized to interest expense under the effective interest method. Non-cash interest expense was $14,000, $43,000 and $46,000 for the years ended December 31, 2004, 2005 and 2006, respectively. We expect to amortize the remaining $36,000 in 2007.

We also issued warrants to our financial advisor, in connection with the CIT line of credit, to purchase 75,000 shares of our common stock at an exercise price of $3.704 per share which expire on September 28, 2011. The fair market value of the warrants, as determined using the Black-Scholes option-pricing model, was accounted for as additional paid in capital and debt issue costs. The resulting debt issue cost of $131,000 is being amortized

F-14

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

over the life of the CIT line of credit. Non-cash debt issue expense was $10,000, $39,000 and $39,000 for the years ended December 31, 2004, 2005 and 2006, respectively. We expect to amortize the remaining $43,000 in 2007.

Outstanding borrowings are collateralized by eligible lease contracts pledged to CIT. In addition, we granted CIT a security interest in all of our other assets. Our obligation to repay the CIT line of credit is subject to lease collateral availability and the borrowing base formula. The CIT line of credit expires on September 29, 2007.

Prior to obtaining the CIT line of credit, we had borrowings outstanding under a $192 million senior credit facility with a group of financial institutions which failed to renew as of September 30, 2002. At December 31, 2002, we were in default of certain covenants under this credit facility and on April 14, 2003, we entered into a long-term agreement with the lenders. This long-term agreement waived the covenant defaults and in consideration for this waiver, required the balance of the loan to be repaid over a term of 22 months at an interest rate of prime plus 2.0%. As of September 30, 2004, the loan under the senior credit facility was fully repaid.

Also, on April 14, 2003, we issued warrants to purchase an aggregate of 268,199 shares of our common stock at an exercise price of $0.825 per share. The warrants were issued to the lenders in connection with the waiver of the covenant defaults and the extension of our loan. Due to the anti-dilutive rights contained in the warrant agreement, on June 10, 2004, an additional 2,207 warrants were issued to the lenders and all of the warrants were re-priced to $0.815 per share. This was a result of the issuance of warrants in connection with the June 10, 2004 credit facility described below. The warrants held by the lenders became 50% exercisable on June 30, 2004. Since all of our obligations to the lenders were paid in full prior to September 30, 2004, the remaining 50% of the warrants were automatically canceled. During the year ended December 31, 2005, the cashless exercise of 24,736 warrants resulted in the issuance of 20,596 shares. During the year ended December 31, 2006, the cashless exercise of 17,668 warrants resulted in the issuance of 13,983 shares. The remaining 93,289 warrants expire on September 30, 2014. The $77,000 fair market value of the warrants as determined using the Black-Scholes option-pricing model was accounted for as additional paid in capital and was being amortized to interest expense under the effective interest method. As of December 31, 2004, because the debt had been repaid in full, the entire $77,000 had been amortized to interest expense. The resulting effective interest rate on the senior credit facility was prime plus 2.09%.

On June 10, 2004, we entered into a one year revolving line of credit where we could borrow a maximum of $8 million based upon qualified lease receivables at an interest rate of 15.6%. Upon the closing of the $30 million CIT line of credit, the $8 million line of credit was terminated.

In connection with the $8 million line of credit, we issued warrants to purchase an aggregate of 100,000 shares of our common stock at an exercise price of $6.00 per share which expire on June 10, 2007. The fair market value of the warrants, as determined using the Black-Scholes option-pricing model, was accounted for as additional paid in capital and discount on notes payable. The resulting discount of $117,000 was being amortized to interest expense under the effective interest method. Since the $8 million line of credit was canceled as of September 29, 2004 the entire discount was accreted to interest expense during the year ended December 31, 2004.

Subordinated Notes Payable

At December 31, 2005, we had subordinated debt outstanding of $2,602,000. This debt was subordinated in the rights to our assets to notes payable to the primary lenders as described above. These borrowings had interest rates ranging from 8% to 12.0% and maturity dates ranging from March 2006 to November 2006. At December 31, 2006, these notes were paid in full.

In June 2004, we secured a commitment for a three year subordinated note for $2 million bearing interest at 13%, simultaneously with the closing of the $8 million credit line discussed above. In connection with the note, we issued warrants to purchase 110,657 shares of our common stock at an exercise price of $2.00 per share and 191,685 shares of our common stock at an exercise price of $2.91 per share, both expiring on June 10, 2007. The fair market value of the warrants, as determined using the Black-Scholes option-pricing model, was accounted for as additional paid in capital and discount on subordinated notes payable. The resulting discount of $628,000 was

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MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amortized to interest expense under the effective interest method. Non-cash interest expense was $65,000 and $563,000 for the years ended December 31, 2004 and 2005, respectively.

In May 2005, the lender elected to exercise all the warrants issued in connection with the $2 million subordinated note. The lender paid the exercise price by cancelling $779,117 of the outstanding subordinated note. As of December 31, 2005, this note was fully repaid.

At December 31, 2005, subordinated notes payable included $652,000 due to stockholders, officers and directors. Interest paid to stockholders, officers and directors under such notes, at rates ranging between 8% and 12%, amounted to $78,000, $78,000 and $35,000 for the years ended December 31, 2004, 2005 and 2006, respectively.

Fair Value of Notes Payable and Subordinated Debt

The carrying amount of our variable rate CIT line of credit agreement approximates its fair value. The fair value of our long-term fixed rate borrowings is estimated using discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 2005, the carrying value of the fixed rate borrowings was approximately $2,602,000, with an estimated fair value of approximately $2,596,000.

F.   Stockholders’ Equity

Treasury Stock

We had 227,980 shares of common stock held in treasury, at cost, as of July 1, 2004. Effective July 1, 2004, the Commonwealth of Massachusetts adopted a legislative act that resulted in the elimination of treasury stock. In accordance with this change in the law we retroactively reclassified stockholders’ equity to reflect the retirement of our treasury stock. Accordingly, during the year ended December 31, 2004, common stock and additional paid-in capital were reduced by $2,000 and $2,445,000, respectively.

Stock Options and Restricted Stock

The 1998 Equity Incentive Plan (the “1998 Plan”) permits the Compensation Committee of our Board of Directors to make various long-term incentive awards, generally equity-based, to eligible persons. We reserved 4,120,380 shares of our common stock for issuance pursuant to the 1998 Plan. Qualified stock options, which are intended to qualify as “incentive stock options” under the Internal Revenue Code, may be issued to employees at an exercise price per share not less than the fair value of our common stock on the date of grant. Nonqualified stock options may be issued to our officers, employees and directors, as well as our consultants and agents, at an exercise price per share not less than fifty percent of the fair value of our common stock on the date of grant. The vesting periods and expiration dates of the grants are determined by the Board of Directors. The option period may not exceed ten years.

On February 4, 2004, a new non-employee director was granted 25,000 shares of restricted stock with a fair value of $3.17 per share. On August 15, 2006, a second new non-employee director was granted 25,000 shares of restricted stock with a fair value of $3.35 per share. In each case, the restricted stock vested 20% upon grant, and vests 5% on the first day of each quarter after the grant date. As vesting occurs, compensation expense is recognized and deferred compensation on the balance sheet was reduced. During the year ended December 31, 2004, 8,750 shares vested and $28,000 was amortized from unearned compensation to compensation expense. On adoption of SFAS 123(R), we reclassified the balance of deferred compensation to additional paid-in capital. During the year ended December 31, 2005, 5,000 shares vested and $15,000 was amortized to compensation expense. During the year ended December 31, 2006, 11,250 shares vested and $37,000 was amortized to compensation expense. As of December 31, 2006, 25,000 shares of restricted stock had not vested.

F-16

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On July 14, 2005, the non-employee directors were granted a total of 13,912 shares of restricted stock with a fair value of $4.50 per share in accordance with our director compensation policy. These shares were fully vested on the date of issuance.

In February 2006, executive officers and directors were granted a total of 56,141 shares of restricted stock with a fair value of $3.55 per share for services rendered during the year ended December 31, 2005. In July 2006, the non-employee directors were granted a total of 15,078 shares of restricted stock with a fair value of $3.17 per share in accordance with our director compensation policy. In August 2006, a new non-employee director was granted a total of 1,091 shares of restricted stock with a fair value of $3.35 per share in accordance with our director compensation policy. These shares were fully vested on the date of issuance.

The following summarizes stock option activity for the years ended December 31, 2004 (no activity), 2005 and 2006 (no activity):

						Weighted-
						Average
	Shares			Price Per Share		Exercise Price
Outstanding at December 31, 2003 and 2004		1,675,000		$	0.86 to $13.544	$	7.139
Exercised in 2005		(432,500	)	$	0.86 to $ 1.585	$	1.250
Outstanding at December 31, 2005 and 2006		1,242,500		$	1.585 to $13.544	$	9.189

The options vest over five years based solely on service and are exercisable only after they become vested. At December 31, 2004, 2005 and 2006, 1,178,000, 1,090,500 and 1,195,500, respectively, of the outstanding options were fully vested. The total intrinsic value of all options exercised during the year ended December 31, 2005 was $1,554,000.

At December 31, 2005 and 2006, 1,242,500 shares of common stock were reserved for common stock option exercises. At December 31, 2005 and 2006, 1,763,952 and 1,666,642 shares of common stock were reserved for future grants.

Information relating to our outstanding stock options at December 31, 2006 is as follows:

	Outstanding						Exercisable
			Weighted-				Weighted-
			Average		Intrinsic		Average				Intrinsic
Exercise Price	Shares		Life (Years)		Value		Exercise Price		Shares		Value
$12.31		359,391		2.16	$	—	$	12.31		359,391	$	—
13.54		40,609		2.16		—		13.54		40,609		—
9.78		350,000		3.15		—		9.78		350,000		—
13.10		90,000		4.14		—		13.10		90,000		—
6.70		235,000		5.16		—		6.70		188,000		—
1.59		167,500		5.91		386,000		1.59		167,500		386,000
		1,242,500		4.26	$	386,000	$	9.29		1,195,500	$	386,000

In March 2005, our Board of Directors accelerated the vesting of all of our President and CEO’s in the money options which resulted in the vesting of 70,000 options with an exercise price of $1.585 and 80,000 options with an exercise price of $0.86. As a result of the acceleration, we recognized additional compensation expense of $566,000 for the year ended December 31, 2005. In addition, our Board of Directors elected to allow the cashless exercise of options exercised during the year ended December 31, 2005. As a result of the circumstances of the exercises, all awards made under the 1998 Plan have been classified as share-based liability awards. During the year ended December 31, 2005, the total share-based employee compensation cost recognized for stock options was $1,025,000 and we recognized a related income tax benefit of approximately $291,000. During the year ended

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MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2006, the total share-based employee compensation cost recognized for stock options was $255,000 and we did not recognize a related income tax benefit as no options were exercised.

In November 2005, FASB issued FASB Staff Position SFAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” We have elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects (if any) of stock-based compensation expense pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact to the additional paid-in capital pool and the statements of operations and cash flows for the tax effects of employee stock-based compensation awards that were outstanding upon adoption of SFAS 123(R).

In accordance with SFAS 123(R), for share-based liability awards, we recognize compensation cost equal to the greater of (a) the grant date fair value or (b) the fair value of the modified liability when it is settled. As of December 31, 2006, $29,000 of unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted average period of three months. In addition, we will recognize any incremental compensation cost as it is incurred. For the years ended December 31, 2005 and 2006, we recognized an additional $53,000 and $23,000, respectively, in compensation expense due to the change in the fair value of the share-based liability awards outstanding.

We estimate the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R), Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 107 and our prior period pro forma disclosures as prescribed by SFAS 123. Key input assumptions used to estimate the fair value of stock options include the expected option term, volatility of the stock, the risk-free interest rate and the dividend yield.

There were no options granted during the years ended December 31, 2004, 2005 and 2006. The fair values as of December 31, 2005, of the outstanding options classified as liability instruments under SFAS 123(R)were estimated using expected lives of two to four years, annualized volatility of 79.50%, an expected dividend yield of 5.13% and risk-free interest rates of 3.82% to 4.05%. The fair values as of December 31, 2006, were estimated using expected lives of one to three years, annualized volatility of 40.45%, an expected dividend yield of 5.14% and a risk-free interest rate of 4.82%.

The expected life represents the average period of time that the options are expected to be outstanding given consideration to vesting schedules; annualized volatility is based on historical volatilities of our common stock; dividend yield represents the current dividend yield expressed as a constant percentage of our stock price and the risk-free interest rate is based on the U.S. Treasury yield curve in effect on the measurement date for periods corresponding to the expected life of the option. At each subsequent reporting date, we recalculate the fair value of our share-based liability awards based on current assumptions.

Common Stock Reserved

We reserved shares of common stock at December 31, 2006 as follows:

Warrants	318,289
Stock options	1,242,500
Restricted stock grants	25,000
Reserved for future grants	1,666,642
Total	3,252,431

F-18

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

G.   Income Taxes

The provision (benefit) for income taxes consists of the following:

	Year Ended December 31,
	2004			2005			2006
Current:
Federal	$	(8,045	)	$	168		$	(416	)
State		(1,149	)		161			179
		(9,194	)		329			(237	)
Deferred:
Federal		(12,098	)		(978	)		2,039
State		843			(404	)		(247	)
		(11,255	)		(1,382	)		1,792
Total	$	(20,449	)	$	(1,053	)	$	1,555

At December 31, 2005 and 2006, the components of the net deferred tax asset were as follows:

	2005			2006
Deferred tax assets:
Allowance for credit losses	$	2,781		$	1,747
Accrued expenses		101			315
Depreciation and amortization		2,100			7,760
Federal alternative minimum tax credit		1,551			1,345
Federal NOL carryforward		2,453			1,020
State NOL and other state attributes		3,764			3,451
State valuation allowance		(3,576	)		(2,915	)
Total deferred tax assets		9,174			12,723
Deferred tax liabilities:
Lease receivable and unearned income		(2,991	)		(7,969	)
Residual value		(1,262	)		(1,543	)
Initial direct costs		(39	)		(121	)
Total deferred tax liabilities		(4,292	)		(9,633	)
Net deferred tax asset	$	4,882		$	3,090

At December 31, 2006, we had a Federal loss carry-forward of approximately $3.0 million which may be used to offset future income. This loss carry-forward is available for use against future Federal income until expiration in 2024. In addition, at December 31, 2006, we had State net operating loss carry-forwards of $41.2 million which may be used to offset future income. The State NOL’s have restrictions and expire in approximately two to twenty years. We recorded a valuation allowance against our State deferred tax assets as it is unlikely that these deferred tax assets will be fully realized.

F-19

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is reconciliation between the effective income tax rate and the applicable statutory federal income tax rate:

	Year Ended December 31,
	2004			2005			2006
Federal statutory rate		(35.00	)%		(35.00	)%		35.00	%
State income taxes, net of federal benefit		(5.60	)		(4.13	)		6.36
State valuation allowance		7.63			(6.90	)		(7.49	)
IRS audit settlement		—			—			(7.03	)
Nondeductible expenses and other		(33.71	)		7.22			1.58
Effective income tax rate		(66.68	)%		(38.81	)%		28.42	%

The calculation of our tax liabilities involves dealing with estimates in the application of complex tax regulations in a multitude of jurisdictions. We record liabilities for estimated tax obligations for federal and state purposes. For the year ended December 31, 2004, the nondeductible expenses and other rate of (33.71%) includes a benefit of $7.9 million that resulted from a reduction in our estimate of certain tax liabilities included on our balance sheet. For the years ended December 31, 2005 and 2006, the nondeductible expenses and other rate of 7.22% and 1.58%, respectively, includes certain non-deductible stock-based compensation.

Our 1997 through 2003 tax years were audited by the Internal Revenue Service. As part of the audit, the Internal Revenue Service Agent had proposed several adjustments to our federal tax returns that would have required us to pay the IRS an amount between $8.0 and $10.0 million. Such payments would have been offset by an adjustment to our deferred tax asset as the amount would likely have been recoverable in future periods. We filed a formal protest under the appeals process challenging these adjustments and reached a final settlement in December 2006 which required us to pay $31,000 in additional taxes and $9,000 in interest. The income tax provision for the year ended December 31, 2006 includes a net benefit of $385,000 resulting from the IRS audit settlement.

H.   Commitments and Contingencies

Operating Leases

The lease for our facility in Woburn, Massachusetts expires in 2010. At December 31, 2006, future minimum lease payments under non-cancelable operating leases are $237,000 in 2007, $237,000 in 2008, $237,000 in 2009 and $237,000 in 2010. Rental expense under operating leases totaled $631,000, $668,000 and $275,000 for the years ended December 31, 2004, 2005 and 2006, respectively.

Legal Matters

We are 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 our results of operations or financial position.

In October 2003, we were served with a purported class action complaint filed in United States District Court for the District of Massachusetts alleging violations of the federal securities laws. The purported class would have consisted of all persons who purchased our securities between February 5, 1999 and October 30, 2002. The Complaint asserted that during this period we made a series of materially false or misleading statements about our business, prospects and operations, including with respect to certain lease provisions, our course of dealings with our vendor/dealers, and our reserves for credit losses. In April 2004, an Amended Class Action Complaint was filed which added additional defendants and expanded upon the prior allegations with respect to us. We filed a Motion to Dismiss the Amended Complaint. On June 13, 2006, the Court granted our Motion to Dismiss the Amended Complaint with Prejudice and on July 12, 2006, the plaintiffs filed an appeal. On December 6, 2006, the parties filed

F-20

MICROFINANCIAL INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

an Agreement of Dismissal whereby the plaintiffs voluntarily agreed to dismiss their appeal with prejudice and without payment by us.

Lease Commitments

We accept lease applications on a daily basis and, as a result, we have a pipeline of applications that have been approved, where a lease has not been originated. Our commitment to lend does not become binding until all of the steps in the origination process have been completed, including the receipt of the lease, supporting documentation and verification with the lessee. Since we fund on the same day a lease is verified, we have no outstanding commitments to lend.

I.   Employee Benefit Plan

We have a defined contribution plan under Section 401(k) of the Internal Revenue Code to provide retirement and profit sharing benefits covering substantially all full-time employees. Employees are eligible to contribute up to 100% of their gross salary until they reach the maximum annual contribution amount allowed under the Internal Revenue Code. We contribute $0.50 for every $1.00 contributed by an employee up to 3% of the employee’s salary. Vesting of our contributions is over a five-year period at 20% per year. Our contributions to the defined contribution plan were $53,000 and $47,000 for the years ended December 31, 2005 and 2006, respectively. For the year ended December 31, 2004 we were able to fully settle our obligation by offsetting the match against the forfeiture account.

J.   Concentration of Credit Risk

Our financial instruments that are exposed to concentration of credit risk consist primarily of lease and rental receivables and cash and cash equivalent balances. To reduce our risk, credit policies are in place for approving leases and lease pools are monitored by us. In addition, cash and cash equivalents are maintained with several high-quality financial institutions.

During the year ended December 31, 2004, our top four dealers accounted for 65.09% of all of the leases originated at 21.84%, 16.83%, 15.71%, and 10.71%, respectively. During the year ended December 31, 2005, our top three dealers accounted for 47.29% of all of the leases originated at 26.61%, 10.64%, and 10.04%, respectively. During the year ended December 31, 2006, our top dealer accounted for 13.91% of all of the leases originated.

We service leases and rental contracts in all 50 states of the United States and its territories. As of both December 31, 2005 and 2006, leases in California, Florida, Texas, Massachusetts and New York accounted for approximately 40% of our portfolio. Only California accounted for more than 10% of the total portfolio as of December 31, 2005 at approximately 14%. As of December 31, 2006, California, Florida, New York and Texas accounted for approximately 13%, 11%, 8%, and 7%, respectively, of the total portfolio. None of the remaining states accounted for more than 4% of such total.

The majority of our portfolio consists of authorization systems for point-of-sale (“POS”), card-based payments by, for example, debit, credit, gift and charge cards. POS authorization systems require the use of a POS terminal capable of reading a cardholder’s account information from the card’s magnetic strip and combining this information with the amount of the sale entered via a POS terminal keypad, or POS software used on a personal computer to process a sale. The terminal electronically transmits this information over a communications network to a computer data center and then displays the returned authorization or verification response on the POS terminal.

F-21

EX-3.2

                                                                     EXHIBIT 3.2

                                     AMENDED

                                       AND

                                    RESTATED

                                     BY-LAWS

                                       OF

                           MICROFINANCIAL INCORPORATED





                                TABLE OF CONTENTS
                                                                           
1. Articles of Organization...............................................     1
2. Fiscal Year............................................................     1
3. Meetings of Stockholders...............................................     1
   3.1 Annual Meetings....................................................     1
   3.2 Special Meetings...................................................     5
   3.3 Place of Meetings..................................................     6
   3.4 Notice of Meetings.................................................     6
   3.5 Quorum.............................................................     7
   3.6 Action by Vote.....................................................     7
   3.7 Voting.............................................................     8
   3.8 Action by Consent..................................................     8
   3.9 Proxies............................................................     8
4. Directors..............................................................     9
   4.1 Powers.............................................................     9
   4.2 Enumeration, Election and Term of Office...........................     9
   4.3 Regular Meetings...................................................     9
   4.4 Special Meetings...................................................    10
   4.5 Notices............................................................    10
   4.6 Quorum.............................................................    11
   4.7 Action by Consent..................................................    11
   4.8 Committees.........................................................    11
   4.9 Meeting by Telecommunications......................................    12
5. Officers and Agents....................................................    12
   5.1 Enumeration; Qualification.........................................    12
   5.2 Powers.............................................................    13
   5.3 Election...........................................................    13
   5.4 Tenure.............................................................    13
   5.5 Chairman of the Board..............................................    14
   5.6 President and Vice Presidents......................................    14
   5.7 Treasurer and Assistant Treasurers.................................    14
   5.8 Clerk and Assistant Clerks.........................................    15
   5.9 Secretary and Assistant Secretary..................................    15
6. Resignations, Removals and Vacancies...................................    15
   6.1 Resignations.......................................................    15
   6.2 Removals...........................................................    15
   6.3 Vacancies..........................................................    17
7. Indemnification of Directors and Others................................    17
8. Stock..................................................................    19
   8.1 Stock Authorized...................................................    19
   8.2 Issue of Authorized Unissued Capital Stock.........................    19
   8.3 Certificates of Stock..............................................    20
   8.4 Transfers..........................................................    21
   8.5 Lost, Mutilated, or Destroyed Certificates.........................    21
   8.6 Transfer Agent and Registrar.......................................    22
   8.7 Setting Record Date and Closing Transfer Records...................    22
9. Miscellaneous Provisions...............................................    23
   9.1 Execution of Papers................................................    23
   9.2 Voting of Securities...............................................    23
   9.3 Corporate Seal.....................................................    23
   9.4 Corporate Records..................................................    23
   9.5 Evidence of Authority..............................................    24
10. Amendments............................................................    24


                                      - i -



                                    RESTATED

                                     BY-LAWS

                                       OF

                           MICROFINANCIAL INCORPORATED

1     Articles of Organization.

      The name and purposes of MicroFinancial Incorporated (the "Corporation")
shall be as set forth in the Articles of Organization. These By-Laws, the powers
of the Corporation and its Directors and stockholders, and all matters
concerning the conduct and regulation of the business of the Corporation, shall
be subject to such provisions in regard thereto, if any, as are set forth in the
Articles of Organization. All references in these By-Laws to the Articles of
Organization shall be construed to mean the Articles of Organization of the
Corporation as from time to time amended or restated.

2.    Fiscal Year.

      Except as from time to time otherwise determined by the Directors, the
fiscal year of the Corporation shall in each year end on December 31.

3.    Meetings of Stockholders.

      3.1   Annual Meetings.

            (a) The annual meeting of stockholders shall be held on the second
Tuesday in April in each year (or if that be a legal holiday in the place where
the meeting is to be held, on the next succeeding full business day) at ten
o'clock A.M. unless a different hour is fixed by the Board of Directors or the
President and stated in the notice of the meeting. The purposes for which the
annual meeting is to be held, in addition to those prescribed by law, by the
Articles of



Organization or these By-Laws, may be specified by the Board of Directors or the
President. If no annual meeting has been held on the date fixed above, a special
meeting in lieu thereof may be held and such special meeting shall have for the
purposes of these By-Laws, or otherwise, all the force and effect of an annual
meeting.

            (b) At an annual meeting of the stockholders of the Corporation,
only such business shall be conducted as shall have been properly brought before
such meeting. To be properly brought before an annual meeting, business must be
(i) specified in the notice of such meeting (or any supplement thereto) given by
or at the direction of the Board of Directors of the Corporation, (ii) otherwise
properly brought before such meeting by or at the direction of the Board of
Directors of the Corporation, or (iii) otherwise properly brought before such
meeting by a stockholder of the Corporation in accordance with these Bylaws. For
business to be properly brought before an annual meeting by a stockholder of the
Corporation, such stockholder must have given timely notice thereof in writing
to the Clerk of the Corporation. To be timely, such stockholder's notice must be
delivered either by personal delivery or by registered or certified mail, return
receipt requested, to the principal executive offices of the Corporation
(addressed to the Clerk) not later than ninety (90) calendar days prior to the
anniversary date of the release of the Corporation's proxy statement to its
stockholders in connection with the preceding year's annual meeting of its
stockholders, except that if no annual meeting of its stockholders was held in
the previous year or the date of the annual meeting of its stockholders has been
changed by more than thirty (30) calendar days from the anniversary of the
annual meeting of its stockholders stated in the previous year's proxy
statement, a proposal of a stockholder of the Corporation shall be received by
the Corporation a reasonable time before the solicitation is made. Such
stockholder's notice shall set forth, as to each matter such stockholder

                                      - 2 -


proposes to bring before an annual meeting, (i) a brief description of the
business desired to be brought before such annual meeting and the reasons for
conducting such business at the annual meeting, (ii) a representation that such
stockholder is a holder of record of stock of the Corporation entitled to vote
with respect to such business and that such stockholder intends to appear in
person or by proxy at the annual meeting to move the consideration of such
business, (iii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (iv) the class and number of shares
of stock of the Corporation which are beneficially owned by such stockholder,
and (v) any interest of such stockholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at an
annual meeting except in accordance with the procedures set forth in this
Section 3.1. The Chairman of an annual meeting may refuse to acknowledge a
motion to consider any business that he/she determines was not made in
compliance with the foregoing procedures and if he/she should so determine and
declare to such meeting, then any such business not properly brought before such
meeting shall not be transacted.

            (c) Only persons who are nominated in accordance with the procedures
set forth in this Section 3.1, the Articles of Organization and applicable laws,
rules and regulations shall be eligible for election as directors of the
Corporation. Without limiting the foregoing, nomination of persons for election
to the Board of Directors of the Corporation may be made at a meeting of
stockholders of the Corporation (i) by or at the direction of the Board of
Directors of the Corporation or any nominating

                                      - 3 -


or similar committee thereof, or (ii) by any stockholder of the Corporation
entitled to vote for the election of directors of the Corporation at such
meeting who complies with the notice procedures set forth in this Section 3.1.
Such nominations, other than those made by or at the direction of the Board of
Directors of the Corporation or any nominating or similar committee thereof,
shall be made pursuant to timely notice in writing to the Clerk of the
Corporation. To be timely, a stockholder's notice shall be delivered either by
personal delivery or by registered or certified mail, return receipt requested,
to the principal executive offices of the Corporation (addressed to the Clerk)
not later than ninety (90) calendar days prior to the anniversary date of the
release of the Corporation's proxy statement to its stockholders in connection
with the preceding year's annual meeting of its stockholders, except that if no
annual meeting of its stockholders was held in the previous year or the date of
the annual meeting of its stockholders has been changed by more than thirty (30)
calendar days from the anniversary of the annual meeting of its stockholders
stated in the previous year's proxy statement, a proposal of a stockholder of
the Corporation shall be received by the Corporation a reasonable time before
the solicitation is made. Such stockholder's notice shall set forth (i) as to
each person whom such stockholder proposes to nominate for election or
re-election as a director of the Corporation (A) the name, age, business address
and residence address of such nominee, (B) the principal occupation or
employment of such nominee, (C) the class and number of shares of the
Corporation, if any, which are beneficially owned by such nominee, (D) a
description of all arrangements or understandings between such stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which such nomination is made by such stockholder, and (E) any other
information relating to such nominee that is required to be disclosed in
solicitations of proxies for election of directors, or as otherwise required, in
each case, pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including, without limitation, such nominee's written consent to
being named in the proxy statement as a nominee and to serving as a director of
the Corporation if elected); and (ii) as to such stockholder (A) the name and
address, as they appear on the Corporation's books, of such

                                      - 4 -


stockholder, (B) a representation that such stockholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and that such
stockholder intends to appear in person or by proxy at such meeting to nominate
the person or persons specified in such notice, and (C) the class and number of
shares of stock of the Corporation which are beneficially owned by such
stockholder. At the request of the Board of Directors of the Corporation, any
person nominated by the Board of Directors of the Corporation for election as a
director of the Corporation shall furnish to the Clerk of the Corporation that
information required to be set forth in a stockholder's notice of nomination, as
provided above in this Section 3.1, which pertains to such nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 3.1. The Chairman of
the meeting may refuse to acknowledge a motion to consider any nominee as a
director of the Corporation that he/she determines was not made in compliance
with the foregoing procedures and if he/she should so determine and declare to
such meeting then the defective nomination shall be disregarded.

            (d) The affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the then-outstanding shares of stock of the
Corporation entitled to vote, voting together as a single class, shall be
required to alter, amend or repeal Section 3.1(b) or Section 3.1(c).

      3.2   Special Meetings.

      A special meeting of the stockholders may be called at any time only by
(a) the Chairman of the Board, (b) the President, (c) by a majority of the
Directors acting by vote or by written instrument or instruments signed by them,
or (d) by the Clerk, or in case of the death, absence, incapacity or refusal of
the Clerk, by any other officer, upon written application of stockholders

                                      - 5 -


holding at least sixty-six and two-thirds percent (66 2/3%) of the issued and
outstanding voting stock. Such call shall state the time, place and purposes of
the meeting. The business transacted at such special meeting shall be limited to
the purpose for which it was called except as otherwise determined by the Board
of Directors of the Corporation or the chairman of the meeting.

      3.3   Place of Meetings.

      All meetings of the stockholders shall be held at the principal office of
the Corporation in Massachusetts, unless a different place within Massachusetts
or, if permitted by the Articles of Organization, elsewhere within the United
States is designated by the President, or by a majority of the Directors acting
by vote or by written instrument or instruments signed by them and stated in the
notice of the meeting. Any adjourned session of any meeting of the stockholders
shall be held at such place within Massachusetts or, if permitted by the
Articles of Organization, elsewhere within the United States as is designated in
the vote of adjournment.

      3.4   Notice of Meetings.

      A written notice of the place, date and hour of all meetings of
stockholders stating the purposes of the meeting shall be given at least seven
(7) days before the meeting to each stockholder entitled to vote thereat and to
each stockholder who is otherwise entitled by law or by the Articles of
Organization to such notice, by leaving such notice with him or at his residence
or usual place of business, or by mailing it, postage prepaid, and addressed to
such stockholder at his address as it appears in the records of the Corporation.
Such notice shall be given by the Clerk, or in case of the death, absence,
incapacity or refusal of the Clerk, by any other officer or by a person
designated either by the Clerk, by the person or persons calling the meeting or
by the Board of Directors. Whenever notice of a meeting is required to be given
a

                                      - 6 -


stockholder under any provision of law, of the Articles of Organization, or of
these By-Laws, a written waiver thereof, executed before or after the meeting by
such stockholder or his attorney thereunto authorized, and filed with the
records of the meeting, shall be deemed equivalent to such notice.

      3.5   Quorum.

      At any meeting of the stockholders, a quorum shall consist of a majority
of all shares of stock then issued and outstanding and entitled to vote at the
meeting except that if two or more classes or series of stock are entitled to
vote on any matter as separate classes or series, then in the case of each such
class or series a quorum for that matter shall consist of a majority of all
shares of stock of that class or series then issued and outstanding and except
when a different quorum is required by law, by the Articles of Organization or
by these By-Laws. Stock owned directly or indirectly by the Corporation, if any,
shall not be deemed outstanding for this purpose. Any meeting may be adjourned
from time to time by a majority of the votes properly cast upon the question,
whether or not a quorum is present, and the meeting may be held as adjourned
without further notice.

      3.6   Action by Vote.

      When a quorum is present at any meeting, a plurality of the votes properly
cast for election to any office shall elect to such office and a majority of the
vote properly cast upon any question other than an election to an office shall
decide the question, except when a larger vote is required by law, by the
Articles of Organization or by these By-Laws. No ballot shall be required for
any election unless requested by a stockholder present or represented at the
meeting and entitled to vote in the election.

                                      - 7 -


      3.7   Voting.

      Stockholders entitled to vote shall have one vote for each share of stock
entitled to vote held by them of record according to the records of the
Corporation and a proportionate vote for a fractional share, unless otherwise
provided by the Articles of Organization. The Corporation shall not, directly or
indirectly, vote any share of its own stock.

      3.8   Action by Consent.

      Any action required or permitted to be taken at any meeting of the
stockholders may be taken without a meeting if all stockholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of the meetings of stockholders. Such consents shall be
treated for all purposes as a vote at a meeting.

      3.9   Proxies.

      Stockholders entitled to vote may vote either in person or by proxy in
writing dated not more than six months before the meeting named therein, which
proxies shall be filed with the clerk or other person responsible to record the
proceedings of the meeting before being voted. Unless otherwise specifically
limited by their terms, such proxies shall entitle the holders thereof to vote
at any adjournment of such meeting but shall not be valid after the final
adjournment of such meeting. A proxy with respect to stock held in the name of
two or more persons shall be valid if executed by any one of them unless at or
prior to exercise of the proxy the Corporation receives a specific written
notice to the contrary from any one of them. A proxy purporting to be executed
by or on behalf of a stockholder shall be deemed valid unless challenged at or
prior to its exercise and the burden of proving invalidity shall rest on the
challenger.

                                      - 8 -


4.    Directors.

      4.1   Powers.

      The business of the Corporation shall be managed by a Board of Directors
who shall have and may exercise all the powers of the Corporation except as
otherwise reserved to the stockholders by law, by the Articles of Organization
or by these By-Laws. 4.2 Enumeration, Election and Term of Office.

      The Board of Directors shall consist of no more than seven (7) or less
than three (3) Directors divided into three (3) classes in accordance with the
provisions of the Articles of Organization. The Directors shall be chosen at the
annual meeting of the stockholders by such stockholders as have the right to
vote thereon, and each shall hold office until the end of his or her specified
term and until his or her successor is chosen and qualified or until he or she
sooner dies, resigns, is removed or becomes disqualified. No Director need be a
stockholder.

      4.3   Regular Meetings.

      Regular meetings of the Board of Directors may be held at such times and
places within or without The Commonwealth of Massachusetts as the Board of
Directors may fix from time to time and, when so fixed, no notice thereof need
be given, provided that any Director who is absent when such times and places
are fixed shall be given notice as provided in this Section 4 of the fixing of
such times and places and provided further that any resolution relating to the
holding of regular meetings shall remain in force only until the next annual
meeting of stockholders. The first meeting of the Board of Directors following
the annual meeting of the stockholders may be held without notice immediately
after and at the same place as the annual meeting of the stockholders or the
special meeting held in lieu thereof. If in any year a meeting of the Board of
Directors is not held at such time and place, any action to be taken may be
taken

                                      - 9 -


at any later meeting of the Board of Directors with the same force and effect as
if held or transacted at such meeting.

      4.4   Special Meetings.

      Special meetings of the Directors may be called by the President or by the
Treasurer or by the Clerk or by any two Directors and shall be held at the place
designated in the call thereof.

      4.5   Notices.

      Notices of any special meeting of the Directors shall be given by the
Clerk or Secretary to each Director, by mailing to him, postage prepaid, and
addressed to him at his address as registered on the books of the Corporation,
or if not so registered at his last known home or business address, a written
notice of such meeting at least forty-eight (48) hours before the meeting or by
delivering such notice to him at least twenty-four (24) hours before the meeting
or by sending to him at least twenty-four (24) hours before the meeting, by
prepaid telegram addressed to him at such address, notice of such meeting. If
the Clerk or Secretary refuses or neglects for more than twenty-four (24) hours
after receipt of a call to give notice of such special meeting, or if the
offices of Clerk and Secretary are vacant or the Clerk and Secretary are absent
from The Commonwealth of Massachusetts, or incapacitated, such notice may be
given by the officer or one of the Directors calling the meeting. Notice need
not be given to any Director if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
Director who attend the meeting without protesting prior thereto or at its
commencement the lack of notice to him. A notice or waiver of notice of a
Directors' meeting need not specify the purposes of the meeting.

                                     - 10 -


      4.6   Quorum.

      At any meeting of the Directors, a quorum for any election or for the
consideration of any question shall consist of a majority of the Directors then
in office. Whether or not a quorum is present, any meeting may be adjourned from
time to time by a majority of the votes properly cast upon the question, and the
meeting may be held as adjourned without further notice. When a quorum is
present at any meeting, the votes of a majority of the Directors present shall
be requisite and sufficient for election to any office and shall decide any
question brought before such meeting, except in any case where a different vote
is required by law, by the Articles of Organization or by these By-Laws.

      4.7   Action by Consent.

      Any action required or permitted to be taken at any meeting of the
Directors may be taken without a meeting if all the Directors consent to the
action in writing and the written consents are filed with the records of the
meetings of the Directors. Such consent shall be treated for all purposes as a
vote of the Directors at a meeting.

      4.8   Committees.

      The Board of Directors, by vote of a majority of the Directors then in
office, may elect from its number an Executive Committee or other committees and
may delegate thereto some or all of its powers except those which by law, by the
Articles of Organization, or by these By-Laws may not be delegated. Except as
the Board of Directors may otherwise determine, any such committee may make
rules for the conduct of its business, but unless otherwise provided by the
Board of Directors or in such rules, its business shall be conducted so far as
possible in the same manner as is provided by these By-Laws for the Board of
Directors. All members of such committees shall hold such offices at the
pleasure of the Board of Directors. The Board of

                                     - 11 -


Directors may abolish any such committee at any time. Any committee to which the
Board of Directors delegates any of its powers or duties shall keep records of
its meetings and shall upon request report its action to the Board of Directors.
The Board of Directors shall have power to rescind any action of any committee,
but no such rescission shall have retroactive effect.

      4.9   Meeting by Telecommunications.

      Members of the board of directors or any committee elected thereby may
participate in a meeting of such board or committee by means of a conference
telephone or similar communications equipment by means of which all persons
participating in a meeting can hear each other at the same time and
participation by such means shall constitute presence in person at the meeting.

5.    Officers and Agents.

      5.1   Enumeration; Qualification.

      The officers of the Corporation shall be a President, a Treasurer, a
Clerk, and such other officers, including a Chairman of the Board, if any, as
the incorporators at their initial meeting, or the Directors from time to time,
may in their discretion elect or appoint. The Corporation may also have such
agents, if any, as the incorporators at their initial meeting, or the Directors
from time to time, may in their discretion appoint. Any officer may be but none
need be a Director or stockholder. The Clerk shall be a resident of
Massachusetts unless the Corporation has a resident agent appointed for the
purpose of service of process. Any two or more offices may be held by the same
person. Any officer may be required by the Directors to give bond for the
faithful performance of his duties to the Corporation in such amount and with
such sureties as the Directors may determine. The premiums for such bonds may be
paid by the Corporation.

                                     - 12 -


      5.2   Powers.

      Subject to law, to the Articles of Organization and to the other
provisions of these By-Laws, each officer shall have, in addition to the duties
and powers herein set forth, such duties and powers as are commonly incident to
his office and such duties and powers as the Directors may from time to time
designate.

      5.3   Election.

      The Chairman of the Board may, and the President, the Treasurer and the
Clerk shall be elected annually by the Directors at their first meeting
following the annual meeting of the stockholders. Other officers, if any, may be
elected or appointed by the Board of Directors at said meeting or at any other
time.

      5.4   Tenure.

      Except as otherwise provided by law or by the Articles of Organization or
by these By-Laws, the Chairman of the Board, the President, the Treasurer and
the Clerk shall hold office until the first meeting of the Directors following
the next annual meeting of the stockholders and until their respective
successors are chosen and qualified, and each other officer shall hold office
until the first meeting of the Directors following the next annual meeting of
the stockholders and until their respective successors are chosen and qualified,
unless a different period shall have been specified by the terms of his election
or appointment, or in each case until he sooner dies, resigns, is removed or
becomes disqualified. Each agent shall retain his authority at the pleasure of
the Directors.

                                     - 13 -


      5.5   Chairman of the Board.

      If elected, the Chairman of the Board of Directors shall preside at all
meetings of the Directors and shall be an ex-officio, voting member of all
committees, including any executive committee, which may be established by the
Board of Directors.

      5.6   President and Vice Presidents.

      The President shall be the chief executive officer of the Corporation and
shall, subject to the direction of the Board of Directors, have general
supervision and control of its business. Unless otherwise provided by the Board
of Directors he shall preside, when present, at all meetings of stockholders
and, in the absence of the Chairman of the Board of Directors, he shall preside
at any meeting of the Board of Directors.

      In the absence or disability of the President, his powers or duties shall
be performed by the Vice President, if only one, or, if more than one, by the
one designated for the purpose by the Directors. Any Vice President shall have
such other powers and shall perform such other duties as the Board of Directors
may from time to time designate.

      5.7   Treasurer and Assistant Treasurers.

      The Treasurer shall, subject to the direction of the Board of Directors,
have general charge of the financial affairs of the Corporation and shall cause
to be kept accurate books of account. He shall have custody of all funds,
securities, and valuable documents of the Corporation, except as the Board of
Directors may otherwise provide.

      In the absence or disability of the Treasurer, his powers and duties shall
be performed by the Assistant Treasurer, if only one, or, if more than one, by
the one designated for the purpose by the Directors. Any Assistant Treasurer
shall have such other powers and perform such other duties as the Board of
Directors may from time to time designate.

                                     - 14 -


      5.8   Clerk and Assistant Clerks.

      The Clerk shall keep a record of the meetings of stockholders. In the
event there is no Secretary or he is absent, the Clerk or an Assistant Clerk
shall keep a record of the meetings of the Board of Directors. Unless the
Directors shall appoint a transfer agent and/or registrar or other officer or
officers for the purpose, the Clerk shall be charged with the duty of keeping,
or causing to be kept, accurate records of all stock outstanding, stock
certificates issued and stock transfers. In the absence of the Clerk from any
meeting of stockholders, an Assistant Clerk if one be elected, otherwise a
Temporary Clerk designated by the person presiding at the meeting, shall perform
the duties of the Clerk. An Assistant Clerk shall have such powers and perform
such other duties as the Board of Directors may from time to time designate.

      5.9   Secretary and Assistant Secretary.

      The Secretary, if one be elected or appointed, shall keep a record of the
meetings of the Board of Directors. In the absence of the Secretary, the Clerk
and any Assistant Clerk, a Temporary Secretary shall be designated by the person
presiding at such meeting to perform the duties of the Secretary.

6.    Resignations, Removals and Vacancies.

      6.1   Resignations.

      Any Director or officer may resign at any time by delivering his
resignation in writing to the President or the Clerk or to a meeting of the
Directors. Such resignation shall take effect at such time as is specified
therein, or if no such time is so specified then upon delivery thereof.

      6.2   Removals.

      Unless a higher percentage is required by law or the Articles of
Organization, any director of the Corporation may be removed from office at any
time, but only for cause (as defined below) and only by the affirmative vote (i)
of the holders of at least sixty-six and two-

                                     - 15 -


thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of
the Corporation, voting together as a single class or (ii) at least sixty-six
and two-thirds percent (66 2/3%) of the directors then in office, though less
than a quorum, but excluding from such vote any director(s) who is (are) then
the subject of the removal vote. For purposes of this provision, "cause" shall
mean (i) gross negligence, fraud or dishonesty, (ii) conviction of a felony
offense, (iii) breach of a fiduciary duty involving personal profit, or (iv)
willful violation of any material written Corporation policy. The affirmative
vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of
the then-outstanding shares of the Common Stock of the Corporation, voting
together as a single class, shall be required to alter, amend or repeal this
provision.

      The Directors may remove any officer from office with or without
assignment of cause by vote of a majority of the Directors then in office.

      If cause is assigned for removal of any Director or officer, such Director
or officer may be removed only after a reasonable notice and opportunity to be
heard before the body proposing to remove him.

      The Directors may terminate or modify the authority of any agent or
employee.

      Except as the Directors may otherwise determine, no Director or officer
who resigns or is removed shall have any right to any compensation as such
Director or officer for any period following his resignation or removal, or any
right to damages on account of such removal whether his compensation be by the
month or by the year or otherwise, provided, however, that the foregoing
provision shall not prevent such Director or officer from obtaining damages for
breach of any contract of employment legally binding upon the Corporation.

                                     - 16 -


      6.3   Vacancies.

      Unless a higher percentage is required by law or the Articles of
Organization, any vacancies in the Board of Directors for any reason, and any
newly created directorships resulting from any increase in the number of
directors, may be filled only by the Board of Directors, acting by vote of
eighty percent (80%) of the directors then in office, although less than a
quorum, and any directors so chosen shall hold office until the next election of
the class for which such directors shall have been chosen and until their
respective successors shall be duly elected and qualified. No decrease in the
number of directors shall shorten the term of any incumbent director. The
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation,
voting together as a single class, shall be required to alter, amend or repeal
this provision.

      If the office of any officer becomes vacant, the Directors may elect or
appoint a successor by vote of a majority of the Directors present at the
meeting at which such election or appointment is made.

      Each such successor shall hold office for the unexpired term of his
predecessor and until his successor shall be elected or appointed and qualified,
or until he sooner dies, resigns, is removed or becomes disqualified.

7.    Indemnification of Directors and Others.

      The Corporation shall, to the extent legally permissible, indemnify any
person serving or who has served as a Director or officer of the Corporation, or
at its request as a Director, trustee, officer, employee or other agent of any
organization in which the Corporation owns shares or of which it is a creditor
against all liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and counsel fees, reasonably
incurred by

                                     - 17 -


him in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with which
he may be threatened, while serving or thereafter, by reason of his being or
having been such a Director, officer, trustee, employee or agent, except with
respect to any matter as to which he shall have been adjudicated in any
proceeding not to have acted in good faith in the reasonable belief that his
action was in the best interests of the Corporation; provided, however, that as
to any matter disposed of by a compromise payment by such Director, officer,
trustee, employee or agent, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses shall be
provided unless:

      (a)   such compromise shall be approved as in the best interests of the
            Corporation, after notice that it involves such indemnification:

            (i)   by a disinterested majority of the directors then in office;
                  or

            (ii)  by the holders of a majority of the outstanding stock at the
                  time entitled to vote for Directors, voting as a single class,
                  exclusive of any stock owned by any interested Director or
                  officer; or

      (b)   in the absence of action by disinterested directors or stockholders,
            there has been obtained at the request of a majority of the
            Directors then in office an opinion in writing of independent legal
            counsel to the effect that such Director or officer appears to have
            acted in good faith in the reasonable belief that his action was in
            the best interests of the Corporation.

Expenses including counsel fees, reasonably incurred by any such Director,
officer, trustee, employee or agent in connection with the defense or
disposition of any such action, suit or other proceeding may be paid from time
to time by the Corporation in advance of the final disposition

                                     - 18 -


thereof upon receipt of an undertaking by such individual to repay the amounts
so paid to the Corporation if it is ultimately determined that indemnification
for such expenses is not authorized under this section. The right of
indemnification hereby provided shall not be exclusive of or affect any other
rights to which any such Director, officer, trustee, employee or agent may be
entitled. Nothing contained in this Section shall affect any rights to
indemnification to which corporate personnel other than such Directors,
officers, trustees, employees or agents may be entitled by contract or otherwise
under law. As used in this Section the terms "Director", "officer", "trustee",
"employee" and "agent" include their respective heirs, executors and
administrators, and an "interested" Director, officer, trustee, employee or
agent is one against whom in such capacity the proceedings in question or other
proceedings on the same or similar grounds is then pending.

8.    Stock.

      8.1   Stock Authorized.

      The total number of shares and the par value, if any, of each class of
stock which the Corporation is authorized to issue, and if more than one class
is authorized, a description of each class with the preferences, voting powers,
qualifications and special and relative rights and privileges as to each class
and any series thereof, shall be as stated in the Articles of Organization.

      8.2   Issue of Authorized Unissued Capital Stock.

      Any unissued capital stock from time to time authorized under the Articles
of Organization may be issued by vote of the Directors. No such stock shall be
issued unless the cash, so far as due, or the property, services or expenses for
which it was authorized to be issued,

                                     - 19 -


has been actually received or incurred by, or conveyed or rendered to, the
Corporation or is in its possession as surplus.

      8.3   Certificates of Stock.

      Each stockholder shall be entitled to a certificate in form selected by
the Board of Directors stating the number and the class and the designation of
the series, if any, of the shares held by him. Such certificate shall be signed
by the President or a Vice President and the Treasurer or an Assistant
Treasurer. Such signatures may be facsimiles if the certificate is signed by a
transfer agent, or by a registrar, other than a Director, officer or employee of
the Corporation.

      Every certificate for shares of stock subject to any restriction on
transfer pursuant to the Articles of Organization, these By-Laws, or any
agreement to which the Corporation is a party shall have the restriction noted
conspicuously on the certificate and shall also set forth on the face or back
either the full text of the restriction or a statement of the existence of such
restriction and a statement that the Corporation will furnish a copy to the
holder of such certificate upon written request and without charge. Every
certificate issued when the Corporation is authorized to issue more than one
class or series of stock shall set forth on its face or back either the full
text or the preferences, voting powers, qualifications and special and relative
rights of the shares of each class and series authorized to be issued or a
statement of the existence of such preferences, powers, qualifications and
rights, and a statement that the Corporation will furnish a copy thereof to the
holder of such certificate upon written request and without charge.

                                     - 20 -


      8.4   Transfers.

      Subject to the restrictions, if any, imposed by the Articles of
Organization, these By-Laws or any agreement to which the Corporation is a
party, shares of stock shall be transferred on the books of the Corporation only
by the surrender to the Corporation or its transfer agent of the certificate
representing such shares properly endorsed or accompanied by a written
assignment of such shares or by a written power of attorney to sell, assign, or
transfer such shares, properly executed, with necessary transfer stamps affixed
if necessary, and with such proof that the endorsement, assignment or power of
attorney is genuine and effective as the Corporation or its transfer agent may
reasonably require. Except as may be otherwise required by law, the Corporation
shall be entitled to treat the record holder of stock as shown on its books as
the owner of such stock for all purposes, including the payment of dividends and
the right to vote with respect thereto, regardless of any transfer, pledge or
other disposition of such stock, until the shares have been transferred on the
books of the Corporation in accordance with the requirements of these By-Laws.
It shall be the duty of each stockholder to notify the Corporation of his post
office address.

      8.5   Lost, Mutilated, or Destroyed Certificates.

      Except as otherwise provided by law, the Board of Directors may determine
the conditions upon which a new certificate of stock may be issued in place of
any certificate alleged to have been lost, mutilated or destroyed. It may in its
discretion, require the owner of a lost, mutilated or destroyed certificate, or
his legal representative, to give a bond, sufficient in its opinion, with or
without surety, to indemnify the Corporation against any loss or claim which may
arise by reason of the issue of a certificate in place of such lost, mutilated
or destroyed stock certificate.

                                     - 21 -


      8.6   Transfer Agent and Registrar.

      The Board of Directors may appoint a transfer agent or a registrar or both
for its capital stock or any class or series thereof and require all
certificates for such stock to bear the signature or facsimile thereof of any
such transfer agent or registrar.

      8.7   Setting Record Date and Closing Transfer Records.

      The Board of Directors may fix in advance a time not more than sixty (60)
days before (i) the date of any meeting of the stockholders or (ii) the date for
the payment of any dividend or the making of any distribution to stockholders or
(iii) the last day on which the consent or dissent of stockholders may be
effectively expressed for any purpose, as the record date for determining the
stockholders having the right to notice and to vote at such meeting, or the
right to receive such dividend or distribution, or the right to give such
consent or dissent. If a record date is set, only stockholders of record on the
date shall have such right notwithstanding any transfer of stock on the records
of the Corporation after the record date. Without fixing such record date, the
Board of Directors may close the transfer records of the Corporation for all or
any part of such sixty (60) day period.

      If no record date is fixed and the transfer books are not closed, then the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors acts with respect thereto.

                                     - 22 -


9.    Miscellaneous Provisions.

      9.1   Execution of Papers.

            All deeds, leases, transfers, contracts, bonds, notes, releases,
checks, drafts and other obligations authorized to be executed on behalf of the
Corporation shall be signed by the President or the Treasurer except as the
Directors may generally or in particular cases otherwise determine.

      9.2   Voting of Securities.

      Except as the Directors may generally or in particular cases otherwise
specify, the President or the Treasurer may on behalf of the Corporation vote or
take any other action with respect to shares of stock or beneficial interest of
any other corporation, or of any association, trust or firm, of which any
securities are held by this corporation, and may appoint any person or persons
to act as proxy or attorney-in-fact for the Corporation, with or without power
of substitution, at any meeting thereof.

      9.3   Corporate Seal.

      The seal of the Corporation shall be a circular die with the name of the
Corporation, the word "Massachusetts" and the year of its incorporation cut or
engraved thereon, or shall be in such other form as the Board of Directors may
from time to time determine.

      9.4   Corporate Records.

      The original, or attested copies, of the Articles of Organization, By-Laws
and records of all meetings of the incorporators and stockholders, and the stock
and transfer records, which shall contain the names of all stockholders and the
record address and the amount of stock held by each, shall be kept in
Massachusetts at the principal office of the Corporation or at an office of its
transfer agent or of its Clerk or of its Resident Agent. Said copies and records
need not all be kept in the same office. They shall be available at all
reasonable times to the inspection of

                                     - 23 -


any stockholder for any proper purpose but not to secure a list of stockholders
for the purpose of selling said list or copies thereof or of using the same for
a purpose other than in the interest of the applicant, as a stockholder,
relative to the affairs of the Corporation.

      9.5   Evidence of Authority.

      A certificate by the Clerk or Secretary or an Assistant or Temporary Clerk
or Secretary as to any matter relative to the Articles of Organization, By-Laws,
records of the proceedings of the incorporators, stockholders, Board of
Directors, or any committee of the Board of Directors, or stock and transfer
records or as to any action taken by any person or persons as an officer or
agent of the Corporation, shall as to all persons who rely thereon in good faith
be conclusive evidence of the matters so certified.

      10.   Amendments.

      If authorized by the Articles of Organization, the Directors may make,
amend or repeal the By-Laws, in whole or in part, except with respect to any
provision thereof which by law, the Articles of Organization or the By-Laws does
not allow such action by the Directors. No change in the date fixed in these
By-Laws for the annual meeting of stockholders may be made within sixty (60)
days before the date fixed in these By-Laws, and in case of any change in such
date, notice thereof shall be given to each stockholder in person or by letter
mailed to his last known post office address at least twenty (20) days before
the new date fixed for such meeting.

                                     - 24 -

EX-10.6.3

                                                                  EXHIBIT 10.6.3

                           MICROFINANCIAL INCORPORATED
                           1998 EQUITY INCENTIVE PLAN
                        INCENTIVE STOCK OPTION AGREEMENT

      This Agreement is by and between MicroFinancial Incorporated (the
"Company") and _____ (the "Optionee").

                              W I T N E S S E T H:

      1. GRANT OF OPTION. Pursuant to the provisions of the MicroFinancial
Incorporated 1998 Equity Incentive Plan (the "Plan"), effective _______________
(the "Grant Date"), the Company awarded to the Optionee, subject to the terms
and conditions of the Plan and the terms and conditions contained herein, the
right and option to purchase from the Company all or any part of an aggregate of
____________ shares of the common stock ($.01 par value) of the Company ("Common
Shares"), at a purchase price equal to $____________ per share, such option to
be exercised as hereinafter provided. It is intended that the option evidenced
hereby constitute an incentive stock option within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"). Capitalized terms
not defined herein shall have the meanings given to such terms in the Plan.

      2. TERMS AND CONDITIONS. In addition to the terms and conditions contained
in the Plan, it is understood and agreed that the option evidenced hereby is
subject to the following additional terms and conditions:

      (a) Expiration Date. The option shall expire on the tenth anniversary of
the Grant Date.

      (b) Period of Exercise. Subject to the other terms of this Agreement
regarding the exercisability of this option, this option shall become
exercisable in cumulative installments in accordance with the following
schedule:

                                          Percentage of Options
On or after                                     Exercisable
- -----------                               ---------------------
[       ]                                       [  ]%
[       ]                                       [  ]%
[       ]                                       [  ]%
[       ]                                        100%

      (c) Exercise of Option. This option shall be exercised by submitting a
written notice to the Committee authorized to administer the Plan pursuant to
Section 4 thereof (the "Committee") signed by the Optionee and specifying the
number of Common Shares as to which the option is being exercised. Such notice
shall be accompanied by the payment of the full option price for the Common
Shares being purchased. Payment shall be made in cash, which may be paid by
check, or other instrument acceptable to the Company, (ii) with the consent of
the Committee or the Chief Executive Officer, in Common Shares, valued at the
Fair Market Value (as defined in the Plan) on the date prior to exercise, or if
there were no sales on such date, on the next preceding day on which there were
sales, (iii) with the consent of the Committee and subject to such terms and
conditions as it may determine, by surrender of outstanding options under the
1998 Plan, (iv) with the consent of the Committee, the delivery of a promissory
note containing such terms as deemed acceptable to the Committee, or (v) any
combination of the above. In addition, any amount necessary to satisfy
applicable federal, state or local tax requirements shall be paid


promptly upon notification of the amount due. The Committee may permit such
amount to be paid in Common Shares previously owned by Optionee, or a portion of
the Common Shares that otherwise would be distributed to Optionee upon exercise
of the option, or a combination of cash and such Common Shares. A certificate or
certificates for the Common Shares purchased shall be issued by the Company
after the exercise of the option and payment therefor, including the provision
for any federal and state withholding taxes, and other applicable employment
taxes.

      In lieu of delivering all or a portion of the Common Shares as to which an
option has been exercised, the Committee may elect to pay the Optionee an amount
in cash or Common Shares, or a combination of cash or Common Shares, equal to
the excess of the Fair Market Value of the Common Shares the Optionee would have
received upon exercise over the aggregate exercise price, as determined in
accordance with the Plan.

      (d) Termination of Option upon Termination of Employment, Death or Total
Disability.

      (i) Unless the Committee in its discretion determines otherwise, upon the
termination of Optionee's employment with the Company for any reason other than
a Breach of Conduct (as defined in the Plan), death or Total Disability (as
defined in the Plan), any portion of this option that is not exercisable by
reason of Paragraph 2(b) hereof shall immediately terminate. Any portion of this
option that is exercisable on the employment termination date shall continue to
be exercisable for three months following such termination date, unless sooner
terminated by reason of Paragraph 2(a) hereof.

      (ii) If termination of employment is by reason of death or Total
Disability, any portion of this option which is not exercisable on the date of
death or Total Disability by reason of Paragraph 2(b) hereof shall immediately
terminate, and any remaining portion of this option shall terminate if not
exercised within one year following the date of death or commencement of Total
Disability, unless sooner terminated by reason of Paragraph 2(a) hereof.

      (iii) In the event of a Breach in Conduct by Optionee at any time while
employed by the Company or within two years of termination of employment, (i)
any unexercised portion of this option, whether exercisable pursuant to
Paragraph 2(b) hereof or not exercisable, shall immediately terminate upon
action by the Committee. The Committee's action shall be communicated in writing
to the Optionee as soon as practicable. In addition, the Committee may, in its
sole discretion, by written notice demand that any or all stock certificates for
Common Shares acquired pursuant to the exercise of this option, or any profit
realized from the sale or transfer of such Common Shares, be returned to the
Company within five (5) days of receipt of such notice. Any exercise price paid
by the Optionee shall be returned to Optionee by the Company immediately
thereafter, without interest. The Company shall be entitled to reimbursement of
reasonable attorney fees and expenses incurred in seeking to enforce it rights
under this subparagraph 2(d)(iii) and Section 15 of the Plan.

      (e) Non-transferability. This option and all rights hereunder shall be
exercisable during the Optionee's lifetime only by the Optionee and shall be
non-assignable and non-transferable by the Optionee except, in the event of the
Optionee's death, by will or by the laws of descent and distribution. In the
event the death of the Optionee occurs, the representative or representatives of
the Optionee's estate, or the person or persons who acquire (by bequest or
inheritance) the rights to exercise this option in whole or in part, may
exercise this option prior to the expiration of the applicable exercise period,
as specified in Paragraph 2(d) above.

      (f) Change in Control. Unless the Committee determines otherwise, this
option shall accelerate and become immediately exercisable for a period of
fifteen days (or such longer or shorter period as the

                                      -2-


Committee may prescribe) immediately prior to the scheduled consummation of a
Change in Control (as defined in the Plan). Such acceleration of exercisability
shall be conditioned upon the consummation of the Change in Control and, any
exercise of any portion of the option that becomes exercisable by reason of this
Paragraph 2(f) shall become effective only immediately before the consummation
of such Change in Control.

      Unless the Committee determines otherwise, upon consummation of any such
Change in Control, the Plan and any unexercised portion of this option shall
terminate. Notwithstanding the foregoing, to the extent provision is made in
writing in connection with such Change in Control for the continuation of the
Plan and the assumption of this option, or for the substitution for this option
of new options covering the stock of a successor company, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares or units and exercise prices, then the Plan and this option shall
continue in the manner and under the terms contained herein, and the
acceleration and termination provisions set forth in the first two sentences of
this Paragraph 2(f) shall be of no effect. The Company shall send written notice
of a Change in Control to Optionee not later than the time at which the Company
gives notice thereof to its shareholders.

      (g) Modification or cancellation of option. The Committee shall have the
authority to effect, at any time and from time to time, with the consent of the
Optionee, the modification of the terms of this option agreement (subject to the
limitations contained in the Plan).

      (h) No Rights as Shareholder. The Optionee shall have no rights as a
shareholder with respect to any Common Shares subject to this option prior to
the date of issuance to Optionee of a certificate or certificates for such
shares.

      (i) No Right to Continued Employment. This option shall not confer upon
the Optionee any right with respect to continuance of employment by the Company,
nor shall it interfere in any way with the right of the Company to terminate the
Optionee's employment at any time.

      (j) Compliance with Law and Regulations. This option and the obligation of
the Company to sell and deliver shares hereunder shall be subject to all
applicable federal and state laws, rules and regulations and to such approvals
by any government or regulatory agency as may be required. The Company shall not
be required to issue or deliver any certificates for Common Shares prior to (i)
the listing of such Common Shares on any stock exchange on which the Common
Shares may then be listed, and (ii) the completion of any registration or
qualification of such Common Shares under any federal or state law, or any rule
or regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable. Moreover, this option may
not be exercised if its exercise, or the receipt of Common Shares pursuant
thereto, would be contrary to applicable law.

      3. DISQUALIFYING DISPOSITION OF SHARES. This option shall not qualify as
an incentive stock option within the meaning of Section 422 of the Code if the
Common Shares acquired pursuant to the exercise of the option are transferred,
other than by will or by the laws of descent and distribution, within two years
of the Grant Date or within one year after the transfer of the Common Shares to
the Optionee pursuant to such exercise.

      4. OPTIONEE BOUND BY PLAN. The Optionee hereby agrees to be bound by all
of the terms and provisions of the Plan. In the event of any inconsistency
between this Agreement and the terms of the Plan, the terms of the Plan shall
govern.

                                      -3-


      5. WITHHOLDING TAXES. Optionee acknowledges and agrees that the Company
has the right to deduct from payments of any kind otherwise due to Optionee any
federal, state or local taxes of any kind required by law to be withheld with
respect to the exercise of this option hereunder.

      6. NOTICES. Any notice hereunder to the Company shall be addressed to it
at its principal business office, 10-M Commerce Way, Woburn, Massachusetts
01801, and any notice hereunder to the Optionee shall be sent to the address
reflected on the payroll records of the Company, subject to the right of either
party to designate at any time hereafter in writing some other address.

      7. MASSACHUSETTS LAW TO GOVERN. This Agreement shall be construed and
administered in accordance with and governed by the laws of the Commonwealth of
Massachusetts.

      IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its duly authorized officer and the Optionee has executed this Agreement this
___ day of _______ ________.

                                          MICROFINANCIAL INCORPORATED

                                          By:___________________________________

                                          Title:________________________________

                                          ______________________________________

                                      -4-

EX-10.6.4

                                                                  EXHIBIT 10.6.4

                           MICROFINANCIAL INCORPORATED
                           1998 EQUITY INCENTIVE PLAN
                      NON-QUALIFIED STOCK OPTION AGREEMENT

      This Agreement is by and between MicroFinancial Incorporated (the
"Company") and ______________________ (the "Optionee").

                              W I T N E S S E T H:

      1. GRANT OF OPTION. Pursuant to the provisions of the MicroFinancial
Incorporated 1998 Equity Incentive Plan (the "Plan"), effective _______________
____, _________ (the "Grant Date"), the Company awarded to the Optionee, subject
to the terms and conditions of the Plan and the terms and conditions contained
herein, the right and option to purchase from the Company all or any part of an
aggregate of ________ shares of the common stock ($.01 par value) of the Company
("Common Shares"), at a purchase price equal to $__________ per share, such
option to be exercised as hereinafter provided. It is intended that the option
evidenced hereby constitute a non-qualified stock option. Capitalized terms not
defined herein shall have the meanings given to such terms in the Plan.

      2. TERMS AND CONDITIONS. In addition to the terms and conditions contained
in the Plan, it is understood and agreed that the option evidenced hereby is
subject to the following additional terms and conditions:

      (a) Expiration Date. The option shall expire on the tenth anniversary of
the Grant Date.

      (b) Period of Exercise. Subject to the other terms of this Agreement
regarding the exercisability of this option, this option shall become
exercisable in cumulative installments in accordance with the following
schedule:



                                 Percentage of Options
 On or after                          Exercisable
- -------------                    ----------------------
                              
[         ]                               [  ]%
[         ]                               [  ]%
[         ]                               [  ]%
[         ]                                100%


      (c) Exercise of Option. This option shall be exercised by submitting a
written notice to the Committee authorized to administer the Plan pursuant to
Section 4 thereof (the "Committee") signed by the Optionee and specifying the
number of Common Shares as to which the option is being exercised. Such notice
shall be accompanied by the payment of the full option price for the Common
Shares being purchased. Payment shall be made in cash, which may be paid by
check, or other instrument acceptable to the Company, (ii) with the consent of
the Committee or the Chief Executive Officer, in Common Shares, valued at the
Fair Market Value (as defined in the Plan) on the date prior to exercise, or if
there were no sales on such date, on the next preceding day on which there were
sales, (iii) with the consent of the Committee and subject to such terms and
conditions as it may determine, by surrender of outstanding options under the
1998 Plan, (iv) with the consent of the Committee, the delivery of a promissory
note containing such terms as deemed acceptable to the Committee, or (v) any
combination of the above. In addition, any amount necessary to satisfy
applicable federal, state or local tax requirements shall be paid promptly upon
notification of the amount due. The Committee may permit such amount to be paid
in



Common Shares previously owned by Optionee, or a portion of the Common Shares
that otherwise would be distributed to Optionee upon exercise of the option, or
a combination of cash and such Common Shares. A certificate or certificates for
the Common Shares purchased shall be issued by the Company after the exercise of
the option and payment therefor, including the provision for any federal and
state withholding taxes, and other applicable employment taxes.

      In lieu of delivering all or a portion of the Common Shares as to which an
option has been exercised, the Committee may elect to pay the Optionee an amount
in cash or Common Shares, or a combination of cash or Common Shares, equal to
the excess of the Fair Market Value of the Common Shares the Optionee would have
received upon exercise over the aggregate exercise price, as determined in
accordance with the Plan.

      (d) Termination of Option upon Termination of Employment, Death or Total
Disability.

      (i) Unless the Committee in its discretion determines otherwise, upon the
termination of Optionee's employment with the Company or directorship for any
reason other than a Breach of Conduct (as defined in the Plan), death or Total
Disability (as defined in the Plan), any portion of this option that is not
exercisable by reason of Paragraph 2(b) hereof shall immediately terminate. Any
portion of this option that is exercisable on the employment or directorship
termination date shall continue to be exercisable for three months following
such termination date, unless sooner terminated by reason of Paragraph 2(a)
hereof.

      (ii) If termination of employment or directorship is by reason of death or
Total Disability, any portion of this option which is not exercisable on the
date of death or Total Disability by reason of Paragraph 2(b) hereof shall
immediately terminate, and any remaining portion of this option shall terminate
if not exercised within one year following the date of death or commencement of
Total Disability, unless sooner terminated by reason of Paragraph 2(a) hereof.

      (iii) In the event of a Breach in Conduct by Optionee at any time while
employed by the Company or while a director of the Company, or within two years
of termination of employment or directorship, (i) any unexercised portion of
this option, whether exercisable pursuant to Paragraph 2(b) hereof or not
exercisable, shall immediately terminate upon action by the Committee. The
Committee's action shall be communicated in writing to the Optionee as soon as
practicable. In addition, the Committee may, in its sole discretion, by written
notice demand that any or all stock certificates for Common Shares acquired
pursuant to the exercise of this option, or any profit realized from the sale or
transfer of such Common Shares, be returned to the Company within five (5) days
of receipt of such notice. Any exercise price paid by the Optionee shall be
returned to Optionee by the Company immediately thereafter, without interest.
The Company shall be entitled to reimbursement of reasonable attorney fees and
expenses incurred in seeking to enforce it rights under this subparagraph
2(d)(iii) and Section 15 of the Plan.

      (e) Non-transferability. This option and all rights hereunder shall be
exercisable during the Optionee's lifetime only by the Optionee and shall be
non-assignable and non-transferable by the Optionee except, in the event of the
Optionee's death, by will or by the laws of descent and distribution. In the
event the death of the Optionee occurs, the representative or representatives of
the Optionee's estate, or the person or persons who acquire (by bequest or
inheritance) the rights to exercise this option in whole or in part, may
exercise this option prior to the expiration of the applicable exercise period,
as specified in Paragraph 2(d) above.

                                       -2-


      (f) Change in Control. Unless the Committee determines otherwise, this
option shall accelerate and become immediately exercisable for a period of
fifteen days (or such longer or shorter period as the Committee may prescribe)
immediately prior to the scheduled consummation of a Change in Control (as
defined in the Plan). Such acceleration of exercisability shall be conditioned
upon the consummation of the Change in Control and, any exercise of any portion
of the option that becomes exercisable by reason of this Paragraph 2(f) shall
become effective only immediately before the consummation of such Change in
Control.

      Unless the Committee determines otherwise, upon consummation of any such
Change in Control, the Plan and any unexercised portion of this option shall
terminate. Notwithstanding the foregoing, to the extent provision is made in
writing in connection with such Change in Control for the continuation of the
Plan and the assumption of this option, or for the substitution for this option
of new options covering the stock of a successor company, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares or units and exercise prices, then the Plan and this option shall
continue in the manner and under the terms contained herein, and the
acceleration and termination provisions set forth in the first two sentences of
this Paragraph 2(f) shall be of no effect. The Company shall send written notice
of a Change in Control to Optionee not later than the time at which the Company
gives notice thereof to its shareholders.

      (g) Modification or cancellation of option. The Committee shall have the
authority to effect, at any time and from time to time, with the consent of the
Optionee, the modification of the terms of this option agreement (subject to the
limitations contained in the Plan).

      (h) No Rights as Shareholder. The Optionee shall have no rights as a
shareholder with respect to any Common Shares subject to this option prior to
the date of issuance to Optionee of a certificate or certificates for such
shares.

      (i) No Right to Continued Employment. This option shall not confer upon
the Optionee any right with respect to continuance of employment or directorship
by the Company, nor shall it interfere in any way with the right of the Company
to terminate the Optionee's employment or directorship at any time.

      (j) Compliance with Law and Regulations. This option and the obligation of
the Company to sell and deliver shares hereunder shall be subject to all
applicable federal and state laws, rules and regulations and to such approvals
by any government or regulatory agency as may be required. The Company shall not
be required to issue or deliver any certificates for Common Shares prior to (i)
the listing of such Common Shares on any stock exchange on which the Common
Shares may then be listed, and (ii) the completion of any registration or
qualification of such Common Shares under any federal or state law, or any rule
or regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable. Moreover, this option may
not be exercised if its exercise, or the receipt of Common Shares pursuant
thereto, would be contrary to applicable law.

      3. OPTIONEE BOUND BY PLAN. The Optionee hereby agrees to be bound by all
of the terms and provisions of the Plan. In the event of any inconsistency
between this Agreement and the terms of the Plan, the terms of the Plan shall
govern.

      4. WITHHOLDING TAXES. Optionee acknowledges and agrees that the Company
has the right to deduct from payments of any kind otherwise due to Optionee any
federal, state or local taxes of any kind required by law to be withheld with
respect to the exercise of this option hereunder.

                                       -3-


      5. NOTICES. Any notice hereunder to the Company shall be addressed to it
at its principal business office, 10-M Commerce Way, Woburn, Massachusetts
01801, and any notice hereunder to the Optionee shall be sent to the address
reflected on the payroll records of the Company, subject to the right of either
party to designate at any time hereafter in writing some other address.

      6. MASSACHUSETTS LAW TO GOVERN. This Agreement shall be construed and
administered in accordance with and governed by the laws of the Commonwealth of
Massachusetts.

      IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its duly authorized officer and the Optionee has executed this Agreement this
______ day of _____________, _____________.

                                              MICROFINANCIAL INCORPORATED

                                              By:_______________________________

                                              Title:____________________________

                                              __________________________________

                                      -4-

EX-10.8

                                                                    EXHIBIT 10.8

                    AMENDED AND RESTATED EMPLOYMENT AGREEMENT

                  EMPLOYMENT AGREEMENT dated as of March 15, 2004 by and between
MicroFinancial Incorporated, (f/k/a Boyle Leasing Technologies, Inc.), a
Massachusetts corporation (the "Company") and Richard F. Latour, (the
"Executive") currently residing at 11 Stillbrook Lane, Mansfield, MA 02048.

                  WHEREAS, Executive has served as Executive Vice President,
Chief Operating Officer and Chief Financial Officer of the Company pursuant to
an Employment Agreement dated June 12, 1998 (the " Employment Agreement"), and
was subsequently elected by the Board of Directors ("Board") as President and
Chief Executive Officer of the Company; and

                  WHEREAS, the Company desires to continue to employ Executive,
to enter into this Amended and Restated Employment Agreement embodying the terms
of such continued employment, and to modify certain terms of the Employment
Agreement to reflect changes in the Executive's title and responsibilities (the
"Agreement"); and

                  WHEREAS, Executive desires to accept such continued employment
and enter into this Agreement;

                  NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
parties agree as follows:

         1.       Term of Employment. Subject to the provisions of Section 7,
Executive shall be employed by the Company pursuant to the terms and conditions
of this Agreement for a period commencing on March 15, 2004 (the "Commencement
Date") and ending March 15, 2005; provided that such period shall be
automatically extended for one (1) year on March 15, 2005 and March 15th of any
succeeding year unless a minimum of six (6) months prior notice of termination
of this Agreement is given by either party to the other. The period beginning on
the




Commencement Date and ending March 15, 2005, or upon the expiration of any
renewal period, in either case in accordance with the foregoing provision, shall
be referred to as the "Employment Term".

         2.       Position. (a) The Executive shall continue to serve the
Company with the title of President and Chief Executive Officer , or such other
title as the Board may from time to time determine, and in the event of an
internal corporate restructuring, shall serve in a position or positions of
comparable authority and responsibility in any resulting entity. In such
position or positions, Executive shall have such duties and authority as shall
be determined from time to time by the Board which duties and responsibilities
shall not be less than those for which the Executive was responsible on the
Commencement Date.

                  (b)      During the Employment Term, Executive will devote
substantially all of his business time and best efforts to the performance of
his duties hereunder and will not engage in any other business, profession or
occupation for compensation or otherwise which would conflict with the rendition
of such services either directly or indirectly, without the prior written
consent of the Board.

         3.       Base Salary. The Company shall pay Executive an annual base
salary (the "Base Salary") at the rate on the Commencement Date of $260,000
payable in arrears in substantially equal installments not less frequently than
monthly during the Employment Term in accordance with the Company's payroll
practices. The Company shall increase (but not decrease) the Base Salary on each
January 1 which occurs during the Employment Term after March 15, 2004 by a
percentage equal to the percentage increase in the Consumer Price Index for all
Urban Consumers for the Northeast Region, class B metropolitan area, for the
twelve (12) month period



                                      -2-


ending on each such January 1. In addition to any automatic increases hereunder,
the Board may, at any time, increase Executive's Base Salary in its sole
discretion.

         4.       Incentive Compensation. (a) With respect to each fiscal year
during all of which Executive is employed with the Company, including the fiscal
year beginning January 1, 2004, Executive shall also be eligible to participate
in the Company's annual bonus program as such program may be modified by the
Board.

                  (b)      With respect to each performance period during which
Executive is employed by the Company, including the performance period beginning
January 1, 2004, the Executive shall also be eligible to participate in the
Company's profit-sharing plan as such plan may be modified by the Board.

                  (c)      Executive shall be eligible to participate in the
1998 Equity Incentive Plan, and any other equity plan adopted by the Company
(collectively "Option Plans"), at a level consistent with his position and
responsibilities.

         5.       Employee Benefits. (a) Executive shall continue to be provided
employee benefits (including fringe benefits and other perquisites, profit
sharing plan participation and life, health, accident and disability insurance)
(collectively "Employee Benefits") on terms no less favorable in the aggregate
(except for any changes thereto required to comply with changes in applicable
law) than those benefits which were provided to Executive by the Company
immediately prior to the Commencement Date, except as otherwise required
hereunder.

                  (b)      The Board shall determine the amount of the payments,
if any, to be awarded to the Executive under the Company's annual bonus program
and/or profit-sharing plan pursuant to their terms for the 2003 fiscal year and
for which payments have not been made prior to the Commencement Date.



                                      -3-


                  (c)      Executive shall be entitled to a maximum of six (6)
weeks annual vacation, in accordance with the Company's current vacation
policies.

         6.       Business Expenses. Reasonable travel, entertainment and other
business expenses incurred by Executive in the performance of his duties
hereunder shall be reimbursed by the Company in accordance with Company
policies.

         7.       Termination. This Agreement, and Executive's employment may be
terminated by either party at any time pursuant to the terms and conditions set
forth herein. In the event of any such termination, Executive's rights and
entitlements shall be determined in accordance with the following provisions.

                  (a)      For Cause by the Company. The provisions of this
Section 7(a) shall apply in the event that Executive's employment hereunder is
terminated by the Company for "Cause". For purposes of this Agreement, "Cause"
shall mean (i) Executive's willful and continued failure substantially to
perform his duties hereunder (other than as a result of total or partial
incapacity due to physical or mental illness), (ii) the willful commission by
Executive of acts that are dishonest and demonstrably injurious to the Company,
or (iii) an act or acts on Executive's part constituting a felony under the laws
of the United States or any state thereof. If Executive is terminated for Cause,
he shall be entitled to receive his Base Salary through the date of termination,
and any accrued but unpaid amounts earned under any bonus program or
profit-sharing plan. All other benefits due Executive following Executive's
termination of employment pursuant to this Section 7(a) shall be determined in
accordance with the plans, policies and practices of the Company at the time of
such termination. Any Notice of Termination (as defined in subsection (i) of
this Section 7), communicating the termination of Executive's employment
pursuant to this Section 7(a) shall include a copy of a resolution duly



                                      -4-


adopted by the affirmative vote of not less than a majority of the entire
membership of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and reasonable opportunity for
Executive, together with Executive's counsel, to be heard before the Board prior
to such vote), finding that in the good faith opinion of the Board that any
event constituting Cause for termination in accordance with this Section 7(a)
has occurred and specifying the particulars thereof in detail.

                  (b)      Disability. The provisions of this Section 7(b) shall
apply in the event that Executive's employment terminates on account of
"Disability". For purposes of this Agreement, "Disability" shall mean
Executive's physical or mental incapacity, which results in his inability to
perform his duties for a period of six (6) consecutive months. Any question as
to the existence of the Disability of Executive as to which Executive and the
Company cannot agree, shall be determined in writing by a qualified independent
physician mutually acceptable to Executive and the Company.

         In the event of the Disability of Executive, the Company may terminate
the employment of Executive, by delivery of a Notice of Termination to the
Executive which Notice shall be effective not less than thirty (30) days after
the giving of such Notice. Upon termination of Executive's employment hereunder
as a result of Disability, Executive shall receive his Base Salary for a period
of twelve (12) months following such termination, and any and all accrued but
unpaid amounts earned by Executive under the annual bonus program or
profit-sharing plan as of the date of Disability. Any payments provided for in
this Section 7(b) shall be offset (but not below zero) by any payment of
disability benefits in lieu of Base Salary received by Executive under the
Company's employee benefit plans as then in effect. In addition, all options



                                      -5-


or other awards issued under the Option Plans shall become fully vested and
exercisable as of the date of Disability.

                  (c)      Death. Upon termination of Executive's employment
hereunder as a result of Executive's death, Executive's estate shall receive his
Base Salary at the rate in effect at the time of Executive's death for a period
of twelve (12) months following his death, and any and all accrued but unpaid
amounts earned by Executive under the Company's annual bonus program or
profit-sharing plan as of the date of death. In addition, all options or awards
under the Option Plans shall become fully vested and exercisable as of the date
of death. Thereafter, the Company shall, except as provided in subsections 5(a)
and 7(g) hereof, have no further obligation to compensate Executive under this
Agreement.

                  (d)      Without Cause by the Company. If Executive's
employment is terminated by the Company (including a termination of this
Agreement by means of six (6) months prior notice of termination by the Company
as provided in Section 1 hereof) without "Cause" (other than by reason of
Disability or death), Executive shall receive, as promptly as practicable
following such termination, but in any event not later than ten (10) business
days following such termination, a lump sum payment in cash equal to the sum of:

                  (i) if not theretofore paid, the Executive's Base Salary
                  through the date of termination at the rate in effect on the
                  date of termination or, if higher, at the highest rate in
                  effect at any time within the 90-day period preceding the
                  Commencement Date; and

                  (ii) the product of (x) the annual bonus paid to the Executive
                  for the last full fiscal year ending during the Employment
                  Term and (y) the fraction obtained by dividing (a) the number
                  of days between the Commencement Date and the last day of the
                  last full fiscal year ending during the Employment Term and
                  (b) 365; and

                  (iii) in the case of compensation previously deferred by the
                  Executive, all amounts of such compensation previously
                  deferred and not yet paid by the Company.



                                      -6-


         Executive shall in addition receive an amount equal to three (3) times
the Executive's annual Base Salary at the rate in effect at the time Notice of
Termination was given, or if higher, at the highest rate in effect at any time
within the ninety (90) day period preceding the Commencement Date. Such amount
shall be paid to Executive in two (2) equal payments, on the first and second
anniversaries, respectively, of the Executive's date of termination.

         No option or other award granted to Executive under the Option Plans
shall terminate prior to the expiration of the option term or award period
without regard to a termination of employment.

                  (e)      For Good Reason By Executive. The provisions of this
Section 7(e) shall apply in the event that the Executive terminates his
employment with the Company for "Good Reason". For purposes of this Agreement,
"Good Reason" means (without Executive's express prior written consent):

                                    (i)      The assignment to Executive by the
                    Company of duties inconsistent with Executive's positions,
                    duties, responsibilities, titles or offices, or any removal
                    of Executive from or any failure to re-elect Executive to
                    any of such positions, except in connection with the
                    termination of Executive's employment for Cause, Disability,
                    or as a result of Executive's death or by Executive other
                    than for Good Reason;

                                    (ii)     A reduction by the Company in
                    Executive's Base Salary as in effect at the Commencement
                    Date, as the same may be increased according to the terms of
                    this Agreement;

                                    (iii)    A relocation of the Company's
                    principal executive offices to a location outside of the
                    metropolitan Boston, Massachusetts area or the Company's
                    requiring Executive to be based anywhere other than the
                    Company's principal executive offices, except for required
                    travel on the Company's business to an extent substantially
                    consistent with Executive's business travel obligations at
                    the Commencement



                                      -7-


                    Date, or any material reduction or adverse change in the
                    emoluments or perquisites of office provided to the
                    Executive at the Commencement Date;

                                    (iv)     A failure by the Company to
                    continue in effect fringe benefits and benefit or
                    compensation plans or agreements (including but not limited
                    to any profit sharing, bonus, life insurance, health,
                    accidental death or dismemberment or disability plan, or
                    this Agreement) with terms which in the aggregate are as
                    favorable as those fringe benefits and plans or agreements
                    to which Executive is entitled or in which Executive is
                    participating, as the case may be, at the Commencement Date
                    (or in the case of fringe benefits or plans granted or
                    adopted, as the case may be, after the date hereof and
                    providing a type of benefit not provided by the Company at
                    the Commencement Date, at the respective dates of grant or
                    adoption of such fringe benefits or plans); or

                                    (v)      The failure by the Company to
                    obtain the specific assumption of this Agreement by any
                    successor or assign of the Company or any person acquiring a
                    substantial portion of the assets of the Company, or,
                    following any such assumption, assignment or acquisition by
                    an entity other than an affiliate of the Company, the
                    occurrence of any event Executive believes will impair his
                    duties under this Agreement.

If Executive terminates his employment for "Good Reason", Executive shall be
entitled to the same payments he would have received if his employment had been
terminated by the Company without "Cause", as set forth in subsection 7(d)
hereof.
                  (f)      Gross-up Payments. In the event that Executive
receives any payments under this Agreement, or other payments subject to Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code"), which are
considered "excess parachute payments" as defined in Section 280G of the Code,
the Company shall make an additional gross-up payment to Executive in an amount
which results in Executive being in the same after-tax position that he would
have been in had no excise tax under Code Section 4999 been imposed.



                                      -8-


                  (g)      Without Good Reason by Executive. If Executive
voluntarily terminates his employment with the Company for any reason other than
"Good Reason", Executive shall be entitled to the same payments he would have
received if his employment had been terminated by the Company for Cause, as set
forth in subsection 7(a) hereof.

                  (h)      Continuation of Benefits. Upon the termination of
Executive's employment other than as a result of death or for Cause, in addition
to any amounts due under Section 5(a) and (b) hereof and Sections (a) through
(f) of this Section 7, the Company shall provide Executive with a continuation
of those benefits denoted by an asterisk on Exhibit A hereto until the earlier
of Executive's death or 65th birthday; provided, however, that in the event that
Executive obtains other substantially comparable employment during such period,
Executive shall notify the Company and the amount of any benefits to which
Executive is entitled under this Section 7(h) shall be reduced (but not below
zero) by any such benefits provided by Executive's new employer.

                  (i)      Notice of Termination. Any purported termination of
employment by the Company or by Executive shall not be effective until
communicated by written Notice of Termination to the other party hereto in
accordance with Section 11(i) hereof. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of employment under the provision so indicated.

         8.       Noncompetition. (a) During the Employment Term, and for a two
(2) year period following termination of Executive's employment hereunder,
Executive shall not, directly or indirectly, (i) become under contract to or
associated with, employed by, render services to or



                                      -9-


own an interest (other than as a shareholder owning not more than a 5% interest)
in any microticket leasing business that is in competition with the Company in
the United States, (ii) solicit any officer or employee of the Company or any of
its affiliates to engage in any conduct prohibited hereby for Executive or to
terminate any existing relationship with the Company or such affiliate or (iii)
assist any other person to engage in any activity in any manner prohibited
hereby to Executive. For purposes of this Section 8(a), in the event of a
termination of employment prior to expiration of the Employment Term,
determination of the duration of the Employment Term, shall be made without
regard to the automatic renewal provisions of Section 1 hereof.

                  (b)      It is expressly understood and agreed that although
Executive and the Company consider the restrictions contained in this Section 8
to be reasonable, if a final judicial determination is made by a court of
competent jurisdiction that the time or territory or any other restriction
contained in this Agreement is an unenforceable restriction against Executive,
the provisions of this Agreement shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such maximum
extent as such court may judicially determine or indicate to be enforceable.
Alternatively, if any court of competent jurisdiction finds that any restriction
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such finding shall not affect the
enforceability of any of the other restrictions contained herein.

         9.       Confidentiality. Executive will not at any time (whether,
during or after his employment with the Company) disclose or use for his own
benefit or purposes or the benefit or purposes of any other person, firm,
partnership, joint venture, association, corporation or other business
organization, entity or enterprise other than the Company and any of its
subsidiaries or


                                      -10-


affiliates, any trade secrets, information, data, or other confidential
information relating to customers, development programs, costs, marketing,
trading, investment, sales activities, promotion, credit and financial data,
manufacturing processes, financing methods, plans, or the business and affairs
of the Company generally, or of any subsidiary or affiliate of the Company,
provided that the foregoing shall not apply to information which is not unique
to the Company or which is generally known to the industry or the public other
than as a result of Executive's breach of this covenant. Executive agrees that
upon termination of his employment with the Company, for any reason, he will
return to the Company immediately all memoranda, books, papers, plans,
information, letters and other data, and all copies thereof or therefrom, in any
way relating to the business of the Company and its affiliates, except that he
may retain personal notes, notebooks and diaries. Executive further agrees that
he will not retain or use for his account at any time any trade names, trademark
or other proprietary business designation used or owned in connection with the
business of the Company or its affiliates.

         10.      Specific Performance. Executive acknowledges and agrees that
the Company's remedies at law for a breach or threatened breach of any of the
provisions of Sections 8 or 9 would be inadequate and, in recognition of this
fact, Executive agrees that, in the event of such a breach or threatened breach,
in addition to any remedies at law, the Company, without posting any bond, shall
be entitled to obtain equitable relief in the form of specific performance,
temporary restraining order, temporary or permanent injunction or any other
equitable remedy which may then be available.

         11.      Miscellaneous.

                  (a)      Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts.



                                      -11-


                  (b)      Entire Agreement/Amendments. This Agreement contains
the entire understanding of the parties with respect to the subject matter
hereof and, subject to the exception noted below, supersedes any and all prior
understandings, agreements, contracts and arrangements, whether written or oral,
between the Company and Executive, including but not limited to the Prior
Employment Agreement and the Executive Performance Incentive Plan. The parties
hereto agree that as of the Commencement Date, the Prior Employment Agreement
shall be null and void and of no further force or effect and any and all current
and future obligations of either party thereunder are fully and forever
discharged. Notwithstanding anything to the contrary contained herein, this
Agreement shall in no way reduce or diminish any benefit to which Executive is
otherwise entitled and which has already accrued, or been granted, to Executive,
pursuant to the terms of a plan, program or arrangement of the Company,
including without limitation, any outstanding award granted to Executive under
the Company's Executive Performance Incentive Plan for which the performance
period has not closed (or, if closed, payment has not been made) prior to the
Commencement Date. The Executive hereby agrees to provide any consent, waiver or
other documentation necessary to give effect to this paragraph (b). This
Agreement may not be altered, modified, or amended except by written instrument
signed by the parties hereto.

                  (c)      No Waiver. The failure of a party to insist upon
strict adherence to any term of this Agreement on any occasion shall not be
considered a waiver of such party's rights or deprive such party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Agreement.

                  (d)      Severability. In the event that any one or more of
the provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity,



                                      -12-


legality and enforceability of the remaining provisions of this Agreement shall
not be affected thereby.

                  (e)      Assignment. This Agreement is personal to Executive
and without the prior written consent of the Company shall not be assignable by
Executive other than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be binding upon the Company and its
successors and assigns.

                  (f)      Mitigation. The Executive shall not be required to
mitigate damages or the amount of any payment provided for under this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Agreement be reduced by any compensation earned by
Executive as the result of employment by another employer after the termination
of his employment hereunder or otherwise, except to the extent set forth in
Section 7(h) of this Agreement.

                  (g)      Arbitration. Except where equitable relief is sought,
any dispute, controversy or claim arising out of or relating to this Agreement,
or the breach hereof, shall be settled by arbitration in accordance with the
rules of the American Arbitration Association by a single arbitrator. The
Arbitrator shall be an individual familiar with the leasing and finance
industry. The arbitrator's award shall be final and binding upon both parties,
and judgment upon the award may be entered in any court of competent
jurisdiction in any state of the United States or country or application may be
made to such court for a judicial acceptance o the award and an enforcement as
the law of such jurisdiction may require or allow.

                  (h)      Successors; Binding Agreement.

                           (i)      The Company will require any successor
(whether direct or indirect by Change of Control or otherwise) to all or
substantially all of the business and/or



                                      -13-


assets of the Company to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Such assumption and agreement
shall be obtained prior to the effectiveness of any such succession. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise. The term "Company"
shall also mean any affiliate of the Company to which Executive may be
transferred and the Company shall cause such successor employer to be considered
the "Company" bound by the terms of this Agreement and this Agreement shall be
amended to so provide. As used in this Agreement, "Change of Control" shall
mean:

                                    (a)     The acquisition by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"),
including an acquisition pursuant to 11 U.S.C. Section 1129 et passim, of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 50% or more of either (i) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities") or;

                                    (b)     Individuals who, as of the date
hereof, constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board or are divested of possession by
appointment of a trustee pursuant to Chapter 7 or 11 of the United States
Bankruptcy Code; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was



                                      -14-


approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board; or

                                    (c)     Approval by the shareholders of the
Company, or, in the instance of proceedings for the Company pursuant to Chapter
7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy
judge, of a reorganization, merger or consolidation, in each case, unless,
following such reorganization, merger or consolidation, more than 60% of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such reorganization, merger or consolidation in substantially the same
proportions as their ownership, immediately prior to such reorganization, merger
or consolidation, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be; or

                                    (d)     Approval by the shareholders, or, in
the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11
of the United States Bankruptcy Code, approval by the bankruptcy judge, of the
Company of (i) a complete liquidation or dissolution of the Company or (ii) the
sale or other disposition of all or substantially all of the assets of the
Company.

                           (ii)     The Company agrees that within three (3)
days of the entry of an order for relief with respect to the Company pursuant to
the provisions of Chapter 7 or Chapter



                                      -15-


11 of the United States Bankruptcy Code, it will seek approval of the bankruptcy
court having jurisdiction over its affairs for the assumption of this Agreement
pursuant to the provisions of Section 365 of the United States Bankruptcy Code.

                           (iii)    This Agreement shall inure to the benefit of
and be binding upon personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amount would still be payable to Executive
hereunder if Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the devisee, legatee or other designee of Executive or, if there is no such
designee, to the estate of Executive.

                  (i)      Notice. For the purpose of this Agreement, notices
and all other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed to
the respective addresses set forth on the execution page of this Agreement,
provided that all notices to the Company shall be directed to the attention of
the Board with a copy to Managing Partner, Edwards & Angell, 101 Federal Street,
Boston, MA 02110, or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.

                  (j)      Legal Fees and Expenses. The Company shall reimburse
Executive on a quarterly basis for all costs and expenses incurred by Executive
to enforce or protect his rights under this Agreement (including fees and
expenses incurred in connection with an arbitration) unless it shall ultimately
be determined by a final judgment of an arbitrator or a court of competent
jurisdiction that Executive was without any justification for commencing or
continuing any such arbitration, action or proceeding, in which case Executive
shall repay to the



                                      -16-


Company any amounts of reimbursement paid under this Section 11(j) and in the
event of an arbitration, shall also pay one half (1/2) of the fees of the
arbitrator.










                                      -17-





         IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.



                                             -----------------------------------
                                             Richard F. Latour


                                             MicroFinancial Incorporated, (f/k/a
                                             Boyle Leasing Technologies, Inc.



                                             -----------------------------
                                             By:  Peter R. Bleyleben
                                             Its: Chairman of the Board of
                                                  Directors






                                      -18-

EX-21.1

                                                                   EXHIBIT 21.1

                         SUBSIDIARIES OF THE REGISTRANT

Leasecomm Corporation

TimePayment Corp.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

As independent registered public accountants, we hereby consent to the incorporation of our report dated January 26, 2007 relating to the consolidated financial statements of MicroFinancial Incorporated as of December 31, 2005 and 2006, and for the years ended December 31, 2004, 2005 and 2006 included in this Form 10-K, into the Company’s previously filed Registration Statements on Form S-8 (File Nos. 333-75801, 333-77211 and 333-85324) and Form S-3 (File No. 333-122020).

/s/ Vitale, Caturano & Company, Ltd. Boston, Massachusetts
March 28, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Richard F. Latour, certify that:

1.	I have reviewed this annual report on Form 10-K of MicroFinancial Incorporated;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ RICHARD F. LATOUR Richard F. Latour President and Chief Executive Officer
Date: March 27, 2007

EX-31.2

Exhibit 31.2

CERTIFICATION

I, James R. Jackson Jr., certify that:

1.	I have reviewed this annual report on Form 10-K of MicroFinancial Incorporated;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/JAMES R. JACKSON, JR. James R. Jackson, Jr. Vice President and Chief Financial Officer
Date: March 27, 2007

EX-32.1

Exhibit 32.1

MicroFinancial, Incorporated
Certification of Chief Executive Officer
Regarding Annual Report on Form 10-K for the
Year Ended December 31, 2006

     Richard F. Latour, President and Chief Executive Officer of MicroFinancial, Incorporated, (the “Company”), hereby certifies that, to the best of his knowledge, based upon a review of the Annual Report on Form 10-K for the year ended December 31, 2006 (the “Covered Report”) and, except as corrected or supplemented in a subsequent covered report:

Ÿ the Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

Ÿ the information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned has signed this Certification as of March 27, 2007.

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

EX-32.2

Exhibit 32.2

MicroFinancial, Incorporated
Certification of Chief Financial Officer
Regarding Annual Report on Form 10-K for the
Year Ended December 31, 2006

     James R. Jackson Jr., Vice President and Chief Financial Officer of MicroFinancial, Incorporated, (the “Company”), hereby certifies that, to the best of his knowledge, based upon a review of the Annual Report on Form 10-K for the year ended December 31, 2006 (the “Covered Report”) and, except as corrected or supplemented in a subsequent covered report:

Ÿ the Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

Ÿ the information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned has signed this Certification as of March 27, 2007.

/s/JAMES R. JACKSON, JR.               James R. Jackson, Jr.
Vice President and Chief Financial Officer