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

(Mark One)
   [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
                              EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended March 31, 2004

                                       OR

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


                           Commission File No. 1-14771


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


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


                       10 M Commerce Way, Woburn, MA 01801
                    (Address of Principal Executive Offices)


                                 (781) 994-4800
              (Registrant's Telephone Number, Including Area Code)


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

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

     As of April 30, 2004, 13,176,416 shares of the registrant's common stock
were outstanding.





                           MICROFINANCIAL INCORPORATED
                                TABLE OF CONTENTS




                                                                            Page


Part I                     FINANCIAL INFORMATION

    Item 1   Financial Statements (unaudited):

               Condensed Consolidated Balance Sheets
                  December 31, 2003 and March 31, 2004                         3

               Condensed Consolidated Statements of Operations
                 Three months ended March 31, 2003 and 2004                    4

               Condensed Consolidated Statements of Cash Flows
                 Three months ended March 31, 2003 and 2004                    5

               Notes to Condensed Consolidated Financial Statements            7

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

    Item 3   Quantitative and Qualitative Disclosures about Market Risk       19

    Item 4   Controls and Procedures                                          20

Part II                    OTHER INFORMATION

    Item 1   Legal Proceedings                                                21

    Item 5   Other Information                                                24

    Item 6   Exhibits and Reports on Form 8-K                                 24

    Signatures                                                                25







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





                                                                          December 31,    March 31,
                                                                              2003          2004
                                                                          -----------     ---------
                                                                                    
                                     ASSETS

Net investment in leases and loans:
     Receivables due in installments                                       $ 175,788      $ 143,515
     Estimated residual value                                                 19,110         15,499
     Initial direct costs                                                      1,804          1,295
     Less:
        Advance lease payments and deposits                                      (37)           (34)
        Unearned income                                                      (23,729)       (17,034)
        Allowance for credit losses                                          (43,011)       (36,814)
                                                                           ---------      ---------
Net investment in leases and loans                                         $ 129,925      $ 106,427
Investment in service contracts                                                8,844          7,688
Cash and cash equivalents                                                      6,533          6,196
Restricted cash                                                                2,376          2,233
Property and equipment, net                                                    5,844          5,364
Other assets                                                                   2,892          2,124
                                                                           ---------      ---------
          Total assets                                                     $ 156,414      $ 130,032
                                                                           =========      =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Notes payable                                                              $  58,843      $  41,454
Subordinated notes payable                                                     3,262          3,262
Capitalized lease obligations                                                    209            165
Accounts payable                                                               3,186          2,784
Other liabilities                                                              4,104          3,324
Income taxes payable                                                           7,789          7,826
Deferred income taxes payable                                                  7,755          4,627
                                                                           ---------      ---------
          Total liabilities                                                   85,148         63,442
                                                                           ---------      ---------
Stockholders' equity:
     Preferred stock, $.01 par value; 5,000,000 shares authorized;
        no shares issued at 12/31/03 and 3/31/04                                  --             --
     Common stock, $.01 par value; 25,000,000 shares authorized;
        13,410,646 shares issued at 12/31/03 and 3/31/04, respectively           134            134
     Additional paid-in capital                                               44,245         44,324
     Retained earnings                                                        29,402         24,710
     Treasury stock, at cost (234,230 shares at 12/31/03 and 3/31/04)         (2,515)        (2,515)
     Unearned compensation                                                         0            (63)
                                                                           ---------      ---------
          Total stockholders' equity                                          71,266         66,590
                                                                           ---------      ---------
          Total liabilities and stockholders' equity                       $ 156,414      $ 130,032
                                                                           =========      =========










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



                                       3




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





                                                 For the three months ended
                                                          March 31,
                                                 --------------------------
                                                    2003            2004
                                                 ----------      ----------
                                                              
Revenues:
      Income on financing leases and loans          $ 9,821         $ 4,167
      Income on service contracts                     2,251           1,731
      Rental income                                   8,547           8,465
      Loss and damage waiver fees                     1,483           1,131
      Service fees and other                          3,469           2,514
                                                 ----------      ----------
                Total revenues                       25,571          18,008
                                                 ----------      ----------

Expenses:
      Selling general and administrative              9,131           7,280
      Provision for credit losses                    10,799          13,408
      Depreciation and amortization                   4,270           4,294
      Interest                                        2,629             846
                                                 ----------      ----------
                Total expenses                       26,829          25,828
                                                 ----------      ----------

Loss before provision for income taxes               (1,258)         (7,820)
Benefit for income taxes                               (503)         (3,128)
                                                 ----------      ----------

Net loss                                            $  (755)        $(4,692)
                                                 ==========      ==========

Net loss per common share - basic                   $ (0.06)        $ (0.36)
                                                 ==========      ==========

Net loss per common share - diluted                 $ (0.06)        $ (0.36)
                                                 ==========      ==========

Weighted-average shares used to compute:
           Basic net loss per share              12,854,642      13,179,548
                                                 ----------      ----------
           Fully diluted net loss per share      12,854,642      13,179,548
                                                 ----------      ----------











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



                                       4




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





                                                          For the three months ended
                                                                  March 31,
                                                          --------------------------
                                                            2003              2004
                                                          --------          --------
                                                                      

Cash flows from operating activities:
     Cash received from customers                         $ 39,652          $ 25,218
     Cash paid to suppliers and employees                  (10,796)           (7,206)
     Cash (paid) received for income taxes                      (8)               37
     Interest paid                                          (3,181)             (928)
     Interest received                                          44                 3
                                                          --------          --------
          Net cash provided by operating activities         25,711            17,124
                                                          --------          --------

Cash flows from investing activities:
     Investment in lease contracts                          (1,423)              (73)
     Investment in inventory                                   (71)              (54)
     Investment in direct costs                               (125)                0
     Investment in fixed assets                                (50)              (45)
                                                          --------          --------
          Net cash used in investing activities             (1,669)             (172)
                                                          --------          --------

Cash flows from financing activities:
     Repayment of secured debt                             (23,736)          (17,389)
     Decrease in restricted cash                             4,097               144
     Repayment of capital leases                               (95)              (44)
                                                          --------          --------
          Net cash used in financing activities            (19,734)          (17,289)
                                                          --------          --------

Net increase (decrease) in cash and cash equivalents:        4,308              (337)
Cash and cash equivalents, beginning of period               5,494             6,533
                                                          --------          --------

Cash and cash equivalents, end of period                  $  9,802          $  6,196
                                                          ========          ========




                          (continued on following page)










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


                                       5



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




                                                         For the three months ended
                                                                  March 31,
                                                         --------------------------
                                                             2003            2004
                                                          --------         --------
                                                                    

Reconciliation of net income to net cash provided
   by operating activities:

   Net Loss                                               $   (755)       $ (4,692)
   Adjustments to reconcile net loss to
      cash provided by operating activities
      Depreciation and amortization                          4,270           4,294
      Provision for credit losses                           10,799          13,408
      Recovery of equipment cost and residual value,
        net of revenue recognized                           12,411           7,536
   Change in assets and liabilities:
      Decrease (increase) in current taxes payable            (172)             37
      Increase (decrease) in current taxes receivable            0               0
      Decrease (increase) in deferred income taxes            (503)         (3,128)
      Increase (decrease) in other assets                     (563)            768
      Increase (decrease) in accounts payable                  105            (402)
      Increase in accrued liabilities                          119            (697)
                                                          --------        --------
        Net cash provided by operating activities         $ 25,711        $ 17,124
                                                          ========        ========











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




                                       6



                           MICROFINANCIAL INCORPORATED
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(A)   Nature of Business:

     MicroFinancial Incorporated (the "Company") which operates primarily
through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized
commercial finance company that primarily leases and rents "microticket"
equipment and provides other financing services in amounts generally ranging
from $400 to $15,000 with an average amount financed of approximately $1,900 and
an average lease term of 44 months. The Company does not market its services
directly to lessees but sources leasing transactions through a network of
independent sales organizations and other dealer-based origination networks
nationwide. The Company has funded its operations primarily through borrowings
under its credit facilities, issuances of subordinated debt and on balance sheet
securitizations.

     MicroFinancial incurred net losses of $22.1 million and $15.7 million for
the years ended December 31, 2002 and 2003, respectively. The net losses
incurred by the Company during the third and fourth quarters of 2002 caused the
Company to be in default of certain debt covenants in its credit facility and
securitization agreements. In addition, as of September 30, 2002, the Company's
credit facility failed to renew and consequently, the Company was forced to
suspend substantially all new origination activity as of October 11, 2002. On
April 14, 2003, the Company entered into a long-term agreement with its lenders.
This long-term agreement waives the defaults described above, and in
consideration for this waiver, requires the outstanding balance of the loan to
be repaid over a term of 22 months beginning in April 2003 at an interest rate
of prime plus 2.0%. The Company received a waiver, which was set to expire on
April 15, 2003, for the covenant violations in connection with the
securitization agreement. Subsequently, the Company received a permanent waiver
of the covenant defaults and the securitization agreement was amended so that,
going forward, the covenants are the same as those contained in the long-term
agreement entered into on April 14, 2003, for the senior credit facility. To
date, the Company has fulfilled all of its debt obligations, as agreed to by the
bank group, in a timely manner.

     MicroFinancial has taken certain steps in an effort to improve its
financial position. Management is actively considering various financing,
restructuring and strategic alternatives as well as continuing to work closely
with the Company's lenders to ensure continued compliance with the terms of the
long term agreement. In addition, Management has taken steps to reduce overhead,
including a reduction in headcount from 203 at December 31, 2002 to 136 at
December 31, 2003. During the three months ended March 31, 2004, the employee
headcount was further reduced to 125 in a continued effort to maintain an
infrastructure that is aligned with current business conditions.

     MicroFinancial, through its wholly owned subsidiary, Leasecomm Corporation,
periodically finances its lease and service contracts, together with
unguaranteed residuals, through securitizations using special purpose vehicles.
MFI Finance Corporation I and MFI Finance Corporation II, LLC are special
purpose companies. The assets of such special purpose vehicles and cash
collateral or other accounts created in connection with the financings in which
they participate are not available to pay creditors of Leasecomm Corporation,
MicroFinancial Incorporated, or other affiliates. While Leasecomm Corporation
generally does not sell its interests in leases, service contracts or loans to
third parties after origination, the Company does, from time to time, contribute
certain leases, service contracts, or loans to special-purpose entities for
purposes of obtaining financing in connection with the related receivables. The
contribution of such assets under the terms of such financings are intended to
constitute "true sales" of such assets for bankruptcy purposes (meaning that
such assets are legally isolated from Leasecomm Corporation). However, the
special purpose entities to which such assets are contributed are required under
generally accepted accounting principles to be consolidated in the financial
statements of the Company. As a result, such assets and the related liability
remain on the balance sheet and do not receive gain on sale treatment.




                                       7



                           MICROFINANCIAL INCORPORATED
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(B)  Summary of Significant Accounting Policies:


Basis of Presentation:

     The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the Securities and
Exchange Commission for interim financial statements. Accordingly, the interim
statements do not include all of the information and disclosures required for
the annual financial statements. In the opinion of the Company's management, the
condensed consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation of these interim results. These financial statements should be read
in conjunction with the consolidated financial statements and notes included in
the Company's Annual Report and Form 10-K for the year ended December 31, 2003.
The results for the three-month period ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the full year ended December
31, 2004.

     The balance sheet at December 31, 2003 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.

Allowance for Credit Losses:

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

     The following table sets forth the Company's allowance for credit losses as
of December 31, 2003 and March 31, 2004 and the related provision, charge-offs
and recoveries for the three months ended March 31, 2004.


                                                                          
     Balance of allowance for credit losses at December 31, 2003                $43,011
                                                                                =======
     Provision for credit losses                                       13,408
             Total provisions for credit losses                                  13,408
     Charge-offs                                                       21,238
     Recoveries                                                         1,633
                                                                      -------
             Charge-offs, net of recoveries                                      19,605
                                                                                -------
     Balance of allowance for credit losses at March 31, 2004                   $36,814
                                                                                =======



Net Income (Loss) Per Share:

     Basic net income (loss) per common share is computed based on the
weighted-average number of common shares outstanding during the period. Dilutive
net income (loss) per common share gives effect to all dilutive potential 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 per common share. Stock options were not
included in the computation of diluted net income per share for the three months
ended March 31, 2003 because their effects were antidilutive. All stock options,
common stock warrants, and unvested






                                       8



                           MICROFINANCIAL INCORPORATED
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


restricted stock were excluded from the computation of dilutive net income
(loss) per share for the three months ended March 31, 2004, because their
inclusion would have had an antidilutive effect on net income (loss) per share.




                                                   For three months ended
                                                         March 31,
                                                  ------------------------
                                                     2003          2004
                                                  ----------    ----------
                                                             
   Net loss                                            $(755)      $(4,692)
   Shares used in computation:
     Weighted average common shares
        outstanding used in computation
        of net loss per common share              12,854,642    13,179,548

      Dilutive effect of common stock
        options                                            0             0

                                                  ----------    ----------
   Shares used in computation of net
      loss per common share -
      assuming dilution                           12,854,642    13,179,548
                                                  ----------    ----------

   Net income (loss) per common share                 $(0.06)       $(0.36)
   Net income (loss) per common share
         assuming dilution                            $(0.06)       $(0.36)




Stock Options

     Under the 1998 Equity Incentive Plan (the "1998 Plan") which was adopted on
July 9, 1998 the Company had reserved 4,120,380 shares of the Company's common
stock for issuance pursuant to the 1998 Plan. No options were granted during the
three months ended March 31, 2004. A total of 1,675,000 options were outstanding
at March 31, 2004 of which 1,088,000 were vested.


     On February 4, 2004, one non-employee director was granted 25,000 shares of
restricted stock. The restricted stock vested 20% upon grant, and vests 5% on
the first day of each quarter after the grant date. As of March 31, 2004, 5,000
shares were fully vested, and $16,000 had been amortized from unearned
compensation to compensation expense.

Stock-based Employee Compensation

     All stock options issued to directors and employees have an exercise price
not less than the fair market value of the Company's common stock on the date of
grant. In accordance with accounting for such options utilizing the
intrinsic-value method, there is no related compensation expense recorded in the
Company's financial statements. The Company follows the disclosure requirements
of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires
that compensation under a fair value method be determined using the
Black-Scholes option-pricing model and disclosed in a pro forma effect on
earnings and earnings per share. The Company accounts 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 current period amortization of unearned compensation
expense relating to the restricted stock awards is reflected in net income
(loss). No other stock-based employee compensation cost is 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 March 31, 2004. The following table illustrates the effect on net income
(loss) and





                                       9



                           MICROFINANCIAL INCORPORATED
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.



                                                           For the three months ended
                                                                   March 31,
                                                           --------------------------
                                                            2003               2004
                                                           ------             -------
                                                                        

Net income (loss), as reported                             $ (755)            $(4,692)
Add:  Stock-based employee compensation
  expense included in reported net income, net of
  related tax effects                                          51                  16
Deduct:  Total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects                (269)               (177)
                                                           ------             -------
Pro forma net income (loss)                                $ (973)            $(4,853)
                                                           ======             =======
Net Income (loss) per share:
Basic -- as reported                                       $(0.06)            $ (0.36)
                                                           ======             =======
Basic -- pro forma                                         $(0.08)            $ (0.37)
                                                           ======             =======
Diluted -- as reported                                     $(0.06)            $ (0.36)
                                                           ======             =======
Diluted -- pro forma                                       $(0.08)            $ (0.37)
                                                           ======             =======



     The Company granted 200,000 options during the three months ended March 31,
2003. There were no options granted during the three months ended March 31,
2004. The fair value of option grants for options granted during the three
months ended March 31, 2003 was estimated on the date of grant utilizing the
Black-Scholes option-pricing model with the following weighted-average
assumptions.

                                                2003
                                              -------
       Risk-free interest rate                  3.34%
       Expected dividend yield                  0.00%
       Expected life                          7 years
       Volatility                              76.00%

     The weighted-average fair value at the date of grant for options granted
during the three months ended March 31, 2003 approximated $0.62 per option.

Notes Payable:

     On August 22, 2000, the Company entered into a revolving line of credit and
term loan facility with a group of financial institutions whereby it could
borrow a maximum of $192,000,000 based upon qualified lease receivables, loans,
rentals and service contracts. As of September 30, 2002, this credit facility
failed to renew. While cash flows from its portfolio and other fees have been
sufficient to repay amounts borrowed under the senior credit facility,
securitizations and subordinated debt, in October 2002, the Company was forced
to suspend virtually all new contract originations until a new source of
liquidity is obtained or until such time as the senior debt facility has been
paid in full.

     According to the original agreement, outstanding borrowings with respect to
the revolving line of credit bear interest based either at Prime minus 0.25% for
Prime Rate Loans or the prevailing rate per annum as offered in the London
Interbank Offered Rate (LIBOR) plus 1.75% for LIBOR Loans or the seven-day Money
Market rate plus 2.00% for Swing Line Advances. If the LIBOR loans are not
renewed upon their maturity they automatically convert into prime rate loans.
The Swing Line Advances have a seven-day maturity, and upon their maturity they
automatically




                                       10


                           MICROFINANCIAL INCORPORATED
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


convert into prime rate loans. In addition, the Company's aggregate outstanding
principal amount of Swing Line Advances shall not exceed $10 million. The prime
rate at December 31, 2003 and March 31, 2004 was 4.00%.

     As of September 30, 2002, the revolving credit line failed to renew and the
Company began paying down the balance on the basis of a 36-month amortization
plus interest. Based on the terms of the agreement, interest rates increased
from Prime minus 0.25% to Prime plus 0.50% for prime based loans and from LIBOR
plus 1.75% to LIBOR plus 2.50% for existing LIBOR based loans. In addition,
based on the covenant defaults described below, the outstanding borrowings on
all loans bear an additional 2.00% default interest. On January 3, 2003, the
Company entered into a Forbearance and Modification Agreement for the senior
credit facility, which expired on February 7, 2003. Based on the terms of the
Forbearance and Modification Agreement, interest rates increased again on the
prime based loans to prime plus 1.00%.

     At December 31, 2002, the Company was in default of certain of its debt
covenants in its senior credit facility. The covenants that were in default with
respect to the senior credit facility require that the Company maintain a fixed
charge ratio in an amount not less than 130% of consolidated earnings, a
consolidated tangible net worth minimum of $77.5 million plus 50% of net income
quarterly beginning with September 30, 2000, and compliance with the borrowing
base. On April 14, 2003, the Company entered into a long-term agreement with its
lenders. This long-term agreement waived the defaults described above, and in
consideration for this waiver, required the outstanding balance of the loan to
be repaid over a term of 22 months beginning in April 2003 at an interest rate
of prime plus 2.0%. Based on the amortization schedule in the new agreement, as
subsequently amended on June 30, 2003, and November 7, 2003, the Company is
obligated to repay a minimum of $40.5 million, plus applicable interest, over
the next twelve months.

     The Company had borrowings outstanding under the senior credit facility
with the following terms:




                                   December 31, 2003                 March 31, 2004
                                  --------------------            -------------------
     Type                         Rate          Amount            Rate         Amount
     ----                         ----         -------            ----         ------
                                           (in thousands)                 (in thousands)
                                                                  

     Prime                       6.0000%       $55,346          6.0000%       $40,512
                                               -------                        -------
           Total Outstanding                   $55,346                        $40,512
                                               =======                        =======




     Outstanding borrowings are collateralized by leases, loans, rentals, and
service contracts pledged specifically to the financial institutions. In
addition, on April 14, 2003, the Company granted its lenders a security interest
in all of the assets of the Company not held by the special purpose vehicles to
further collateralize the outstanding borrowings.

     On April 14, 2003, the Company issued warrants to purchase an aggregate of
268,199 shares of the Company's common stock at an exercise price of $.825 per
share. The warrants were issued to the nine lenders in the Company's lending
syndicate in connection with the waiver of defaults and an extension of the
Company's term loan. The warrants will be automatically terminated if all of the
obligations owed by the Company to the lenders pursuant to the loan agreement
have been paid in full prior to June 30, 2004. If all of the Company's
obligations to the Lenders have not been paid in full prior to June 30, 2004,
the warrants will become 50% exercisable as of that date. If all of the
Company's obligations to the Lenders have not been paid in full prior to
September 30, 2004, the warrants will then become 100% exercisable as of that
date. Unless the warrants are automatically terminated or exercised pursuant to
the above criteria, they will expire on September 30, 2014. The fair market
value of the warrants, as determined using the Black-Scholes option-pricing
model, was accounted for as additional paid in capital. The resulting cost of
the warrants was $77,000, which is being amortized to interest expense under the
interest method. As of March 31, 2004, $63,000 had been accreted to interest
expense and the resulting effective interest rate on the senior credit facility
was prime plus 2.09%.






                                       11



                           MICROFINANCIAL INCORPORATED
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



     MFI I issued three series of notes, the 2000-1 Notes, the 2000-2 Notes, and
the 2001-3 Notes. In March 2000, MFI I issued the 2000-1 Notes in aggregate
principal amount of $50,056,686. In December 2000, MFI I issued the 2000-2 Notes
in aggregate principal amount of $50,561,633. In September 2001, MFI I issued
the 2001-3 Notes in aggregate principal amount of $39,397,354. Outstanding
borrowings are collateralized by specific pools of lease receivables.

     At December 31, 2002, the Company was in default on two of its debt
covenants in its securitization agreements. The covenants that were in default
with respect to the securitization agreements require that the Company maintain
a fixed charge ratio in an amount not less than 125% of consolidated earnings
and a consolidated tangible net worth greater than $90 million plus 50% of net
income for each fiscal quarter after June 30, 2001. Additionally per the terms
of the securitization agreement, any default with respect to the senior credit
facility is considered a default under the terms of the agreement. The Company
received a waiver, which was set to expire on April 15, 2003, for the covenant
violations in connection with the securitization agreement. Subsequently, the
Company received a permanent waiver of the covenant defaults and the
securitization agreement was amended so that going forward, the covenants are
the same as those contained in the long-term agreement entered into on April 14,
2003, for the senior credit facility.

     MFI I had borrowings outstanding under the series of notes with the
following terms:



                               December 31, 2003              March 31, 2004
                             ----------------------        -------------------
Series                       Rate            Amount        Rate         Amount
                             ----            ------        ----         ------
                                         (in thousands)             (in thousands)
                                                        
MFI I
2001-3 Notes                5.5800%          $3,247        5.5800%        $692
                                             ------                     ------
      Total Outstanding                      $3,247                       $692
                                             ======                     ======


     At December 31, 2003 and March 31, 2004, the Company also had other notes
payable which totaled $250,000. These notes are term notes that carry an
interest rate of 7.5% and are due on February 1, 2005.

Dividends:

     During the fourth quarter of 2002, the Board of Directors suspended the
future payment of dividends to comply with the Company's banking agreements.
Currently the terms of the Company's senior credit facility prohibit the payment
of dividends so long as there is a balance outstanding on the debt. Provisions
in certain of the Company's credit facilities and agreements governing its
subordinated debt contain, and the terms of any indebtedness issued by the
Company in the future are likely to contain, certain restrictions on the payment
of dividends on the Common Stock. The decision as to the amount and timing of
future dividends paid by the Company, if any, will be made at the discretion of
the Company's Board of Directors in light of the financial condition, capital
requirements, earnings and prospects of the Company and any restrictions under
the Company's credit facilities or subordinated debt agreements, as well as
other factors the Board of Directors may deem relevant, and there can be no
assurance as to the amount and timing of payment of future dividends.

Commitments and Contingencies:

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





                                       12





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

Results of Operations
---------------------



                                                        For the three months ended
                                                                 March 31,
                                                      2003        Change        2004
                                                     ------       ------        -----
                                                              (in thousands)

                                                                      
     Income on financing leases and loans....        $9,821       (57.6)%      $4,167
     Income on service contracts ............         2,251       (23.1)%       1,731
     Rental income...........................         8,547        (.96)%       8,465
     Service fees and other..................         4,952       (26.4)%       3,645
                                                     ------       ------        -----
     Total revenues..........................        25,571       (29.6)%      18,008
                                                     ------       ------       ------



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

     Total revenues for the three months ended March 31, 2004 were $18.0
million, a decrease of $7.6 million, or 29.6%, from the three months ended March
31, 2003. The decrease was primarily due to a decrease of $5.7 million, or
57.6%, in financing leases and loans, $1.3 million or 26.4% in fee and other
income, and $520,000, or 23.1% in service contract income. The overall decrease
in revenue can be attributed to the decrease in the overall size of the
Company's portfolio of leases, rentals and service contracts. The shrinking
portfolio is a direct result of the Company being forced to suspend virtually
all new originations in October 2002, as a result of its Lenders not renewing
the revolving credit facility on September 30, 2002. Revenues are expected to
continue to decline so long as the Company is not originating new contracts.

     Selling, General and Administrative



                                                        For the three months ended
                                                                 March 31,
                                                       2003        Change        2004
                                                     ---------    ---------     -------
                                                               (in thousands)
                                                                       
     Selling, general and administrative.....         9,131       (20.3)%       7,280
     As a percent of revenue.................          35.7%                     40.4%



     Our selling, general and administrative (SG&A) expenses include costs of
maintaining corporate functions including accounting, finance, collections,
legal, human resources, information systems and communications. SG&A expenses
also include commissions, service fees and other marketing costs associated with
the Company's portfolio of leases and rental contracts. SG&A expenses decreased
by $1.9 million, or 20.3%, for the three months ended March 31, 2004, as
compared to the three months ended March 31, 2003. The decrease was primarily
driven by a reduction in personnel related expenses of approximately $1.0
million, as management reduced headcount from 203 to 136 and $664,000 reduction
in rent expense. The expense reductions were achieved as management continued to
align the Company's infrastructure with the current business conditions.

     Provision for Credit Losses



                                                        For the three months ended
                                                                 March 31,
                                                       2003        Change        2004
                                                     ---------    ---------     -------
                                                                 (thousands)

                                                                      
     Provision for credit losses.............        10,799        24.2%       13,408
     As a percent of revenue.................          42.2%                     74.5%



     The Company maintains an allowance for credit losses on its investment in
leases, service contracts, rental contracts and loans at an amount that it
believes is sufficient to provide adequate protection against losses in its




                                       13


portfolio. The Company's provision for credit losses increased by $2.6 million,
or 24.2%, for the three months ended March 31, 2004, as compared to the three
months ended March 31, 2003, while net charge-offs decreased 42.7% to $19.6
million. The provision was based on the Company's historical policy of providing
a provision for credit losses based upon the dealer fundings and revenue
recognized in any period, as well as taking into account actual and expected
losses in the portfolio as a whole and the relationship of the allowance to the
net investment in leases, service contracts, rental contracts and loans.

     Depreciation and Amortization



                                                        For the three months ended
                                                                 March 31,
                                                       2003        Change        2004
                                                     ---------    ---------     -------
                                                                 (thousands)
                                                                       
     Depreciation and amortization...........         4,270         0.5%        4,294
     As a percent of revenue.................          16.7%                     23.8%



     Depreciation and amortization expenses consist primarily of the
depreciation taken against fixed assets and rental equipment, and the
amortization of the Company's investment in service contracts. The Company's
investment in fixed assets is recorded at cost and amortized over the expected
life of the service period of the asset. Rental equipment is either recorded at
estimated residual value and depreciated using the straight-line method over a
period of 12 months or at the acquisition cost and depreciated using the
straight line method over a period of 36 months. Service contracts are recorded
at cost and amortized over 84 months. The Company periodically evaluates whether
events or circumstances have occurred that may affect the estimated useful life
or recoverability of the asset and any resulting charge is made to depreciation
and amortization expense. Depreciation and amortization increased by $24,000, or
0.5%, for the three months ended March 31, 2004, as compared to the three months
ended March 31, 2003.

     Interest Expense



                                                        For the three months ended
                                                                 March 31,
                                                       2003        Change        2004
                                                     ---------    ---------     -------
                                                               (in thousands)
                                                                         

     Interest................................         2,629       (67.8)%         846
     As a percent of revenue.................          10.3%                      0.5%



     The Company pays interest on borrowings under the senior credit facility,
subordinated debt and the on balance sheet securitizations. Interest expense
decreased by $1.8 million, or 67.8%, for the three months ended March 31, 2004,
as compared to the three months ended March 31, 2003. This decrease resulted
primarily from the Company's decreased level of borrowings. At March 31, 2004,
the Company had notes payable of $41,454, compared to $145,191 at March 31,
2003.

     Other Operating Data

     Dealer Fundings were $41,000 for the three months ended March 31, 2004, a
decrease of $1.1 million, or 96.5%, compared to the three months ended March 31,
2003. This decrease is a result of the failure of the credit facility to renew,
which, in turn, forced the Company to suspend virtually all new contract
originations in the third quarter of 2002. Receivables due in installments,
estimated residual values, loans receivable, investment in service contracts,
and investment in rental equipment also decreased from $470.6 million for the
year ended December 31, 2003 to $180.9 million in March 2004. Net cash provided
by operating activities decreased by $14.4 million, or 36.4%, to $25.2 million
during the three months ended March 31, 2004.

Critical Accounting Policies
----------------------------

     In response to the SEC's release No. 33-8040, "Cautionary Advice regarding
Disclosure About Critical Accounting Policies," Management identified the most
critical accounting principles upon which our financial status depends. The
Company determined the critical principles by considering accounting policies
that involve the most






                                       14


complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to revenue recognition and maintaining
the allowance for credit losses. These accounting policies are discussed below
as well as within the notes to the consolidated financial statements.

     Revenue Recognition

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

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

     Allowance for Credit Losses

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

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

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

Exposure to Credit Losses
-------------------------

     The following table sets forth certain information as of December 31, 2002
and 2003 and March 31, 2004 with respect to delinquent leases, service contracts
and loans. The percentages in the table below represent the aggregate on such
date of the actual amounts not paid on each invoice by the number of days past
due, rather than the entire




                                       15



balance of a delinquent receivable, over the cumulative amount billed at such
date from the date of origination on all leases, service contracts, and loans in
the Company's portfolio. For example, if a receivable is 90 days past due, the
portion of the receivable that is over 30 days past due will be placed in the
31-60 days past due category, the portion of the receivable which is over 60
days past due will be placed in the 61-90 days past due category and the portion
of the receivable which is over 90 days past due will be placed in the over 90
days past due category. The Company historically used this methodology of
calculating its delinquencies because of its experience that lessees who miss a
payment do not necessarily default on the entire lease. Accordingly, the Company
includes only the amount past due rather than the entire lease receivable in
each category.



                                                            As of               As of
                                                        December 31,           March 31,
                                                   ----------------------      --------
                                                      2002         2003          2004
                                                   ---------     --------      --------
                                                                     
Cumulative amounts billed (in thousands)           $600,637      $478,791      $428,422
31-60 days past due                                     1.0%          1.1%          1.2%
61-90 days past due                                     1.0%          0.8%          0.9%
Over 90 days past due                                  22.9%         17.9%         17.1%
                                                   ---------     --------      --------
   Total past due                                      24.9%         19.8%         19.2%
                                                   =========     ========      ========


Liquidity and Capital Resources
-------------------------------

     General

     The Company's lease and finance business is capital-intensive and requires
access to substantial short-term and long-term credit to fund new leases,
contracts and loans. Since inception, the Company has funded its operations
primarily through borrowings under its credit facilities, its on-balance sheet
securitizations, the issuance of subordinated debt and an initial public
offering completed in February of 1999. The Company will continue to require
significant additional capital to maintain and expand its volume of leases,
contracts and loans funded, as well as to fund any future acquisitions of
leasing companies or portfolios.

     Currently, the Company's uses of cash include the payment of interest
expenses, repayment of borrowings under its credit facilities and
securitizations, payment of selling, general and administrative expenses, income
taxes and capital expenditures.

     The Company utilizes its credit facilities to fund the origination and
acquisition of leases that satisfy the eligibility requirements established
pursuant to each facility. On August 22, 2000, the Company entered into a new
$192 million credit facility with nine banks, expiring on September 30, 2002. As
of September 30, 2002, the credit facility failed to renew and the Company began
paying down the outstanding balance. As a result of the failure to renew, the
Company was forced to suspend essentially all new contract originations until a
new source of financing is obtained or at such time that the senior credit
facility has been paid in full. At December 31, 2002, the Company was in default
of certain of its debt covenants in its credit facility. The covenants that were
in default with respect to the credit facility, require that the Company
maintain a fixed charge ratio in an amount not less than 130% of consolidated
earnings, a consolidated tangible net worth minimum of $77.5 million plus 50% of
net income quarterly beginning with September 30, 2000, and compliance with the
borrowing base. On April 14, 2003, the Company entered into a long-term
agreement with its lenders. This long-term agreement waives the defaults
described above, and in consideration for this waiver, requires the outstanding
balance of the loan to be repaid over a term of 22 months beginning in April
2003 at an interest rate of prime plus 2.0%. Based on the amortization schedule
in the new agreement, as subsequently amended in June and November 2003, as of
March 31, 2004, the Company is obligated to repay a minimum of $40.5 million,
plus applicable interest, over the next twelve months. At March 31, 2004, the
Company had approximately $40.5 million outstanding under the facility.

     The Company, through its wholly owned subsidiary, Leasecomm Corporation,
periodically finances its lease and service contracts, together with
unguaranteed residuals, through securitizations using special purpose entities.
The assets of such special purpose entities and cash collateral or other
accounts created in connection with the





                                       16


financings in which they participate are not available to pay creditors of
Leasecomm Corporation, MicroFinancial Incorporated, or other affiliates.
However, the special purpose entities to which such assets are required under
generally accepted accounting principles to be consolidated in the financial
statements of the Company. As a result, such assets and the related liability
remain on the balance sheet and do not receive gain on sale treatment. At
December 31, 2002, the Company was in default of certain of its debt covenants
in its securitization agreements. The covenants that were in default with
respect to the securitization agreements, required that the Company maintain a
fixed charge ratio in an amount not less than 125% of consolidated earnings and
a consolidated tangible net worth greater than $90 million plus 50% of net
income for each fiscal quarter after June 30, 2001. The Company received a
permanent waiver of the covenant defaults and the securitization agreement was
amended so that going forward, the covenants are the same as those contained in
the long-term agreement entered into on April 14, 2003, for the senior credit
facility. To date, cash flows from its portfolio and other fees have been
sufficient to repay amounts borrowed under the securitization agreements. At
March 31, 2004, the Company had approximately $692,000 outstanding under its
securitization.

     MicroFinancial has taken certain steps in an effort to improve its
financial position. Management continues to actively consider various financing,
restructuring and strategic alternatives as well as continuing to work closely
with the Company's lenders to ensure continued compliance with the terms of the
long term agreement. In addition, management has taken steps to reduce overhead
and align its infrastructure with current business conditions, including a
reduction in headcount from 380 at December 31, 2001 to 136 at December 31,
2003. The failure or inability of MicroFinancial to successfully carry out these
plans could ultimately have a material adverse effect on the Company's financial
position and its ability to meet its obligations when due. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

     Provided that the Company continues to comply with the terms of the long
term bank agreement, including the suspension of new contract originations, the
Company believes that cash flows from its existing portfolio will be sufficient
to fund the Company's operations for the foreseeable future.

Contractual Obligations and Commercial Commitments
--------------------------------------------------

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

     At March 31, 2004, the repayment schedules for outstanding long term debt,
minimum lease payments under non-cancelable operating leases and future minimum
lease payments under capital leases were as follows:



For the period ended               Long-Term   Operating   Capital
   December 31,                       Debt       Leases     Leases     Total
--------------------               ---------   ---------   -------    -------
                                                         

       2004                         $41,204      $  439     $ 110     $41,753
       2005                             912         585        55       1,552
       2006                           2,600          --        --       2,600
       2007                              --          --        --          --
       2008                              --          --        --          --
       2009                              --          --        --          --
 Thereafter                              --          --        --          --
                                    -------      ------     -----     -------
          Total                     $44,716      $1,024     $ 165     $45,905
                                    =======      ======     =====     =======


Note on Forward-Looking Information
-----------------------------------

     Statements in this document that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes" "anticipates" "expects" and similar expressions are intended to
identify forward-looking statements. The




                                       17


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




                                       18




ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General Risks

     MicroFinancial incurred net losses of $22.1 million and $15.7 million for
the years ended December 31, 2002 and 2003, respectively. The net losses
incurred by the Company during the third and fourth quarters of 2002 caused the
Company to be in default of certain debt covenants in its credit facility and
securitization agreements. In addition, as of September 30, 2002, the Company's
credit facility failed to renew and consequently, the Company was forced to
suspend virtually all new origination activity as of October 11, 2002. On April
14, 2003, the Company entered into a long-term agreement with its lenders. This
long-term agreement waives the covenant defaults as of December 31, 2002, and in
consideration for this waiver, requires the outstanding balance of the loan to
be repaid over a term of 22 months beginning in April 2003 at an interest rate
of prime plus 2.0%. The Company received a waiver, which was set to expire on
April 15, 2003, for the covenant violations in connection with the
securitization agreement. Subsequently, the Company received a permanent waiver
of the covenant defaults and the securitization agreement was amended so that
going forward, the covenants are the same as those contained in the long-term
agreement entered into on April 14, 2003, for the senior credit facility. To
date, the Company has fulfilled all of its debt obligations, as agreed to by the
bank group, in a timely manner.

     MicroFinancial has taken certain steps in an effort to improve its
financial position. Management continues to actively consider various financing,
restructuring and strategic alternatives as well as continuing to work closely
with the Company's lenders to ensure continued compliance with the terms of the
long term agreement. In addition, Management has taken steps to reduce overhead
and align its infrastructure with current business conditions, including a
reduction in headcount from 380 at December 31, 2001 to 136 at December 31,
2003. The failure or inability of MicroFinancial to successfully carry out these
plans could ultimately have a material adverse effect on the Company's financial
position and its ability to meet its obligations when due. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

Market-Rate-Sensitive Instruments and Risk Management

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

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

Interest Rate Risk Management

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

     Given the relatively short average life of the Company's leases, contracts
and loans, the Company's goal is to maintain a blend of fixed and variable
interest rate obligations. Currently, given the fixed repayment schedules of the
Company's outstanding debt, the Company is limited in its ability to manage the
blend of fixed and variable rate interest obligations. As of March 31, 2004, the
Company's outstanding fixed-rate indebtedness outstanding under the Company's
securitizations and subordinated debt represented 9.4% of the Company's total
outstanding indebtedness.





                                       19


ITEM 4   CONTROLS AND PROCEDURES

     Disclosure controls and procedures: As of the end of the period covered by
this report, the Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to the Exchange Act Rule 13a-15. Based upon the evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's 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 Company 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: As of the date of the evaluation described above, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect those controls.





                                       20



PART II. OTHER INFORMATION

ITEM 1   LEGAL PROCEEDINGS

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

     A. The Company filed an action in the United States District Court for the
District of Massachusetts against Sentinel Insurance Company, Ltd.,
("Sentinel"), Premier Holidays International, Inc., ("Premier") and Daniel
DelPiano ("DelPiano") arising from Premier's October, 1999, default on its
repayment obligations to the Company under a Twelve Million Dollar ($12,000,000)
loan. Judgment has been entered in this case against Sentinel, which had issued
a business performance insurance policy guaranteeing repayment of the loan, in
the amount of Fourteen Million Dollars ($14,000,000). This judgment has not been
satisfied. Sentinel is currently undergoing liquidation proceedings, and a claim
in this amount has been filed with the bankruptcy court. The Company does not
expect to receive any amount as a result of its claim. The Company's case
against Premier and DelPiano was tried in November 2003 and was decided by the
Court in March, 2004. The Court entered a judgment for the Company against
Premier and DelPiano, jointly and severally, on all of the Company's counts,
including fraud and violation of Massachusetts General Laws, Chapter 93A, and
dismissing with prejudice all of Premier and DelPiano's claims and
counterclaims. The Court awarded the Company Twenty Three Million Dollars
($23,000,000) in damages. Collection of this award is not assumed and therefore
it is not reflected in the financial statements as of March 31, 2004. The
judgment is now on appeal.

     B. In October 2002, the Company was served with a Complaint in an action in
the United States District Court for the Southern District of New York filed by
approximately 170 present and former lessees asserting individual claims. The
Complaint contains claims for violation of RICO (18 U.S.C. ss. 1964), fraud,
unfair and deceptive acts and practices, unlawful franchise offerings, and
intentional infliction of mental anguish. The claims purportedly arise from
Leasecomm's dealer relationships with Themeware, E-Commerce Exchange,
Cardservice International, Inc., and Online Exchange for the leasing of websites
and virtual terminals. The Complaint asserts that the Company is responsible for
the conduct of its dealers in trade shows, infomercials and web page
advertisements, seminars, direct mail, telemarketing, all which are alleged to
constitute unfair and deceptive acts and practices. Further, the Complaint
asserts that Leasecomm's lease contracts as well as its collection practices and
late fees are unconscionable. The Complaint seeks restitution, compensatory and
treble damages, and injunctive relief. The Company filed a Motion to Dismiss the
Complaint on January 31, 2003. By decision dated September 30, 2003, the court
dismissed the complaint with leave to file an amended complaint. An Amended
Complaint was filed in November 2003. The Company filed a Motion to Dismiss the
Amended Complaint, which is awaiting decision by the Court. Because of the
uncertainties inherent in litigation, we cannot predict whether the outcome will
have a material adverse effect.

     C. On August 22, 2002, plaintiff Aaron Cobb filed a Complaint against
Leasecomm Corporation and MicroFinancial, Inc. and another Entity known as
Galaxy Mall, Inc. alleging breach of contract; Fraud, Suppression and Deceit;
Unjust Enrichment; Conspiracy; Conversion; Theft by Deception; and violation of
Alabama Usury Laws. The Complaint was filed on behalf of Aaron Cobb
individually, and on behalf of a class of persons and entities similarly
situated in the State of Alabama. More specifically, the Plaintiff purports to
represent a class of persons and small business in the State of Alabama who
allegedly were induced to purchase services and/or goods from any of the
Defendants named in the Complaint. The case is venued in Bullock County,
Alabama. On March 31, 2003 the trial court entered an Order denying the
Company's Motion to Dismiss. An appeal of the Order was filed with the Alabama
Supreme Court on May 12, 2003. On February 20, 2004, the Alabama Supreme Court
overruled the Company's application for rehearing. On February 24, 2004,
Plaintiff filed a First Amended Class Action Complaint in which Plaintiff added
Electronic Commerce International ("ECI") as an additional party defendant. No
new allegations were asserted against the Company in the Amended Complaint. On
March 31, 2004 the Company has filed an answer to the Amended Complaint denying
the Plaintiff's allegations. The Company continues to deny any wrongdoing and
plans to vigorously defend this claim. Because of the uncertainties inherent in
litigation, the company cannot predict whether the outcome will have a material
adverse affect





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     D. In March 2003, an action was filed by a shareholder against the Company
in United States District Court asserting a single count of common law fraud and
constructive fraud. The complaint alleges that the shareholder was defrauded by
untrue statements made to him by management, upon which he relied in the
purchase of Company stock for himself and for others. The complaint seeks
damages in an unspecified amount. The Company filed an answer denying the
allegations. In December 2003, upon motion filed by the plaintiff shareholder,
the Court dismissed the action without prejudice.

     E. In March 2003, a purported class action was filed in Superior Court in
Massachusetts against Leasecomm and one of its dealers. The class sought to be
certified is a nationwide class (excluding certain residents of the State of
Texas) who signed identical or substantially similar lease agreements with
Leasecomm covering the same product. After the Company had filed a motion to
dismiss, but before the motion to dismiss was heard by the Court, plaintiffs
filed an Amended Complaint. The Amended Complaint asserts claims against the
Company for declaratory relief, absence of consideration, unconscionability, and
violation of Massachusetts General Laws Chapter 93A, Section 11. The Company
filed a motion to dismiss the Amended Complaint. The Court allowed the Company's
motion to dismiss the Amended Complaint in March 2004.

     F. On April 28, 2003, plaintiff Wallace Dickey filed a purported class
action against Leasecomm Corporation, Cardservice International, Linkpoint
International and Clear Commerce Corporation alleging that he lease-financed
through Leasecomm the right to use certain computer software manufactured,
distributed and sold by the other defendants. The plaintiff does not allege that
Leasecomm failed to provide the lease financing contemplated by the Leasecomm
lease. Instead, the Plaintiff alleges that the software failed to operate as he
believed it would, and he has sued for a declaration that would allow him to
rescind his contract, to recover money paid in the course of the transaction and
to recover damages allegedly caused by unspecified deceptive trade practices.
The plaintiff asserts his claims "on behalf of himself and all others similarly
situated." Leasecomm denies all of the Plaintiff's allegations. The parties have
reached an agreement on settlement terms and are currently drafting the
settlement documents. The settlement, if finalized and signed by the parties,
will require court approval to become effective. Because of the uncertainties
inherent in litigation, the company cannot predict whether the outcome will have
a material adverse affect.

     G. On April 29, 2003, Leasecomm was served with a Complaint filed in the
Orange County Superior Court for the State of California. In that Complaint,
Maria J. Smith purports to bring a claim against Leasecomm and two other
defendants (Galaxy Mall, Inc. and Electronic Commerce International, Inc.) for
unfair business practices and competition under California Business and
Professions Code section 17200 et seq. The essence of the claim is that Smith
and others who are similarly situated were defrauded in connection with their
acquisition of certain licenses that were financed by Leasecomm. In May 2003,
Leasecomm filed a motion to stay the action in favor of a Massachusetts forum
based on a forum selection clause contained in plaintiff's lease agreement with
Leasecomm. After filing the motion, Leasecomm entered into settlement
negotiations with plaintiff's counsel to explore the possibility of resolving
the matter on a class wide basis without the need for further litigation
(meaning the settlement would, if accepted, apply not only to the named
plaintiff but to others similarly situated). The parties have reached agreement
on settlement terms and are currently drafting the settlement documents. The
settlement, if finalized and signed by the parties, will require Court approval
to become effective. Because of the uncertainties inherent in litigation, the
company cannot predict whether the outcome will have a material adverse affect.

     H. In October 2003, the Company was served with a purported class action
complaint which was filed in the United States District Court for the District
of Massachusetts alleging violations of federal securities law. The purported
class would consist of all persons who purchased Company securities between
February 5, 1999 and October 30, 2002. The Complaint asserts that during this
period the Company made a series of materially false or misleading statements
about the Company's business, prospects and operations, including with respect
to certain lease provisions, the Company's course of dealings with its
vendor/dealers, and the Company's reserves for credit losses. No motion or
answer has been filed in response to the Complaint. Because of the uncertainties
inherent in litigation, we cannot predict whether the outcome will have a
material adverse effect.

     I. In February 2004, a purported class action was filed in Superior Court
in Massachusetts against Leasecomm, a dealer, and a party purportedly related to
the dealer. The class sought to be certified is a nationwide class who signed
lease agreements identical to, or substantially similar to, the plaintiff's
lease agreement with




                                       22


Leasecomm, and covering the same product. The Complaint asserts claims for
declaratory judgment, absence of consideration, unconscionability, and violation
of Massachusetts General Laws Chapter 93A, Section 11. The claims concern the
validity, enforceability, and alleged unconscionability of the lease of a
product which enabled a merchant to process credit card payments. The Complaint
seeks rescission of lease agreements with Leasecomm, restitution, multiple
damages and attorneys fees under Chapter 93A, and injunctive relief. Because of
the uncertainties inherent in litigation we cannot predict whether the outcome
will have a material adverse effect.

     J. In February 2003, Leasecomm received a Civil Investigative Demand
("CID") from the Office of the Attorney General, State of Washington, to which
it has responded. The CID concerns an investigation of monitoring agreements
between Priority One, Inc. and various State of Washington consumers, as to
which Leasecomm appears to be the assignee of the right to receive monthly
payments. Since the investigation has not been concluded, and no legal action
has been commenced against Leasecomm, there can be no assurance as to the
eventual outcome.




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ITEM 5   OTHER INFORMATION

     The Company's Chief Executive Officer and Chief Financial Officer have
furnished to the SEC the certification with respect to this Form 10-Q that is
required by Section 906 of the Sarbanes-Oxley Act of 2002.


ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K

(a)  The following exhibits are filed herewith:

     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


(b)  A form 8-K was filed on March 11, 2004, to announce the results for the
     year ended December 31, 2003. A second report on Form 8-K was filed on
     April 2, 2004 disclosing that the Company was awarded a $23 million
     judgement.




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                                   SIGNATURES

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



                                  MicroFinancial Incorporated



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



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



Date: May 14, 2004







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