UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 000-50448

Marlin Business Services Corp.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:

(888) 479-9111

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

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

Common Stock, $.01 par value

      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.     þ

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the closing price of such shares on the NASDAQ National Market was approximately $60,732,608 as of June 30, 2004. Shares of common stock held by each executive officer and director and persons known to us who beneficially owns 5% or more of our outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      The number of shares of Registrant’s common stock outstanding as of February 25, 2005 was 11,595,353 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s definitive Proxy Statement related to the 2005 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days of the close of Registrant’s fiscal year, is incorporated by reference into Part III of this Form 10-K.

MARLIN BUSINESS SERVICES CORP.

FORM 10-K

INDEX

EXPLANATORY NOTE

      As previously disclosed in our Current Report on Form 8-K dated March 10, 2005, on March 8, 2005, our Board of Directors, including our Audit Committee, concluded to restate the Company’s financial statements for the years ended December 31, 2003 and December 31, 2002 and for the four quarters of fiscal 2004 and 2003.

      Following a review of its lease-related accounting policies, the Company determined that its accounting policy relating to the treatment of “interim rent” did not conform with generally accepted accounting principles (“GAAP”). As a result, the Company has changed the timing of the recognition and classification of “interim rent”, which represents rental payments paid by certain customers to cover the period between the installation of equipment and the commencement of the lease contract. Since its inception in 1997, the Company has recognized interim rent in fee income at the time it was invoiced, and it has described this practice in its prior financial statements. The Company, in consultation with its independent registered public accounting firm, KPMG LLP, has determined that interim rent payments should be treated in the same manner as other fixed non-cancelable contractual minimum lease payments due from lessees in determining the Company’s investment in direct financing leases. This treatment will defer the recognition of income for financial statement purposes while increasing the amount of unearned income for balance sheet purposes at the inception of the lease. The unearned income, net of initial direct origination costs, will be recognized over the lease term based on a constant periodic rate of return as interest income. This change lowered earnings for 2004 from $13.8 million or $1.18 per diluted share (as previously reported in the Company’s Form 8-K filing on February 3, 2005) to $13.5 million or $1.15 per diluted share.

      This change relates principally to the timing of income recognition for financial statement purposes. It is a non-cash adjustment and will not have any impact on historical or future cash flows or any other aspect of the Company’s business.

      The cumulative effect of this restatement from 1997 through the year ended December 31, 2004 was to reduce retained earnings by approximately $1.9 million, and book value per common share by $0.17. Net investment in leases decreased approximately $3.2 million related to the additional recorded unearned income that will be earned over the remaining term of the leases.

      The Company is reporting the effects of this change on prior periods in this Form 10-K, including restated financial statements for the years ended December 31, 2003 and December 31, 2002 and for the four quarters of fiscal years 2004 and 2003, and corrected information in the five year selected financial data table. As a result of this restatement, the financial statements contained in the Company’s prior filings with the SEC should not be relied upon.

      For a more detailed description of these restatements, see Note 2, “Restatement of Financial Statements,” to the accompanying audited consolidated financial statements and the section entitled “Restatement” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K.

PART I

Overview

      We are a nationwide provider of equipment financing solutions primarily to small businesses. We finance over 60 categories of commercial equipment important to our end user customers, including copiers, telecommunications equipment, water filtration systems, computers, and certain commercial and industrial equipment. Our average lease transaction was approximately $8,400 at December 31, 2004, and we typically do not exceed $200,000 for any single lease transaction. This segment of the equipment leasing market is commonly known in the industry as the small-ticket segment. We access our end user customers through origination sources comprised of our existing network of over 9,200 independent commercial equipment dealers and, to a lesser extent, through relationships with lease brokers and direct solicitation of our end user customers. We use a highly efficient telephonic direct sales model to market to our origination sources. Through these origination sources, we are able to deliver convenient and flexible equipment financing to our end user customers. Our typical financing transaction involves a non-cancelable, full-payout lease with payments sufficient to recover the purchase price of the underlying equipment plus an expected profit. As of December 31, 2004, we serviced approximately 95,000 active equipment leases having a total original equipment cost of $797.3 million for approximately 76,000 end user customers.

      The small-ticket equipment leasing market is highly fragmented. We estimate that there are up to 75,000 independent equipment dealers who sell the types of equipment we finance. We focus primarily on the segment of the market comprised of the small and mid-size independent equipment dealers. We believe this segment is underserved because: 1) the large commercial finance companies and large commercial banks typically concentrate their efforts on marketing their products and services directly to equipment manufacturers and larger distributors, rather than the independent equipment dealers; and 2) many smaller commercial finance companies and regional banking institutions have not developed the systems and infrastructure required to adequately service these equipment dealers on high volume, low-balance transactions. We focus on establishing our relationships with independent equipment dealers to meet their need for high quality, convenient point-of-sale lease financing programs. We provide equipment dealers with the ability to offer our lease financing and related services to their customers as an integrated part of their selling process, allowing them to increase their sales and provide better customer service. We believe our personalized service approach appeals to the independent equipment dealer by providing each dealer with a single point of contact to access our flexible lease programs, obtain rapid credit decisions and receive prompt payment of the equipment cost. Our fully integrated account origination platform enables us to solicit, process and service a large number of low balance financing transactions. From our inception in 1997 to December 31, 2004, we processed approximately 335,000 lease applications and originated nearly 146,000 new leases.

Reorganization

      Marlin Leasing Corporation was incorporated in the state of Delaware on June  16, 1997. On August 5, 2003, we incorporated Marlin Business Services Corp. in Pennsylvania. On November 11, 2003, we reorganized our operations into a holding company structure by merging Marlin Leasing Corporation with a wholly owned subsidiary of Marlin Business Services Corp. As a result, all former shareholders of Marlin Leasing Corporation became shareholders of Marlin Business Services Corp. After the reorganization, Marlin Leasing Corporation remains in existence as our primary operating subsidiary.

Initial Public Offering

      In November 2003, 5,060,000 shares of our common stock were issued in connection with an initial public offering (IPO). Of these shares, a total of 3,581,255 shares were sold by the company and 1,478,745 shares were sold by selling shareholders. The initial public offering price was $14.00 per share resulting in net proceeds to us, after payment of underwriting discounts and commissions but before other offering costs, of approximately $46.6 million. We did not receive any proceeds from the shares sold by the

selling shareholders. We used the net proceeds from the IPO as follows: (i) approximately $10.1 million was used to repay all of our outstanding 11% subordinated debt and all accrued interest thereon; (ii) approximately $6.0 million was used to pay accrued dividends on preferred stock which converted to common stock at the time of the IPO; and (iii) approximately $1.6 million was used to pay issuance costs incurred in connection with the IPO. The remaining proceeds were used to fund newly originated and existing leases in our portfolio and other general business purposes. Our common stock trades on the NASDAQ National Market under the ticker symbol “MRLN”.

Competitive Strengths

      We believe several characteristics may distinguish us from our competitors, including our:

Disciplined Growth Strategy

      Our primary objective is to enhance our current position as a provider of equipment financing solutions primarily to small businesses by pursuing a strategy focused on organic growth initiatives. We believe we can create additional lease financing opportunities by increasing our new origination source relationships and further penetrating our existing origination sources. We expect to do this by adding new sales account executives and continuing to train and season our existing sales force. We also believe that we can increase originations in certain regions of the country by establishing offices in identified strategic locations. To this end, we opened our third regional office in Chicago, Illinois in January 2004. Other regional offices are located in or near Atlanta, Georgia and Denver, Colorado.

Asset Originations

      Overview of Origination Process. We access our end user customers through our extensive network of independent equipment dealers and, to a lesser extent, through relationships with lease brokers and the direct solicitation of our end user customers. We use a highly efficient telephonic direct sales model to market to our origination sources. Through these sources, we are able to deliver convenient and flexible equipment financing to our end user customers.

      Our origination process begins with our database of thousands of origination source prospects located throughout the United States. We developed and continually update this database by purchasing marketing data from third parties, such as Dun & Bradstreet, Inc., by joining industry organizations and by attending equipment trade shows. The independent equipment dealers we target typically have had limited access to lease financing programs, as the traditional providers of this financing generally have concentrated their efforts on the equipment manufacturers and larger distributors.

      The prospects in our database are systematically distributed to our sales force for solicitation and further data collection. Sales account executives access prospect information and related marketing data through our contact management software. This contact management software enables the sales account executives to sort their origination sources and prospects by any data field captured, schedule calling campaigns, fax marketing materials, send e-mails, produce correspondence and documents, manage their time and calendar, track activity, recycle leads and review management reports. We have also integrated predictive dialer technology into the contact management system, enabling our sales account executives to create efficient calling campaigns to any subset of the origination sources in the database.

      Once a sales account executive converts a prospect into an active relationship, that sales account executive becomes the origination source’s single point of contact for all dealings with us. This approach, which is a cornerstone of our origination platform, offers our origination sources a personal relationship through which they can address all of their questions and needs, including matters relating to pricing, credit, documentation, training and marketing. This single point of contact approach distinguishes us from our competitors, many of whom require the origination sources to interface with several people in various departments, such as sales support, credit and customer service, for each application submitted. Since many of our origination sources have little or no prior experience in using lease financing as a sales tool, our personalized, single point of contact approach facilitates the leasing process for them. Other key aspects of our platform aimed at facilitating the lease financing process for the origination sources include:

      Of our 273 total employees as of December 31, 2004, we employed 100 sales account executives, each of whom receives a base salary and earns commissions based on their lease originations. We also employed three employees dedicated to marketing as of December 31, 2004.

      Sales Origination Channels. We use direct and indirect sales origination channels to effectively penetrate a multitude of origination sources in the highly diversified and fragmented small-ticket equipment leasing market. All sales account executives use our telephonic direct marketing sales model to solicit these origination sources and end user customers.

Sales Recruiting, Training and Mentoring

      Sales account executive candidates are screened for previous sales experience and communication skills, phone presence and teamwork orientation. Due to our extensive training program and systematized sales approach, we do not regard previous leasing or finance industry experience as being necessary. Our location of offices near large urban centers gives us access to large numbers of qualified candidates.

      Each new sales account executive undergoes up to a 60-day comprehensive training program shortly after he or she is hired. The training program covers the fundamentals of lease finance and introduces the sales account executive to our origination and credit policies and procedures. It also covers technical training on our databases and our information management tools and techniques. At the end of the program, the sales account executives are tested to ensure they meet our standards. In addition to our formal training program, sales account executives receive extensive on-the-job training and mentoring. All sales account executives sit in groups, providing newer sales account executives the opportunity to learn first hand from their more senior peers. In addition, our sales managers frequently monitor and coach a sales account executive during phone calls, enabling the individual to receive immediate feedback. Our sales account executives also receive continuing education and training, including periodic detailed presentations on our contact management system, underwriting guidelines and sales enhancement techniques.

Product Offerings

      Equipment leases. The type of lease products offered by each of our sales origination channels share common characteristics, and we generally underwrite our leases using the same criteria. We seek to reduce the financial risk associated with our lease transactions through the use of full pay-out leases. A full pay-out lease provides that the non-cancelable rental payments due during the initial lease term are sufficient to recover the purchase price of the underlying equipment plus an expected profit. The initial non-cancelable lease term is equal to or less than the equipment’s economic life. Initial terms generally range from 36 to 60 months. At December 31, 2004, the average original term of the leases in our portfolio was approximately 46 months, and we had personal guarantees on approximately 46% of our leases. The remaining terms and conditions of our leases are substantially similar, generally requiring end user customers to, among other things:

      We charge late fees when appropriate throughout the term of the lease. Our standard lease contract provides that in the event of a default, we can require payment of the entire balance due under the lease through the initial term and can seize and remove the equipment for subsequent sale, refinancing or other disposal at our discretion, subject to any limitations imposed by law.

      At the time of application, end user customers select a purchase option that will allow them to purchase the equipment at the end of the contract term for either one dollar, the fair market value of the equipment or a specified percentage of the original equipment cost. We seek to realize our recorded residual in leased equipment at the end of the initial lease term by collecting the purchase option price from the end user customer, re-marketing the equipment in the secondary market or receiving additional rental payments pursuant to the contract’s automatic renewal provision.

      Property Insurance on Leased Equipment. Our lease agreements specifically require the end user customers to obtain all-risk property insurance in an amount equal to the replacement value of the equipment and to designate us as the loss payee on the policy. If the end user customer already has a commercial property policy for its business, it can satisfy its obligation under the lease by delivering a certificate of insurance that evidences us as a loss payee under that policy. At December 31, 2004, approximately 56% of our end user customers insured the equipment under their existing policies. For the others, we offer an insurance product through a master property insurance policy underwritten by a third party national insurance company that is licensed to write insurance under our program in all 50 states and the District of Columbia. This master policy names us as the beneficiary for all of the equipment insured under the policy and provides all-risk coverage for the replacement cost of the equipment.

      In May 2000, we established AssuranceOne, Ltd., our Bermuda-based, wholly owned captive insurance subsidiary, to enter into a reinsurance contract with the issuer of the master property insurance policy. Under this contract, AssuranceOne reinsures 100% of the risk under the master policy, and the issuing insurer pays AssuranceOne the policy premiums, less a ceding fee based on annual net premiums written. The reinsurance contract expires in May 2006.

Portfolio Overview

      At December 31, 2004, we had 95,096 active leases in our portfolio, representing an aggregate minimum lease payments receivable of $571.3 million. With respect to our portfolio at December 31, 2004:

Information Management

      A critical element of our business operations is our ability to collect detailed information on our origination sources and end user customers at all stages of a financing transaction and to effectively manage that information so that it can be used across all aspects of our business. Our information management system integrates a number of technologies to optimize our sales origination, credit, collection and account servicing functions. Applications used across our business include:

      Our information technology platform infrastructure is industry standard and fully scalable to support future growth. Our systems are backed up nightly and a full set of data tapes is sent to an off-site storage provider weekly. In addition, we have contracted with a third party for disaster recovery services.

Credit Underwriting

      Credit underwriting is separately performed and managed apart from asset origination. Each sales origination channel has one or more credit teams supporting it. Our credit teams are located in our New Jersey

headquarters and our Colorado, Georgia and Illinois regional offices. At December 31, 2004, we had 28 credit analysts managed by 7 credit managers having an average of nine years of experience. Each credit analyst is measured monthly against a discrete set of performance variables, including decision turnaround time, approval and loss rates, and adherence to our underwriting policies and procedures.

      Our typical financing transaction involves three parties: the origination source, the end user customer and us. The key elements of our comprehensive credit underwriting process include the pre-qualification and ongoing review of origination sources, the performance of due diligence procedures on each end user customer and the monitoring of overall portfolio trends and underwriting standards.

      Pre-qualification and ongoing review of origination sources. Each origination source must be pre-qualified before we will accept applications from it. The origination source must submit a source profile, which we use to review the origination source’s credit information and check references. Over time, our database has captured credit profiles on thousands of origination sources. We regularly track all applications and lease originations by source, assessing whether the origination source has a high application decline rate and analyzing the delinquency rates on the leases originated through that source. Any unusual situations that arise involving the origination source are noted in the source’s file. Each origination source is reviewed on a regular basis using portfolio performance statistics as well as any other information noted in the source’s file. We will place an origination source on watch status if its portfolio performance statistics are consistently below our expectations. If the origination source’s statistics do not improve in a timely manner, we often stop accepting applications from that origination source.

      End user customer review. Each end user customer’s application is reviewed using our rules-based set of underwriting guidelines that focus on commercial and consumer credit data. These underwriting guidelines have been developed and refined by our management team based on their experience in extending credit to small businesses. The guidelines are reviewed and revised as necessary by our Senior Credit Committee, which is comprised of our CEO, President, General Counsel, Vice President of Credit and Vice President of Collections. Our underwriting guidelines require a thorough credit investigation of the end user customer, which typically includes an analysis of the personal credit of the owner, who often guarantees the transaction, and verification of the corporate name and location. The credit analyst may also consider other factors in the credit decision process, including:

      Transactions over $75,000 often receive a higher level of scrutiny, including review of financial statements or tax returns and review of the business purpose of the equipment to the end user customer.

      Within two hours of receipt of the application, the credit analyst is usually ready to render a credit decision. If there is insufficient information to render a credit decision, a request for more information will be made by the credit analyst. Credit approvals are valid for a 90-day period from the date of initial approval. In the event that the funding does not occur within the 90-day initial approval period, a re-approval may be issued after the credit analyst has reprocessed all the relevant credit information to determine that the creditworthiness of the applicant has not deteriorated.

      In most instances after a lease is approved, a phone audit with the end user customer is performed by us, or in some instances by the origination source, prior to funding the transaction. The purpose of this audit is to verify information on the credit application, review the terms and conditions of the lease contract, confirm the

customer’s satisfaction with the equipment, and obtain additional billing information. We will delay paying the origination source for the equipment if the credit analyst uncovers any material issues during the phone audit.

      Monitoring of portfolio trends and underwriting standards. Credit personnel use our databases and our information management tools to monitor the characteristics and attributes of our overall portfolio. Reports are produced to analyze origination source performance, end user customer delinquencies, portfolio concentrations, trends, and other related indicators of portfolio performance. Any significant findings are presented to the Senior Credit Committee for review and action.

      Our internal credit audit and surveillance team is responsible for ensuring that the credit department adheres to all underwriting guidelines. The audits produced by this department are designed to monitor our origination sources, fraud indicators, regional office operations, appropriateness of exceptions to credit policy and documentation quality. Management reports are regularly generated by this department detailing the results of these auditing activities.

Account Servicing

      We service all of the leases we originate. Account servicing involves a variety of functions performed by numerous work groups, including:

      Our integrated lease processing and accounting systems automate many of the functions associated with servicing high volumes of small-ticket leasing transactions.

Collection Process

      Our centralized collections department is structured to collect delinquent accounts, minimize credit losses and collect post-default recovery dollars. Our collection strategy generally utilizes a life-cycle approach, under which a single collector handles an account through an account’s entire period of delinquency. This approach allows the collector to consistently communicate with the end user customer’s decision-maker to ensure that delinquent customers are providing consistent information. It also creates account ownership by the collectors, allowing us to evaluate them based on the delinquency level of their assigned accounts. The collectors are individually accountable for their results and a significant portion of their compensation is based on the delinquency performance of their accounts.

      Our collectors are grouped into teams that support a single sales origination channel. By supporting a single channel, the collector is able to gain knowledge about the origination sources and the types of transactions and other characteristics within that channel. Our collection activities begin with phone contact when a payment becomes ten days past due and continue throughout the delinquency period. We utilize a predictive dialer that automates outbound telephone dialing. The dialer is used to focus on and reduce the number of accounts that are between ten and 30 days delinquent. A series of collection notices are sent once an account reaches the 30-, 60-, 75- and 90-day delinquency stages. Collectors input notes directly into our servicing system, enabling them to monitor the status of problem accounts and promptly take any necessary actions. In addition, late charges are assessed when a leasing customer fails to remit payment on a lease by its

due date. If the lease continues to be delinquent, we may exercise our remedies under the terms of the contract, including acceleration of the entire lease balance, litigation and/or repossession.

      In addition, the collections department employs specialist collectors who focus on delinquent late fees, property taxes, bankrupt and large balance accounts. Bankrupt accounts are assigned to a bankruptcy paralegal and accounts with more than $30,000 outstanding are assigned to more experienced collection personnel.

      After an account becomes 120 days or more past due, it is charged-off and referred to our internal recovery group, consisting of a lawyer and a team of paralegals. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts, including: 1) initiating litigation against the end user customer and any personal guarantor using our internal legal staff; 2) referring the account to an outside law firm or collection agency; and/or 3) repossessing and remarketing the equipment through third parties.

Regulation

      Although most states do not directly regulate the commercial equipment lease financing business, certain states require lenders and finance companies to be licensed, impose limitations on interest rates and other charges, mandate disclosure of certain contract terms and constrain collection practices and remedies. Under certain circumstances, we also may be required to comply with the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These acts require, among other things, that we provide notice to credit applicants of their right to receive a written statement of reasons for declined credit applications. The Telephone Consumer Protection Act (“TCPA”) of 1991 and similar state statutes or rules that govern telemarketing practices are generally not applicable to our business-to-business calling platform; however, we are subject to the sections of the TCPA that regulate business-to-business facsimiles.

      Our insurance operations are subject to various types of governmental regulation. We are required to maintain insurance producer licenses in states where we sell our insurance product. Our wholly owned insurance company subsidiary, AssuranceOne Ltd., is a Class 1 Bermuda insurance company and, as such, is subject to the Insurance Act 1978 of Bermuda, as amended, and related regulations.

      We believe that we currently are in compliance with all material statutes and regulations that are applicable to our business.

Competition

      We compete with a variety of equipment financing sources that are available to small businesses, including:

      Our principal competitors in the highly fragmented and competitive small-ticket equipment leasing market are smaller finance companies and local and regional banks. Other providers of equipment lease financing include Key Corp, CIT Group, De Lage Landen Financial, GE Commercial Equipment Finance and Wells Fargo Bank, National Association. Many of these companies are substantially larger than we are and have significantly greater financial, technical and marketing resources than we do. While these larger competitors provide lease financing to the marketplace, many of them are not our primary competitors given that our average transaction size is relatively small and that our marketing focus is on independent equipment dealers and their end user customers. Nevertheless, there can be no assurances that these providers of equipment lease financing will not increase their focus on our market and begin to compete more directly with us.

      Some of our competitors have a lower cost of funds and access to funding sources that are not available to us. A lower cost of funds could enable a competitor to offer leases with yields that are less than the yields we use to price our leases, which might force us to lower our yields or lose lease origination volume. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could enable them to establish more origination sources and end user customer relationships and increase their market share. We compete on the quality of service we provide to our origination sources and end user customers. We have and will continue to encounter significant competition.

Employees

      As of December 31, 2004, we employed 273 people. None of our employees are covered by a collective bargaining agreement and we have never experienced any work stoppages. We work hard to build strong relations with our employees.

      We are a Pennsylvania corporation with our principal executive offices located at 300 Fellowship Road, Mount Laurel, NJ 08054. Our telephone number is (888) 479-9111 and our web site address is www.marlincorp.com. We make available free of charge through the Investor Relations section of our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our web site address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our web site.

      We operate from five leased facilities including our executive office facility and four branch offices. In December 2004 we relocated our Mount Laurel, New Jersey executive offices to a leased facility of approximately 50,000 square feet under a lease that expires in May 2013. Previously we leased 29,265 square feet of office space in Mount Laurel under a lease that expired in December 2004. We also lease 5,621 square feet of office space in Philadelphia, Pennsylvania, where we perform our lease recording and acceptance functions. Our Philadelphia lease expires in May 2008. In addition, we have regional offices in Norcross, Georgia (a suburb of Atlanta), Englewood, Colorado (a suburb of Denver) and Chicago, Illinois. Our Georgia office is 6,043 square feet and the lease expires in July 2008. Our Colorado office is 5,914 square feet and the lease expires in August 2006. Our Chicago office, which opened in January 2004, is 4,166 square feet and the lease expires in April 2008.

      We believe our leased facilities are adequate for our current needs and sufficient to support our current operations and growth.

      We are party to various legal proceedings, which include claims, litigation and class action suits arising in the ordinary course of business. In the opinion of management, these actions will not have a material adverse effect on our business, financial condition or results of operations.

      None

PART II

      Marlin Business Services Corp. completed its initial public offering of common stock and became a publicly traded company on November 12, 2003. The Company’s common stock trades on the NASDAQ

National Market under the symbol “MRLN.” Prior to our initial public offering there was no active public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ National Market.

Dividend Policy

      We have not paid or declared any cash dividends on our common stock and we presently have no intention of paying cash dividends on the common stock in the foreseeable future. The payment of cash dividends, if any, will depend upon our earnings, financial condition, capital requirements, cash flow and long-range plans and such other factors as our Board of Directors may deem relevant.

Number of Record Holders

      There were 112 holders of record of our common stock at February 25, 2005. We believe that the number of beneficial owners is greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”

Sale of Unregistered Securities

      On July 22, 2004, we issued $304.6 million of asset-backed debt securities through our special purpose subsidiary, Marlin Leasing Receivables VIII LLC. The issuance was done in reliance on the exemption from registration provided by Rule 144A of the Securities Act of 1933. Deutsche Bank Securities served as the initial purchaser and placement agent for the issuance, and the aggregate initial purchaser’s discounts and commissions paid was approximately $1.2 million.

      The following financial information should be read together with the financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections included elsewhere in this Form 10-K.

FORWARD-LOOKING STATEMENTS

      Certain statements in this document may include the words or phrases “can be,” “expects,” “plans,” “may,” “may affect,” “may depend,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “if” and similar words and phrases that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to various known and unknown risks and uncertainties and the Company cautions that any forward-looking information provided by or on its behalf is not a guarantee of future performance. Statements regarding the following subjects are forward-looking by their nature: (a) our business strategy; (b) our projected operating results; (c) our ability to obtain external financing; (d) our understanding of our competition; and (e) industry and market trends. The Company’s actual results could differ materially from those anticipated by such forward-looking statements due to a number of factors, some of which are beyond the Company’s control, including, without limitation:

Forward-looking statements apply only as of the date made and the Company is not required to update forward-looking statements for subsequent or unanticipated events or circumstances.

Overview

      We are a nationwide provider of equipment financing solutions primarily to small businesses. We finance over 60 categories of commercial equipment important to businesses including copiers, telephone systems, computers, and certain commercial and industrial equipment. We access our end user customers through origination sources comprised of our existing network of independent equipment dealers and, to a lesser extent, through relationships with lease brokers and through direct solicitation of our end user customers. Our leases are fixed rate transactions with terms generally ranging from 36 to 60 months. At December 31, 2004, our lease portfolio consisted of approximately 95,000 accounts, from approximately 76,000 customers, with an average original term of 46 months, and average transaction size of approximately $8,400.

      Since our founding in 1997, we have grown to $537.8 million in total assets at December 31, 2004. Our assets are substantially comprised of our net investment in leases which totaled $489.7 million at December 31, 2004. Our lease portfolio grew 16.8% in 2004. Personnel costs represent our most significant overhead expense and we have added to our staffing levels to both support and grow our lease portfolio. Since inception, we have also added three regional sales offices to help us penetrate certain targeted markets, with our most recent office opening in Chicago, Illinois in the first quarter of 2004. Growing the lease portfolio, while maintaining asset quality, remains the primary focus of management. We expect our on-going investment in our sales teams and regional offices to drive continued growth in our lease portfolio.

      Our revenue consists of interest and fees from our leases and, to a lesser extent, income from our property insurance program and other fee income. Our expenses consist of interest expense and operating expenses, which include salaries and benefits and other general and administrative expenses. As a credit lender, our earnings are also significantly impacted by credit losses. For the year ended December 31, 2004, our net credit losses were 1.99% of our average net investment in leases. We establish reserves for credit losses which require us to estimate expected losses in our portfolio.

      Our leases are classified as direct financing leases under generally accepted accounting principles, and we recognize interest income over the term of the lease. Direct financing leases transfer substantially all of the benefits and risks of ownership to the equipment lessee. Our investment in leases is reflected in our financial statements as “net investment in direct financing leases.” Net investment in direct financing leases consists of the sum of total minimum lease payments receivable and the estimated residual value of leased equipment, less unearned lease income. Unearned lease income consists of the excess of the total future minimum lease payments receivable plus the estimated residual value expected to be realized at the end of the lease term plus deferred net initial direct costs and fees less the cost of the related equipment. Approximately 66% of our lease portfolio amortizes over the term to a $1 residual value. For the remainder of the portfolio, we must estimate end of term residual values for the leased assets. Failure to correctly estimate residual values could result in losses being realized on the disposition of the equipment at the end of the lease term.

      Since our founding, we have funded our business through a combination of variable rate borrowings and fixed rate asset securitization transactions, as well as through the issuance from time to time of subordinated debt and equity. Our variable rate financing sources consist of a revolving bank facility and two CP conduit warehouse facilities. We issue fixed rate term debt through the asset-backed securitization market. Typically, leases are funded through variable rate borrowings until refinanced through term note securitization at fixed rates. All of our term note securitizations have been accounted for as on-balance sheet transactions and, therefore, we have not recognized gains or losses from these transactions. As of December 31 2004, $404.6 million or 97.1% of our borrowings were fixed rate term note securitizations.

      Since we initially finance our fixed-rate leases with variable rate financing, our earnings are exposed to unexpected increases in interest rates that may occur before those variable rates can be hedged by a fixed rate term note securitization. We use derivative contracts to attempt to reduce our exposure to increasing interest rates. We generally benefit in times of falling and low interest rates. We are also dependent upon obtaining future financing to refinance our warehouse lines of credit in order to grow our lease portfolio. We currently plan to complete a fixed-rate term note securitization at least once a year. Failure to obtain such financing, or other alternate financing, would significantly restrict our growth and future financial performance.

Restatement

      Following a review of our lease-related accounting policies, the Company determined that its accounting policy relating to the treatment of “interim rent” did not conform with generally accepted accounting principles (“GAAP”). As a result, the Company has changed the timing of the recognition and classification of “interim rent”, which represents rental payments paid by certain customers to cover the period between the installation of equipment and the commencement of the lease contract. As a result, on March 8, 2005, our Board of Directors, including our Audit Committee, concluded to restate the Company’s financial statements for the years ended December 31, 2003 and December 31, 2002 and for the four quarters of fiscal 2004 and 2003.

      Since its inception in 1997, the Company has recognized interim rent in fee income at the time it was invoiced, and it has described this practice in its prior financial statements. The Company, in consultation with its independent registered public accounting firm, KPMG LLP, has determined that interim rent payments should be treated in the same manner as other fixed non-cancelable contractual minimum lease payments due from lessees in determining the Company’s investment in direct financing leases. This treatment will defer the recognition of income for financial statement purposes while increasing the amount of unearned income for balance sheet purposes at the inception of the lease. The unearned income, net of initial direct origination costs, will be recognized over the lease term based on a constant periodic rate of return as interest income. This change lowered earnings for 2004 from $13.8 million or $1.18 per diluted share (as previously reported in the Company’s Form 8-K filing on February 3, 2005) to $13.5 million or $1.15 per diluted share.

      This change relates principally to the timing of income recognition for financial statement purposes. It is a non-cash adjustment and will not have any impact on historical or future cash flows or any other aspect of the Company’s business.

      The cumulative effect of this restatement from 1997 through the year ended December 31, 2004 was to reduce retained earnings by approximately $1.9 million, and book value per common share by $0.17. Net investment in leases decreased approximately $3.2 million related to the additional recorded unearned income that will be earned over the remaining term of the leases.

      Management’s Discussion and Analysis of Financial Condition and Results of Operations has been revised for the effects of the Restatement. See Note 2 to the consolidated financial statements.

Reorganization

      Marlin Leasing Corporation was incorporated in the state of Delaware on June  16, 1997. On August 5, 2003, we incorporated Marlin Business Services Corp. in Pennsylvania. On November 11, 2003, we reorganized our operations into a holding company structure by merging Marlin Leasing Corporation with a wholly owned subsidiary of Marlin Business Services Corp. As a result, all former shareholders of Marlin Leasing Corporation became shareholders of Marlin Business Services Corp. After the reorganization, Marlin Leasing Corporation remains in existence as our primary operating subsidiary.

      In anticipation of our public offering, on October 12, 2003, Marlin Leasing Corporation’s Board of Directors approved a stock split of its Class A common stock at a ratio of 1.4 shares for every one share of Class A common stock in order to increase the number of shares of Class A common stock authorized and issued. All per share amounts and outstanding shares, including all common stock equivalents, such as stock options, warrants and convertible preferred stock, have been retroactively restated in the accompanying consolidated financial statements and notes to consolidated financial statements for all periods presented to reflect the stock split.

      The following steps to reorganize our operations into a holding company structure were taken prior to the completion of our initial public offering of common stock in November 2003:

      As a result of this reorganization, 7,632,355 shares of Marlin Leasing Corporation common stock were issued and outstanding prior to the merger with Marlin Business Services Corp. and the initial public offering. Also, options to purchase 1,078,208 shares of common stock were outstanding at that time under our 2003 Equity Compensation Plan.

Initial Public Offering

      In November 2003, 5,060,000 shares of our common stock were issued in connection with our IPO. Of these shares, a total of 3,581,255 shares were sold by the company and 1,478,745 shares were sold by selling shareholders. The initial public offering price was $14.00 per share resulting in net proceeds to us, after payment of underwriting discounts and commissions but before other offering costs, of approximately $46.6 million. We did not receive any proceeds from the shares sold by the selling shareholders. We used the net proceeds from the IPO as follows: (i) approximately $10.1 million was used to repay all of our outstanding 11% subordinated debt and all accrued interest thereon; (ii) approximately $6.0 million was used to pay accrued dividends on preferred stock which converted to common stock at the time of the IPO; and (iii) approximately $1.6 million was used to pay issuance costs incurred in connection with the IPO. The remaining proceeds were used to fund newly originated and existing leases in our portfolio and other general business purposes.

Critical Accounting Policies

      Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). Preparation of these financial statements requires us to make estimates and judgments that affect reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we evaluate our estimates, including credit losses, residuals, initial direct costs and fees, other fees and realizability of deferred tax assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties. Our consolidated financial statements are based on the selection and application of critical accounting policies, the most significant of which are described below.

      Income recognition. Interest income is recognized under the effective interest method. The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease. When a lease is 90 days or more delinquent, the lease is classified as being on non-accrual and we do not recognize interest income on that lease until the lease is less than 90 days delinquent.

      Fee income consists of fees for delinquent lease payments and cash collected on early termination of leases. Fee income also includes net residual income which includes income from lease renewals and gains and losses on the realization of residual values of equipment disposed of at the end of term.

      Fee income from delinquent lease payments is recognized on an accrual basis based on anticipated collection rates. Other fees are recognized when received. Net residual income includes charges for the reduction in estimated residual values on equipment for leases in renewal and is recognized during the renewal period. Residual balances at lease termination which remain uncollected more than 120 days are charged against income.

      Insurance income is recognized on an accrual basis as earned over the term of the lease. Payments that are 120 days or more past due are charged against income. Ceding commissions, losses and loss adjustment expenses are recorded in the period incurred and netted against insurance income.

      Initial direct costs and fees. We defer initial direct costs incurred and fees received to originate our leases in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. The initial direct costs and fees we defer are part of the net investment in direct financing leases and are amortized to interest income using the effective interest method. We defer third party commission costs as well as certain internal costs directly related to the origination activity. The costs include evaluating the prospective lessee’s financial condition, evaluating and recording guarantees and other security arrangements, negotiating lease terms, preparing and processing lease documents and closing the transaction. The fees we defer are documentation fees collected at lease inception.

The realization of the deferred initial direct costs, net of fees deferred, is predicated on the net future cash flows generated by our lease portfolio.

      Lease residual values. A direct financing lease is recorded at the aggregate future minimum lease payments plus the estimated residual values less unearned income. Residual values reflect the estimated amounts to be received at lease termination from lease extensions, sales or other dispositions of leased equipment. These estimates are based on industry data and on our experience. Management performs periodic reviews of the estimated residual values and any impairment, if other than temporary, is recognized in the current period.

      Allowance for credit losses. We maintain an allowance for credit losses at an amount sufficient to absorb losses inherent in our existing lease portfolio as of the reporting dates based on our projection of probable net credit losses. To project probable net credit losses, we perform a migration analysis of delinquent and current accounts. A migration analysis is a technique used to estimate the likelihood that an account will progress through the various delinquency stages and ultimately be charged off. In addition to the migration analysis, we also consider other factors including recent trends in delinquencies and charge-offs; accounts filing for bankruptcy; recovered amounts; forecasting uncertainties; the composition of our lease portfolio; economic conditions; and seasonality. We then establish an allowance for credit losses for the projected probable net credit losses based on this analysis. A provision is charged against earnings to maintain the allowance for credit losses at the appropriate level. Our policy is to charge-off against the allowance the estimated unrecoverable portion of accounts once they reach 121 days delinquent.

      Our projections of probable net credit losses are inherently uncertain, and as a result we cannot predict with certainty the amount of such losses. Changes in economic conditions, the risk characteristics and composition of the portfolio, bankruptcy laws, and other factors could impact our actual and projected net credit losses and the related allowance for credit losses. To the degree we add new leases to our portfolio, or to the degree credit quality is worse than expected, we will record expense to increase the allowance for credit losses for the estimated net losses expected in our lease portfolio.

      Derivatives. SFAS 133, as amended, Accounting for Derivative Instruments and Hedging Activities, requires recognition of all derivatives at fair value as either assets or liabilities in the consolidated balance sheet. The accounting for subsequent changes in the fair value of these derivatives depends on whether it has been designated and qualifies for hedge accounting treatment pursuant to the accounting standard. For derivatives not designated or qualifying for hedge accounting, the related gain or loss is recognized in earnings for each period and included in other income or financing related costs in the consolidated statement of operations. For derivatives designated for hedge accounting, initial assessments are made as to whether the hedging relationship is expected to be highly effective and on-going periodic assessments may be required to determine the on-going effectiveness of the hedge. The gain or loss on derivatives qualifying for hedge accounting is recorded in other comprehensive income on the balance sheet net of tax effects (unrealized gain or loss on cash flow hedges) or in current period earnings depending on the effectiveness of the hedging relationship.

      Warrants. We issued warrants to purchase our common stock to the holders of our subordinated debt that was repaid in November 2003. In accordance with EITF Issue No. 96-13, codified in EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock, we initially classified the warrants’ fair value as a liability since the warrant holders had the ability to put to the Company the shares of common stock exercisable under the warrants under certain conditions to us for cash settlement. Subsequent changes in the fair value of the warrants were recorded in the accompanying statement of operations. The charge to operations in 2003 was $5.7 million. Under the terms of the warrant agreement, the warrants were exercised into common stock at the time of our IPO and the total warrant liability balance of $7.1 million was reclassified back to equity and, therefore, there are no effects on operations in 2004.

      Income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets. The process involves summarizing temporary differences resulting from the different treatment of

items, for example, leases for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Our management 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 our management believes recovery is not likely, a valuation allowance must be established. To the extent that we establish a valuation allowance in a period, an expense must be recorded within the tax provision in the statement of operations.

      Our net operating loss carryforwards (“NOLs”) as of December 31, 2004 for federal and state income tax purposes were approximately $33.9 million and $598,000, respectively. The NOLs expire in periods beginning 2009 to 2025. The Tax Reform Act of 1986 contains provisions that may limit the NOLs available to be used in any given year upon the occurrence of certain events, including significant changes in ownership interest. A change in the ownership of a company greater than 50% within a three-year period results in an annual limitation on a company’s ability to utilize its NOLs from tax periods prior to the ownership change. Management believes that the reorganization and initial public offering did not have a material effect on its ability to utilize these NOLs. No valuation allowance has been established against net deferred tax assets related to our NOLs, as our management believes these NOLs will be realizable through reversal of existing deferred tax liabilities, and future taxable income. If actual results differ from these estimates or these estimates are adjusted in future periods, we may need to establish a valuation allowance, which could materially impact its financial position and results of operations.

RESULTS OF OPERATIONS

      Net income. Net income increased $10.7 million to $13.5 million for the year ended December 31, 2004 from $2.8 million for the year ended December 31, 2003. Net income for 2003 was significantly impacted by recognition of $5.7 million of expense relating to mark to market accounting of the fair value of warrants outstanding. The warrants were exercised in conjunction with our IPO transaction in November 2003 and are no longer outstanding. Excluding the impact of the change in fair value of warrants, 2004 net income of $13.5 million was an increase of $5.0 million, or 58.8%, compared to pro forma net income of $8.5 million for the year 2003. Our increased earnings are primarily the result of growth and improved net interest and fee margins in our core leasing business. In 2004 we benefited from lower borrowing costs primarily due to a generally low interest rate environment and successful completion of our first “AAA” rated term securitization in July 2004. Previous term transactions were issued with lower credit ratings. Interest expense was also lower in 2004 as borrowings were reduced due to our higher levels of capital following our IPO in November 2003.

      For the year ended December 31, 2004, we generated 31,818 new leases at a cost of $272.2 million compared to 30,258 new leases at a cost of $242.3 million for the year ended December 31, 2003. Overall, the

net investment in direct financing leases grew 16.8%, to $489.7 million at December 31, 2004 from $419.2 million at December 31, 2003.

      Net interest and fee margin. Net interest and fee income increased $16.2 million, or 42.3%, to $54.5 million for the year ended December 31, 2004 from $38.3 million for the year ended December 31, 2003. The increase in the net interest and fee margin represents an increase of 166 basis points to 12.19% for the year ended December 31, 2004 from 10.53% for the same period in 2003.

      Interest income, net of amortized initial direct costs and fees, increased $10.1 million, or 21.2%, to $57.7 million for the year ended December 31, 2004 from $47.6 million for the year ended December 31, 2003. The increase is primarily due to a 22.8% growth in average net investment in direct financing leases (“DFL”) which increased $83.1 million to $447.0 million for the year ended December 31, 2004 from $363.9 million for the same period in 2003. Interest rates were generally low in 2004. Our interest income yield on our lease portfolio declined by 18 basis points to 12.91% as older higher yielding leases amortized and implicit yields on new leases originated fell in 2004. The weighted average implicit interest rate on new leases originated was 13.82% for the year ended December 31, 2004 compared to 14.01% for the same period in 2003.

      Fee income increased $4.7 million, or 53.4%, to $13.5 million for the year ended December 31, 2004 from $8.8 million for the same period in 2003. All major components of fee income contributed to the increase in the 2004 period consistent with the continued growth and seasoning of our lease portfolio. Fee income as a percentage of average net investment in DFL, increased 60 basis points to 3.01% for the year ended December 31, 2004 from 2.41% for the year ended December 31, 2003. The increase is primarily due to higher net residual income including income from lease extensions as more leases where we retain a residual interest reach end of term. As a percentage of average net investment in DFL, net residual income was 1.05% for the year ended December 31, 2004 compared to 0.56% for the same period in 2003. Fees for delinquent lease payments (late charges), which were the largest component of fee income, was 1.69% as a percentage of average net investment in DFL for the year ended December 31, 2004 compared to 1.63% for the same period in 2003.

      Interest expense decreased $1.4 million to $16.7 million for the year period ended December 31, 2004 from $18.1 million for the same period in 2003. Interest expense, as a percentage of the average net investment in DFL, decreased 124 basis points to 3.73% annualized for the year period ended December 31, 2004 from

4.97% annualized for the same period in 2003. Lower borrowing costs have resulted from a generally low interest rate environment in both 2004 and 2003 and from higher capitalization levels in 2004 primarily resulting from our IPO. For the year ended December 31, 2004 average warehouse funding was $69.4 million or 15.5% of average investment in DFL compared with $70.8 million and 19.5% of average investment in DFL for the same period in 2003. The weighted average coupon expense on warehouse funding was 2.13% for the year ended December 31, 2004 compared to 2.42% for the same period in 2003.

      In addition to lower variable rate warehouse funding, older higher fixed rate term borrowings have been reduced through scheduled repayments and payoffs of over the past 24 months and, recent fixed rate term borrowings have been issued at lower interest rates. In November 2003 we repaid $10 million of subordinated debt with a coupon of 11.00%. In April 2004 we exercised our call option and paid off our 2000 term securitization when the remaining note balances outstanding were $9.4 million at a coupon of 7.96%. In August 2004 we exercised our call option and paid off our 2001 term securitization when the remaining note balances outstanding were $16.3 million at a coupon of approximately 6.00%. The existing term securitizations and subordinated debt that we repaid were all at higher coupons than the weighted average coupon of term debt issued in over this same period. In July 2004 we issued $304.6 million in term securitizations with an initial weighted average initial coupon of 3.29% and in June 2003 we issued $217.2 million in term securitizations at a weighted average coupon of 3.18%.

      Insurance and other income. Insurance and other income increased $1.0 million to $4.4 million for the year ended December 31, 2004 from $3.4 million for the same period in 2003. The increase is primarily related to higher insurance income of $775,000 related to a 24.1% increase in the number of insured accounts.

      Salaries and benefits expense. Salaries and benefits expense increased $4.1 million, or 39.8%, to $14.4 million for the year ended December 31, 2004 from $10.3 million for the same period in 2003. The increase in compensation expense is attributable to increases in overall growth in personnel, merit and bonus payment increases. Total personnel increased to 273 at December 31, 2004 from 237 at December 31, 2003. In 2004, sales compensation increased $2.2 million related to additional hiring of sales account executives. In addition, collection and operations salaries increased $508,000 related to additional personnel associated with growth in the lease portfolio. In 2004, management and support department compensation increased $1.5 million related to additional personnel and $652,000 of the increase related to accrued incentive bonuses.

      General and administrative expense. General and administrative expenses increased $2.4 million, or 31.2%, to $10.1 million for the year ended December 31, 2004 from $7.7 million for the same period in 2003. The increase in general and administrative expenses was due primarily to an increase in insurance costs of $571,000 relating to higher Directors and Officers Insurance costs and increased credit bureau charges of $244,000. Other increases included audit and professional fees of $279,000 for the incremental costs associated with being a public company and Sarbanes-Oxley compliance, investor relations expense of $151,000, franchise tax expense of $151,000 and occupancy expense of $223,000 due to the incremental costs of our new Chicago office which opened in January 2004 and expansion of our Denver and Atlanta offices. We also incurred $221,000 in non-recurring expense in 2004 associated with the relocation of our New Jersey office. Additionally, we spent more on recruiting and training, bank processing fees, data processing and postage as a result of increased lease originations and our overall growth.

      Financing related costs. Financing related costs include commitment fees paid to our financing sources and costs pertaining to our derivative contracts used to limit our exposure to possible increases in interest rates. Financing related costs increased $451,000 to $2.1 million for the year period ended December 31, 2004 from $1.6 million for the same period in 2003. The increase was due principally to higher costs associated with mark to market adjustments for derivative contracts in the period. Mark to market adjustments of $528,000 were recorded on derivatives for the year ended December 31, 2004 compared with $199,000 for the year ended December 31, 2003. Commitment fees were $1.5 million for the year ended December 31, 2004 compared with $1.4 for the year ended December 31, 2003.

      Change in fair value of warrants. Warrants issued in connection with subordinated debt increased in value $5.7 million during 2003. This non-cash expense increased primarily as a result of the increase in the estimated fair market value of our common stock used in valuing our warrants. As part of our reorganization

undertaken in November 2003, all outstanding warrants were exercised on a net issuance basis for common stock. Accordingly, this expense did not continue beyond fiscal year 2003.

      Provision for credit losses. The provision for credit losses increased $2.0 million, or 25.0%, to $10.0 million for the year ended December 31, 2004 from $8.0 million for the same period in 2003. The increase in our provision for credit losses was a result of growth of our lease portfolio and the corresponding proportional growth in net charge-offs. Net charge-offs were $8.9 million for the period ended December 31, 2004 and $6.9 million for the same period in 2003. Net charge-offs as a percentage of average net investment in leases increased to 1.99% in 2004 from 1.90% in 2003. Given the overall economic environment for the periods reported, we expected net charge-offs to approximate 2.0% of average net investment in leases and consider our net charge-off levels to be consistent with our expectations.

      Provision for income taxes. The provision for income taxes increased to $8.9 million for the year ended December 31, 2004 from $5.6 million for the same period in 2003. The increase in tax expense is primarily attributed to the increase in pretax income. Our effective tax rate, which is a combination of federal and state income tax rates, was 39.8% for the year ended December 31, 2004 compared to 66.3% for the year ended December 31, 2003. The effective tax rate in 2003 was heavily impacted by the expense associated with the changes in fair value of warrants which is a non-deductible expense. We anticipate our effective tax rate in future years to approximate our 2004 effective tax rate.

      Net income. Net income decreased $1.5 million, or 34.9%, to $2.8 million for the year ended December 31, 2003 from $4.3 million for the year ended December 31, 2002. Net income for 2003 was significantly impacted by recognition of $5.7 million of expense relating to mark to market accounting of the fair value of warrants outstanding. The warrants were exercised in conjunction with our IPO transaction in November 2003 and are no longer outstanding. Warrant expense for the year ended December 31, 2002 was $908,000. Excluding the impact of the change in fair value of warrants, net income would have increased $3.3 million to $8.5 million for the year ended December 31, 2003 compared to $5.2 million for the year 2002. This increase was attributable to growth in earning assets (net investment in direct financing leases), an expanding net interest and fee margin and improved asset quality.

      For the year ended December 31, 2003, we generated 30,258 new leases at a cost of $242.3 million compared to 25,368 new leases at a cost of $203.5 million for the year ended December 31, 2002. The weighted average implicit interest rate on new leases originated was 14.01% for the year ended December 31, 2003 compared to 14.17% for the same period in 2002. Overall, the net investment in direct financing leases grew 25.0%, to $419.2 million at December 31, 2003 from $335.4 million at December 31, 2002.

      Net interest and fee margin. Net interest and fee income increased $9.9 million, or 34.9%, to $38.3 million for the year ended December 31, 2003 from $28.4 million for the year ended December 31, 2002. The increase in the net interest and fee margin represents an increase of 61 basis points to 10.53% for the year ended December 31, 2003 from 9.92% for the same period in 2002. In 2003, we benefited from a low interest rate environment as borrowing costs declined faster than the yield on assets.

      Interest income, net of amortized initial direct costs and fees, increased $8.5 million, or 21.7%, to $47.6 million for the year ended December 31, 2003 from $39.1 million for the year ended December 31, 2002. The increase is due to a 27.0% growth in average net investment in direct financing leases which increased $77.3 million to $363.9 million for the year ended December 31, 2003 from $286.6 million for the same period in 2002. For the year ended December 31, 2003 compared to the same period in 2002, our weighted average cost of borrowing declined 128 basis points while our interest income yield declined less significantly, by 56 basis points. Our ability to sustain pricing and increase our net interest and fee margin was due to a less competitive leasing environment and the amount of direct business recorded during the period.

      Fee income increased $1.6 million to $8.8 million for the year ended December 31, 2003 from $7.2 million for the same period in 2002. The increase in fee income resulted primarily from additional residual gains on lease terminations, which includes income from lease extensions, of $761,000, higher late fees earned of $633,000 and increases in early prepayment gains. Fee income, as a percentage of the average net investment in direct financing leases, declined 11 basis points to 2.41% for the year ended December 31, 2003 from 2.52% for the year ended December 31, 2002 primarily due to lower average late fees earned as a result of lower delinquency levels in the lease portfolio.

      Interest expense increased $170,000 to $18.1 million for the year ended December 31, 2003 from $17.9 million for same period in 2002. Interest expense, as a percentage of average net investment in direct financing leases, decreased 128 basis points to 4.97% for the year ended December 31, 2003 from 6.25% for the same period in 2002 due to the declining interest rate environment and the resulting impact on our weighted average borrowing costs. In June of 2003 we completed our fifth fixed rate term asset-backed securitization debt issuance raising $217.2 million at our lowest weighted average coupon done to date of 3.18%. This issuance along with the continued amortization of prior issues at higher coupons and the overall low interest rate environment that also kept variable rate warehouse borrowings low, combined to blend the overall costs of borrowing lower. In conjunction with the IPO transaction, we also paid off $10 million of 11% coupon subordinated debt in November 2003. The early payoff of the subordinated debt resulted in a one-time expense due to the recapture of $446,000 of unamortized discount and issuance costs in the fourth quarter of 2003.

      Insurance and other income. Insurance and other income increased $699,000 to $3.4 million for the year ended December 31, 2003 from $2.7 million for the same period in 2002. The increase is primarily related to an increase in net insurance income of $683,000 related to a 28% increase in the number of insured accounts offset by lower miscellaneous income earned in the period. Lessees are required by contract to insure their

leased equipment naming us as a loss payee. Lessees may elect to satisfy this obligation through our insurance program, and we anticipate this activity will change proportionately with the lease portfolio.

      Salaries and benefits expense. Salaries and benefits expense increased $2.2 million, or 26.7%, to $10.3 million for the year ended December 31, 2003 from $8.1 million for the same period in 2002. During 2003, we continued to aggressively hire sales account executives. For the year 2003, compensation expense related to sales increased $1.8 million or 25.8% compared to 2002. Other increases in compensation expense are attributable to merit increases and increases in other personnel to support the overall growth of the lease portfolio and the company. Total personnel increased to 237 at December 31, 2003 from 201 at December 31, 2002.

      General and administrative expense. General and administrative expenses increased $2.0 million, or 35.1%, to $7.7 million for the year ended December 31, 2003 from $5.7 million for the same period in 2002. The increase in general and administrative expenses was due primarily to an increase in legal fees of $577,000, including costs and fees of $574,000 relating to the settlement of litigation. Audit expenses increased $241,000 due to increased external and internal audit services performed some of which related to our IPO transaction. Occupancy expenses increased $157,000 due in part to the opening of a 5,621 square foot office in Philadelphia in June 2003 and the March 2003 move of our Georgia office into larger space. Insurance expenses increased $88,000 due in part to more locations insured and higher Directors and Officers insurance coverage associated with being a public company. Marketing expenses increased $73,000. The remainder of the increase is due to increases in postage, training, bank fees, depreciation, data processing and credit bureau report costs to support the growth in our leasing portfolio.

      Financing related costs. Financing related costs were $1.6 million for both the years ended December 31, 2003 and 2002. Increases in 2003 of $343,000 in commitment fees were offset by lower costs associated with mark to market adjustments for interest rate cap contracts in the period.

      Change in fair value of warrants. Warrants issued in connection with subordinated debt increased in value $5.7 million during 2003 compared with $908,000 during 2002. This non-cash expense increased primarily as a result of the increase in the estimated fair market value of our common stock used in valuing our warrants. As part of our reorganization undertaken in November 2003, all outstanding warrants were exercised on a net issuance basis for common stock. Accordingly, this expense will not continue beyond fiscal year 2003.

      Provision for credit losses. The provision for credit losses increased $1.1 million, or 16.3%, to $8.0 million for the year ended December 31, 2003 from $6.9 million for the same period in 2002. The increase in our provision for credit losses was principally a result of the growth of our lease portfolio. Net charge-offs were $6.9 million for the period ended December 31, 2003 and $5.9 million for the same period in 2002. Net charge-offs as a percentage of average net investment in leases declined to 1.90% in 2003 from 2.07% in 2002. We generally expect our annual net charge-offs to approximate 2% of average net investment in leases.

      Provision for income taxes. The provision for income taxes increased to $5.6 million for the year ended December 31, 2003 from $3.6 million for the same period in 2002. The increase is directly attributable to the increase in pretax income. Our effective tax rate was 66.3% for the year ended December 31, 2003 compared to 45.4% for the year ended December 31, 2002. The effective tax rates in both 2003 and 2002 were heavily impacted by the expense associated with the changes in fair value of warrants which is a non-deductible expense.

      In conjunction with our November 2003 reorganization and IPO, warrants were exercised and convertible preferred stock converted, and our capital structure simplified into one class of common stock outstanding. The number of common shares issued as a result of these conversions was 5.86 million, or approximately 52% of total common shares outstanding following the IPO. Because of the significant impact on share count and the related impact on operations from warrant valuations and preferred dividends, we believe a pro forma analysis of diluted EPS provides a more meaningful basis to evaluate performance of the Company. The following analysis reconciles EPS calculations on a GAAP basis to pro forma EPS which assumes the exercise of the of warrants and the conversion of the convertible preferred stock as of the beginning of the periods reported and adds back warrant expenses and preferred dividends (in thousands, except per share amounts):

Operating Data

      We manage expenditures using a comprehensive budgetary review process. Expenses are monitored by departmental heads and are reviewed by senior management monthly. The efficiency ratio (relating expenses

with revenues) and the ratio of salaries and benefits and general and administrative expenses as a percentage of the average net investment in direct financing leases shown below are metrics used by management to monitor productivity and spending levels.

      Key growth indicators management evaluates regularly are sales account executive staffing levels and the activity of our origination sources, which are shown below.

Residual Performance

      Our leases offer our end user customers the option to own the purchased equipment at lease expiration. As of December 31, 2004, approximately 66% of our leases were one dollar purchase option leases, 23% were fair market value leases and 11% were fixed purchase option leases, the latter of which typically are 10% of the original equipment cost. As of December 31, 2004, there were $41.1 million of residual assets retained on our balance sheet of which $25.6 million or 60.4% were related to copiers.

      Our leases generally include automatic renewal provisions and many leases continue beyond their initial term. We consider renewal income a component of residual performance. For the years ended December 31, 2004, 2003, and 2002 renewal income, net of depreciation amounted to $4.5 million, $2.5 million, and $1.3 million and net gains (losses) on residual values disposed at end of term amounted to $158,000, ($443,000), and ($27,000) respectively. The increase in net residual income is generally consistent with the growth in our lease portfolio and an increased number of leases where we retain a residual interest reaching end of term.

Asset Quality

      The chart below provides our asset quality statistics for the years ended December 31, 2004, 2003 and 2002:

      We generally experience higher delinquency rates in December of each year, as we believe our borrowers adjust their payment patterns around the year-end. Given the overall economic environment for the periods reported, we expected net charge-offs to approximate 2.0% of average net investment in leases and consider our annualized net charge-off levels reported to be consistent with our expectations.

Liquidity and Capital Resources

      Our business requires a substantial amount of cash to operate and grow. Our primary liquidity need is for new lease originations. In addition, we need liquidity to pay interest and principal on our borrowings, to pay fees and expenses incurred in connection with our securitization transactions, to fund infrastructure and technology investment and to pay administrative and other operating expenses. We are dependent upon the availability of financing from a variety of funding sources to satisfy these liquidity needs. Historically, we have relied upon four principal types of third party financing to fund our operations:

      New lease originations are generally funded in the short-term with cash from operations or through borrowings under our revolving bank facility or our CP conduit warehouse facilities. Our current plans assume the execution of a term note securitization approximately once a year to refinance and relieve the bank and CP

conduit warehouse facilities. As of December 31, 2004 we had approximately $253.0 million of available borrowing capacity under our existing bank and CP conduit warehouse facilities.

      In November 2003, 5,060,000 shares of our common stock were issued in connection with our IPO. Of these shares, a total of 3,581,255 shares were sold by the company and 1,478,745 shares were sold by selling shareholders. The initial public offering price was $14.00 per share resulting in net proceeds to us, after payment of underwriting discounts and commissions but before other offering costs, of approximately $46.6 million. We did not receive any proceeds from the shares sold by the selling shareholders. We used the net proceeds from the IPO as follows: (i) approximately $10.1 million was used to repay all of our outstanding 11% subordinated debt and all accrued interest thereon; (ii) approximately $6.0 million was used to pay accrued dividends on preferred stock which converted to common stock at the time of the IPO; (iii) approximately $1.6 million was used to pay issuance costs incurred in connection with the IPO. The remaining $28.9 million was used to fund newly originated and existing leases in our portfolio and other general business purposes.

      Net cash provided by financing activities was $34.0 million, $89.9 million and $73.6 million for the years ended December 31, 2004, 2003 and 2002, respectively.

      We used cash in investing activities of $81.7 million, $90.4 million and $86.3 million for the years ended December 31, 2004, 2003 and 2002, respectively. Investing activities primarily relate to lease origination activity.

      Additional liquidity is provided by our cash flow from operations. We generated cash flow from operations of $34.4 million, $23.6 million and $16.6 million for the years ended December 31, 2004, 2003 and 2002, respectively.

      We expect cash from operations, additional borrowings on existing and future credit facilities and, the completion of additional on-balance sheet term note securitizations to be adequate to support our operations and projected growth.

      Cash and Cash Equivalents. Our objective is to maintain a low cash balance, investing any free cash in leases. We generally fund our lease originations and growth using advances under our revolving bank facility and our CP conduit warehouse facilities. We had available cash and cash equivalents of $16.1 million at December 31, 2004 and $29.4 million at December 31, 2003.

      In addition we had $20.5 million of cash classified as restricted cash as of December 31, 2004 compared to $15.7 million at December 31, 2003. Restricted cash consists primarily of the cash reserves and advance payment accounts related to our term note securitizations.

      Borrowings. Our aggregate outstanding secured borrowings amounted to $416.6 million at December 31, 2004 and $378.9 million at December 31, 2003. At December 31, 2004, our external financing sources, maximum facility amounts, amounts outstanding and unused available commitments, subject to certain minimum equity restrictions and other covenants and conditions, are summarized below:

      Revolving bank facility. Our revolving bank facility, which increased from $32.5 million to $40.0 million on October 16, 2003 through the addition of another lender to the facility, is secured by leases that meet specified eligibility criteria. Our revolving bank facility provides temporary funding pending the accumulation of sufficient pools of leases for financing through a CP conduit warehouse facility or an on-balance-sheet term note securitization. Funding under this facility is based on a borrowing base formula and factors in an assumed discount rate and advance rate against the pledged leases. Our weighted average outstanding borrowings under this facility were $5.7 million for the year ended December 31, 2004 compared to $9.7 million for the year ended December 31, 2003. We incurred interest expense under this facility of $197,000 for the year ended December 31, 2004 compared to $384,000 for the year ended December 31, 2003. This facility expires on August 31, 2005. As of December 31, 2004, there were no borrowings outstanding under the revolving bank facility.

      CP conduit warehouse facilities. We have two CP conduit warehouse facilities that allow us to borrow, repay and re-borrow based on a borrowing base formula. In these transactions, we transfer pools of leases and interests in the related equipment to special purpose, bankruptcy remote subsidiaries. These special purpose entities in turn pledge their interests in the leases and related equipment to an unaffiliated conduit entity, which generally issues commercial paper to investors. These facilities are also credit enhanced through third party financial guarantor’s insurance policies. These financing arrangements have minimum annual fee requirements based on anticipated usage of the facilities.

      Our $125.0 million CP conduit warehouse facility is secured by leases that meet specified eligibility criteria. We obtain funding under this facility through a special-purpose, bankruptcy remote subsidiary to which we transfer eligible leases. Funding under this facility is based on a borrowing base formula and factors in an assumed discount rate and advance rate against the pledged collateral combined with specific portfolio concentration criteria. As of December 31, 2004, the maximum advance rate under this facility was 88.5% of our borrowing base. Interest on borrowings under the facility is charged at a floating rate based on commercial paper rates and averaged 1.71% for the year ended December 31, 2004. Our weighted average outstanding borrowings under this facility were $31.1 million for the year ended December 31, 2004 compared to $26.0 million for the year ended December 31, 2003. We incurred interest expense under this facility of $530,000 for the year ended December 31, 2004 compared to $477,000 for the year ended December 31, 2003. This facility expires on October 7, 2006.

      Our second CP conduit warehouse facility is also secured by leases that meet specified eligibility criteria. On March 19, 2004, we closed on an amendment to increase this facility size to $100 million. We obtain funding under this facility through a special-purpose, bankruptcy remote subsidiary to which we transfer eligible leases. Funding under the facility is based on a borrowing base formula and factors in an assumed discount rate and advance rate against the pledged collateral combined with specified portfolio concentration criteria. As of December 31, 2004, the maximum advance rate under this facility was 87.0% of our borrowing base. Interest on borrowings under the facility is charged at a floating rate based on commercial paper rates and averaged 2.29% for the year ended December 31, 2004. We had weighted average outstanding borrowings under this facility of $32.7 million for the year ended December 31, 2004 compared to $35.1 million for the year ended December 31, 2003. We incurred interest expense under this facility of $749,000 for the year ended December 31, 2004, compared to $854,000 for the year ended December 31, 2003. The facility is scheduled to expire on April 11, 2005, but may, at the option of the committed lenders, be renewed through April 8, 2006.

      Term note securitizations. Since our founding, we have completed six on-balance-sheet term note securitizations of which three remain outstanding. In connection with each securitization transaction, we have transferred leases to our wholly owned, special-purpose bankruptcy remote subsidiaries and issued term debt collateralized by such commercial leases to institutional investors in private securities offerings. Our term note

securitizations differ from our CP conduit warehouse facilities primarily in that our term note securitizations have fixed terms, fixed interest rates and fixed principal amounts. By entering into term note securitizations, we reduce outstanding borrowings under our CP conduit warehouse facilities and revolving bank facility, which increases the amounts available to us under these facilities to fund additional lease originations. Our Series 1999-2 transaction, which was our first term note securitization, was repaid in full on January 15, 2003. Our Series 2000-1 transaction was repaid in full on April 15, 2004, and our 2001-1 transaction was repaid in full on August 16, 2004.

      As of December 31, 2004, $398.0 million of our net investment in direct financing leases was pledged to our term note securitizations. Each of our outstanding term note securitizations is summarized below:

Financial Covenants

      All of our secured borrowing arrangements have financial covenants we must comply with in order to obtain funding through the facilities and to avoid an event of default. The revolving bank facility and CP conduit warehouse facilities also contain cross default provisions such that an event of default on any facility would be considered an event of default under the others, in essence simultaneously restricting our ability to access either of these critical sources of funding. A default by any of our term note securitizations is also

considered an event of default under the revolving bank facility and CP conduit warehouse facilities. Some of the critical financial covenants under our borrowing arrangements as of December 31, 2004 include:

      As of December 31, 2004 we believe we were in compliance with all covenants in our borrowing relationships.

Contractual Obligations

      In addition to our scheduled maturities on our credit facilities and term debt, we have future cash obligations under various types of contracts. We lease office space and office equipment under long-term operating leases. The contractual obligations under our agreements, credit facilities, term securitizations, operating leases and commitments under non-cancelable contracts as of December 31, 2004 were as follows:

Market Interest Rate Risk and Sensitivity

      Market risk is the risk of losses arising from changes in values of financial instruments. We engage in transactions in the normal course of business that expose us to market risks. We attempt to mitigate such risks through prudent management practices and strategies such as attempting to match the expected cash flows of our assets and liabilities.

      We are exposed to market risks associated with changes in interest rates and our earnings may fluctuate with changes in interest rates. The lease assets we originate are almost entirely fixed rate. Accordingly, we generally seek to finance these assets with fixed interest cost term note securitization borrowings that we issue periodically. Between term note securitization issues, we finance our new lease originations through a combination of variable rate warehouse facilities and working capital. Our mix of fixed and variable rate borrowings and our exposure to interest rate risk changes over time. Over the past twelve months, the mix of variable rate borrowings has ranged from zero to 42% of total borrowings and averaged 16%. Our highest exposure to variable rate borrowings generally occurs just prior to the issuance of a term note securitization.

      We also use derivative financial instruments to attempt to further reduce our exposure to changing cash flows caused by possible changes in interest rates. On July 22, 2004 we issued a term note securitization where certain classes of notes were issued at variable rates to investors. We simultaneously entered into interest rate swap contracts to convert these borrowings to fixed interest costs to the Company for the term of the borrowing. The notional amount of these swaps reduce over time in conjunction with the amortization of the related notes. As of December 31, 2004 the notional amount of these swap agreements was $168.4 million. At December 31, 2003 we did not have any such swap agreements outstanding.

      We may also use interest rate swaps to reduce our exposure to changing market interest rates prior to issuing a term note securitization. In this scenario we usually enter into forward starting swap agreements to coincide with the forecasted pricing date of our next term note securitization. The value of this derivative moves directly with interest rates and our intention is to close these derivative contracts simultaneous with the pricing of our next term securitization and amortize the resulting gain or loss to interest expense over the term of our forecasted securitization. We may choose to hedge all or a portion of a forecasted transaction. In October and December 2004 we entered forward starting swap agreements with a total notional amount of $250 million to partially hedge our forecasted 2005 term securitization. At December 31, 2003 we did not have any such swap agreements outstanding.

      To provide additional protection against potential interest rate increases associated with our variable rate warehouse borrowing facilities, we are required by our CP conduit warehouse facilities to enter into derivative financial transactions. We are using interest rate caps to fulfill these requirements. As of December 31, 2004, we held interest rate caps with a notional amount of $133.9 million with several counterparties at various terms and the fair value of these contracts was $73,000.

      The following table provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including debt obligations. For debt obligations, the table presents the expected principal cash flows and the related weighted average interest rates as of December 31, 2004 expected as of and for each year ended through December 31, 2009 and for periods thereafter.

      Our earnings are sensitive to fluctuations in interest rates. The revolving bank facility and CP conduit warehouse facilities are charged a floating rate of interest based on LIBOR, prime rate or commercial paper interest rates. Because our assets are fixed rate, increases in these market interest rates would negatively impact earnings and decreases in the rates would positively impact earnings because the rate charged on our borrowings would change faster than our assets could reprice. We would have to offset increases in borrowing costs by adjusting the pricing under our new leases or our net interest margin would be reduced. There can be no assurance that we will be able to offset higher borrowing costs with increased pricing of our assets.

      For example, the impact of a hypothetical 100 basis point, or 1.0%, increase in the market rates for which our borrowings are indexed for the twelve month period ended December 31, 2004 would have been to reduce net interest and fee income by approximately $694,000 based on our average variable rate warehouse borrowings of approximately $69.4 million for the year then ended, excluding the effects of derivatives, taxes and possible increases in the yields from our lease portfolio due to the origination of new leases at higher interest rates.

      We manage and monitor our exposure to interest rate risk using balance sheet simulation models. Such models incorporate many of our assumptions about our business including new asset production and pricing, interest rate forecasts, overhead expense forecasts and assumed credit losses. Past experience drives many of the assumptions used in our simulation models and actual results could vary substantially.

Selected Quarterly Data (Unaudited)