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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-11618

HPSC, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 04-2560004
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices)(Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 720-3600

NONE
(Former name, former address, and former fiscal year if
changed since last report)

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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: COMMON STOCK, PAR VALUE $.01 PER
SHARE. SHARES OUTSTANDING AT August 5, 1998, 4,556,030.

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HPSC, INC.

INDEX

PAGE
----

PART I -- FINANCIAL INFORMATION

Condensed Consolidated Balance Sheets as of June 30,
1998 and December 31, 1997......................................... 3

Condensed Consolidated Statements of Income for Each of
the Three and Six Months Ended June 30, 1998 and June 30, 1997..... 4

Condensed Consolidated Statements of Cash Flows for
Each of the Six Months Ended June 30, 1998 and June 30, 1997....... 5

Notes to Condensed Consolidated Financial Statements................. 6

Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 8

PART II -- OTHER INFORMATION

Other Information.................................................... 12

Signatures........................................................... 13

2
3

HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)

ASSETS
CASH AND CASH EQUIVALENTS................................... $ 2,206 $ 2,137
RESTRICTED CASH............................................. 8,303 7,000
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in
installments.......................................... 254,274 219,147
Notes receivable....................................... 31,436 33,245
Retained interest in leases and notes sold............. 14,923 11,895
Estimated residual value of equipment at end of lease
term.................................................. 12,680 11,342
Less unearned income................................... (63,027) (53,868)
Less allowance for losses.............................. (5,858) (5,541)
Less security deposits................................. (6,246) (5,801)
Deferred origination costs............................. 6,103 5,300
-------- --------
Net investment in leases and notes.......................... 244,285 215,719
-------- --------
OTHER ASSETS:
Other assets........................................... 5,391 5,502
Refundable income taxes................................ 384 2,770
-------- --------
TOTAL ASSETS................................................ $260,569 $233,128
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS................................. $ 47,000 $ 39,000
SENIOR NOTES................................................ 143,890 123,952
SENIOR SUBORDINATED NOTES................................... 20,000 20,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES.................... 3,422 6,254
ACCRUED INTEREST............................................ 1,237 1,129
INCOME TAXES:
Currently payable...................................... -- 66
Deferred............................................... 8,189 7,553
-------- --------
TOTAL LIABILITIES........................................... 223,738 197,954
-------- --------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 par value; authorized 5,000,000
shares; issued - None................................. -- --
COMMON STOCK, $.01 par value; 15,000,000 shares
authorized; issued and outstanding 4,556,030 shares in
1998 and 4,912,530 in 1997............................. 46 49
Additional paid-in capital............................. 12,502 12,304
Retained earnings...................................... 27,345 26,472
Less: Treasury Stock (at cost) 274,400 shares in 1998 and
236,900 in 1997........................................... (1,413) (1,210)
Deferred compensation.................................. (1,355) (2,286)
Notes receivable from officers and employees........... (294) (155)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................. 36,831 35,174
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $260,569 $233,128
======== ========

The Accompanying Notes are an Integral Part of the Condensed Consolidated
Financial Statements.

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4

HPSC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------

REVENUES:
Earned income on leases and notes....... $ 8,033 $ 5,401 $ 15,527 $ 10,416
Gain on sales of leases and notes....... 1,225 486 1,750 1,468
Provisions for losses................... (681) (303) (1,265) (740)
---------- ---------- ---------- ----------
Net Revenues................................. 8,577 5,584 16,012 11,144
---------- ---------- ---------- ----------
EXPENSES:
Selling, general and administrative..... 3,991 2,437 7,202 5,244
Interest expense........................ 3,796 2,800 7,312 5,237
Interest income......................... (40) (93) (68) (185)
---------- ---------- ---------- ----------
Net operating expenses....................... 7,747 5,144 14,446 10,296
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES................... 830 440 1,566 848
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current............................ 30 82 56 171
Deferred........................... 338 99 637 207
---------- ---------- ---------- ----------
TOTAL INCOME TAXES........................... 368 181 693 378
---------- ---------- ---------- ----------
NET INCOME................................... $ 462 $ 259 $ 873 $ 470
========== ========== ========== ==========
BASIC NET INCOME PER SHARE................... $ 0.12 $ 0.07 $ 0.24 $ 0.12
========== ========== ========== ==========
SHARES USED TO COMPUTE BASIC NET
INCOME PER SHARE............................. 3,714,784 3,758,317 3,683,117 3,774,451

DILUTED NET INCOME PER SHARE................. $ 0.11 $ 0.06 $ 0.21 $ 0.11
========== ========== ========== ==========
SHARES USED TO COMPUTE DILUTED NET
INCOME PER SHARE............................. 4,245,374 4,080,515 4,125,698 4,108,419

The Accompanying Notes are an Integral Part of the Condensed Consolidated
Financial Statements.

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5

HPSC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)

JUNE 30, JUNE 30,
1998 1997
-------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................. $ 873 $ 470
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,974 1,995
Deferred income taxes.................................. 636 208
Restricted stock compensation.......................... 673 99
Gain on sale of receivables............................ (1,750) (1,468)
Provision for losses on lease contracts and notes
receivable............................................ 1,265 740
Increase in accrued interest........................... 108 751
Decrease in accounts payable and accrued liabilities... (1,909) (3,945)
Increase (decrease) in accrued income taxes............ (66) 16
Decrease in refundable income taxes.................... 2,386 500
Decrease in other assets............................... 80 154
-------- --------
Cash provided by (used in) operating activities............. 4,270 (480)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due
in installments....................................... (77,500) (60,682)
Portfolio receipts, net of amounts included in
income................................................ 27,835 34,257
Proceeds from sales of lease contracts and notes
receivable due in installments........................ 14,317 14,021
Net (increase) decrease in notes receivable............ 1,750 (6,228)
Net increase in security deposits...................... 445 577
Net (increase) decrease in other assets................ (223) 9
Net (increase) decrease in loans to employees.......... (139) 26
-------- --------
Cash (used in) investing activities......................... (33,515) (18,020)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes.............................. (24,543) (19,212)
Proceeds from issuance of senior notes, net of debt
issue costs........................................... 44,337 21,621
Proceeds from issuance of senior subordinated notes,
net of debt issuance costs............................ -- 18,255
Net proceeds of revolving credit borrowings............ 8,000 492
Purchase of treasury stock............................. (203) (442)
Increase (decrease) in restricted cash................. 1,303 (3,124)
Repayment of employee stock ownership plan promissory
note.................................................. 105 105
Exercise of employee stock options..................... 315 --
-------- --------
Cash provided by financing activities....................... 29,314 17,695
-------- --------
Net increase (decrease) in cash and cash equivalents........ 69 (805)
Cash and cash equivalents at beginning of period............ 2,137 2,176
-------- --------
Cash and cash equivalents at end of period.................. $ 2,206 $ 1,371
======== ========
Supplemental disclosures of cash flow information:
Interest paid.......................................... $ 6,964 $ 3,910
Income taxes paid...................................... 35 99

The Accompanying Notes are an Integral Part of the Condensed Consolidated
Financial Statements.

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6

HPSC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The information presented for the interim periods is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of HPSC, Inc. (the "Company"), are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. The results for interim periods are not necessarily
indicative of results to be expected for the full fiscal year. Certain 1997
account balances have been reclassified to conform with 1998 presentation. Such
financial statements have been prepared in accordance with the instructions of
Form 10-Q pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been omitted
pursuant to such rules and regulations. As a result, these financial statements
should be read in conjunction with the audited consolidated financial statements
and related notes included in the Company's latest annual report on Form 10-K.

2. Statement of Financial Accounting Standards No. 128, "Earnings per
Share", effective for the Company for the year ended December 31, 1997, provided
new standards for computing and presenting earnings per share (EPS). The
Company's basic net income per share calculation is based on the weighted
average number of common shares outstanding, which does not include unallocated
shares under the Company's Employee Stock Ownership Plan, Supplemental Employee
Stock Ownership Plan (for 1997 only-see Note 3), restricted shares issued under
the Company's Incentive Stock Plans, treasury stock, or any shares issuable upon
the exercise of outstanding stock options. Diluted net income per share includes
the weighted average number of stock options and contingently issuable
restricted shares under the Company's Incentive Stock Plans outstanding as
calculated under the treasury stock method, but not unallocated shares under the
Company's ESOP and SESOP.

3. In April 1998, the Company canceled its Supplemental Employee Stock
Ownership Plan ("SESOP"). The Company had originally issued 350,000 shares of
common stock to this plan in July 1994 in consideration of a promissory note in
the principal amount of $1,225,000. No contributions or allocations had been
made to any participant accounts. The shares issued to the SESOP have been
retired and the promissory note canceled. In addition, 550,000 shares of the
Company's common stock were reserved for issuance pursuant to the Company's 1998
Stock Incentive Plan as approved by the stockholders. The Board of Directors
also approved the 1998 Outside Directors Stock Bonus Plan, pursuant to which
25,000 shares of the Company's common stock were reserved for issuance. During
the quarter ended June 30, 1998, the Company also extended certain 5-year
options which were scheduled to expire and certain of such options were
exercised. Additionally, as a result of increases in the Company's stock price
in May and June 1998, vesting events occurred with respect to restricted shares
issued under the 1995 Incentive Stock Plan. As a result of this activity, the
Company recognized additional compensation expense of $660,000 in the quarter
ended June 30, 1998. Furthermore, certain restricted shares issued under the
1995 Incentive Stock Plan were converted to stock options under such plan.

4. The terms of the HPSC Bravo Funding Corp. ("Bravo") revolving credit
facility were amended in June 1998 to increase available borrowings to
$225,000,000 and to allow up to $67,500,000 of the facility to be used to
finance sales of financing contracts. Under this facility, Bravo had Senior
Notes of $52,885,000 outstanding at June 30, 1998. Bravo incurs interest at
various rates in the commercial paper market and enters into interest rate swap
agreements to assure fixed rate funding. At June 30, 1998, Bravo had seventeen
separate swap contracts with BankBoston with a total notional value of
$58,867,000. These interest rate swaps are matched swaps, and as such, are
accounted for using settlement accounting. Monthly cash settlements on the swap
agreements are recognized in income as they accrue. In the case where the
notional value of the interest rate swap agreements significantly exceeds the
outstanding underlying debt, the excess swap agreements would be
marked-to-market through income until new borrowings are incurred which would be
subject to such swap agreements. All interest rate swap agreements entered into
by the Company are for other than trading purposes.

5. In March 1997, the Company completed the issuance of $20,000,000 of
unsecured senior subordinated notes (the "Notes") due in 2007, which bear
interest at a fixed rate of 11%. The Notes pay interest semi-annually on April 1
and October 1, with such payments beginning on October 1, 1997. The Notes are

6
7

redeemable at the option of the Company, in whole or in part, other than through
the operation of a sinking fund, after April 1, 2002 at established redemption
prices, plus accrued but unpaid interest to the date of repurchase. Beginning
July 1, 2002, the Company is required to redeem through sinking fund payments,
on January 1, April 1, July 1, and October 1 of each year, a portion of the
aggregate principal amount of the Notes at a redemption price equal to 100% of
such principal amount redeemed plus accrued but unpaid interest to the
redemption date.

6. In April 1998, the HPSC Capital Funding Inc. ("Capital") Lease
Receivable Purchase Agreement was amended to increase availability to
$150,000,000. All other terms of the Agreement remain substantially the same.
Under this Agreement, Capital had Senior Notes outstanding of $87,435,000 at
June 30, 1998, and in connection with this facility had 10 separate interest
rate swap agreements with BankBoston with a total notional value of $77,654,000.

7. On June 30, 1998, the Company had restricted cash of $4,732,000 under
the Bravo facility and $3,571,000 under the Capital facility. All such
restricted cash is reserved for debt service.

8. The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
This statement, adopted January 1, 1998, establishes standards for reporting and
presenting comprehensive income and its components. There was no difference
between comprehensive income and net income as a result of the adoption of SFAS
No. 130.

9. Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards for
public enterprises in reporting information about its operating segments,
products and services, geographic concentrations, and major customers. Statement
of Financial Accounting Standards No. 132, "Employer's Disclosures about
Pensions and Other Post-Retirement Benefits" provides new standards for
disclosures related to pension plans and other post retirement benefits. SFAS
Nos. 131 and 132 will be effective for the Company for the year ending December
31, 1998. It is not expected that the adoption of these standards will have a
material impact on the Company's consolidated operating results or financial
condition.

10. In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement will be
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. The Company is still evaluating the impact of this Statement on its
consolidated results of operations.

7
8

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

RESULTS OF OPERATIONS

Earned income from leases and notes for the three months ended June 30,
1998 was $8,033,000 (including approximately $1,234,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $5,401,000 (including approximately $983,000 from ACFC) for the
three months ended June 30, 1997. Earned income for the six months ended June
30, 1998 was $15,527,000 (including approximately $2,491,000 from ACFC) compared
to $10,416,000 (including approximately $1,843,000 from ACFC) for the comparable
period of 1997. The increases of 49% for the three and six month periods were
due principally to increases in net investment in leases and notes for both
periods in 1998 over 1997. The increases in net investment for both periods
resulted in part from a higher level of originations in the 1998 second quarter
of $41,818,000 compared to $39,563,000 for the second quarter of 1997 and
$81,003,000 for the six months ended June 30, 1998 compared to $66,671,000 in
the comparable 1997 period. Gains on sales of leases and notes were $1,225,000
in the three months ended June 30, 1998 compared to $486,000 for the 1997
quarter. Gains on sales of leases and notes for the six months ended June 30,
1998 were $1,750,000 compared to $1,468,000 in the comparable 1997 period. The
increase for the six month period was caused by improved margins associated with
current year asset sales offset by a lower level of asset sales activity.

Interest expense (net of interest income) for the second quarter of 1998
was $3,756,000 (47% of earned income) compared to $2,707,000 (50% of earned
income) in the comparable 1997 period. For the six months ended June 30, 1998,
net interest expense was $7,244,000 (47% of earned income) compared to
$5,052,000 (49% of earned income) in the six months ended June 30, 1997. The
increase in net interest expense was due primarily to a 51% increase in debt
levels from June 30, 1997 to June 30 1998. These higher debt levels resulted
primarily from borrowings to finance a higher level of contract originations.

Net financing margin (earned income less net interest expense) for the
second quarter of 1998 was $4,277,000 (53% of earned income) compared to
$2,694,000 (50% of earned income) for the second quarter of 1997. For the six
months, net financing margin in 1998 was $8,283,000 (53% of earned income)
compared to $5,364,000 (51% of earned income). The increases in amounts in the
three and six month periods were due to higher earnings on higher balances of
earning assets.

The provision for losses for the second quarter of 1998 was $681,000 (8% of
earned income) compared to $303,000 (6% of earned income) in the second quarter
of 1997. For the six months ended June 30, 1998, the provision for losses was
$1,265,000 (8% of earned income) compared to $740,000 (7% of earned income) for
the comparable 1997 period. The increase in the six month period is due to the
Company's continuing evaluation of its portfolio quality, loss history and
allowance for losses.

The allowance for losses at June 30, 1998 was $5,858,000 (2.4% of net
investment) compared to $4,832,000 (2.8% of net investment) at June 30, 1997.
Net charge offs for the six months ended June 30, 1998 were $941,000 compared to
$472,000 in 1997.

Selling, general and administrative expenses for the three months ended
June 30, 1998 were $3,991,000 (50% of earned income) compared to $2,437,000 (45%
of earned income) in the comparable 1997 period. For the six months ended June
30, 1998, selling, general and administrative expenses were $7,202,000 (46% of
earned income) compared to $5,244,000 (50% of earned income) in the same 1997
period. The increase in the three month period was caused by increased
compensation and related costs associated with the Company's 1995 Stock
Incentive Plan as higher HPSC stock prices caused certain performance benchmarks
in such plan to be met and certain five-year options scheduled to expire were
extended. In addition, increased staffing and related costs were required to
support higher levels of owned and managed assets.

The Company's income before income taxes for the quarter ended June 30,
1998 was $830,000 compared to $440,000 in the 1997 period. For the six months
ended June 30, 1998, income before income taxes was $1,566,000 compared to
$848,000 in the 1997 period. For the quarter ended June 30, 1998 the provision
for

8
9

income taxes was $368,000 (44% of income before income taxes) compared to
$181,000 (41% of income before income taxes) in the second quarter of 1997. For
the six months ended June 30, 1998, the provision for income taxes was $693,000
(44% of income before income taxes) compared to $378,000 ( 45% of income before
income taxes) in the 1997 period. The increase in the three month provision in
1998 was caused by expenses related to the continuing wind-down of the Company's
Canadian operation in the second quarter that are not deductible in computing
the tax provision.

The Company's net income for the three months ended June 30, 1998 was
$462,000 ($.12 basic net income per share) compared to $259,000 ($.07 basic net
income per share) for the three months ended June 30, 1997. For the six months
ended June 30, 1998, the Company's net income was $873,000 ($.24 basic net
income per share) compared to $470,000 ($.12 basic net income per share) for the
six months ended June 30, 1997. The increases in both periods in 1998 as
compared to 1997 were due to higher earned income on leases and notes and higher
gains on sales offset by higher selling, general and administrative costs,
higher net interest costs and a higher effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1998, the Company had $10,509,000 in cash, cash equivalents and
restricted cash as compared to $9,137,000 at December 31, 1997. As described in
Note 7 to the Company's condensed consolidated financial statements included in
this report on Form 10-Q, $8,303,000 was restricted pursuant to financing
agreements as of June 30, 1998, compared to $7,000,000 at December 31, 1997.

Cash provided by operating activities was $4,270,000 for the six months
ended June 30, 1998 compared to cash used in operating activities of $480,000
for the six months ended June 30, 1997. The significant components of cash
provided by operating activities for the six months ended June 30, 1998, as
compared to the same period in 1997, were the decrease in accounts payable and
accrued liabilities of $1,909,000 as compared to $3,945,000 for the same period
of 1997, a decrease in refundable income taxes of $2,386,000 as compared to
$500,000 from the prior period, offset by a decrease in accrued income taxes.

Cash used in investing activities was $33,515,000 for the six months ended
June 30, 1998 compared to $18,020,000 for the six months ended June 30, 1997.
The significant components of cash used in investing activities for the first
six months of 1998 compared to the same period in 1997 were an increase in
originations of lease contracts and notes receivable to $77,500,000 from
$60,682,000 along with a decrease in portfolio receipts to $27,835,000 from
$34,257,000, offset by a decrease in notes receivable of $1,750,000 in 1998
compared to an increase of $6,228,000 in the comparable period ended June 30,
1997.

Cash provided by financing activities for the six months ended June 30,
1998 was $29,314,000 compared to $17,695,000 for the six months ended June 30,
1997. The significant components of cash provided by financing activities for
the first six months of 1998 as compared to 1997 were an increase in proceeds
from issuance of senior notes, net of debt issuance costs, to $44,337,000 from
$21,621,000, an increase in proceeds from revolving credit borrowings of
$8,000,000 compared to $492,000 in the prior period, and an increase in
restricted cash balances of $1,303,000 compared to a decrease of $3,124,000,
offset by higher repayments of Senior Notes of $24,543,000 for the six months
ended June 30, 1998 compared to $19,212,000 for the six months ended June 30,
1997 as well as no Senior Subordinated Note borrowings in 1998.

On December 27, 1993, the Company raised $70,000,000 through an asset
securitization transaction in which its wholly-owned subsidiary, HPSC Funding
Corp I ("Funding I"), issued senior secured notes (the "Funding I Notes") at a
rate of 5.01%. The Funding I Notes are secured by a portion of the Company's
portfolio which it sold in part and contributed in part to Funding I. Proceeds
of this financing were used to retire $50,000,000 of 10.125% senior notes due
December 28, 1993, and $20,000,000 of 10% subordinated notes due January 15,
1994. Under the terms of the Funding I securitization, when the principal
balance of the Funding I Notes equals the balance of the restricted cash in the
facility, the Funding I Notes are paid off from the restricted cash and Funding
I terminates. This occurred during the second quarter of 1997, prior to the
scheduled termination of Funding I. Due to this early termination, the Company
incurred a $175,000 non-cash, non-operating charge against earnings in both the
first and second quarters of 1997 representing the partial early recognition of
certain unamortized deferred transaction origination costs.

9
10

The Company's Second Amended and Restated Revolving Credit Agreement with
BankBoston as Agent Bank, dated December 12, 1996 ("the Revolver Agreement")
increased the Company's availability under the Revolver Agreement to
$95,000,000. On December 10, 1997, the Revolver Agreement was extended on the
same terms and conditions providing availability to $60,000,000. The Company
signed a Third Amended and Restated Revolving Credit Agreement with BankBoston
as Agent on March 16, 1998 providing the Company with availability up to
$100,000,000 through March 31, 1999. Under the Third Amended and Restated
Revolving Credit Agreement, the Company may borrow at variable rates of prime
and at LIBOR plus 1.35% to 1.50%, dependent on certain performance covenants. At
June 30, 1998, the Company had $47,000,000 outstanding under this facility and
$53,000,000 available for borrowing, subject to borrowing base limitations. The
Third Amended and Restated Revolving Credit Agreement currently is not hedged
and is, therefore, exposed to upward movements in interest rates.

As of January 31, 1995, the Company, along with its wholly-owned,
special-purpose subsidiary HPSC Bravo Funding Corp ("Bravo"), established a
$50,000,000 revolving credit facility structured and guaranteed by Capital
Markets Assurance Corporation ("CapMAC", subsequently acquired by MBIA in
February, 1998). Under the terms of the facility, Bravo, to which the Company
sells and may continue to sell or contribute certain of its portfolio assets
subject to certain covenants regarding Bravo's portfolio performance and
borrowing base calculations, pledges its interests in these assets to a
commercial paper conduit entity. Bravo incurs interest at variable rates in the
commercial paper market and enters into interest rate swap agreements to assure
fixed rate funding. Monthly settlements of principal and interest payments are
made from the collection of payments on Bravo's portfolio. The Company is the
servicer of the Bravo portfolio, subject to the Company meeting certain
covenants. The required monthly payments of principal and interest to purchasers
of the commercial paper are guaranteed by CapMAC pursuant to the terms of the
facility. In November 1996, the Bravo facility was increased to $100,000,000 and
amended to allow up to $30,000,000 of the facility to be used for sale
accounting treatment. In June 1998, the Bravo facility was further amended by
increasing the availability of the facility to $225,000,000 with $67,500,000 of
the facility available to be used for sale accounting treatment. Bravo had
$22,532,000 outstanding at June 30, 1998 from sales of receivables under the
sale accounting portion of the Bravo facility. Bravo had $52,885,000 of
indebtedness outstanding under the loan portion of the facility at June 30,
1998, and in connection with this facility, had 17 separate interest rate swap
agreements with BankBoston with a total notional value of $58,867,000.

In April, 1995, the Company entered into a fixed rate, fixed term loan
agreement with Springfield Institution for Savings ("SIS") under which the
Company borrowed approximately $3,500,000 at 9.5% subject to certain recourse
and performance covenants. In July 1997, the Company entered into another fixed
rate, fixed term loan agreement with SIS under which the Company borrowed an
additional $3,984,000 at 8% subject to the same conditions as the first loan.
The Company had $3,571,000 outstanding under these agreements at June 30, 1998.

In March 1997, the Company completed a $20,000,000 offering of unsecured
senior subordinated notes due 2007 bearing interest at a fixed rate of 11% (the
"Note Offering"). The Note Offering was completed on the terms and conditions
described in Amendment No. 2 to the Company's Registration Statement No. 333-
20733 on Form S-1. The Company received approximately $18,300,000 in net
proceeds from the Note Offering and used such proceeds to repay in part amounts
outstanding under the Revolver Agreement.

In September 1997, the Company, along with its wholly-owned, special
purpose subsidiary, HPSC Capital Funding, Inc. ("Capital"), established a
$100,000,000 Lease Receivable Purchase Agreement with EagleFunding Capital
Corporation ("Eagle"). Under the terms of the facility, Capital, to which the
Company may sell certain of its portfolio assets from time to time, pledges or
sells its interests in these assets to Eagle, a commercial paper conduit entity.
Capital may borrow at variable rates in the commercial paper market and may
enter into interest rate swap agreements to assure fixed rate funding. Monthly
settlements of the borrowing base and any applicable principal and interest
payments are made from collections of Capital's portfolio. The Company is the
servicer of the Capital portfolio subject to certain covenants. In April 1998,
the facility was amended to increase availability under the facility to
$150,000,000. The Company had $18,389,000 outstanding at June 30, 1998 from
sales of receivables under the Capital facility. The Company had $87,435,000 of
indebtedness outstanding under the loan portion of the facility at June 30,
1998, and in

10
11

connection with this facility had 10 separate interest rate swap agreements with
BankBoston with a total notional value of $77,654,000.

Management believes that the Company's liquidity, resulting from the
availability of credit under the Third Amended and Restated Revolving Credit
Agreement, the Bravo facility, the Capital facility, the Note Offering, and the
loans from SIS, along with cash obtained from the sales of its financing
contracts and from internally generated revenues, is adequate to meet current
obligations and future projected levels of financings and to carry on normal
operations. In order to finance adequately its anticipated growth, the Company
will continue to seek to raise additional capital from bank and non-bank
sources, make selective use of asset sale transactions and use its current
credit facilities. The Company expects that it will be able to obtain additional
capital at competitive rates, but there can be no assurance it will be able to
do so.

Inflation in the form of rising interest rates could have an adverse impact
on the interest rate margins of the Company and its ability to maintain adequate
earning spreads on its portfolio assets.

The Company has reviewed all significant areas within its operations,
including the application, underwriting and accounting management systems, for
date sensitive issues after December 31, 1999 ("Year 2000 Issues"). The Company
is also monitoring the progress of its major service providers. Based on this
review, the Company does not anticipate any material adverse impact from Year
2000 Issues.

FORWARD-LOOKING STATEMENTS

This Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act. When used in this Form 10-Q, the words
"believes," "anticipates," "expects," "plans," "intends," "estimates,"
"continue," "may," or "will" (or the negative of such words) and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties, including but not limited to
the following: the Company's dependence on funding sources; restrictive
covenants in funding documents; payment restrictions and default risks in asset
securitization transactions to which the Company, or its subsidiaries, are a
party; customer credit risks; competition for customers and for capital funding
at favorable rates relative to the capital costs of the Company's competitors;
changes in healthcare payment policies; interest rate risk; the risk that the
Company may not be able to realize the residual value on financed equipment at
the end of its lease term; risks associated with the sale of certain receivable
pools by the Company; dependence on sales representatives and the current
management team; and fluctuations in quarterly operating results. The Company's
filings with the Securities and Exchange Commission, including its Annual Report
on Form 10-K for the year ended December 31, 1997 contain additional information
concerning such risk factors. Actual results in the future could differ
materially from those described in any forward-looking statements as a result of
the risk factors set forth above, and the risk factors described in the Annual
Report. HPSC cautions the reader, however, that such list of risk factors may
not be exhaustive. HPSC undertakes no obligation to release publicly the result
of any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.

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12

HPSC, INC.
PART II. OTHER INFORMATION

ITEMS 1, 2, 3, AND 5 ARE OMITTED BECAUSE THEY ARE INAPPLICABLE.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS:

a) The Annual Meeting of Stockholders was held on April 23, 1998

b) Not applicable

c) The stockholders elected the following three persons to serve as Class
III Directors:

FOR WITHHELD
--- --------

John W. Everets....................................... 4,014,631 48,379
Dollie A. Cole........................................ 4,038,031 24,979
J. Kermit Birchfield.................................. 4,038,031 24,979

The stockholders approved the Company's 1998 Stock Incentive Plan:

FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------

3,208,509 250,862 14,010 589,629

The stockholders ratified the appointment of Deloitte & Touche LLP as
the independent auditors of the Company for the fiscal year ending
December 31, 1998:

FOR AGAINST ABSTAIN
--- ------- -------

4,036,038 19,250 7,722

d) Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

10.1 1998 Outside Directors Stock Bonus Plan, dated April 23,
1998

10.2 Employment Agreement with Rene Lefebvre, Vice President and
Chief Financial Officer, dated April 23, 1998

10.3 Amendment No. 1, dated April 30, 1998 to Liquidity Agreement
dated June 27, 1997, by and among EagleFunding Capital
Corporation (Borrower), BankBoston, N.A. (Liquidity
Provider) BKB (Liquidity Agent), and Bankers Trust Company
(Collateral Agent)

10.4 Amendment No. 2, dated April 30, 1998 to Lease Receivable
Purchase Agreement, dated June 27, 1997, by and among HPSC
Capital Funding, Inc. (Seller), EagleFunding Capital
Corporation (Purchaser), HPSC, Inc. (Servicer and
Custodian), and BancBoston Securities, Inc. (Deal Agent)

10.5 Amendment No. 1, dated June 29, 1998 to Lease Receivable
Purchase Agreement, dated October 18, 1996, by and among
HPSC Bravo Funding Corporation (Seller), Triple-A One
Funding Corporation, and Capital Markets Assurance
Corporation (Collateral Agent and Administrative Agent)

10.6 Amendment No. 3, dated June 29, 1998 to Credit Agreement,
dated January 31, 1995 by and among HPSC Bravo Funding
Corporation (Borrower), Triple-A One Funding Corporation,
and Capital Markets Assurance Corporation (Collateral Agent
and Administrative Agent)

10.7 Amendment No. 4, dated June 29, 1998 to Purchase and
Contribution Agreement, dated January 31, 1995 by and among
HPSC Bravo Funding Corporation (Buyer), and HPSC, Inc.
(Seller)

27 Financial Data Schedule

b) Reports on Form 8-K:

There were no reports on Form 8-K filed during the three months ended
June 30, 1998.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, HPSC, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

HPSC, INC.
------------------------------------
(REGISTRANT)

By: /s/ JOHN W. EVERETS
------------------------------------
JOHN W. EVERETS
CHIEF EXECUTIVE OFFICER
CHAIRMAN OF THE BOARD

By: /s/ RENE LEFEBVRE
------------------------------------
RENE LEFEBVRE
VICE PRESIDENT
CHIEF FINANCIAL OFFICER

Dated: August 14, 1998