HPSC Inc.  (HDR)
By: Richard W. West, CFA

SEC FILED ACTION AGAINST PERPETRATORS OF DELFACICATION

STRONG BUY RECOMMENDATION REITERATED

On August 16, 2002 the Securities and Exchange Commission filed Litigation Release No. 17686 (www.sec.gov/litigation/litreleases/lr17686.htm).

The SEC filed a civil fraud suit against Kevin J. Morrison and Mildred K. Miller in the $ 5.0 million HSD defalcation. Morrison, a former Executive Vice President of HPSC, Inc.'s wholly owned Subsidiary, American Commercial Finance Corporation (ACFC), and Miller, a purported ACFC factoring customer, were alleged to be behind the $5.0 million financial fraud. The Complaint alleges that Morrison caused HPSC to materially overstate the results of its operations when he improperly diverted more than $4.7 million of corporate assets to Mildred K. Miller, a purported ACFC factoring customer.

On June 17, 2002, HPSC first reported that it had discovered that an employee of its wholly owned asset-based lending subsidiary had perpetrated a defalcation by which approximately $5 million had been diverted from the company over the last five years. The Company has indicated that it had completed its formal investigation into this matter. As a result of the investigation, the company has restated its financial statements for the periods affected beginning in 1996 through the first quarter of 2002.

In the SEC release, a spokesperson indicated that the company's certification of its financial statements shouldn't jeopardize Chief Executive John Everets or Chief Financial Officer Rene LeFebvre because HPSC restated its results with the SEC and posted the news on its Web site. It is our belief that the management of HPSC has handled the situation swiftly and efficiently as possible by notifying the necessary regulatory agencies and by keeping investors informed by news releases and its web-site. Management indicated in a conference call that they had taken steps to insure that such an event will not happen in the future. The Company has filed a claim with its insurance carrier and has expectations that money's will be eventually forthcoming, thereby mitigating, in whole or part, these losses.

SUMMARY and CONCLUSION:

The following table summarizes the actual dollar amount of the defalcation losses and the restated fully diluted EPS for the period's year ending 12/31/99 through the second quarter ended 6/30/02.

The total affect on the stockholders' equity from year ended 12/31/99 to 12/31/01* is a reduction of $2,875,000 to $36,781,000 from a pre-restated value of $39,656,000. The total affect on total assets from the period ending 12/31/99 to 12/31/01* is a reduction of $4,853,000 to $436,886,000 from a pre-restated value of $441,739,000. (*last available audited statements) We expect that the total reduction in retained earnings and total assets from 12/31/01 to6/30/02 to be approximately $500,000 and that periods going forward will not be negatively affected and may be positively affected by any recovery from insurance or return of assets.

The Litigation announcement by the SEC closes another chapter in the 'defalcation saga' that began with the June 17, 2002 announcement for HPSC, Inc. On the date of the original announcement, June 17, 2002, the common stock of HPSC closed at $ 9.95, since that time the stock has traded down and closed on Friday August 16, 2002 at $8.45 a decrease of 15.0%. During the same time frame the Russell Value 2000 index has declined from 121.65 to 116.13, a 4.5 % decrease. We believe that at current prices, the defalcation has been overly discounted for HPSC, Inc. and are maintaining our Strong Buy Recommendation. While there may be some temporary weakness, we view any such weakness as a major buying opportunity. We currently have in a full research update and will be reviewing our estimates for this fiscal year and presenting estimates for the year ended 12/31/03.

We reiterate our STRONG BUY RECOMMENDATION and our price target over the next twelve to eighteen months remains at $14.00 to $16.00 a share.

J.M.Dutton & Associates, LLC. John M. Dutton, President and Supervisory Analyst, 1129 Manning Drive, Suite 310, El Dorado Hills, CA 95762 Phone (916) 941-4985, Fax (978) 418-6422 Email: [email protected] Web site: www.JMDutton.com

Information, opinions or recommendations contained in this research note are submitted solely for advisory and information purposes. The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Such information and the opinions expressed are subject to change without notice. This research note is not intended as an offering or a solicitation of an offer to buy or sell the securities mentioned or discussed. Neither the Firm, its principals, nor the assigned analysts own or trade shares of any company covered. The Firm does not accept any equity compensation. Anyone may enroll a company for research coverage, which costs US $25,000 prepaid for one-year. Reports are performed on behalf of the public, and are not a service to any company. The analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests and insure independence. Please read full disclosure and other reports and notes on the Company at www.JMDutton.com.

' Copyright, 2002, by J.M. Dutton & Associates, LLC.