Exhibit 21










                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of
Phoenix Leasing Incorporated:

We have audited the accompanying  consolidated balance sheets of Phoenix Leasing
Incorporated (a California corporation) and Subsidiaries as of June 30, 1997 and
1996.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance  about  whether  the  balance  sheets are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in the balance  sheets.  An audit also  includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the balance  sheets  referred to above present  fairly,  in all
material respects,  the financial  position of Phoenix Leasing  Incorporated and
Subsidiaries as of June 30, 1997 and 1996, in conformity with generally accepted
accounting principles.




San Francisco, California,                               ARTHUR ANDERSEN LLP
September 5, 1997


                                  Page 1 of 14


<PAGE>



                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                                      June 30,     June 30,
                                                        1997         1996
                                                    -----------  -----------

Cash and cash equivalents                           $11,409,747  $ 3,767,098
Investments in securities                             5,105,289    1,287,323
Trade accounts receivable, net of allowance
  for doubtful accounts of $121,944 and $31,246
  at June 30, 1997 and 1996, respectively               289,284      989,030
Receivables from Phoenix Leasing Partnerships and
  other affiliates                                    4,796,513    3,955,935
Notes receivable from related party                     710,598    8,767,694
Equipment inventory                                        --      2,240,448
Equipment subject to lease                            4,320,755   14,232,017
Notes receivable                                      5,825,842    3,560,830
Investments in Phoenix Leasing Partnerships           1,678,239    1,773,887
Property and equipment, net of accumulated
  depreciation of $10,881,577 and $11,398,438 at
  June 30, 1997 and 1996, respectively                6,009,049    6,933,608
Other assets                                          3,087,741    3,011,229
                                                    -----------  -----------

        TOTAL ASSETS                                $43,233,057  $50,519,099
                                                    ===========  ===========

                      LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:

Short-term lines of credit                          $      --    $ 1,750,000
Warehouse lines of credit                            10,310,568   16,930,044
Payables to affiliates                                2,950,748    2,155,626
Accounts payable and accrued expenses                 2,564,226    3,205,932
Deferred revenue                                           --        328,676
Long-term debt                                          147,532      620,899
Deficit in investments in Phoenix Leasing
  Partnerships                                          738,297      761,214
                                                    -----------  -----------

        TOTAL LIABILITIES                            16,711,371   25,752,391
                                                    -----------  -----------

Minority Interests in Consolidated Subsidiaries         105,901       27,615
                                                    -----------  -----------

Commitments and Contingencies (Note 15)

SHAREHOLDER'S EQUITY:

Common stock, without par value, 30,000,000 shares
  authorized, 5,433,600 issued and outstanding at
  June 30, 1997 and 1996, respectively                   20,369       20,369
Additional paid-in capital                           11,466,920   11,466,920
Unrealized gains on investments in securities,
  available for sale                                    243,311         --
Retained earnings                                    14,685,185   13,251,804
                                                    -----------  -----------
        TOTAL SHAREHOLDER'S EQUITY                   26,415,785   24,739,093
                                                    -----------  -----------

        TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY  $43,233,057  $50,519,099
                                                    ===========  ===========

   The accompanying notes are an integral part of these financial statements.


                                        2


<PAGE>



                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997




Note 1. Summary of Significant Accounting Policies:

      a.  Organization - Phoenix  Leasing  Incorporated  and  subsidiaries  (the
Company),  a wholly owned subsidiary of Phoenix American  Incorporated (PAI), is
engaged in the organization  and management of partnerships  which specialize in
the  purchase  and  lease  of  primarily  high-technology  and  data  processing
equipment.  The partnerships  purchase equipment directly from equipment vendors
for lease to financial,  commercial and industrial  businesses and  governmental
agencies.   The  partnerships   also  finance   transactions  in  the  areas  of
microcomputers  and emerging growth  companies.  The Company has also engaged in
similar  leasing  activities  for its own  account.  The Company  also  provides
ongoing equipment  maintenance  services for end-users of  high-technology  data
processing equipment and graphic plotters.

      b. Principles of  Consolidation - The  consolidated  financial  statements
include  the  accounts  of  Phoenix  Leasing  Incorporated  and  its  wholly  or
majority-owned  subsidiaries  and  subsidiaries  over which the  Company  exerts
control.  All  significant  intercompany  accounts  and  transactions  have been
eliminated in consolidation.

           Except as otherwise  explained below,  minority  interests in the net
assets and net income or loss of  majority-owned  subsidiaries  are allocated on
the basis of the proportionate ownership interests of the minority owners.

           Three  of  the  consolidated   subsidiaries  are  California  limited
partnerships  (the  Partnerships)  which are  general  partners  of three of the
Phoenix  Leasing  Partnerships.  As of June 30,  1997,  the  Company  held a 50%
general  partner  ownership  interest  in two of the  Partnerships  and a  62.5%
interest  in one.  Under the terms of the  partnership  agreements,  profits and
losses  attributable to acquisition fees paid to the  Partnerships  from Phoenix
Leasing Partnerships are allocated to the limited partner (the minority owner in
the Partnerships) in proportion to the limited partner's ownership interest. All
remaining profits and losses are allocated to the Company.  Distributions to the
partners are made in accordance with the terms of the partnership agreement. The
limited  partner of each of the  Partnerships  is Lease  Management  Associates,
Inc., a Nevada corporation  controlled by an officer of the Company,  who is the
owner of PAI.

      c. Management, Acquisition and Incentive Fee Income - As of June 30, 1997,
the Company is the corporate  general partner in 11 actively  operating  limited
partnerships  and manager of 7 actively  operating joint ventures,  all of which
own and lease equipment. Seven of the partnership agreements provide for payment
of management fees based on partnership  revenues and acquisition  fees when the
partnerships'  assets are acquired.  Five of the limited partnership  agreements
provide for payment of  management  fees and  liquidation  fees (see  discussion
later in this footnote). One of the partnership agreements provides for a fee to
be paid to the Company based on a percentage of equity proceeds  received by the
partnership and a percentage of net income. Most of the joint venture agreements
provide for payment of management fees based on joint venture revenues.

       These partnerships and the joint ventures are collectively referred to as
 the "Phoenix Leasing Partnerships."

      d. Investments - Investments in Phoenix Leasing  Partnerships  reflect the
Company's  equity basis in the Phoenix  Leasing  Partnerships.  Under the equity
method of accounting the original investment is recorded at cost and is adjusted
periodically  to  recognize  the  Company's   share  of  earnings,   losses  and
distributions after the date of acquisition.  The Company has adopted the equity
method of accounting on the basis of its control and significant  influence over
the Phoenix Leasing Partnerships.


                                        3


<PAGE>


                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997



Note 1. Summary of Significant Accounting Policies (continued):

      e. Liquidation Fee Income - The Company earned  liquidation fees from five
of the Phoenix  Leasing  Partnerships  in  consideration  for the  services  and
activities  performed in connection  with the  disposition of the  partnerships'
assets.  Management of the Company  concluded that the total liquidation fees to
be  earned  over  the life of these  partnerships  may not be fully  realizable.
Accordingly,  the Company  recognized  liquidation fee income when the fees were
paid by the  partnerships.  During  the year ended June 30,  1996,  the  Company
recognized the remaining $1,062,046 in liquidation fees from these partnerships.

          In two other  partnerships,  cash distributions  received in excess of
the allocated  cumulative net profits  represent a liquidation  fee which cannot
exceed, in the aggregate, 7.792% of the net contributed capital.

      f. Lease  Accounting - The Company's  leasing  operations  consist of both
financing and operating  leases.  The method of  accounting  for finance  leases
recognizes  unearned  income at the  inception  of the lease  calculated  as the
excess of net rentals  receivable and estimated residual value at the end of the
lease term over the cost of the equipment  leased.  Unearned income is amortized
monthly  over  the  term  of the  lease  on a  declining  basis  to  provide  an
approximate  level  rate of return on the  unrecovered  cost of the  investment.
Initial direct costs of  originating  new leases are  capitalized  and amortized
over the initial lease term.

         When accounting for operating leases,  the leased equipment is recorded
as an asset,  at cost,  and is  depreciated  on a  straight-line  basis over its
estimated  useful life,  ranging up to six years.  Rental income  represents the
rental payments due during the period under the terms of the lease.

         The Company is the lessor in  leveraged  lease  agreements  under which
computer  equipment  having an  estimated  useful life of 5 years was leased for
periods  from 4-5 years.  The Company is the equity  participant  and  equipment
owner. A portion of the purchase price was furnished by third-party financing in
the form of  long-term  debt that  provides  no  recourse  to the Company and is
secured by a first lien on the financed equipment.

      g. Property and Equipment - Property and equipment which the Company holds
for its own use are recorded at cost and  depreciated on a  straight-line  basis
over estimated useful lives ranging up to 45 years.

      h. Income Taxes - The Company is included in consolidated and combined tax
returns filed by PAI. See Note 14 for further information.

      i.  Deferred   Revenue  -  Deferred  revenue  is  the  result  of  selling
maintenance  contracts  which  provide  service over a specific  period of time.
Deferred  revenue is amortized on a straight-line  basis over the service period
not to  exceed 5 years.  During  the year  ended  June  30,  1997,  the  Company
discontinued  sales  of  such  contracts  and all  deferred  revenue  was  fully
amortized.

      j.  Investments in Securities - Investments  in securities,  available for
sale,  are stated at fair value or  amortized  cost,  as  specified by SFAS 115.
Interest is recognized when earned.


                                        4


<PAGE>


                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997



Note 1. Summary of significant Accounting Policies (continued):

      k.  Use  of  Estimates  -  The  preparation  of  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make  estimates  and  assumptions  that affect the amounts  reported  amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

      l.  Reclassification  - Certain 1996  balances have been  reclassified  to
conform to the 1997 presentation.


Note 2.  Receivables from Phoenix Leasing Partnerships and Other Affiliates:

      Receivables from Phoenix Leasing Partnerships and other affiliates consist
of the following for the years ended June 30:

                                                             1997        1996
                                                             ----        ----

Management Fees                                          $  156,668  $  416,149
Acquisition fees                                            283,133      74,099
Other receivables from Phoenix Leasing Partnerships, net  2,668,081   3,458,687
Other receivables from corporate affiliates               1,688,631       7,000
                                                         ----------   ---------

                                                         $4,796,513  $3,955,935
                                                         ==========  ==========

      The  Company  collected  $2,155,543  of these other  receivables  from the
Phoenix Leasing Partnerships on September 2, 1997.


Note 3. Investments in Phoenix Leasing Partnerships:

       The Company records its investments in Phoenix Leasing Partnerships under
the equity  method of  accounting.  The  ownership  interest  percentages  vary,
ranging  from .5% up to 25%.  As  general  partner,  the  Company  has  complete
authority in, and responsibility for, the overall management and control of each
partnership,   which  includes   responsibility   for  supervising   partnership
acquisition,  leasing, remarketing and sale of equipment.  Distributions of cash
from  the  partnerships  are  made at the  discretion  of the  general  partner;
historically,  a  significant  portion of the  partnerships'  earnings  has been
distributed annually.

       A  shareholder  of PAI and  officers of the Company also have general and
limited partner interests in several of the partnerships.


                                        5


<PAGE>



                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997



Note 3. Investments in Phoenix Leasing Partnerships (continued):

      The activity in the  investments in Phoenix Leasing  Partnerships  for the
years ended June 30 are as follows:

                                                      1997            1996
                                                      ----            ----

             Balance, beginning of year            $1,012,673      $  412,974
             Additional investments                   178,243         830,085
             Equity in earnings                     2,933,649       2,093,488
             Cash distributions                    (3,184,621)     (2,323,874)
                                                   ----------      ----------

             Balance, end of year                  $  939,942      $1,012,673
                                                   ==========      ==========

      The  Company's  total  investments  in Phoenix  Leasing  Partnerships  are
comprised  of  investments  in  certain   partnerships   which  are  subject  to
fluctuations due to partnerships' performances and timing of cash distributions.
At times the investment in those partnerships will be a deficit.

      Certain of the partnership  agreements  require the Company to restore any
deficit in its capital  account to zero at the  dissolution of the  partnership.
This deficit is a result of cash distributions  received and losses allocated to
the Company.  The Company has determined that in certain partnerships it will be
unlikely  that the deficit  investment  will reverse and as a result  during the
year ended June 30, 1993 the Company elected to make capital contributions prior
to partnership dissolution totaling $2,028,733. As of April 1, 1992, the Company
elected to forgo any future  cash  distributions  from,  and will not record its
share  of  future  earnings  generated  from  the  operations  of,  one of these
partnerships.  The Company has deferred any future cash  distributions  from two
other partnerships. The Company believes that it would be likely that any future
cash  distributions  received from these partnerships would have to be paid back
at the dissolution of the partnerships.  The Company will continue to record fee
income earned from the  management  of, and  acquisition  of equipment for these
partnerships.

       The  aggregate  positive  investment  and  aggregate  deficit  investment
balances are presented  separately on the balance sheets as of June 30, 1997 and
1996.

      The partnerships own and lease equipment.  All debt of the partnerships is
secured by the equipment and is without  recourse to the general  partners.  The
unaudited  financial  statements  of  the  partnerships  reflect  the  following
combined,  summarized  financial  information  as of June  30,  1997 and for the
twelve months then ended:

                    Assets                       $ 120,259,000
                    Liabilities                     19,520,000
                    Partners' Capital              100,739,000
                    Revenue                         33,479,000
                    Net Income                      13,994,000


                                        6


<PAGE>


                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997



Note 4.  Equipment Subject to Lease and Notes Receivable:

      Equipment subject to lease includes the Company's investments in leveraged
leases, investments in financing leases, operating leases and notes receivable.

      Equipment subject to lease consists of the following at June 30:

                                                      1997            1996
                                                      ----            ----

      Equipment on lease, net of accumulated
        depreciation of $47,177 and $258,102 at
        June 30, 1997 and 1996, respectively      $    83,057     $    92,008
      Leverage leases                               1,913,392       1,589,772
      Equipment held for resale                       225,084         305,840
      Investment in financing leases                1,863,214      12,036,604
      Operating leases                                236,008         207,793
                                                  -----------     -----------
        Total equipment subject to lease          $ 4,320,755     $14,232,017
                                                  ===========     ===========

      Notes receivable                              5,825,842       3,560,830

      Leverage Leases:

      The  Company's  net  investment  in  leveraged  leases is  composed of the
following elements at June 30:

                                                      1997            1996
                                                      ----            ----

      Rental receivable (net of principal and
        interest on the nonrecourse debt)         $       -       $       -
      Estimated residual value of leased assets     2,602,636       2,498,233
      Less:  Unearned and deferred income            (689,244)       (908,461)
                                                  -----------     -----------

      Net investment in leveraged leases          $ 1,913,392     $ 1,589,772
                                                  ===========     ===========

      Investment in Financing Leases:

      The Company has entered  into direct  lease  arrangements  with  companies
engaged in the development of technologies and other growth industry  businesses
operating  in  different   industries  located  throughout  the  United  States.
Generally,  it is the  responsibility  of the lessee to provide  maintenance  on
leased equipment.

      The Company's net investment in financing leases consists of the following
at June 30:

                                                         1997           1996
                                                         ----           ----

             Minimum lease payments to be received   $ 2,420,101   $ 16,089,868
             Less:unearned income                       (542,155)    (4,053,264)
                  allowance for early termination        (14,732)        -
                                                     -----------   ------------

             Net investment in financing leases      $ 1,863,214   $ 12,036,604
                                                     ===========   ============


                                        7


<PAGE>



                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997



Note 4.  Equipment Subject to Lease and Notes Receivable (continued):

      Minimum rentals to be received on non-cancelable  financing leases for the
years ended June 30, are as follows:

      1998                                                    $   751,632
      1999                                                        704,531
      2000                                                        467,636
      2001                                                        401,409
      2002                                                         94,893
                                                              -----------

         Total                                                $ 2,420,101
                                                              ===========
      Notes Receivable:

      Notes receivable for the years ended June 30, are as follows:

                                                         1997          1996
                                                         ----          ----

      Notes receivable from emerging growth and
      other companies with stated interest ranging
      from 13.8% to 19.8% per annum receivable in
      installments ranging from 35 to 85 months
      collateralized by the equipment financed       $ 5,825,842   $ 3,560,830
                                                     ===========   ===========

      Minimum payments to be received on non-cancelable notes receivable for the
years ended June 30, are as follows:

      1998                                                    $ 1,838,665
      1999                                                      1,793,111
      2000                                                      1,919,794
      2001                                                      1,230,924
      2002                                                        564,672
      Thereafter                                                  353,946
                                                              -----------
         Total minimum payments to be received                $ 7,701,112
                                                              ===========

      Less:  unearned interest                                 (1,875,270)
                                                              -----------
         Net investment in notes receivable                   $ 5,825,842
                                                              ===========


Note 5.  Sale of Leased Assets and Notes Receivable:

        The Company adopted SFAS 125, "Accounting for Transfers and Servicing of
Financial  Assets  and  Extinguishments  of  Liabilities",   as  it  related  to
transactions  including revolving periods completed after January 1, 1997. Prior
to this date, such  transactions were accounted for under SFAS 77, "Reporting by
Transferors  for  Transfers  of  Receivables  without  Recourse".  The change in
standards  has not had a  material  effect on the  financial  statements  of the
Company during the year ended June 30, 1997.


                                        8


<PAGE>


                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997



Note 5.  Sale of Leased Assets and Notes Receivable (continued):

        The Company  acquires  leased or financed  equipment  with the intent to
subsequently  transfer those assets,  accounted for herein as a sale, to a trust
which issues lease backed  certificates  and notes  receivables.  As of June 30,
1997, the Company has acquired  $7,689,056 in such leased or financed  equipment
which is  included  in  Equipment  subject  to lease and notes  receivable.  The
Company  uses  proceeds  from its two  warehouse  lines of credit to purchase or
finance this  equipment.  During the holding  period the Company  recognizes the
revenues  generated from these leases or notes and the interest  expense related
to the drawdowns from the warehouse lines of credit.

        On June 4, 1997,  the  Company  entered  into an  agreement  to transfer
certain assets and notes receivables with a net carrying value of $30,817,909 to
a trust for the purpose of the trust issuing  contract  backed  certificates  in
exchange  for cash  proceeds,  of which $10 million was held back in a specified
account ("Pre-funding Account") to acquire additional assets from a subsidiary .
The  Pre-Funding  Account has a  termination  date of September  25,  1997.  The
Company  recognized a gain on this transaction of $127,209.  The contract backed
certificates  are  recourse  only  to  the  assets  used  to  collateralize  the
obligation.  Under the terms of the  agreement,  the  Company  will  continue to
acquire and transfer additional assets to the trust over the twelve month period
beginning  June 5,  1997 and  ending  June 4,  1998.  In  accordance  with  this
agreement,   the  Company  transferred   additional  assets  to  the  trust  for
$3,629,166. These assets had a net carrying value of $3,527,757,  resulting in a
gain of $101,409.

        On October 11, 1996,  the Company  entered into an agreement to transfer
certain assets and notes receivables with a net carrying value of $24,141,511 to
a trust for the  purpose  of the trust  issuing  lease  backed  certificates  in
exchange for cash proceeds. The Company recognized a gain on this transaction of
$307,069. The certificates are recourse only to the assets used to collateralize
the obligation.  Under the terms of the agreement,  the Company will continue to
acquire and transfer additional assets to the trust over the twelve month period
beginning  October  12,  1996 and ending  October  11,  1997.  During the period
October 12, 1996 through May 1, 1997, the Company transferred  additional assets
to  the  trust  for  $4,786,735.  These  assets  had a  net  carrying  value  of
$4,254,031,  resulting in a gain of  $532,704.  Subsequent  to May 1, 1997,  the
Company ceased to acquire and transfer additional assets to the trust under this
agreement.

        On November 29, 1995, the Company  entered into an agreement to transfer
certain assets and notes receivables with a net carrying value of $27,337,402 to
a trust for the  purpose  of the trust  issuing  lease  backed  certificates  in
exchange for cash proceeds. The Company recognized a gain on this transaction of
$459,633. The leased backed certificates are recourse only to the assets used to
collateralize  the  obligation.  Under the terms of the  agreement,  the Company
continued to acquire and transfer additional assets to the trust over the twelve
month period  beginning  November 30, 1995 and ending November 28, 1996.  During
the period  November 30, 1995 through  June 30,  1996,  the Company  transferred
additional  assets to the trust for $4,668,388.  These assets had a net carrying
value of $4,225,596, resulting in a gain of $442,792.

        In addition, in accordance with the November 29, 1995 agreement,  during
the period July 1, through November 28, 1996, the Company  transferred assets to
the trust for $4,052,704,.  These assets had a net carrying value of $3,676,390,
resulting in a gain of $376,314.


                                        9


<PAGE>


                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997




Note 6.  Property and Equipment:

       Major classes of property and equipment at June 30 are as follows:

                                                           1997         1996
                                                           ----         ----

      Land                                             $ 1,077,830  $ 1,077,830
      Buildings                                          7,420,201    7,352,608
      Office furniture, fixtures and equipment           7,468,072    8,441,476
      Other                                                924,523      843,450
                                                       -----------  -----------

                                                        16,890,626   17,715,364
      Less accumulated depreciation and amortization   (10,881,577) (11,398,438)
      Inventory held for resale                            -            616,682
                                                       -----------  -----------
      Net Property and Equipment                       $ 6,009,049  $ 6,933,608
                                                       ===========  ===========

      PAI owns its headquarters building in San Rafael,  California. The Company
paid  $7,749,476 to purchase the land and  construct  the building.  The cost of
construction  was paid for with a  combination  of  $2,749,476  in cash from the
Company's  operations and a $5,000,000  advance from PAI. The $5,000,000 advance
is included as a reduction in receivable from Phoenix Leasing  Partnerships  and
other  affiliates.  PAI has pledged the market value of the building as security
for a $5,000,000  Industrial Revenue Bond ("IDB") which PAI has with the City of
San  Rafael,  California.  The  principal  of the IDB is  payable  in a lump sum
payment on October 1, 2004.  The Company paid  $335,127 and $248,325 in interest
payments  related  to the IDB  during  the year  ended  June 30,  1997 and 1996,
respectively.

      As of May 31, 1997, the Company sold certain assets and liabilities of its
subsidiary,  which  provided  equipment  maintenance  services for  end-users of
high-technology   data  processing   equipment  and  graphic  plotters,   to  an
unaffiliated  company and recorded a gain on sale of property  and  equipment of
$544,732.

      As of June 30,  1997,  a portion of the  Company's  headquarters  has been
leased to third parties.  The remaining lease term is for less than one year and
the minimum lease payments receivable is $362,785.


Note 7.  Investments in Securities:

      In May 1993, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 115 - Accounting for Certain Investments in
Debt and Equity  Securities  (SFAS 115).  The Company  adopted this statement on
July 1, 1994. This pronouncement  prescribes specific  accounting  treatment for
investments based on their classification as either held-to-maturity  securities
(HTM),  available-for-sale securities (AFS) or trading securities, as defined in
the statement.

       In connection  with the three prior lease and note  securitizations  (see
Note 7) the Company has acquired Class C Equipment Investment Trust Certificates
(Class C Shares)  and notes.  The Class C Shares are  classified  as AFS and are
reported at their  amortized cost of $4,658,771 and  $1,248,843,  as of June 30,
1997 and 1996,  respectively,  which approximates fair value. The Class C Shares
do not have a specified contractual maturity.


                                       10


<PAGE>


                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997



Note 7.  Investments in Securities (continued):

       All equities  held by the Company are  classified as AFS and are reported
at  their  fair  value of  $446,518  and  $38,480  at June  30,  1997 and  1996,
respectively.  Gross unrealized gains on such securities as of June 30, 1997 and
1996 were $405,518 and $0, respectively.


Note 8.  Fair Value of Financial Instruments:

      Investments in Securities

       The carrying  amounts of investments  in securities,  available for sale,
reported in the balance sheets approximate their fair values.

      Notes Receivable and Debt

       The fair values of the Company's notes  receivable and debt are estimated
based on the  market  prices of similar  instruments  or on the  current  market
interest rates for instruments  with similar terms,  maturities,  and risks. The
estimated fair values of the Company's notes receivable and debt approximate the
carrying amounts reported in the balance sheets.


Note 9.  Short-Term and Warehouse Lines of Credit:

       To provide interim financing for equipment and working capital needs, the
Company  executes  lines of credit which consist of short-term  notes with banks
with interest  rates equal to the prime rate or the banks' index rate. All lines
of credit are renewable annually at the banks' option.

       As of June  30,  1997,  the  Company,  through  PAI,  had  access  to one
short-term  line of credit  totaling $2.5 million,  all of which was  available.
Draw downs under this credit line are secured by the Company's  receivable  from
Phoenix Leasing Partnerships and its investments in class C shares.

       In addition,  the Company has two secured  short-term  warehouse lines of
credit totaling $37.5 million,  which are used to provide interim  financing for
the acquisition of equipment and the financing of notes  receivable.  As of June
30, 1997 and 1996, $10.3 and $16.9 million ,  respectively,  of these lines have
been drawn  down and are due in one year or less.  The draw  downs  under  these
lines are collateralized by investments in financing leases and notes receivable
included in equipment  subject to lease.  The interest  rate is tied to the IBOR
(Eurodollar) rate. The initial commitment period for these lines of credit is 18
months  and  may be  extended  to 36  months  at the  discretion  of the  banks.
Principal payments are based on the lesser of the aggregate payments received by
the Company on its leases and notes  receivable or the  aggregate  principal and
interest outstanding on the payment date of the credit line.

       In  connection  with the  Company's  lines of credit,  various  financial
ratios and other  covenants must be  maintained.  The Company has guaranteed its
right,  title and interest in certain of its assets and the future receipts from
these assets in order to secure payment and performance of these credit lines.


                                       11


<PAGE>


                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997




Note 10.  Long-Term Debt:

      Long-term debt consists of the following at June 30:

                                                           1997        1996
                                                           ----        ----

      Mortgage payable at varying interest rates
        with an initial rate of 8.75% secured by a
        first deed of trust on real property with a
        cost of $167,650. Note is amortized over 83
        months with monthly payments of $559 with a
        final payment of $121,267.                      $  147,532  $  154,238

      Note payable to a bank, collateralized by the
        assets of Phoenix Leasing Liquidation
        Corporation, a subsidiary of the Company, with
        a variable rate of interest tied to the bank's
        prime rate payable in 30 consecutive monthly
        installments                                          -        466,661
                                                        ----------  ----------
                                                        $  147,532  $  620,899
                                                        ==========  ==========

The aggregate  long-term debt maturities for the fiscal years ended June 30, are
as follows:

      1998                                              $    6,706
      1999                                                   6,706
      2000                                                   6,706
      2001                                                 127,414
                                                        ----------
      Total                                             $  147,532
                                                        ==========


Note 11.  Profit Sharing Plan:

      The Company has a profit sharing plan covering substantially all employees
who meet certain age and service requirements.  Contributions to the plan by the
Company are made at the discretion of the board of directors. The profit sharing
expense was $600,000 for the years ended June 30, 1997 and 1996, respectively.


Note 12. Leased Facilities:

      The Company  leases  office and  warehouse  space in various  parts of the
country and had annual rental expense of approximately $437,000 and $417,000 for
the years ended June 30, 1997 and 1996, respectively.


                                       12


<PAGE>



                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997




Note 13.  Income Taxes:

      The Company's income or loss for tax reporting purposes is included in the
consolidated  and  combined  tax returns  filed by PAI which are prepared on the
accrual  basis  of  accounting.  In  accordance  with  a Tax  Sharing  Agreement
effective  July 1, 1991,  between the  Company and PAI,  PAI has assumed all tax
liabilities and benefits arising from the Company's income or loss.

      The  Company  computes  and  records  its tax  attributes  and the related
benefit or provision is transferred to PAI.

      The  provision  (benefit)  for  income  taxes for the year  ended  June 30
consists of the following:

                                                  1997            1996
                                                  ----            ----

        Current tax benefit                    $ (111,925)      $(551,913)
        Deferred tax expense                      670,305         598,161
                                               ----------       ---------

                                               $  782,230       $  46,248
                                               ==========       =========

      Cumulative temporary  differences of $10,097,889 and $7,977,571 as of June
30, 1997 and 1996,  respectively,  are primarily  related to differences in book
and tax accounting treatments for leveraged leases.

      The  difference  between the  effective tax rate and statutory tax rate is
due to certain expenses  deductible for financial reporting purposes but not for
tax purposes,  state tax expense net of federal benefit and other  miscellaneous
items.


Note 14.  Transactions with Related Parties:

        The  Company  provides  an  interest  bearing  line of  credit  totaling
$8,000,000 to PAI's controlling  shareholder which is secured by common stock of
Phoenix Precision Graphics,  Inc. (a Nevada corporation,  owned by the principal
shareholder). As of June 30, 1997 and 1996, $511,493 and $6,646,209 of this line
of credit was  outstanding  and is included  in notes  receivable  from  related
party. As of June 30, 1997 and 1996, Phoenix Precision Graphics is in a start-up
mode and has cumulative losses of $13,236,982 and $9,120,711, respectively.

        The  Company  provides  an  interest  bearing  line of  credit  to PAI's
controlling  shareholder,  which is secured by common stock of Phoenix Fiberlink
Inc. (a Nevada Corporation,  owned by the principal shareholder). As of June 30,
1997 and 1996,  $199,105  and  $2,121,484  of this line of credit has been drawn
down and is included in notes receivable from related party.

        The Company  earned a  management  fee from an affiliate of $515,137 and
$556,453  for the  years  ended  June 30,  1997  and  1996,  respectively.  This
management fee is included in Portfolio management fees.

        The Company paid an affiliate an asset management fee of $305,770 during
the year  ended  June 30,  1996.  This  asset  management  fees is  included  in
equipment lease operations, maintenance, remarking and administrative fees.


                                       13


<PAGE>



                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1997


Note 14.  Transactions with Related Parties (continued):

        As of  January 1,  1997,  the  Company  transferred  certain  assets and
liabilities to a  non-consolidated  affiliate,  ReSource/Phoenix,  Inc.,  wholly
owned by the Company's controlling shareholder.  No gain or loss was recorded as
a result of this transaction.  In addition,  the Company  transferred all of its
third party resource  service  contracts to  ReSource/Phoenix,  Inc. The Company
recorded  fees from these  contracts  of $657,295  for the period July 1 through
December 31, 1996 and $980,981 for the year ended June 30, 1996.  For the period
January  1  through  June 30,  1997,  ReSource/Phoenix,  Inc.  recorded  fees of
$746,333.  ReSource/Phoenix,  Inc. will continue to provide Accounting, Finance,
Human Resources,  Legal,  Investor  Administration,  and Information  Technology
services to the Company. The Company paid ReSource/Phoenix,  Inc. $1,089,012 for
these  services for the period  January 1 through June 30, 1997,  the expense of
which is included in selling, general and administrative for the year ended June
30, 1997.


Note 15.  Commitments and Contingencies:

        The Company has entered into agreements which contain specific  purchase
commitments.  The Company may satisfy these commitments by purchasing  equipment
for its own  account  or by  assigning  equipment  purchases  to its  affiliated
partnerships. At June 30, 1997 the Company anticipates being able to satisfy its
future  obligations  under the  agreements  and  intends  to assign  most of the
purchases under the agreements to its affiliated partnerships.

        The Company is party to legal  actions which arise as part of the normal
course of its business.  The Company believes,  after consultation with counsel,
that it has meritorious  defenses in these actions,  and that the liability,  if
any, will not have a material  adverse  effect on the financial  position of the
Company.


                                       14