<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 --------------
                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
              For the fiscal year ended December 31, 1998

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
              For the transition period from ____________ to ___________

                  Commission File Numbers 0-26072 and 814-00157

                         WALNUT FINANCIAL SERVICES, INC.
             (Exact name of Registrant as specified in its charter)

              UTAH                                              87-0415597
 (State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                           Identification Number)

 8000 TOWERS CRESCENT DRIVE, SUITE 1070
            VIENNA, VIRGINIA                                            22182
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code:  (703) 448-3771

           Securities Registered Pursuant to Section 12(b) of the Act:


<TABLE>
<CAPTION>
                                                   Name of Each Exchange
              Title of Each Class                  on which Registered
              -------------------                  -------------------
<S>                                                <C>
                     NONE                                  NONE
</TABLE>

           Securities Registered Pursuant to Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (Title of Class)

         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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES   X    NO
                                        ---       ---
 
         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. [X]

         As of April 13, 1999, the Registrant had issued and outstanding
3,350,533 shares of the Registrant's common stock, $.01 par value per share (the
"Common Stock"). The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of April 13, 1999, was approximately
$1,076,285 based on the last reported price of an actual transaction in
Registrant's Common Stock on April 13, 1999 ($1-15/16).


================================================================================


<PAGE>   2




                                     PART I

ITEM 1.      BUSINESS

         GENERAL. The Company is a closed-end management investment company,
which elected on October 15, 1997 to be regulated as a business development
company (a "BDC") under the Investment Company Act of 1940 (as amended, the
"Investment Company Act"). As such, the Company is, among other requirements,
required to invest at least 70% of its total assets in certain prescribed
"Eligible Assets," which generally include securities of privately-held
companies and cash items, government securities and high-quality short-term
debt. The Company has three primary business focuses: (1) investing in start-up
and early stage development companies, (2) operating an investment vehicle that
specializes in bridge financing to small to medium-sized companies and (3)
providing accounts receivable-based commercial financing, or factoring, and
related services to small and medium-sized businesses. The Company's goal is to
become a single source for the various financing needs of small- and
medium-sized companies.

         The Company engages in its investment business through its wholly-owned
subsidiary, Walnut Capital Corp., a Delaware corporation ("Walnut Capital").
Walnut Capital was formed in 1980 for the purpose of operating as a Small
Business Investment Company (an "SBIC") under the Small Business Investment Act
of 1958 (as amended, the "SBIA") and is subject to regulations promulgated by
the Small Business Administration (the "SBA") pursuant to the provisions of the
SBIA. In the past, the Company made investments through its wholly-owned
subsidiary, Walnut Funds, Inc., a Delaware corporation ("Walnut Funds"). Walnut
Funds has a 40% ownership interest in and indirectly provides investment
management services to Walnut Growth Partners Limited Partnership, an Illinois
limited partnership ("Walnut Growth"), an investment fund. Walnut Growth did not
make any investments in 1998, and the Company does not expect Walnut Growth to
make any further investments.

         The Company pursues its bridge financings through its wholly-owned
subsidiary, Universal Bridge Fund, Inc., a Delaware corporation ("Universal
Bridge"). Universal Bridge owns 50% of the outstanding general partnership
interests and approximately 83% of the outstanding limited partnership interests
of Universal Partners, L.P., an Illinois limited partnership ("UPLP").

         The Company engages in its accounts receivable factoring business
through its wholly-owned subsidiaries, Pacific Financial Services Corporation, a
Washington corporation based in Bellevue, Washington ("Pacific Financial"),
which was acquired by the Company in January 1998, and Inland Financial
Corporation, a Washington corporation based in Spokane, Washington ("Inland
Financial"), which was acquired by the Company in October 1998. Inland Financial
and Pacific Financial are principally engaged in providing receivables-based
commercial financing and related fee-based credit, collection and management
information services. Inland Financial and Pacific Financial generally provide
financing to their clients by purchasing accounts receivable owed to the clients
by the clients' customers. Inland Financial and Pacific Financial also provide
financing by guaranteeing amounts due under letters of credit issued to their
clients which are collateralized by accounts receivable and other assets and
provide equipment and inventory financing to some of their factoring clients.

         In addition to the foregoing primary businesses, the Company operated a
human resources and quality assurance consulting business through its
wholly-owned subsidiary, Walnut Consulting, Inc., a Delaware corporation
("Walnut Consulting"), during 1997 and part of 1998. The operations of Walnut
Consulting were not significant to the revenues of the Company.

<PAGE>   3

         BACKGROUND. The Company was organized under the laws of the State of
Utah on June 26, 1984 under the name DNE Corporation. The Company began its
current existence on February 27, 1995, when the former shareholders of Walnut
Capital acquired the Company in a reverse acquisition (the "Business
Combination") in which such shareholders exchanged all of their shares of Walnut
Capital common stock for shares of the Company's Common Stock. Prior to February
27, 1995, Walnut Capital was a privately held investment company managed by
members of the Company's current management.

         BDC ELECTION. On October 15, 1997, the Company and certain of its
subsidiaries (Walnut Capital, Universal Bridge and Walnut Funds) elected to be
regulated as BDCs as provided by the Investment Company Act. The Company may
have inadvertently became subject to the requirements of the Investment Company
Act as a result of the Business Combination. After the date of the Business
Combination, the Company relied on the one-year safe harbor exemption provided
by Rule 3a-2 under the Investment Company Act from the registration, filing and
operating requirements imposed by the Investment Company Act. The Company's
one-year exemption period expired on February 27, 1996 and from such date the
Company may be deemed to have been an unregistered investment company. As a
result, certain actions taken after the expiration of the one-year exemption
period may have violated the Investment Company Act.

         The Company is actively pursuing the acquisition of additional
operating businesses in the financial services industry, particularly in the
accounts receivable factoring industry. Management anticipates that the Company
may seek to cease to be a BDC upon the acquisition of additional operating
businesses; however, the Company cannot change the nature of its business so as
to cease to be a BDC unless such change is approved by the Company's
stockholders in accordance with the Investment Company Act.

         REVERSE STOCK SPLIT. On January 22, 1999, the Company effected a
one-for-six reverse stock split (the "Reverse Stock Split") of its Common Stock,
pursuant to shareholder approval granted at the annual meeting of the
shareholders of the Company held on January 20, 1999. Fractional shares held by
any holder of Common Stock after aggregating all of such holder's shares were
rounded up to the nearest whole share. Immediately following the effectiveness
of the Reverse Stock Split, after giving effect to the rounding up of fractional
shares, there were 3,350,533 issued and outstanding shares of Common Stock. All
share amounts, price and other material terms described herein for the Common
Stock and options and warrants exercisable therefor give effect to the Reverse
Stock Split regardless of the date with respect to which such share amounts,
price or other terms are being described.

         PRESENTATION OF FINANCIAL INFORMATION. The Company has determined it is
required to present its financial statements in accordance with generally
accepted accounting principles and Securities and Exchange Commission ("SEC")
regulations in the format applicable to investment companies. The Company had
previously reported its financial statements in accordance with generally
accepted accounting principles and SEC rules and regulations applicable to
operating companies. Accordingly, the financial information presented herein for
the years ended prior to December 31, 1997 has been restated in accordance with
generally accepted accounting principles and SEC rules in the format applicable
to investment companies which generally means that investments are reported at
fair market value rather than cost, including wholly-owned subsidiaries. Because
of such reporting requirements, the operating results of Inland Financial and
Pacific Financial are not included in the consolidated operating results of the
Company and instead the Company reports only the fair value of its investments
in such companies. Similarly, the Company reports only the fair value of its
investment in UPLP. Certain financial information of UPLP is presented in 
footnote 11 of the audited financial statements which are contained in this 
Annual Report on Form 10-K.

<PAGE>   4

         WALNUT CAPITAL. Walnut Capital was incorporated on September 18, 1980
and maintains offices in Chicago, Illinois and Vienna, Virginia. Since 1984,
Walnut Capital has invested in more than 100 start-up and early stage
development companies. Each company in which an investment is made is a
"portfolio company". Once an investment is made, Walnut Capital's principal
objective is to assist the management of the portfolio company by utilizing the
extensive experience and breadth of professional contacts of Walnut Capital's
officers and directors. Walnut Capital takes an active approach toward assisting
a portfolio company's management to meet and exceed business objectives in order
to enhance the potential return on Walnut Capital's investment. Walnut Capital's
officers and directors maintain contacts throughout the U.S. and international
business and financial communities and are dedicated to introducing the
management of portfolio companies to additional business contacts and sources of
financing. Walnut Capital's officers and directors provide extensive technical,
operational and managerial assistance in a wide variety of industries, and
maintain an array of sales and marketing contacts in the domestic and
international business communities.

         Walnut Capital does not maintain a specific investment policy to guide
its investment choices. Rather, Walnut Capital's officers and directors review
investment opportunities and, in collaborative fashion, seek to identify and
select the best among them. However, Walnut Capital, as a BDC, may not acquire
any asset other than "Eligible Assets" unless, at the time the acquisition is
made, Eligible Assets represent at least 70% of the Company's total assets
(other than certain assets necessary for its operation, such as office
furniture, equipment and facilities). See "Business--BDC Regulation" for a
description of "Eligible Assets." In general, Walnut Capital seeks to maintain a
diversified portfolio of companies from various industries and various
geographic locations. Walnut Capital also seeks to invest in companies with
original or exclusive technology or expertise, and in companies that have the
potential for revenue and earnings growth sufficient to become a candidate for a
public offering within five years. Accordingly, Walnut Capital's portfolio
companies are located throughout the United States and in numerous industries.
Initial investment amounts range from $100,000 to $750,000, and may take the
form of debt, equity or some combination thereof. The amount currently invested
in each such company ranges from $100,000 to approximately $1,000,000 and takes
the form indicated in the chart below.

         Walnut Capital has the contractual right to appoint a member of, or an
observer to, the boards of directors of a number of such companies. In addition,
Walnut Capital currently has a representative on the board of directors of an
additional number of such companies although Walnut Capital has no contractual
right to continue such representation. Walnut Capital's representative on the
board of directors of a portfolio company may receive options to purchase
securities of the portfolio company if such options are provided pursuant to a
plan covering all directors. There can be no assurance that Walnut Capital's
representative to the board of directors of such companies can influence or
affect policy with respect to such companies or that said representative will
continue to be elected to the boards of directors of such companies.

         As of December 31, 1998, Walnut Capital held equity securities,
including its investment in UPLP, with a fair market value of $14.4 million,
with a cost basis of approximately $16.4 million, and as of such date,
approximately 42% of the fair market value of Walnut Capital's equity securities
were concentrated in the health care industry. As of December 31, 1998, Walnut
Capital's debt securities were valued at $23,000, with a cost basis of
approximately $718,000. Below is a list of certain of Walnut Capital's
investments, divided into business categories, which in the aggregate constitute
the principal investments of Walnut Capital as of December 31, 1998:


<PAGE>   5
<TABLE>
<S>                                                          <C>
I.     HEALTH CARE COMPANIES (A)                             II.    COMPUTER AND HIGH TECHNOLOGY COMPANIES

       American Psych Systems, Inc. (3)                             Logic Devices Incorporated (1)(2)(3)
       First Health Group Corp. (1)(2)(3)                           Madison Info. Tech. (3)
       HP America Inc. (3)                                          Multimedia Games, Inc.(1)(3)
       Ivonyx Group Services, Inc. (3)                              E-Synch, Inc. (3)
       Mariner Post-Acute Network (1)(2)(3)                         Thermo Information Solutions, Inc. (3)
       MHM Services, Inc. (1)(3)

III.   SERVICE-RELATED, LOW-TECH AND OTHER COMPANIES         IV.    MEDICAL AND HEALTH PRODUCTS COMPANIES (B)

       The Alta Group Ltd. (5)                                      BioHorizon Implant Systems, Inc. (3)
       Automotive Performance Group (1)(3)                          I-Flow Corporation(1)(2)(3)
       Inorganic Recycling, Inc. (3)                                Greystone Medical Group, Inc.(2)(3)
       International Business Network (3)                           Med Images, Inc.(2)(3)
       Linter's, Inc. (3)                                           Optiva Corporation(3)
       Site Based Media, Inc. (3)                                   Osteoimplant Technology, Inc. (1)(2)(3)
       Trans Global Services, Inc. (1)(3)                           Rainbow Medical, Inc. (3)
       VINnet, Inc. (5)                                             Sovereign Medical Acquisition Corp.(2)(3)
       Vision III Imaging, Inc. (2)(3)                              VaxGen, Inc. (3)
</TABLE>

--------------------

(1) Publicly traded.

(2) Walnut Capital representative on the board of directors.

(3) Investment in the form of equity only.

(4) Investment in the form of debt only.

(5) Investment in the form of a combination of equity and debt.

(A) Excludes medical and health products companies

(B) Includes biotechnology companies


         UPLP. UPLP was formed in 1993 and has invested approximately $5 million
in portfolio companies since its inception. The Company's wholly owned
subsidiary, Universal Bridge, owns 50% of the outstanding general partnership
interests and approximately 83% of the limited partnership interests of UPLP.
The remaining 50% of the outstanding general partnership interests is indirectly
owned by Windy City, Inc., an affiliate of the Company ("Windy City"). See
"Certain Relationships and Related Transactions." UPLP is an investment vehicle
that specializes in bridge financing to small to medium-sized companies. UPLP
targets investments that will provide significant return of capital from a known
repayment source (such as a proposed initial public offering) within a six to
eighteen month time frame.

         As of December 31, 1998, UPLP had a fair market value of $1.5 million
in equity securities with a cost basis of $1.4 million. UPLP's debt securities
are valued at $0.5 million with a cost basis of $0.9 million. Below is a list of
certain of UPLP's investments, divided into business categories, which in the
aggregate constitute the principal investments of UPLP as of December 31, 1998:


<PAGE>   6

<TABLE>
<S>                                                          <C>
I.    BIOTECHNOLOGY COMPANIES                                II.   COMMUNICATIONS AND MEDIA COMPANIES

      Cellegy Pharmaceuticals, Inc.(1)(3)                          Didax On-Line (1)(4)
      Innapharma, Inc. (5)                                         Novazen, Inc. (4)
                                                                   NuWave Technologies, Inc. (3)
                                                                   The Outlet Mall Network (5)
                                                                   Trex Communications (3)
                                                                   Umagic Systems, Inc. (2)(3)

III.  COMPUTER AND HIGH TECHNOLOGY COMPANIES                 IV.   MEDICAL AND HEALTH PRODUCTS COMPANIES (A)

      Daleen Technologies, Inc.(5)                                 Greystone Medical Group, Inc.(5)
      Dynaco Acquisition Corporation (3)                           Osteoimplant Technology, Inc.(1)(5)
      Multimedia Games, Inc.(1)(3)
      ThermoLyte Corporation(3)


V.    BASIC INDUSTRIAL COMPANIES                             VI.   SERVICE-RELATED, LOW-TECH AND OTHER COMPANIES

      The Alta Group Ltd. (2)(5)                                   Bartech System (3)
      Piedras Petroleum (3)                                        Country Star Restaurants(1)(3)
      Galveston Steakhouse Corp. (4)                               Delta-Omega Technologies, Inc. (3)
      Industrial Flexible Materials, Inc.(1)(3)                    IDF International, Inc.(1)(5)
      Nuecol Corporation(3)                                        Jenna Lane, Inc.(3)
      Palomar Electronics Corp. (3)                                Kat-Man-Du Entertainment(5)
      Rosecap, Inc. (3)                                            Nations Flooring, Inc. (1)(3)
      S.C.R.U.B.S, Inc.(3)                                         Playorena Inc. (1)(3)
      Thermo Trilogy Corp. (3)                                     You Bet International Inc.(3)
</TABLE>


-------------------
(1) Publicly traded.
(2) Universal Bridge representation on the board of directors
(3) Investment in form of equity only.
(4) Investment in form of debt only.
(5) Investment in form of a combination of equity and debt. 
(A) Excludes biotechnology companies


         PACIFIC FINANCIAL AND INLAND FINANCIAL. The Company purchased 100% of
the issued and outstanding capital stock of Pacific Financial in January 1998.
The Company acquired Inland Financial through reverse merger with a newly
created subsidiary of the Company on October 19, 1998. Both Inland Financial and
Pacific Financial provide accounts receivable factoring services to small- and
medium-sized businesses. Pacific Financial is based in the Seattle, Washington
area. Inland Financial is based in Spokane, Washington.

         Inland Financial and Pacific Financial generally provide financing to
their clients by purchasing accounts receivable owed to the clients by the
clients' customers, usually on a non-recourse basis, as well as by guaranteeing
amounts due under letters of credit issued to the clients which are
collateralized by accounts receivable and other assets. The purchase of accounts
receivable, or "factoring," earns a factoring fee, generally equal to 0.5% to 2%
of the factored sales volume. No money is paid to the client at the time Inland
Financial or Pacific Financial purchases the client's receivables. Instead,
Inland Financial and Pacific Financial record a liability to the client on its
books for the purchase price of the receivable. Generally, Inland Financial and
Pacific Financial and the client notify the client's customer to make all
payments on the receivable directly to Inland Financial or Pacific Financial. In
most cases, a client's customers are other commercial entities and the client
does not deal directly with individuals.

         Inland Financial and Pacific Financial also provide their clients with
access to credit management, collection and information services, including
certain computerized accounting services, as well as credit assurance. Inland
and Pacific conduct credit checks on client's customers, analyze the information
and make recommendations as to the amount of any credit to be extended. If
Inland Financial or Pacific Financial approves the credit of the customer, in
accordance with written guidelines established by Inland Financial and Pacific
Financial, then Inland Financial or Pacific Financial will purchase the
receivable for a fee and guarantee the collection of the receivable based solely



<PAGE>   7

on the customer's financial ability to pay the receivable. If the credit of the
customer is not approved, Inland Financial or Pacific Financial will purchase
the receivable for a fee, but will not guarantee collection of the receivable.

         Inland Financial and Pacific Financial guarantee the collection of each
client's pre-approved receivables or receivables from each client's customers
with pre-approved credit lines. Payment for receivables which are
credit-approved by the Inland Financial or Pacific Financial is made to the
client after collection from the client's customer or, if the receivable is not
paid based solely on the customer's financial inability to pay, payment is made
to the client after an agreed upon period of time, usually 90 to 120 days after
the due date of the receivable. Frequently, Inland Financial and Pacific
Financial also advance funds to its clients prior to collection of receivables,
charge interest on such advances (in addition to any factoring fees) and satisfy
such advances from receivables collections. All payments to clients are reduced
by amounts outstanding to Inland Financial and Pacific Financial, such as the
factoring fee charged to the client or any outstanding advances to the client.
Interest charged on such advances is generally equal to 1% to 4% over prime.
Management believes that the generally short-term and floating rate
characteristics of its advances and the floating rate of its financings result
in minimal interest rate exposure.

         Inland Financial and Pacific Financial also provide equipment and
inventory financing to some of their factoring clients and guarantee amounts due
under letters of credit issued to their clients which are collateralized by
accounts receivable and other assets.

         WALNUT FUNDS. Walnut Funds owns a 40% interest in the 1% sole general
partner of Walnut Growth and a 40% interest in an entity that provides
investment management and other services to the general partner of Walnut Growth
in consideration for management fees. The general partner is entitled to a
portion of the gains on the investments made by Walnut Growth. Walnut Growth was
formed in October 1996 to provide initial financing to early stage and small
companies and has currently invested approximately $6.0 million. Walnut Growth
did not make any investments in 1998 and the Company does not expect it to make
any further investments.

         WALNUT CONSULTING. Walnut Consulting was formed in 1997 to provide
various consulting services and discontinued its business in 1998. It had
insignificant revenues during the period of its operations to date.

        COMPETITION. Each of Walnut Capital and UPLP engages in the business of
investing in companies through debt and equity participation. Consequently, each
of Walnut Capital and UPLP competes for investment opportunities with other
venture capital companies, banks and other lenders and private investors. Many
of such entities are significantly larger than the Company and have greater
resources. However, Walnut Capital and UPLP typically work directly with the
management of portfolio companies and experience no direct competition once an
initial investment has been made.

        Pacific Financial and Inland Financial compete with a small number of
very large factoring companies operating nationally and a multitude of small
companies generally operating on a local or regional basis. In addition to the
greater traditional sources of financing available to larger factoring
companies, many larger factoring companies also are able to participate in the
securitization of factored advances collateralized by factored accounts
receivable.

         BDC REGULATION. On October 15, 1997, each of the Company, Walnut
Capital, Walnut Funds and Universal Bridge elected to become regulated as BDCs
under the Investment Company Act. Being regulated as a BDC imposes certain
limitations upon the operations of the Company. The following is a brief
description of the Investment Company Act as it relates to BDCs and is qualified
in its entirety by reference to the full text of the Investment Company Act and
the rules thereunder.


<PAGE>   8

         Generally, to be eligible to elect BDC status, a company must engage in
the business of furnishing capital and offering significant managerial
assistance to companies that do not have ready access to capital through
conventional financial channels. Such portfolio companies are termed "eligible
portfolio companies." More specifically, in order to qualify as a BDC, a company
must (a) be a domestic company; (b) have registered a class of its securities or
have filed a registration statement with the SEC pursuant to Section 12 of the
Securities Exchange Act of 1934 (as amended, the "Exchange Act"); (c) operate
for the purpose of investing in the securities of certain types of eligible
portfolio companies, namely less seasoned or emerging companies and businesses
suffering or just recovering from financial distress; (d) offer to extend
significant managerial assistance to such eligible portfolio companies; (e) have
a majority of directors who are not "interested persons" (as defined in the
Investment Company Act); and (f) file (or, under certain circumstances, intend
to file) a proper notice of election with the SEC.

         An eligible portfolio company generally is a United States company that
is not an investment company and that (1) does not have a class of securities
registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (2) is actively controlled by a BDC and has an
affiliate of a BDC on its board of trustees or directors; or (3) meets such
other criteria as may be established by the SEC. Control under the Investment
Company Act is presumed to exist where a BDC owns more than 25% of the
outstanding voting securities of the eligible portfolio company.

         Making available significant managerial assistance by a BDC means any
arrangement whereby a BDC, through its directors, trustees, officers or
employees, offers to provide, and, if accepted, does so provide, significant
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company. It is expected that one of the
officers or employees of the Company, Walnut Capital or Walnut Funds will offer
to serve on the board of directors of each private company in which the Company,
Walnut Capital, Walnut Funds or Universal Bridge invests and, if such offer is
not accepted, will offer to enter into a consulting contract with the management
of each such private portfolio company. In such capacity, such person will offer
his or her substantial experience in strategic management and, if requested,
will lend his or her assistance in arranging financings, managing relationships
with financing sources, recruiting management personnel, and evaluating
acquisition and divestiture opportunities. Such person will be able to call on
the experience of the other directors and officers of the Company, if needed.

         Moreover, the Investment Company Act limits the type of assets that a
BDC may acquire to certain prescribed "Eligible Assets" unless, at the time the
acquisition is made, Eligible Assets represent at least 70% of the value of the
BDC total assets (other than non-investment assets necessary or appropriate to
its operations as a BDC). "Eligible assets" include (a) privately acquired
securities of companies that were eligible portfolio companies at the time the
BDC acquired the securities; (b) securities of bankrupt or insolvent companies;
(c) securities of eligible portfolio companies controlled by a BDC; (d)
securities received in exchange for or distributed in or with respect to any of
the foregoing; and (e) cash items, government securities and high-quality
short-term debt. The Investment Company Act also places restrictions on the
nature of the transactions in which, and the persons from whom, securities can
be purchased in order for the securities to be considered Eligible Assets. Such
restrictions include limiting purchases to transactions not involving a public
offering and requiring that securities be acquired directly from either the
portfolio company or its officers, directors or affiliates.

         Many of the transactions involving an investment company and its
affiliates which would otherwise be prohibited without the prior approval of the
SEC under the Investment Company Act are permissible for a BDC. However, certain
transactions involving certain persons related to the Company, including its
directors, officers and employees, may still require the prior approval of the
SEC. In general, (1) any person who owns, controls or holds power to vote more
than 5% of the Company's outstanding shares of Common Stock; (2) any director,
executive officer or general partner of that person; and (3) any person who
directly or indirectly controls, is controlled by, or is under common 


<PAGE>   9

control with, that person, must obtain the prior approval of a majority of the
Company's disinterested directors and, in some situations, the prior approval of
the SEC, before engaging in certain transactions involving the Company or any
company controlled by the Company. The Investment Company Act generally does not
restrict transactions between the Company and its eligible portfolio companies.

         Having elected to be regulated as a BDC, the Company may not change the
nature of its business so as to cease to be, or withdraw its election as, a BDC
unless authorized by "the vote of a majority of its outstanding voting
securities" as determined in accordance with the Investment Company Act. A BDC
may change the nature of its business so as to cease being a BDC (and in
connection therewith withdraw its election to be treated as a BDC) only if
authorized by its stockholders. Management expects that the Company, in the
future, will seek to no longer be subject to the Investment Company Act;
however, there can be no assurance that the Company will become eligible to no
longer be subject to the Investment Company Act or that the requisite
stockholder approval will be obtained.

         The Investment Company Act prohibits an investment company such as the
Company from knowingly participating in a joint transaction with an affiliate of
any director or investment adviser to the investment company. Accordingly, the
Company may not, without exemptive relief from the SEC, participate in a joint
transaction with such affiliates. The Company is currently co-invested with
certain affiliates and submitted an exemptive application to the SEC in March
1998 to permit such co-investment in the future. The Company believes that it
will be advantageous for the Company to co-invest with certain affiliates where
such investment is consistent with the investment objective, strategies and
other pertinent factors to the Company. The Company believes that co-investment
by the Company and any affiliates will afford the Company the ability to achieve
greater diversification and, together with any affiliates, the opportunity to
exercise greater influence on the portfolio companies in which the Company and
any affiliates invest together. Accordingly, the application seeks an exemptive
order permitting the Company and certain affiliates to invest together in the
same portfolio companies where appropriate. The Company's application is still
pending. If the exemptive relief is granted, it is expected that the Company and
affiliates will invest together in proportion to their respective amounts of
capital available for investment where such is consistent with their respective
investment objective, strategies and other pertinent factors. It is expected
that exemptive relief permitting co-investment will be granted only upon the
conditions, among others, that before a co-investment transaction is effected,
the independent directors of the Company will review such co-investment. In the
future, it is expected that prior to committing to a co-investment, a majority
of the directors of the Company who are not "interested persons" of the Company
and who do not have a financial interest in such transaction will conclude that
(a) the terms of the proposed transaction are reasonable and fair to the Company
and its stockholders and do not involve overreaching of the Company and its
stockholders on the part of any person concerned; (b) the transaction is
consistent with the interests of the stockholders of the Company and is
consistent with the investment objective and policies of the Company; and (c)
the investment by affiliate co-investor would not disadvantage the Company in
making its investment, maintaining its investment position, or disposing of such
investment and that participation by the Company would not be on a basis
different from or less advantageous than that of affiliate co-investor. The
Investment Company Act defines "interested person" to include an affiliate or an
immediate family member of an affiliate of the Company and any person or partner
or employee of any entity that has served as legal counsel to the Company at any
time during its last two fiscal years. There is no assurance that the
application for exemptive relief will be granted by the SEC. Accordingly, there
is no assurance that the Company will be permitted to co-invest with any
affiliates.

         The Company is also seeking exemptive relief from the SEC to permit the
Company, Walnut Capital, Walnut Funds and Universal Bridge to operate as one
company for certain purposes of the Investment Company Act and to report solely
on a consolidated basis for purposes of the Exchange Act. The Company has been
reporting solely on a consolidated basis prior to having received such exemptive
relief in reliance on a letter from the Office of Investment Company Management
of the SEC that the staff of the SEC will not recommend that the SEC take any
action against the Company for so reporting. This letter, commonly known as a
"no-action" letter, is not binding upon the SEC and is subject to numerous
conditions.


<PAGE>   10

         In addition to asset and income qualifications, a BDC is restricted as
to the amount of leverage that it can incur. Generally, a BDC may not issue any
class of senior security representing an indebtedness unless, immediately after
such issuance or sale, it will have an "asset coverage" of at least 200%. "Asset
coverage" of a class of senior security representing an indebtedness of an
issuer means the ratio which the value of the total assets of such issuer, less
all liabilities and indebtedness not represented by senior securities, bears to
the aggregate amount of senior securities representing indebtedness of such
issuer. Currently, the Company is in compliance with the asset coverage
requirements.

         The Investment Company Act imposes certain capital structure
requirements on BDCs, such as an overall 25% limit on the amount of derivative
securities a BDC can have outstanding. In general, the amount of voting
securities that would result from the exercise of all outstanding warrants,
options, and rights to subscribe to, convert to, or purchase voting securities
of a BDC at the time of issuance is not permitted to exceed 25% of the
outstanding voting securities of the BDC. If, however, these outstanding
derivative securities have been issued predominantly to management personnel as
a component of their compensation, then a more restrictive upper limit may apply
to the aggregate amount of derivative securities a BDC can have outstanding. In
particular, if the amount of voting securities that would result from the
exercise of all outstanding warrants, options, and rights issued to a BDC's
directors, officers, employees, and general partners pursuant to an executive
compensation plan would exceed 15% of the outstanding voting securities of the
BDC, then the total amount of voting securities that would result from the
exercise of all outstanding warrants, options, and rights at the time of
issuance is not permitted to exceed 20% of the outstanding voting securities of
the BDC.

         SBA REGULATION. Walnut Capital is licensed to operate as a SBIC under
the SBIA, and is subject to regulation by the SBA. A number of the regulations
are discussed below and reference is made to Part 13 of the Code of Federal
Regulations ("CFR") for the full text of the regulations promulgated under the
SBIA. SBICs are subject to periodic examination by the SBA staff for purposes of
determining compliance with the SBA regulations. As an SBIC, Walnut Capital
received financial assistance from the SBA through the SBA's purchase of certain
debentures from Walnut Capital. Most of these debentures have been repaid and
the maturity of those remaining is September 1, 1999. See "Management's
Discussion and Analysis - Liquidity and Capital Resources."

         Under the SBIC program, Walnut Capital generally is permitted to make
loans only to, or purchase securities only of, those small businesses which
qualify as "Small Concerns". A "Small Concern", as defined in the SBA Act and
the SBA regulations, is a business concern that is independently owned and
operated and which is not dominant in its field of operation. In addition, a
small business will qualify as a Small Concern only if, at the time of Walnut
Capital's investment, either (1) it has a net worth, together with any
affiliates, of $18 million or less and an average net income after Federal
income taxes for the preceding two years of $6 million or less (average net
income to be computed without benefit of any carryover loss), or (2) it
satisfies alternative criteria under the SBA regulations that focus on the
industry in which the business is engaged and the number of persons employed by
the business or its gross revenue. The SBA regulations prohibit an SBIC from
providing funds to a Small Concern for certain purposes, such as for certain
purchases of securities and real estate.

         Under the SBA regulations, loans to Small Concerns under the SBIC
program generally must have a minimum maturity of five years. Short-term
financing is permissible if the financing is (a) in contemplation of long-term
financing of the Small Concern by Walnut Capital or a group including Walnut
Capital equal to at least the amount of the short-term financing and the term
for such short-term financing is no more than one year, (b) to protect prior
investments by Walnut Capital, or (c) to finance certain ownership changes. The
aggregate annual interest rate and other financing costs Walnut Capital may
charge Small Concerns under the SBIC program is limited by the SBA regulations.
As of December 31, 1998, the maximum rate relating to annual financing costs
allowable under the SBA regulations was 15% for straight loans and 14% for loans
containing an equity component.
<PAGE>   11

         In addition to providing funds to a Small Concern in the form of debt,
an SBIC can provide equity funding to a Small Concern. An SBIC can also acquire
options or warrants to purchase equity securities as long as such instruments do
not expire later than six years from the termination of the SBIC's financing of
the Small Concern by prepayment or maturity. Redemption of such equity
securities, options or warrants can be required only after the first five years
and only pursuant to a formula based on book value and/or earnings and not a
redemption price which is a fixed dollar amount. Any equity financing redeemable
in a manner other than as described in the foregoing sentence will be deemed to
be a loan rather than an equity investment and, therefore, will be subject to
the various limitations mentioned in the preceding paragraphs.

         The SBA regulations restrict the amount of control an SBIC can exercise
in connection with a Small Concern. A presumption of control exists whenever an
SBIC and its associates (as defined in the SBA regulations), or two or more
SBICs, control, (i) in the case of a Small Concern with fewer than 50
shareholders, 50% or more of the outstanding voting securities and, (ii) in the
case of a Small Concern with 50 or more stockholders, more than 25% or a block
of 20% or more which is as large or larger than the largest other outstanding
block of voting securities. Temporary control is permitted whenever such control
is reasonably necessary for the protection of the SBIC's investment. However, a
plan to relinquish such control within a reasonable period (not to exceed seven
years) must be submitted to the SBA, and any extension of such period must have
prior SBA approval.

         The SBA regulations limit the dollar amount of Walnut Capital's
investments in and loans to any single Small Concern and the affiliates of the
Small Concern to 20% of Walnut Capital's common stock and additional paid-in
capital.

         The SBA regulations require that financing by certain entities deemed
to be affiliates of Walnut Capital cannot be on terms more favorable than the
terms on which Walnut Capital has participated in the financing of a Small
Concern. The burden is on Walnut Capital to show that its terms are at least as
favorable as those extended to the affiliate, and the transactions which are
subject to this burden of proof are those extended contemporaneously with Walnut
Capital's financing or within six months before or after the financing extended
by Walnut Capital.

         Based on the valuation guidelines promulgated by the SBA (the
"Valuation Policies"), Walnut Capital's loans are valued based on the value of
the collateral, the borrower's ability to make payments, the borrower's
capitalization and profitability, and other pertinent factors. Generally, the
fair values assigned are amounts that are currently expected to be realized in
the ordinary course of business assuming that the loans will be held to
maturity. Therefore the fair value of loans, as determined in good faith by the
Board of Directors of Walnut Capital, correspond to cost unless adverse factors
lead to a determination of fair value at a lower amount, in which case the fair
value assigned is based on the anticipated liquidation value of the collateral.
Based on the Valuation Policies, the fair value of securities owned, as
determined in good faith by the Board of Directors of Walnut Capital, is based
on the liquidity of, existing market price for, and the anticipated sale price
of, the securities, taking into account standard discounts relating to
restricted securities and available trading volumes, as applicable. In
determining market price, the Board of Directors of Walnut Capital refers either
to the most recent bid price at which such securities were traded on a national
exchange or automated quotation system or, in the case of privately-held
companies, the price at which such securities were most recently sold by the
issuer in its last round of equity financing. The reduction in fair value, if
any, resulting from an assessment of the loans and securities owned by Walnut
Capital is reflected in Walnut Capital's reserve for unrealized losses.


<PAGE>   12

         SBA regulations prohibit purchasing securities of any company unless
the proceeds of the subject transaction inure to the benefit of the issuer
thereof. As such, Walnut Capital is effectively prohibited from making temporary
investment divestiture and reacquisition decisions based solely on prevailing
economic and market conditions. As a result, Walnut Capital can sell its
investment holdings only at such time as it makes a decision that permanent
divestiture of the subject investment is desirable. Therefore, the applicable
regulations may cause Walnut Capital to make long-term investment decisions
which are contrary to short-term prevailing economic and market circumstances.
This regulatory structure, therefore, discourages profit taking except in the
context of complete investment divestiture, and, therefore, encourages SBICs in
general, and Walnut Capital in particular, to operate unprofitably despite the
appreciation of securities which must be held until a final divestiture decision
is made. Currently, management believes it is in the best interest of the
Company not to completely divest of most of Walnut Capital's investments. These
restrictions on Walnut Capital may substantially limit the ability of the
Company to pay dividends in the future or operate profitability. In addition,
the SBA regulations require that SBICs maintain a ratio of undistributed
realized earnings (as defined by the SBA regulations to exclude unrealized gains
and losses) to capital stock and surplus of not more than 50%.

         In 1996, the SBA issued a finding that the Company had violated Section
107.903(b)(1) and (d) by financing an Associate (as defined in the SBIA) and
paying fees to an Associate. Additionally, the SBA had issued a finding that the
Company had violated CFR Section 107.501(b)(1), (3) and (4) of the SBIA by not
seeking prior approval of the SBA for management services provided by
Associates. The SBA subsequently determined that such findings had been resolved
and that no further action was necessary.

         In 1998, the SBA issued a finding that the Company had violated Section
107.700 of the SBIA, by purchasing securities from a big business as defined
under the SBIA. The Company believes the SBA is in error in its finding because
the SBA deemed shares held by employees of the seller as being affiliated with
such seller. The SBA has also informed the Company that it is in violation of
section 107.503(c) and 107.650 of the SBIA and valuation guidelines for SBICs
for failing to timely report changes in the valuations of certain of its
investments. The Company disagrees with the SBA's interpretation of the
requirements and the matter is being discussed with the SBA. The SBA also found
the company in violation of Section 107.825(e) of the SBIA, for purchasing
certain securities from non-issuers. The Company believes this finding to be
inconsistent with actions taken by the SBA in the past, has entered into
discussions with the SBA regarding the finding. Further, Walnut Capital failed
to timely file its Form 468 with the SBA due March 31, 1998. Management believes
that neither any of these findings nor failure to timely file will have material
effect on Walnut Capital, or the Company as a whole.

         The last examination report issued to Walnut Capital by the SBA is
dated June 15, 1998 and covered the 13-month period ended March 31, 1998.

         EMPLOYEES. On December 31, 1998, the Company had 2 employees, Walnut
Capital had 3 employees, Inland Financial had 8 employees and Pacific Financial
had 4 employees. None of the foregoing employees are represented by a collective
bargaining agreement, and the Company believes that its relationship and the
relationships of its subsidiaries with their respective employees is good.

ITEM 2.      PROPERTY

         The Company's executive offices in Vienna, Virginia are leased from
Windy City. See "Certain Relationships and Related Transactions".

ITEM 3.      LEGAL PROCEEDINGS

         The Company is not presently involved as plaintiff or defendant in any
material legal actions.
<PAGE>   13

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

         No matters were submitted to a vote of the Company's shareholders
during the last quarter of 1998.



<PAGE>   14


                                     PART II

ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
             MATTERS

         MARKET PRICE OF COMMON STOCK. As of April 13, 1999, the Company's stock
transfer agent reported 3,350,533 shares of Common Stock outstanding, held by
approximately 624 holders of record.

         From February 27, 1995 until August 21, 1995, the Common Stock was
quoted in the National Quotation Bureau's interdealer system through the
over-the-counter "Bulletin Board" under the symbol "WNUT". Since August 22,
1995, the Common Stock has been listed on The Nasdaq National Market under the
symbol "WNUT". The following table shows the high and low trade prices quoted
for bid for Common Stock for each quarter for the period January 1, 1996 through
December 31, 1998 based upon information received from The Nasdaq Stock Market,
adjusted to give effect to the Reverse Stock Split as if it occurred prior to
the date thereof.


<TABLE>
<CAPTION>
          QUARTER ENDED                HIGH       LOW
------------------------------     ---------   --------
<S>                                <C>         <C>      
March 31, 1998                     $ 8-13/16   $   6-3/4
June 30, 1998                          7-7/8           6
September 30, 1998                         6       1-7/8
December 31, 1998                      4-1/2     1-11/16

March 31, 1997                     $   7-7/8   $ 5-14/32
June 30, 1997                         18-3/4       4-7/8
September 30, 1997                    11-1/4       6-3/4
December 31, 1997                     10-1/2       8-1/4

March 31, 1996                     $  19-1/8   $  13-1/2
June 30, 1996                         17-1/4     14-1/16
September 30, 1996                    17-1/4           9
December 31, 1996                     12-3/8       6-3/4
</TABLE>


         DIVIDENDS. The Company has paid no cash dividends since its inception
and it is unlikely that any cash dividend will be paid in the future. The
declaration in the future of any cash or stock dividends will be at the
discretion of the Board depending upon the earnings, capital requirements and
financial position of the Company, general economic conditions and other
pertinent factors. Unless otherwise approved by the SBA, Walnut Capital is
prohibited from making any dividend or other cash advance to the Company. See
"Management's Discussion and Analysis -- Liquidity and Capital Resources of
Walnut Capital". Inland Financial is prohibited from making any dividends to the
Company without the consent of Inland Financial's lender under the terms of a
revolving credit facility. Pacific Financial is prohibited from making any
dividends to the Company without the consent of Pacific Financial's lender under
the terms of a revolving credit facility.


<PAGE>   15

ITEM 6.      SELECTED FINANCIAL INFORMATION

        The following selected financial data for the Company for the five-year
period ended December 31, 1998 is presented below. The information for the years
ended December 31, 1998, 1997, 1996, 1995 and 1994 is derived from the audited
financial statements of the Company as of and for the five years then ended. The
data should be read in conjunction with the financial statements, related notes
and other financial information of the Company for such periods included
elsewhere in this Annual Report on Form 10-K.


                WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES



<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                           ----------------------------------------------------------------------------
                                               1998            1997            1996            1995*            1994*
                                           ------------    ------------    ------------    ------------    ------------
<S>                                        <C>             <C>             <C>             <C>             <C>    
Income Statement Data:
Investment income
     Interest income                             87,000          69,000          61,000         453,000         186,000
     Dividend income                              3,000           6,000          16,000               0         257,000
                                           ------------    ------------    ------------    ------------    ------------
Total income                                     90,000          75,000          77,000         453,000         443,000
Expenses:

   Interest expense                             533,000       1,099,000       1,597,000       1,698,000       1,594,000
   General and administrative                 1,182,000       1,490,000       1,651,000       1,282,000         722,000
                                           ------------    ------------    ------------    ------------    ------------
Net investment (loss) before taxes           (1,625,000)     (2,514,000)     (3,171,000)     (2,527,000)     (1,873,000)
Income tax benefit                                8,000         858,000       1,268,000       1,438,000         725,000
                                           ------------    ------------    ------------    ------------    ------------
Net investment (loss)                        (1,617,000)     (1,656,000)     (1,903,000)     (1,089,000)     (1,148,000)
                                           ------------    ------------    ------------    ------------    ------------
Realized and unrealized gains on
    investments:
    Realized gain on sale of investments      1,372,000       3,032,000       2,904,000       4,667,000       1,044,000
    before income tax
    Income tax provision                         (7,000)     (1,391,000)     (1,162,000)     (1,822,000)       (407,000)
                                           ------------    ------------    ------------    ------------    ------------
Net realized gain on sale of investments      1,365,000       1,641,000       1,742,000       2,845,000         637,000
                                           ------------    ------------    ------------    ------------    ------------
Unrealized appreciation (depreciation)
    on investments before tax                (8,371,000)     (1,437,000)     (3,773,000)     (5,392,000)      4,608,000
Income tax (provision) benefit                   43,000         491,000         969,000       1,669,000      (1,797,000)
                                           ------------    ------------    ------------    ------------    ------------
Net unrealized appreciation
    depreciation) on investments             (8,328,000)       (946,000)     (2,804,000)     (3,723,000)      2,811,000
                                           ------------    ------------    ------------    ------------    ------------
Net realized and unrealized gains
    (losses) on investments                  (6,963,000)        695,000      (1,062,000)       (878,000)      3,448,000
                                           ------------    ------------    ------------    ------------    ------------
Net increase (decrease) in net assets
    resulting from operations              $ (8,580,000)   $   (961,000)   $ (2,965,000)   $ (1,967,000)   $  2,300,000
Income (loss) per share                           (2.70)          (0.39)          (1.25)          (0.93)           1.65
Weighted average shares outstanding           3,176,660       2,463,219       2,374,516       2,124,609       1,392,310

Balance Sheet Data:
    Total assets                             15,322,000      26,509,000      32,353,000      35,073,000      33,132,000
    Current liabilities                       6,317,000       7,791,000      13,928,000      10,473,000      10,187,000
    Long-term liabilities                             0       2,044,000       4,038,000       9,201,000      10,680,000
Net Assets                                    9,005,000      16,674,000      14,387,000      15,399,000      12,265,000
Total Liabilities and Net Assets           $ 15,322,000    $ 26,509,000    $ 32,353,000    $ 35,073,000    $ 33,132,000
</TABLE>


*      Includes the results of operations of Walnut Capital only

<PAGE>   16

ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
             RESULTS OF OPERATIONS

         As previously indicated, the Company reports the results of its
operations as an investment company rather than an operating company. See
"Business--Presentation of Financial Information." Because of such reporting,
the Company's consolidated financial statements include the operating results
only of the Company and Walnut Capital. For all subsidiaries other than Walnut
Capital and Universal Bridge, the Company reports only the fair value of its
investments therein as of the date of such information. The only operating
activity of Universal Bridge is recording the change in fair value of its
investment in UPLP. Universal Bridge recorded a decrease of $395,000 in the year
ended December 31, 1998 and an increase of $562,000 in the year ended December
31, 1997.

         The Company separately discusses and analyzes the results of operations
and the liquidity and capital resources of the Company and Walnut Capital. The
Company is required by regulations promulgated by the SBA to separately present
such information for Walnut Capital. The results of operations of the Company
and Walnut Capital for a particular period in the aggregate represent the
consolidated results of operations of the Company for such period before
adjustments to reflect intercompany transfers and other adjustments all made in
accordance with generally accepted accounting principles.

         RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND 
1997.

         Results of Walnut Capital's Operations for the Fiscal Years Ended
December 31, 1998 and 1997. Walnut Capital had realized gain income of
$1,330,000, for the year ended December 31, 1998, compared to $3,939,000, net of
tax, for the year ended December 31, 1997. The realized gains result
predominately from the sale of shares of Vitalink, Inc., and First Health Group,
Inc. (formerly HealthCare COMPARE Corp.), offset by realized losses at
Nhancement Technology Corp., Consolidated Technology Group, Inc, and the
write-off of the investment in Site Based Media, Inc.'s stock.

         Interest expense decreased $473,000 to $371,000 during the year ended
December 31, 1998, representing a 56% decrease from interest expense during the
year ended December 31, 1997. Interest expense consists of two components: (1)
interest paid to the SBA with respect to the Walnut Debentures (as defined
below) ($250,000 and $464,000 for 1998 and 1997, respectively), and (2)
interest paid on margin accounts and bank lines and other debt ($121,000 and
$380,000 for 1998 and 1997, respectively). The decrease in SBA interest expense
was the result of repayment to the SBA of a $2 million of Walnut Debentures on
June 1, 1998.

         General and administrative expense decreased $111,000 to $657,000
during the year ended December 31, 1998. The decrease in general and
administrative expense for 1998 was due to the write down of intangible assets,
representing prepaid travel expenses and bad debt reserves related to debt
securities in 1997.

         Unrealized losses for the year ended December 31, 1998 were
approximately $7.7 million, as compared to unrealized losses for the year ended
December 31, 1997 of approximately $2.6 million, net of tax. The increase in
unrealized loss for 1998 is primarily due to the unrealized losses recorded in
connection with the change in valuation of portfolio investments and a $3
million related tax benefit that was fully reserved in 1998.

         Results of the Company's Unconsolidated Operations for the Fiscal Years
ended December 31, 1998 and 1997. The Company had interest income of $54,000 and
general and administrative cost of $817,000 for the year ended December 31, 1998
as compared to $39,000 and $830,000, respectively, in the years ended December
31, 1997. Consolidated net loss for the Company was approximately $8.6 million,
for the year ended December 31, 1998 as compared to net loss of approximately $1
million in 


<PAGE>   17

the year ended December 31, 1997. The increase in the loss was due to an
increase in the unrealized losses in valuation of the Company's portfolio
securities and a $3 million related tax benefit that was fully reserved in 1998.

         RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997 AND 
1996.

         Results of Walnut Capital's Operations for the Fiscal Years Ended
December 31, 1997 and 1996. Walnut Capital had realized gain income of
$3,939,000, net of tax, for the year ended December 31, 1997, compared to
$1,561,000, net of tax, for the year ended December 31, 1996. The realized gains
result predominately from the sale of shares of First Health Group, Inc.
(formerly HealthCare COMPARE Corp.), offset by realized losses at NFS Services,
Inc. and other portfolio companies.

         Interest expense decreased $373,000 to $844,000 during the year ended
December 31, 1997, representing a 31% decrease from interest expense during the
year ended December 31, 1996. Interest expense consists of two components: (1)
interest paid to the SBA with respect to the Walnut Debentures (as defined
below) ($464,000 and $731,000 for 1997 and 1996, respectively), and (ii)
interest paid on margin accounts and bank lines and other debt ($380,000 and
$483,000 for 1997 and 1996, respectively). The decrease in SBA interest expense
was the result of repayment to the SBA of a $4 million of Walnut Debentures on
April 1, 1997.

         General and administrative expense decreased $2,000 to $768,000 during
the year ended December 31, 1997. Lower personnel costs were offset by a write
down of intangible assets representing prepaid travel expenses.

         Unrealized losses, net of tax, for the year ended December 31, 1997
were approximately $2.6 million, as compared to unrealized losses for the year
ended December 31, 1996 of approximately $1.4 million, net of tax. The increase
in unrealized loss for 1997 was due to the reversal of previously recorded
unrealized gains and the reserve for the reduced valuation of various portfolio
companies.

         Results of the Company's Unconsolidated Operations for the Fiscal Years
ended December 31, 1997 and 1996. The Company had interest income of $39,000 and
general and administrative cost of $830,000 for the year ended December 31, 1996
as compared to $37,000 and $881,000, respectively, in the years ended December
31, 1996. Consolidated net loss for the Company was $961,000 for the year ended
December 31, 1997 as compared to net loss of $2.96 million in the year ended
December 31, 1996. The decrease in the loss was due to a reduction in the
unrealized valuation of the Company's portfolio securities.

         LIQUIDITY AND CAPITAL RESOURCES.

         Liquidity and Capital Resources of Walnut Capital. As part of the SBIC
program, Walnut Capital has, from time to time, issued $12 million of debentures
to the SBA (the "Walnut Debentures"). Walnut Debentures in the principal amount
of $4 million each were repaid on September 1, 1995 and April 1, 1997.
Additional Walnut Debentures in the principal amount of $2 million were repaid
on June 1, 1998. Walnut Debentures in the principal amount of $2 million were
outstanding as of December 31, 1998. Such Walnut Debentures were originally
issued in September 1989, bear interest at a rate of 8.80% per annum and are due
on September 1, 1999.

         Interest on the Walnut Debentures is paid semi-annually, and principal
is due at maturity. Walnut Capital has been current in all of its interest
payments to the SBA. The Walnut Debentures cannot be prepaid without payment of
a substantial prepayment penalty related to the time of such prepayment.


<PAGE>   18

         The Walnut Debentures prohibit the distribution of earnings or other
assets of Walnut Capital to the Company, except for distributions made out of
undistributed realized earnings computed in accordance with SBA regulations. For
so long as any indebtedness under the Walnut Debentures remains outstanding,
Walnut Capital is prohibited from repurchasing or converting any of its equity
(but not debt) securities or paying dividends (including dividends to the
Company) without the consent of the SBA. In addition, Walnut Capital is
prohibited from incurring any secured indebtedness, except for the $5,765,000 of
secured indebtedness that was outstanding at April 8, 1994. There are no
limitations on the amount of unsecured indebtedness Walnut Capital can incur.

         Walnut Capital repaid the $2 million Walnut Debenture due at June 1,
1998 in accordance with its terms. Additionally, Walnut Capital reduced its
broker margin account by $605,000 in 1998. These funds primarily came from the
sale of Vitalink Inc. and First Health Group, Inc. (formerly HealthCare COMPARE
Corp.) securities, creating a realized capital gain of approximately $2.4
million in 1998. Walnut Capital has cash and broker margin available to repay
the $2 million of Walnut Debentures due September 1, 1999.

         Walnut Capital has established margin accounts with two brokers. Walnut
Capital's margin borrowings from one broker accrue interest on a monthly basis
at the broker's call rate plus 1% (7.75% at December 31, 1998). Advances under
this margin account cannot exceed 40% of the quoted market bid for shares
accepted by such broker, and this amount is calculated on an ongoing basis to
reflect market changes. As of December 31, 1998, Walnut Capital had borrowed
$894,000 which was collateralized by 200,000 shares of First Health Group common
stock, having a fair market value of approximately $3,200,000 at December 31,
1998, and 22,872 shares of Mariner Post-Acute Network, Inc. common stock, having
a fair market value of approximately $109,000 at December 31, 1998.

         Walnut Capital's margin borrowings from a second broker also accrue
interest on a monthly basis at that broker's call rate plus 1% (7.75% at
December 31, 1998). Advances under this margin account cannot exceed 40% of the
quoted market bid for shares accepted by such broker, and this amount is
calculated on an ongoing basis to reflect market changes. As of December 31,
1998, Walnut capital had borrowed $799,000, which was collateralized by 55,000
shares of First Health Group, Inc. common stock, having a fair market value of
approximately $911,000 at December 31, 1998, 117,885 shares of Mariner
Post-Acute Network, Inc. common stock, having a fair market value of
approximately $553,000 at December 31, 1998, and 300,000 shares of I-Flow Corp.
common stock, having a fair market value of approximately $366,000 at December
31, 1998.

         Unconsolidated Liquidity and Capital Resources of the Company. On
August 31, 1995, the Company established a $4 million line of credit with
American National Bank and Trust Company of Chicago ("ANB"). This line was
replaced as of September 8, 1996 with a term loan of $2,850,000. This loan
required interest only payments on September 30, 1996 and December 31, 1996. A
principal payment of $575,000 was made on March 31, 1997, with the balance due
on July 31, 1997. This loan was renewed and amended to provide for quarterly
principal payments of $250,000 commencing December 31, 1997 with maturity date
of June 30, 1999. On December 31, 1998, this bank loan was further amended to
require an immediate principal payment of $100,000 and quarterly principal
payments thereafter. The Loan has an amended maturity date of December 31, 1999.
Following the principal payment required on such date, the loan had a principal
balance of $1,025,000 on December 31, 1998. The interest rate associated with
this loan is ANB's base rate plus 2% (10.5% as of December 31, 1998 and 1997).
Two Directors of the Company personally guarantee the loan.

         In April 1997, the Company received an unsecured loan from The Holding
Company ("THC"), a company for which Burton W. Kanter serves as President, in
the amount of $400,000. The loan bears interest at 9.5%. The loan was to be
repaid in four installments each following the end of each of the fiscal
quarters of the Company in 1998 with the first installment to be paid on April
1, 1998. The first and second installments were paid on April 1, 1998 and July
1998, respectively. The third and fourth 


<PAGE>   19

payment which were due on October 1, 1998 and January 1, 1999 had been deferred
and the Company is allowed to delay further principal payments until the quarter
ending June 30, 1999 provided that quarterly interest to be paid on the
outstanding balance.

         In connection with the transaction through which the Company acquired
Inland Financial, the Company borrowed $250,000 from each of the Kanter Family
Foundation, an entity affiliated with the Company, and UPLP in October 1998. The
Company issued to each entity a promissory note which matures on October 13,
2001. The promissory notes bear interest at a rate of 15% per year which is
payable quarterly. This loan is unsecured.

         The Company guarantees the indebtedness of each of Pacific Financial
and Inland Financial under their respective revolving lines of credit. Subject
to certain conditions, Inland Financial is permitted to borrow up to $2,500,000
under its credit facility and Pacific Financial is permitted to borrow up to
$1,000,000 under its credit facility. The Company's guarantee of each facility
is a guarantee of payment and not a guarantee of collection.

         On October 27, 1997, the Company initiated a private placement to
accredited investors (the "1997 Private Placement") of a minimum of 50, and a
maximum of 80, units (the "Units") at $50,000 per Unit. Each Unit consisted of
8,333 shares of Common Stock and 5,833 Class A Redeemable Common Stock purchase
warrants (a "Class A Warrant" and collectively, the "Class A Warrants"). Each
Class A Warrant entitles the holder to acquire one share of Common Stock at an
initial exercise price of $9.00. The Class A Warrants expire on October 15,
2002. Pursuant to the 1997 Private Placement, the Company issued 666,667 shares
of Common Stock and 466,667 Class A Warrants for gross proceeds of $4,000,000.
The Company used a portion of the proceeds of the 1997 Private Placement to
acquire all of the issued and outstanding capital stock of Pacific Financial.
Also on December 18, 1997, the Company consummated the sale of an additional
166,667 Class A Warrants to certain investors for total proceeds of $100,000.

         The Company has paid no cash dividends since its inception and it is
unlikely that any cash dividend will be paid in the future. The declaration in
the future of any cash or stock dividends will be at the discretion of the Board
depending upon the earnings, capital requirements and financial position of the
Company, general economic conditions and other pertinent factors. Unless
otherwise approved by the SBA, Walnut Capital is prohibited from making any
dividend or other cash advance to the Company. See "Management's Discussion and
Analysis -- Liquidity and Capital Resources of Walnut CapitaL". Inland Financial
is prohibited from making any dividends to the Company without the consent of
Inland Financial's lender under the terms of a revolving credit facility.
Pacific Financial is prohibited from making any dividends to the Company without
the consent of Pacific Financial's lender under the terms of a revolving credit
facility.

         YEAR 2000 COMPLIANCE.

         The year 2000 creates the potential for date related data to cause
computer processing errors or system shut-downs because computer-controlled
systems have historically used two digits rather than four to define years.
Computer programs that contain time data sensitive software may recognize a date
using two digits of "00" as the year 1900 rather than the year 2000. The
miscalculations and systems failures that may be caused by such date
misrecognition could disrupt the operations of the Company or its portfolio
companies. Since this risk relates to computer-controlled systems, the year 2000
issue affects computer software, computer hardware, and any other equipment with
imbedded technology that involves date sensitive functions.

         The Company has assessed the scope of its Year 2000 problems and
remediated such problems for each of its internal computer software programs and
its computer hardware. Through December 31, 1998, the Company has spent
approximately $15,000 modifying or replacing its internal computer 


<PAGE>   20

software program and its computer hardware, primarily to upgrade software and to
modify maintenance agreements. The Company does not believe that it has
machinery with embedded computer technology or that it relies upon any supplier
that is material to its business. Since it believes its assessment and
remediation efforts have been completed, the Company has not developed any
contingency plans in the event it or any of its subsidiaries experiences year
2000 problems and it does not expect to expend any material amounts on such
remediation in the future. However, if the Company has failed to properly assess
any of the year 2000 problems or failed to fully remedy any identified year 2000
problems of its computer hardware or computer software programs, the Company may
be forced to spend more on such remediation in the future and the Company's
operations may be adversely affected.

         Since the Company does not control its portfolio companies, it has not
attempted to dictate assessment, remediation or contingency planning for such
companies, though Company representatives on the boards of directors of
portfolio companies have participated in such boards' oversight of those
companies' year 2000 efforts. Each portfolio company's year 2000 efforts are
necessarily directed by such companies' management and boards of directors.
Furthermore, the Company has invested in many private companies which are not
obligated to inform the Company about their year 2000 efforts. If any portfolio
company fails to timely assess or remediate its year 2000 problems, the value of
the Company's investment in such portfolio company may be adversely impacted.
The aggregate value of Company's portfolio could be materially adversely
impacted if a number of portfolio companies experience year 2000 problems or
significant costs to avoid or remediate such problems. The Company does not
expect to know the impact of the year 2000 problem on the aggregate value of its
portfolio until after January 1, 2000. None of the Company's computer systems
are interrelated with those of any of its portfolio companies.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.



<PAGE>   21


ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
Consolidated Financial Statements:                                                                          Page
                                                                                                            ----
<S>                                                                                                         <C>
Report of Independent Auditors...............................................................................22

Consolidated Statements of Assets and Liabilities, December 31, 1998 and 1997................................23

Investments in Securities, December 31, 1998 and 1997........................................................24

Consolidated Statements of Operations,
years ended December 31, 1998, 1997 and 1996.................................................................26

Consolidated Statements of Changes in Net Assets,
years ended December 31, 1998, 1997 and 1996.................................................................27

Consolidated Statements of Cash Flows,
years ended December 31, 1998, 1997 and 1996.................................................................28

Notes to Consolidated Financial Statements...................................................................29
</TABLE>




<PAGE>   22


INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of
Walnut Financial Services, Inc.

We have audited the accompanying consolidated statements of assets and
liabilities of Walnut Financial Services, Inc. and subsidiaries (the "Company"),
including the Schedule of Investments in securities, as of December 31, 1998 and
1997, and the related consolidated statements of operations, changes in net
assets and cash flows for each of the years in the three-year period ended
December 31, 1998. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
verification of investments owned as of December 31, 1998 and 1997, by
correspondence with the custodian and by physical examination. 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 financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 1998 and 1997, and the consolidated results of its operations and
its consolidated cash flows for each of the years in the three-year period ended
December 31, 1998 in conformity with generally accepted accounting principles.

As discussed in Note 3, the U.S. Small Business Administration (the "SBA") has
issued its finding that a subsidiary of the Company, Walnut Capital Corp.
("Walnut Capital") has violated Section 107.700 of Part 13 of Federal
Regulations by investing in a big business as defined. The Company believes that
no such violation has occurred and has entered into discussions with the SBA to
clarify the issue.

In addition, the SBA has issued a finding that Walnut Capital has violated
Section 107.825(e) relating to acquiring shares from a non-issuer. The Company
believes that no such violation has occurred and has entered into discussions
with the SBA to clarify the issue.

Further, the SBA has issued a finding that Walnut Capital has violated Section
107.503(c), 107.650 and Valuation Guidelines for Small Business Investment
Companies. The Company believes that no such violation has occurred and has
entered into discussions with the SBA to clarify the issue.



Richard A. Eisner & Company, LLP
New York, New York
January 21 1999



<PAGE>   23


                WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES


<TABLE>
<CAPTION>
                                                                             December 31,        December 31,
                                                                                1998                1997
                                                                             ------------        ------------
<S>                                                                           <C>                <C>       
Assets:
Investments at Market or Fair Value:
     Marketable equity securities (cost of $1,080,000 in 1998 and
     $1,448,000 in 1997 )                                                        $  5,132,000    $ 13,554,000
     Non-marketable equity securities (cost of $13,483,000 in 1998
     and $8,183,000 in 1997)                                                        7,287,000       3,384,000
     Non-marketable debt securities (cost of $1,418,000 in 1998
     and $1,329,000 in 1997)                                                          723,000         659,000
     Partnership Interests (Cost of $1,762,000 in 1998 and
     $1,862,000 in 1997)                                                            1,894,000       2,389,000
                                                                                 ------------    ------------
       Total portfolio securities                                                  15,036,000      19,986,000

Cash and cash equivalents                                                             140,000       6,479,000
Other assets                                                                          146,000          44,000
                                                                                 ------------    ------------
       Total assets                                                                15,322,000      26,509,000

Liabilities:
Margin payable to brokers                                                           1,692,000       2,297,000
Notes payable to banks                                                              1,025,000       2,025,000
Notes payable to related parties                                                      700,000         400,000
Accounts payable, accrued expenses and other current liabilities                      600,000         869,000
Accrued officer's compensation                                                        300,000         200,000
Debentures payable                                                                  2,000,000       4,000,000
Deferred tax liability                                                                      0          44,000
                                                                                 ------------    ------------
       Net assets                                                                $  9,005,000    $ 16,674,000
                                                                                 ============    ============

Preferred stock, no stated value, 1,000,000, no shares issued

Common  stock, $.01 par value, 50,000,000 shares authorized,
3,301,863 and 3,109,447 issued and outstanding                                   $    198,000    $    187,000

Additional paid in capital                                                         19,137,000      18,237,000

Accumulated deficit:

     Net investment loss                                                          (14,293,000)    (12,676,000)
     Net realized gain on investment                                                9,628,000       8,263,000
     Net unrealized (depreciation) appreciation of investments                     (5,665,000)      2,663,000
                                                                                 ------------    ------------

       Net assets applicable to outstanding common shares (equivalent to $2.73
       and $5.36 per share based on 3,301,863 and 3,109,447 outstanding common
       shares at December 31, 1998 and 1997, respectively)                       $  9,005,000    $ 16,674,000
                                                                                 ============    ============
</TABLE>



Attention is directed to the foregoing auditors' report and to the accompanying
notes to these financial statements.



<PAGE>   24
                WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                            INVESTMENTS IN SECURITIES

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                -----------------------------------------------------
                                                                         1998                        1997 
                                                                ------------------------      -----------------------
                                                                 Shares           Value       Shares         Value  
<S>                                                               <C>        <C>              <C>        <C>        
Common and Preferred Stocks -

    Healthcare - 40% and 72%
       American Psych Systems, Inc.                               122,950    $   150,000      122,950    $   150,000
       Greystone Medical Group, Inc.                              200,000         40,000      200,000        100,000
       First Health Group Corp.                                   255,000      4,080,000      255,000      7,860,000
       HP America Inc.                                             66,667         67,000            0              0
       I-Flow Corporation                                         300,000        362,000      300,000        945,000
       Ivonyx Group Services, Inc.                                100,000        100,000      100,000        100,000
       Mariner Post-Acute Network (Formerly Paragon               140,757        672,000      140,757      2,718,000
       Health)
       Med Images, Inc.                                           241,530        454,000      172,872        379,000
       MHM Services, Inc.                                         131,955         66,000       82,455         60,000
       Rainbow Medical, Inc.                                       25,000         50,000       25,000         50,000
       Sovereign Medical Acquisition Corp.     -Common              4,000         24,000            0              0
       Sovereign Medical Acquisition Corp.     -Units               3,333         20,000            0              0
       Vitalink, Inc.                                                   0              0       83,100      2,005,000
                                                                             -----------                 -----------
                                                                             $ 6,085,000                 $14,367,000
                                                                             -----------                 -----------

    High technology - 3% and 2%
       Consolidated Technology Group, Inc.                              0    $         0      375,000    $    60,000
       Logic Devices Incorporated                                  45,000         76,000       45,000        110,000
       Madison Info. Tech.     -Preferred A                        60,000        150,000            0              0
       Madison Info. Tech.     -Preferred B                        60,000        150,000            0              0
       Multimedia Games, Inc.                                       2,500         18,000            0              0
       Nhancements Technology Corp.                                     0              0       16,185         57,000
       Thermo Information Solutions, Inc.                          10,000         90,000       10,000         90,000
       J.L. Wickham Co., Inc.     -Common                         250,696              0      250,696              0
       J.L. Wickham Co., Inc.     -Preferred                      281,788              0      281,788              0
                                                                             -----------                 -----------
                                                                             $   484,000                 $   317,000
                                                                             -----------                 -----------

    Communications  - 7% and 6%
       International Business Network                              70,000    $   105,000            0    $         0
       Site Based Media, Inc.                                           0              0      321,108         19,000
       Trans Global Services, Inc.     -Common                     83,839        139,000       62,003        374,000
       Vision III Imaging, Inc.                                    10,585        867,000       10,585        847,000
                                                                             -----------                 -----------
                                                                             $ 1,111,000                 $ 1,240,000
                                                                             -----------                 -----------

    Biotechnology - 3% and 1%
       BioHorizon Implant system, Inc.                            193,934    $   300,000            0    $         0
       Metatech Corp.                                              14,817              0            0              0
       Optiva Corporation                                          10,000         63,000       10,000         63,000
       Osteoimplant Technology, Inc.     -Common                   80,000         16,000       80,000         96,000
       Vaxgen, Inc.                                                22,800         83,000       20,000         70,000
                                                                             -----------                 -----------
                                                                             $   462,000                 $   229,000
                                                                             -----------                 -----------

    Environmental - 0% and 0%
       Clean America Corp. (The Alta Group)                        59,375    $         0       59,375    $         0
       Inorganic Recycling, Inc.                                   10,000              0            0              0
                                                                             -----------                 -----------
                                                                             $         0                 $         0
                                                                             -----------                 -----------

    Finance - 24% and 0%
       Pacific Financial Services Corp.  (wholly owned subsidiary)    300    $ 2,212,000            0    $         0
       Inland Financial Corp.  (wholly owned subsidiary)              100      1,328,000            0              0
                                                                             -----------                 -----------
                                                                             $ 3,540,000                 $         0
                                                                             -----------                 -----------
    Other - 5% and 4%                                                                                  
       Automotive Performance Group                                50,000    $   100,000            0    $         0
       Linter's, Inc.                                              42,784         75,000       42,784         75,000
       SoftKat, Inc.     -Common                                  155,309         40,000      155,309        311,000
       SoftKat, Inc.     -Preferred                               120,000        123,000            0              0
       VINnet Inc.      -Common                                    25,000        125,000       25,000        125,000
       VINnet Inc.      -Preferred A                                  180        180,000          180        180,000
       VINnet Inc.      -Preferred B                               37,643         94,000       37,643         94,000
                                                                             -----------                 -----------
                                                                             $   737,000                 $   785,000
                                                                             -----------                 -----------

         Total common and preferred stocks (cost $14,563,000 and             -----------                 -----------
           $9,631,000)                                                       $12,419,000                 $16,938,000
                                                                             -----------                 -----------

    Debt securities - 5% and 3%
       Inland Financial (wholly-owned subsidiary)                            $   500,000                 $         0
       Knox International                                                              0                     200,000
       Pacific Financial (wholly-owned subsidiary)                               200,000                           0
       TCOM Services, Inc.                                                             0                     276,000
       SoftKat, Inc.                                                                   0                     160,000
       VINnet Inc.                                                                23,000                      23,000
                                                                             -----------                 -----------
         Total debt securities (cost $1,418,000 and $1,329,000)              $   723,000                 $   659,000
                                                                             -----------                 -----------


    Partnership interests - 13% and 12%
       Universal Partners. L.P. (majority-owned                              $ 1,894,000                 $ 2,289,000
       subsidiary)
       Knox International                                                              0                     100,000
                                                                             -----------                 -----------
         Total partnership interests (cost $1,762,000 and 1,862,000)           1,894,000                   2,389,000
                                                                             -----------                 -----------

         Total - 100% (cost $17,743,000 and $12,822,000)                     $15,036,000                 $19,986,000
                                                                             ===========                 ===========
</TABLE>

Attention is directed to the foregoing auditor's report and to the accompanying
notes to these financial statements.




<PAGE>   25


                WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                 Years ended December 31,
                                                        -----------------------------------------
                                                           1998           1997           1996
                                                        -----------    -----------    -----------
<S>                                                     <C>            <C>            <C>        
Investment income:
   Interest income                                      $    87,000    $    69,000    $    61,000
   Dividend income                                            3,000          6,000         16,000
                                                        -----------    -----------    -----------
 Total income                                                90,000         75,000         77,000
Expenses:
   Interest expense                                         533,000      1,099,000      1,597,000
   General and administrative                             1,182,000      1,490,000      1,651,000
                                                        -----------    -----------    -----------
 Investment (loss) before taxes                          (1,625,000)    (2,514,000)    (3,171,000)
 Income tax benefit                                           8,000        858,000      1,268,000
                                                        -----------    -----------    -----------
 Net investment (loss)                                   (1,617,000)    (1,656,000)    (1,903,000)
                                                        -----------    -----------    -----------
Realized and unrealized gains on investments:
   Realized gain on sale of investments before income
   tax                                                    1,372,000      3,032,000      2,904,000
   Income tax provision                                      (7,000)    (1,391,000)    (1,162,000)
                                                        -----------    -----------    -----------
   Net realized gain on sale of investments               1,365,000      1,641,000      1,742,000
                                                        -----------    -----------    -----------
   Unrealized (depreciation) on investments before
   income tax                                            (8,371,000)    (1,437,000)    (3,773,000)
   Income tax benefit                                        43,000        491,000        969,000
                                                        -----------    -----------    -----------
   Net unrealized (depreciation) on investments          (8,328,000)      (946,000)    (2,804,000)
                                                        -----------    -----------    -----------
   Net realized and unrealized gains (losses) on
      investments                                        (6,963,000)       695,000     (1,062,000)
                                                        -----------    -----------    -----------
 Net increase (decrease) in net assets resulting from
   operations                                           $(8,580,000)   $  (961,000)   $(2,965,000)
                                                        ===========    ===========    ===========

Loss per share - basic and diluted                      $     (2.70)   $      (.39)   $     (1.25)
                                                        ===========    ===========    ===========

Weighted average shares outstanding                       3,176,660      2,463,219      2,374,516
                                                        ===========    ===========    ===========

</TABLE>


Attention is directed to the foregoing auditors' report and to the accompanying
notes to these financial statements.



<PAGE>   26


                WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS



<TABLE>
<CAPTION>
                                                                                        Years Ended December 31,
                                                                           -----------------------------------------------------
                                                                               1998                1997                 1996
                                                                           -------------       -------------       -------------
<S>                                                                        <C>                 <C>                 <C>          
Decrease in net assets resulting from operations:

  Net investment loss                                                      $ (1,617,000)       $ (1,656,000)       $ (1,903,000)
  Net realized gains on investments                                           1,365,000           1,641,000           1,742,000
  Net unrealized depreciation on investments                                 (8,328,000)           (946,000)         (2,804,000)
                                                                           ------------        ------------        ------------ 
                                                                             (8,580,000)           (961,000)         (2,965,000)
                                                                           ------------        ------------        ------------ 

Increase in net assets resulting from capital share transactions:

  Issuance of 133,663 shares of common stock for Universal Partners
    acquisition                                                                                                       1,793,000
  Issuance of compensatory warrants for consulting                                                                      125,000
  Issuance of 2,334 shares of common stock for legal fees                                                                35,000
  Issuance of 666,667 shares of common stock and
      466,667 warrants, net of costs                                             46,000           3,098,000
  Issuance of 166,667 warrants                                                                      100,000
  Issuance of 6,667 shares of common stock for litigation settlement
  Issuance of 39,022 shares of common stock for Pacific                                              50,000
      Financial Services Corporation acquisition
  Issuance of 153,393 shares of common stock for Inland Financial               300,000
    Services Corporation acquisition
  Expenditures attributable to issuance of common stock                         650,000
                                                                                (85,000)
                                                                           ------------        ------------        ------------ 

                                                                                911,000           3,248,000           1,953,000
                                                                           ------------        ------------        ------------ 

Total increase (decrease) in net assets                                      (7,669,000)          2,287,000          (1,012,000)

Net assets at beginning of period                                            16,674,000          14,387,000          15,399,000
                                                                           ------------        ------------        ------------ 

Net assets at end of period                                                $  9,005,000        $ 16,674,000        $  14,387,000
                                                                           ============        ============        =============

</TABLE>




Attention is directed to the foregoing auditors' report and to the accompanying
notes to these financial statements.




<PAGE>   27


                WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                                        Years ended December 31,
                                                                        --------------------------------------------
                                                                            1998            1997            1996
                                                                        ------------    ------------    ------------
<S>                                                                     <C>             <C>             <C>          
Cash flows from operating activities:
   Net decrease in net assets resulting from operations                 $ (8,580,000)   $   (961,000)   $ (2,965,000)
   Adjustments to reconcile net decrease in net assets resulting from
   operations to net cash provided by operating activities:
      Net unrealized depreciation of investments                           8,371,000       1,437,000       3,773,000
      Net realized gain on investments                                    (1,372,000)     (3,032,000)     (2,904,000)
      Change in net deferred tax liability                                   (44,000)          6,000      (1,090,000)
      Issuance of compensatory warrants                                            0               0         125,000
      Changes in assets and liabilities:
         Other assets                                                       (102,000)        315,000         (30,000)
         Other liabilities                                                  (169,000)        325,000         148,000
                                                                        ------------    ------------    ------------
            Net cash used in operating activities                         (1,896,000)     (1,910,000)     (2,943,000)
                                                                        ------------    ------------    ------------

Cash flows from investing activities:
   Purchases of common stock, healthcare                                    (362,000)       (314,000)       (234,000)
   Purchases of common stock, high tech                                     (320,000)        (50,000)              0
   Purchases of common stock, bio tech                                      (313,000)              0               0
   Purchases of common stock, communications                                (125,000)              0               0
   Purchases of common stock, other                                         (100,000)       (165,000)     (1,065,000)
   Purchase of general partnership interest                                        0         (75,000)              0
   Purchase of equity and debt securities, wholly-owned subsidiaries      (3,290,000)              0        (750,000)

   Purchase of debt securities, other                                              0               0        (239,000)
   Proceeds from sale of partnership interest                                122,000               0               0
   Proceeds from sale of common stock, healthcare                          2,961,000       9,221,000       5,950,000
   Proceeds from sale of common stock, high technology                        38,000           2,000          23,000
   Proceeds from sale of common stock, other                                  53,000       3,870,000               0
   Collection of wholly-owned subsidiary note                                      0         749,000               0
   Collections from debt securities                                          237,000          65,000          50,000
                                                                        ------------    ------------    ------------
            Net cash provided by investing activities                     (1,099,000)     13,303,000       3,735,000
                                                                        ------------    ------------    ------------
Cash flows from financing activities:
   Proceeds from sale of common stock                                         46,000       3,098,000               0
   Expenditures attributable to issuance of common stock                     (85,000)              0               0
   Proceeds from sale of warrants                                                  0         100,000               0
   Repayments of short term debt                                          (1,000,000)     (1,700,000)     (1,144,000)
   Borrowings from related party                                             300,000         400,000               0
   Increase (decrease) in margin accounts                                   (605,000)     (3,162,000)        327,000
   Repayments of long term debt                                           (2,000,000)     (4,000,000)              0
                                                                        ------------    ------------    ------------
            Net cash used in financing activities                         (3,344,000)     (5,264,000)       (817,000)
                                                                        ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents                      (6,339,000)      6,129,000         (25,000)
Cash and cash equivalents, beginning                                       6,479,000         350,000         375,000
                                                                        ------------    ------------    ------------
Cash and cash equivalents, end                                               140,000    $  6,479,000    $    350,000
                                                                        ============    ============    ============
Supplemental Information:

Cash paid for interest                                                  $    443,000    $    813,000    $  1,576,000
                                                                        ============    ============    ============
Issuance of common stock for legal fees                                 $          0    $          0    $     35,000
                                                                        ============    ============    ============
Issuance of common stock and warrants for partnership interest          $          0    $          0    $  1,793,000
                                                                        ============    ============    ============
Issuance of common stock and warrants for equity in wholly owned sub.   $    950,000    $          0    $          0
                                                                        ============    ============    ============
</TABLE>



Attention is directed to the foregoing auditors' report and to the accompanying
notes to these financial statements.



<PAGE>   28



                WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       ORGANIZATION

         The Company is a closed-end management investment company, which
elected on October 15, 1997 to be regulated as a Business Development Company
("BDC") under the Investment Company Act of 1940 (as amended, the "Investment
Company Act"). As such, the Company, among other requirements, is required to
invest at least 70% of its total assets in certain prescribed "Eligible Assets,"
which generally include securities of privately-held companies and cash items,
government securities and high-quality short-term debt. As of December 31, 1998,
the Company has three primary business focuses: (i) investing in start-up and
early stage development companies; (ii) operating an investment vehicle that
specializes in bridge financing to small to medium-sized companies; and (iii)
providing accounts receivable factoring services to small and medium sized
businesses. The Company engages in its investment business (x) through its
wholly-owned subsidiary, Walnut Capital Corp., a Delaware corporation ("Walnut
Capital"), which was formed in 1980 for the purpose of operating as a Small
Business Investment Company (an "SBIC") under the Small Business Investment Act
of 1958 (as amended, the "SBIA") and is subject to regulations promulgated by
the Small Business Administration (the "SBA") pursuant to the provisions of the
SBIA, and (y) through its wholly-owned subsidiary, Walnut Funds, Inc., a
Delaware corporation ("Walnut Funds"), which has an ownership interest in and
indirectly provides investment management services to Walnut Growth Partners
Limited Partnership, an Illinois limited partnership ("Walnut Growth"), a $30
million investment fund. The Company pursues its bridge financings through its
wholly-owned subsidiary, Universal Bridge Fund, Inc., a Delaware corporation
("Universal Bridge"). Universal Bridge owns 50% of the outstanding general
partnership interests and approximately 83% of the limited partnership interests
of Universal Partners, L.P., an Illinois limited partnership ("UPLP"), which was
established in 1994. The Company engages in its accounts receivable factoring
service business through its two wholly-owned subsidiaries; Pacific Financial
Services Corp., a Washington corporation ("Pacific Financial"), which was
acquired in January 1998; and (2) Inland Financial Corp., a Washington
corporation ("Inland Financial") which was acquired in October 1998. The Company
engages in the human resources and quality assurance consulting business through
its wholly-owned subsidiary, Walnut Consulting, Inc., a Delaware corporation
("Walnut Consulting"), which activity is currently insignificant. Management
anticipates that the Company may seek to cease to be a BDC upon the acquisition
of additional operating businesses. However, the Company may not change the
nature of its business so as to cease to be a BDC unless such change is approved
by the Company's shareholders in accordance with the Investment Company Act. As
a result of the technical nature of the Investment Company Act, the Company's
wholly-owned subsidiaries, Walnut Capital, Walnut Funds and Universal Bridge,
also have each elected to be regulated as a BDC. On September 28, 1997, the
Company sold all of the outstanding stock of its wholly-owned subsidiary, NFS
Services, Inc., a Delaware corporation ("NFS"), which performed consulting and
asset recovery services.

         On June 17, 1996, the Company issued 133,663 shares of Common Stock,
together with five-year warrants to purchase an additional 116,391 shares of
Common Stock at an exercise price of $18.00, in connection with the purchase by
Universal Bridge (the "Universal Acquisition") of approximately 83% of the
limited partnership interests and 50% of the general partnership interests of
UPLP. The warrants issued in the Universal Acquisition were subsequently
canceled pursuant to an exchange offer made by the Company whereby each holder
elected to exchange their warrants for shares of newly issued Common Stock and
cash in lieu of fractional shares. The exchange offer provided that one share of
Common Stock would be issued to the holder for every four warrants held. The
exchange offer was consummated on December 18, 1997. The investment assets of
UPLP at the time of acquisition were $1,251,000, net debt securities were
$423,000, total assets were $2,266,000 and liabilities were $75,000.


<PAGE>   29

         On October 27, 1997, the Company initiated a private placement to
accredited investors (the "1997 Private Placement") of a minimum of 50, and a
maximum of 80, units (the "Units") at $50,000 per Unit. Each Unit consisted of
8,333 shares of Common Stock and 5,833 Class A Redeemable Common Stock purchase
warrants (a "Class A Warrant" and collectively, the "Class A Warrants").
Pursuant to the 1997 Private Placement, the Company issued 666,667 shares of
Common Stock and 466,667 Class A Warrants for gross proceeds of $4,000,000. The
Company used a portion of the proceeds of the 1997 Private Placement to acquire
all of the issued and outstanding capital stock of Pacific Financial Services
Corporation. Also on December 18, 1997, the Company consummated the sale of an
additional 166,667 Class A Warrants to certain investors for $100,000.

         On January 28, 1998, the Company acquired all the outstanding common
stock of Pacific Financial for $3,000,000 consisting of $1,500,000 in cash,
39,022 shares of the Company's common stock valued at $300,000, $300,000 in
short term notes and $900,000 in notes payable January 2, 2002. The $300,000
short-term notes were paid at the Pacific closing in accordance with the terms
of the acquisition agreement. The remaining notes are guaranteed by the Company
and bear interest at 8%. Pacific is in the business of accounts receivable
factoring in the Northwest United States.

         On October 19, 1998, the Company acquired Inland Financial through the
merger of a newly formed, wholly owned subsidiary of the Company with and into
Inland Financial with Inland Financial continuing after such merger as the
surviving corporation. Upon consummation of the merger, the Company received all
the outstanding shares of capital stock of the surviving corporation and the
former shareholders of Inland Financial received in the aggregate $650,000 in
cash, 153,393 shares of the Company's common stock valued at $650,000, and
$150,000 in short term notes. The short-term notes are guaranteed by the Company
and bear interest at 8% per annum. Such shareholders are eligible to receive
additional payments of cash, notes and stock of the Company valued at up to
$950,000, based on the net income performance of Inland through April 2000.
Inland is in the business of accounts receivable factoring in the Northwest
United States.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPLES OF CONSOLIDATION. The financial statements include the
accounts of the Company, Walnut Capital, Universal Bridge, Walnut Funds and
Walnut Consulting, each from the applicable date of acquisition or organization.
Investments in Pacific and Inland are recorded at cost which approximate fair
market value. Inter-company transactions and balances have been eliminated in
consolidation.

         NET LOSS PER SHARE. The Company adopted SFAS No. 128 "Earnings Per
Share" in the period ended December 31, 1997 and has retroactively applied the
effects thereof for 1996. Accordingly, the presentation of per share information
includes calculations of basic and diluted income (loss) per share. There was no
impact on the per share amounts previously reported. In January 1999, the
Company effected a 1 for 6 reverse stock split. All share and per share amounts
have been retroactively adjusted to account for the split.

         GENERAL. Walnut Capital is an SBIC licensee. The accompanying financial
statements include financial information for Walnut Capital that has been
prepared on a basis appropriate for SBICs as indicated by the American Institute
of Certified Public Accountants in its guide, Audits of Investment Companies.

         INVESTMENT VALUATION. The non-marketable investments and partnership
interests are stated at fair value as determined by the Board at December 31,
1998 and 1997. The Board takes into account developments since the acquisition
of the investments, and other factors pertinent to the valuation of investments.
The Board, in making its valuation, has in many instances relied on financial
data and on estimates made by the investee companies and professional advisors
as to the effect of future developments. The marketable investments and/or their
derivatives are carried at market value. Market


<PAGE>   30

values are determined based on the average of the closing quotations as of
December 31, 1998 and 1997 and the preceding two trade days, recognizing a
percentage reduction when applicable.

         Debt securities are valued at their face principal amount and bear
interest from 7% to 12%. The debt may be issued together with stock or warrants
whose initial value is nominal. The Company does not obtain collateral upon the
extension of credit for most debt securities. In the event that a debt security
is in default with respect to principal or interest, the Company establishes a
reserve against the face value and does not accrue additional interest. A
reserve may be established for the full amount due to the Company if the Board
determines that the issuer will be unable to fulfill its obligation to the
Company.

         Realized gains and losses on securities are determined on the specific
identification method by subtracting the cost, plus any transaction fees, from
the sales prices, less any transaction fees. Unrealized gains and losses are
determined by subtracting the carrying value (market/fair value) at the end of
the period from the carrying value (market/fair value) at the beginning of the
period.

         INTEREST INCOME. The Company records interest on debt securities when
the indebtedness is current, in accordance with the terms of the agreements made
with investee debtors. A reserve for loss is established to the extent there is
doubt as to the collectibility of current amounts recorded. The Company
generally recognizes interest earned on debt securities which are six months or
more delinquent only when collectibility is assured.

         FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments other than investments:

         Cash and cash equivalents approximate fair value.

         Short-term payables -- the carrying amount approximates fair value due
to the short-term maturities of these instruments.

         Long-term debt approximates fair value based on borrowing rates
currently offered to the Company.

         INCOME TAXES. Deferred tax liabilities and assets are recognized for
the estimated future tax consequences of temporary differences and net operating
loss carryforwards. Temporary differences are primarily the result of the
differences between the tax bases of assets and liabilities and their financial
reporting amounts. Deferred tax liabilities are measured by applying enacted
statutory tax rates, applicable to the future years, in which deferred tax
liabilities are expected to be settled or realized. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense (benefit) consists of the taxes payable
(benefits available) for the current period and the change in deferred tax
assets and liabilities during the period.

         The Company is not entitled to the treatment available to regulated
investment companies and is taxed as a regular corporation for federal and state
income tax purposes. The Company files a consolidated federal income tax return
with its four wholly owned subsidiaries.

         CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents for purposes of the statement of cash flows. Cash and cash
equivalents which potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments with commercial banks.
The Company had no temporary cash on deposit in excess of insured amounts as of
December 31, 1998.
<PAGE>   31

         MARGIN ACCOUNTS. The Company uses margin accounts established at
several brokerage houses for operations. Interest accrues at the brokers' call
rate plus 1% and is charged monthly on the margin balance.

         FIXED ASSETS. Fixed assets are recorded at cost. Depreciation is
computed on the straight line method over the estimated economic lives of the
assets, which range from 5 to 7 years.

         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 reported amounts of assets and
liabilities, 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.

         STOCK-BASED COMPENSATION. During 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). The provisions of SFAS No. 123 allow companies to either expense
the estimated fair value of stock options or to continue to follow the intrinsic
value method set forth in Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees (APB 25) but disclose the pro forma effects on net
income (loss) had the fair value of the options been expensed. The Company has
elected to continue to apply APB 25 in accounting for its stock option incentive
plans. (See Note 12)


3.       LONG-TERM DEBT

         a)       SBA DEBENTURES

         Debentures payable were $2,000,000 at December 31, 1998 (the "Walnut
Debentures"). Walnut Debentures with a principal balance of $2,000,000 are
payable to SBIC Funding Corp. or its designee on September 1, 1999 and bears
interest at 8.8%, payable semiannually on March 1, 1999 and September 1, 1999.

         All principal and interest payments due pursuant to the Walnut
Debentures have been paid as required. Payment of the Walnut Debentures is
guaranteed by the SBA. Under the terms of the Walnut Debentures, Walnut Capital
may not, without prior permission of the SBA, repurchase or retire any of its
common stock or make any distribution to the Company, except from undistributed
realized earnings computed in accordance with SBA regulations.

         In 1998, the SBA issued a finding that the Company had violated Section
107.700, by purchasing securities from a big business as defined. The Company
believes the SBA is in error in their interpretation of this finding, by
including shares held by employees of the seller as being affiliated with such
seller. The SBA has also informed the Company that it is in violation of section
107.503 (c) and 107.650 and valuation guidelines for SBICs. The Company
disagrees with the SBA's interpretation of the requirements and the matter is
being discussed with the SBA. The SBA also found the company in violation of
Section 107.825 (e), purchase of securities from non-issuers. The Company
believes this finding to be inconsistent with actions taken by the SBA in the
past, and has entered into discussions with the SBA to clarify the issue.
Further, Walnut Capital did not file its Form 468 timely for the year ended
December 31, 1998. This report was due on March 31, 1999. Management believes
that none of these findings will have material effect on Walnut Capital, or the
Company as a whole.
<PAGE>   32

         As of December 31, 1998 and December 31, 1997, the Walnut Debentures
payable are due as follows:


<TABLE>
<CAPTION>
                               1998                1997
                          ---------------     ---------------
<S>                       <C>                 <C>
           1998                                   $2,000,000
           1999               $2,000,000          $2,000,000
                              ----------          ----------
                              $2,000,000          $4,000,000
                              ==========          ==========
</TABLE>


         b)       NOTES PAYABLE TO BANKS

         On August 31, 1995, the Company established a $4 million line of credit
with American National Bank and Trust Company of Chicago ("ANB"). This line was
replaced as of September 8, 1996 with a term loan of $2,850,000. A principal
payment of $575,000 was made on March 31, 1997 and the balance was due on July
31, 1997. This loan was renewed and amended to provide quarterly principal
payment of $250,000 commencing on December 31, 1997 with a maturity date of June
30, 1999. On December 31, 1998, this bank loan was further amended to require an
immediate principal payment of $100,000 and quarterly principal payments
thereafter and it has an amended maturity date of December 31, 1999. Following
the principal payment required on such date, the loan had a principal balance of
$1,025,000 on December 1998. The interest rate associated with this loan is
ANB's base rate plus 2% (10.5% as of December 31, 1998 and 1997). Two Directors
of the Company personally guarantee the loan.

         c)       NOTES PAYABLE TO RELATED PARTIES

         In April 1997, the Company received an unsecured loan from a related
party in the amount of $400,000. Such loan bears interest at 9.5% per annum. The
loan is to be repaid in four quarterly installments commencing March 31, 1998.
The first and second installments were paid on April 1, 1998 and July 1998,
respectively. The third and forth payments which were due on October 1, 1998 and
January 1, 1999 respectively have been deferred and the Company is allowed to
defer further principal payments until the quarter ending June 30, 1999 provided
that quarterly interest is paid on the outstanding balance.

         In connection with the transaction through which the Company acquired
Inland Financial, the Company borrowed $250,000 from each of two related
parties. The Company issued to each entity a promissory note which matures on
October 13, 2001. The promissory notes bear interest at a rate of 15% per year
payable quarterly.

4.       MARGIN BROKERAGE ACCOUNTS

         Brokerage margin payable to one investment banker consists of advances
of $894,000 under a line of credit as of December 31, 1998. The brokerage
account accrues interest on a monthly basis at the brokers' call rate plus 1%
(7.75% at December 31, 1998) and is collateralized by 200,000 shares of First
Health Group common stock, having a fair market value of approximately
$3,200,000 at December 31, 1998, and 22,872 shares of Mariner Post-Acute
Network, Inc. common stock, having a fair market value of approximately $109,000
at December 31, 1998.

         Brokerage margin payable to a second investment banker consists of
advances of $799,000 under a line of credit as of December 31, 1998. Advances
under this line cannot exceed 40% of the quoted market bid for shares accepted
by the investment banker, and this amount is calculated on an ongoing basis to
reflect market changes. The brokerage account accrues interest on a monthly
basis at the brokers' call rate plus 1% (7.5% at December 31, 1998). This line
of credit is collateralized by 55,000 shares of First Health Group, Inc. common
stock, having a fair market value of approximately $911,000 at December 31,
1998, 117,885 shares of Mariner Post-Acute Network, Inc. common stock, having a
fair market value of 


<PAGE>   33

approximately $553,000 at December 31, 1998, and 300,000 shares of I-Flow Corp.
common stock, having a fair market value of approximately $366,000 at December
31, 1998.

5.       INCOME TAXES

         As at December 31, 1998 and 1997, the components of the Company's net
deferred tax asset and liability were as follows:


<TABLE>
<CAPTION>
                                        1998           1997
                                     -----------    -----------
<S>                                  <C>            <C>         
Deferred tax liability:
  Unrealized gains                   $         0    $(2,162,000)

Deferred tax asset:
  Unrealized losses                    1,082,000
  Alternative minimum tax credit         145,000
  Deferred compensation                  120,000
  Net operating loss benefit           1,632,000      2,118,000
                                     -----------    -----------
                                       2,979,000        (44,000)
Valuation allowance                   (2,979,000)             0
                                     -----------    -----------

Net deferred tax asset (liability)   $         0    $   (44,000)
                                     ===========    ===========
</TABLE>



         The difference between book and tax accounting for investments is the
primary source of the non-current deferred tax liability. For financial
reporting purposes, investments are carried at market and for income tax
purposes, investments are carried at cost. This resulted in unrealized gains
that are treated as temporary differences under standards for accounting for
income taxes. Additionally, in 1998, it was determined that the Company would
fully reserve its deferred tax asset as the realization of such asset was not
assured. The valuation allowance was increased by $2,979,000 for the year ended
December 31, 1998.



<PAGE>   34




         The components of the income taxes for the years ended December 31 were
as follows:


<TABLE>
<CAPTION>
                                                          1998                1997            1996    
                                                       ----------       -------------     ----------- 
<S>                                                    <C>              <C>               <C>         
Tax (benefit) on net income:                                                                          
                                      Federal          $    7,000       $    (729,000)    $ (1,073,000)
                                        State               1,000            (129,000)        (195,000)
                                                       ----------       -------------     ------------
                                        Total          $    8,000       $    (858,000)    $ (1,268,000)
                                                       ==========       =============     ============
Tax expense on realized gain:                                                                         
                                      Federal          $   (6,000)      $    1,182,000         988,000
                                        State              (1,000)             209,000         174,000
                                                       ----------       -------------     ------------
                                        Total          $   (7,000)      $    1,391,000    $  1,162,000
                                                       ==========       =============     ============
Tax expense (benefit) on unrealized                                                                   
loss:                                 Federal          $   37,000       $    (417,000)    $   (824,000)
                                        State               6,000             (74,000)        (145,000)
                                                       ----------       -------------     ------------
                                                       $   43,000       $    (491,000)    $   (969,000)
                                                       ==========       =============     ============
</TABLE>


The Company's effective federal tax rate was 0.5% in 1998, compared to an
overall statutory rate of 34%. This difference was due to the Company fully
reserving its deferred tax asset.



<TABLE>
<CAPTION>
                                        1998           1997           1996
                                    -----------    -----------    -----------
<S>                                 <C>            <C>            <C>         
Pre-tax (loss)/gain                 $(8,624,000)   $  (919,000)   $(4,202,000)
                                    ===========    ===========    ===========
Federal tax expense/(benefit) at
statutory rate of 34%                (2,932,000)      (312,000)    (1,428,000)
Non-deductible items related to
wholly-owned subsidiary                       0        390,000        374,000
State tax, net of federal benefit      (129,000)       (55,000)       (96,000)
Alternative minimum tax                  38,000         80,000         27,000
Increase in valuation allowance       2,979,000              0              0
                                    -----------    -----------    -----------
                                        (44,000)       103,000     (1,123,000)
Other - net                                   0        (61,000)        48,000
                                    -----------    -----------    -----------
Tax (benefit) expense               $   (44,000)   $    42,000    $(1,075,000)
                                    ===========    ===========    ===========
</TABLE>



<PAGE>   35



         As of December 31, 1998, the Company had net operating loss
carryforwards available for federal income tax purposes as follows:


<TABLE>
<CAPTION>
     Expiration                        Amount
-------------------                -------------
<S>                                <C>          
        2007                       $   1,067,000
        2008                           1,933,000
        2009                             643,000
        2010                             295,000
        2018                             143,000
                                   -------------
                                   $   4,081,000
                                   =============
</TABLE>


6.       COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

         a.       LEASE

         Walnut Capital leases office space and services, also utilized by the
Company, from an affiliate at approximately $5,000 per month as of December 31,
1998. The lease is renewable annually at the discretion of the parties. The
Company paid approximately $56,000, $58,000, and $57,000 for rent for the years
ended December 31, 1998, 1997, and 1996, respectively, and $10,000, $9,000, and
$70,000 for services for the years ended December 31, 1998, 1997 and 1996,
respectively.

         b.       EMPLOYMENT AGREEMENTS

         The Company entered into employment agreements with each of Burton W.
Kanter and Joel S. Kanter in January 1996. Each of the agreements expired by its
terms in February 1998. Mr. Burton Kanter's employment agreement provided that
he was entitled to a minimum base salary of $100,000 per annum (which is paid in
part to Mr. Kanter individually and in part to his sole proprietorship doing
business as BK Consultants; see Footnote 7 - Related Party Transactions.) He is
also entitled to a bonus as determined by the Board of Directors from time to
time in its absolute and sole discretion. Amounts due under Mr. Burton Kanter's
employment agreement were not paid in 1998, 1997 and 1996 and are being accrued
by the Company. The terms and conditions of the employment agreement of Mr. Joel
Kanter was generally identical to that of Burton Kanter except that Joel Kanter
was entitled to a minimum base salary of $70,000 per annum; however, the Board
of Directors determined to increase such base salary to $200,000 for fiscal 1997
and 1996 and increase such salary to $225,000 for 1998 (see Footnote 7 - Related
Party Transactions). Joel Kanter's agreement also differed in that Joel Kanter
agreed not to compete with the Company or NFS (but not Walnut Capital) for a
period of three years after his termination of employment with Walnut Capital.

         c.       GUARANTEES OF INDEBTEDNESS

         The Company guarantees the indebtedness of each of Pacific Financial
and Inland Financial under their respective revolving lines of credit. Subject
to certain conditions, Inland Financial is permitted to borrow up to $2,500,000
under its credit facility and Pacific Financial is permitted to borrow up to
$1,000,000 under its credit facility. The Company's guarantee of each facility
is a guarantee of payment and not a guarantee of collection.
<PAGE>   36

7.       RELATED PARTY TRANSACTIONS

         The Company and its subsidiaries retain a law firm at which an officer
of the Company has been of counsel since 1993. The wife of such officer has been
an employee of and is currently a partner in such firm. Legal fees of
approximately $115,000, $249,000 and $165,000 were incurred by the Company for
the years ended December 31, 1998, 1997 and 1996, respectively.

         At December 31, 1998, 1997 and 1996, approximately $120,000, $123,000
and $128,000, respectively, were due to the law firm and are included in
accounts payable, accrued expenses and other current liabilities in the
accompanying balance sheet.

         As described above at Footnote 6.b., the Company retains Mr. Burton W.
Kanter and his sole proprietorship doing business as BK Consultants to render
services regarding the Company's operations and investment matters. There were
no payments to him in 1998, 1997 and 1996, but $100,000 in salary was accrued by
the Company for 1998, 1997 and 1996.

         Periodically an officer of Walnut Capital, or a designee of Walnut
Capital, serves in the capacity of director or observer to the board of
directors of investee companies.

         Mr. Joel S. Kanter and Mr. Burton Kanter personally guarantee the
amounts due to ANB under the Company's line of credit (see Footnote 3.b.).

8.       CONCENTRATION OF RISK

         The Company has significant holdings of investments in the health care
industry. Total investments in the health care industry in debt and equity
securities were approximately $6,085,000 and $14,367,000 as of December 31, 1998
and 1997 respectively (including unrealized appreciation of approximately
$1,095,000 and $9,248,000 as of December 31, 1998 and 1997 respectively).

         Additionally, substantially all of the Company's cash and securities
are held by a custodian broker who is highly capitalized and a member of major
securities exchanges or at a major banking institution.

9.       FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

         The Company from time to time makes commitments to provide financing in
the form of loans, debt securities and equity investments. The Company's maximum
exposure to credit loss in the event of nonperformance by the other party is
represented by the contractual notational amount of these instruments. As of
December 31, 1998, no commitments were outstanding.

         The Company evaluates each portfolio investee's credit worthiness on a
case-by-case basis. Generally, collateral is not obtained by the Company upon
the extension of credit.

10.      SHAREHOLDERS' EQUITY

         a.       PREFERRED STOCK.

                  The Company is authorized to issue up to 1,000,000 shares of
its preferred stock in one or more series. As of December 31, 1998, no shares of
preferred stock were outstanding.

         b.       COMMON STOCK.

                  In December 1997, in connection with the 1997 Private
Placement, the Company issued 666,667 shares of Common Stock and 466,667
warrants, exercisable through December, 2000 for net proceeds of $46,000 in 1998
and $3,098,000 in 1997. The exercise price of these warrants is $9.00.


<PAGE>   37

                  In February 1998, the Company issued 39,022 shares of common
stock in the acquisition of Pacific Financial Services Corp.

                  In October 1998, the Company issued 153,393 shares of common
stock in the acquisition of Inland Financial Services Corp.

         c.       COMMON STOCK OPTIONS AND WARRANTS.

                  (1) In 1994, the Company adopted the NFS Services, Inc. (Utah)
1994 Incentive Stock Option Plan, which was amended and restated and approved by
the Company's stockholders in December 1997 (as amended, the "1994 Plan"). The
1994 Plan is administered by a stock incentive plan administrative committee
appointed by the Company's Board of Directors (the "1994 Plan Committee"). The
1994 Plan Committee has the authority, subject to approval by the Company's
Board of Directors, the terms of the 1994 Plan and the Investment Company Act,
to select the persons to whom awards may be granted, to determine the terms of
each award, to interpret the provisions of the 1994 Plan and to make all other
determinations that it may deem necessary or advisable for the administration of
the 1994 Plan. The 1994 Plan provides for the grant of incentive stock options,
nonstatutory options, and restricted stock and stock appreciation rights
("SARs"), as determined in each individual case by the 1994 Plan Committee. The
Company's Board of Directors has reserved 1,000,000 shares of Common Stock for
issuance under the 1994 Plan. The Company has granted options under the Plan as
follows:


<TABLE>
<CAPTION>
                                                      1998                       1997
                                            ------------------------    -----------------------
                                            Shares   Weighted avg.       Shares    Weighted avg.
                                                     exercise price                exercise Price
<S>                                         <C>      <C>                 <C>         <C>        
Options outstanding at beginning of year    35,167   $  11.28            42,250      $15.30     
   Granted                                  16,667   $   7.86            33,167      $11.04     
   Expired                                       0                      (12,750)     $17.04     
   Canceled                                      0                      (27,500)     $14.46     
                                            ------                       ------                 
Options outstanding at end of year          51,834   $  10.18            35,167      $11.28     
                                            ======                       ======                 
Options exercisable at end of year          24,750   $  11.22            19,583      $11.16     
                                            ======                       ======                 
</TABLE>


The weighted average life of options outstanding is 7.37 years. 

                  (2) In connection with the Business Combination, the Company
assumed the Walnut Capital Corporation 1987 Stock Option Plan (as amended, the
"1987 Plan"). The 1987 Plan is administered by a stock option plan
administrative committee appointed by the Board of Directors (the "1987 Plan
Committee"). The 1987 Plan Committee has the authority, subject to approval by
the Company's Board of Directors and the terms of the 1987 Plan, to select the
persons to whom awards may be granted, to determine the terms of each award, to
interpret the provisions of the 1987 Plan and to make all other determinations
that it may deem necessary or advisable for the administration of the 1987 Plan.
The 1987 Plan provides for the grant of incentive stock options or nonstatutory
options, as determined in each individual case by the 1987 Plan Committee. There
are 806,930 shares of Common Stock reserved for issuance under the 1987 Plan.
Awards of incentive stock options to purchase up to 24,993 shares of Common
Stock, and awards of nonstatutory options to purchase 109,495 shares of Common
Stock, have been granted pursuant to the 1987 Plan to various officers,
directors, employees, and consultants of Walnut Capital. During 1997, incentive
stock options for 24,993 shares were canceled in connection with termination of
employment. Of the non-qualified stock options, options for 11,170 shares were
also canceled in 1997. Options outstanding at year end are subject to a variety
of vesting requirements and, at December 31, 1997, 97,107 shares were
exercisable. The exercise price of the options outstanding pursuant to the 1987
Plan is $10.80 per share of Common Stock. The average exercise price of options
outstanding under the 1987 Plan is $10.80. As a result of the Business
Combination, no further awards will be granted under the 1987 Plan. During the
year ended December 31, 1998 and 1997, no options to acquire Common Stock were
exercised.
<PAGE>   38


                  (3) In December 1997, the Company sold 166,667 warrants for
$100,000 to five investors. The exercise price of the warrants, which were
immediately exercisable, is $9.00.

11.      CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY

         The following is the condensed financial information of Universal
Bridge's majority-owned subsidiary, Universal Partners, LP., as of and for the
years ended December 31, 1998 and 1997:


<TABLE>
<CAPTION>
                                                          1998           1997
                                                      -----------    ----------- 
<S>                                                   <C>            <C>         
Statement of Operations Data
    Net investment (loss) income                      $   (81,000)   $  (114,000)
    Realized gains on sale of investments                   4,000        553,000
    Unrealized gain (loss) on investments                (416,000)       177,000
                                                      -----------    ----------- 
    Net income (loss)                                    (493,000)   $   616,000
                                                      ===========    =========== 

Balance Sheet Data

    Investments in marketable equity securities
         (cost of $450,000 and $662,000,              $   748,000    $   986,000
         respectively)
    Investments in non-marketable equity securities
         (cost of $955,000 and $534,000,                  729,000        434,000
         respectively)
    Investments in non-marketable debt securities
         (less reserves of $375,000 and $320,000,
         respectively)                                    480,000        485,000
                                                      -----------    -----------
                                                      $ 1,957,000    $ 1,905,000
                                                      ===========    ===========

    Total assets                                      $ 2,328,000    $ 2,790,000
    Total liabilities                                      58,000         56,000
                                                      -----------    -----------
    Partnership capital                               $ 2,270,000    $ 2,734,000
                                                      ===========    ===========
</TABLE>

12.      STOCK OPTION COMPENSATION

         The Company applies APB Opinion 25 and related interpretations in
accounting for its employee stock option and purchase plans. In October, 1995,
Statement of Financial Accounting Standards No. 123 ("SFAS 123") were issued and
requires the Company to elect either expense recognition or disclosure-only
alternative for stock based employee compensation. The expense recognition
provision encouraged by SFAS 123 would require fair-value based financial
accounting to recognize compensation expense for the employee stock compensation
plans. The Company has elected the disclosure-only alternative.

         The Company has computed the pro forma disclosures required under SFAS
123 for employee stock options granted as of December 31, 1996 using the Black
Scholes option pricing model prescribed by SFAS 123. The weighted average fair
value at date of grant for options granted during the years ended December 31,
1996 is $6.96. There were no employee options granted during 1998 or 1997.

         In estimating the value of options pursuant to the accounting
provisions of Financial Accounting Standard No SFAS 123 the Company used the
following assumptions:


<TABLE>
<CAPTION>
                                                        Year Ended
                                                    December 31, 1996
                                                    -----------------
<S>                                                 <C>    
          Risk free interest rate                    5.9% - 7.9%
          Expected life                                5 years
          Expected volatility                            67%
          Dividend yield                                  0
</TABLE>

<PAGE>   39

         If compensation cost was measured using the fair value provisions of
SFAS 123 then the Company's net loss and net loss per share would have been
approximately $3,226,000 and ($1.36) and, for the year ended December 31, 1996.

ITEM 9.      CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         None.



<PAGE>   40


                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following information is as of April 13, 1999, unless otherwise
specified.

<TABLE>
<CAPTION>
Name                          Age           Title
--------------------------  ---------  -----------------------------------------------
<S>                          <C>       <C>                             
Burton W. Kanter*              68      Director (Chairman)
Joel S. Kanter*                41      Chief Executive Officer, President and Director
William F. Burge, III          58      Director 
Gene E. Burleson*              57      Director 
Earl Chapman                   73      Director 
Albert Morrison, Jr.           62      Director 
Solomon A. Weisgal             72      Director 
Robert F. Mauer                44      Chief Financial Officer and Treasurer
Joshua S. Kanter*              36      Secretary and General Counsel
======================================================================================
</TABLE>

*          Such individuals may be deemed to be "interested persons" as such
term is defined in Section 2(a)(19) of the Investment Company Act of 1940, as
amended (the "1940 Act").

BURTON W. KANTER                                             Director since 1995


         Mr. Kanter has served as a director of the Company and the Chief
         Executive Officer of Walnut Capital Corp., a Delaware corporation
         ("Walnut Capital"), a subsidiary of the Company, since February 27,
         1995. He has been a director of Walnut Capital since 1983, and was the
         President of Walnut Capital between 1987 and February 27, 1995, and
         Treasurer of Walnut Capital from January 1994 until February 27, 1995.
         Mr. Kanter is of counsel to Neal Gerber & Eisenberg, a Chicago,
         Illinois law firm. From 1961 through 1985, Mr. Kanter was a partner in
         the law firm of Kanter & Eisenberg or its predecessor firms. He is the
         author of numerous articles and a frequent lecturer in the field of
         Federal income taxation, and founder and senior editor of the
         nationally known column in the Journal of Taxation called "Shop Talk."
         He is a member of the faculty of the University of Chicago Law School.
         He is a director of numerous companies, including the following public
         companies: First Health Group Corp., Scientific Measurement Systems,
         Inc., and Logic Devices Incorporated. He is a member of the Board of
         Directors or the Board of Trustees of: the Midwest Film Center of the
         Chicago Art Institute, the Chicago International Film Festival, and the
         Museum of Contemporary Art of Chicago. He is also on the advisory board
         of the Wharton School of the University of Pennsylvania Real Estate
         Center and the University of Chicago Annual Tax Conference.
         Mr. Kanter is the father of Joel S. Kanter and Joshua S. Kanter.

JOEL S. KANTER                                               Director since 1995

         Mr. Kanter has been a director and the President of the Company since
         February 27, 1995 and has been the Chief Executive Officer of the
         Company since April 15, 1996. From 1988 to February 27, 1995, Mr.
         Kanter was a consultant to Walnut Capital. Mr. Kanter has been
         President and a director of Walnut Capital since February 27, 1995. Mr.
         Kanter has served as President of Windy City, Inc. ("WCI"), a privately
         held investment firm, since July 1986. From 1978 through 1979, Mr.
         Kanter served as a Legislative Assistant to Congressman Abner J. Mikva
         (D-Ill.) specializing in Judiciary Committee affairs. From 1980 through
         1982, Mr. Kanter served as a Special Assistant to the National
         Association of Attorneys General, representing that organization's
         positions in the criminal justice and environmental arenas. From 1982
         through 1984, Mr. Kanter served as Staff Director of the House
         Subcommittee on


<PAGE>   41

         Legislative Process chaired by Congressman Gilles D. Long (D-La.). In
         that capacity, he also lent assistance to the House Democratic Caucus
         which was also chaired by Congressman Long. From 1985 through 1986, Mr.
         Kanter served as Managing Director of The Investors' Washington
         Service, an investment advisory company specializing in providing
         advice to large institutional clients regarding the impact of federal
         legislative and regulatory decisions on debt and equity markets.
         Clients of The Investors' Washington Service included Amoco Oil, AT&T,
         Bankers Trust, Citicorp, Chase Manhattan Bank, Chrysler Corporation,
         General Motors, J.C. Penney, and others. Mr. Kanter currently serves on
         the Boards of Directors of Mariner Post-Acute Network, Inc., I-Flow
         Corporation, Osteoimplant Technology, Inc., Encore Medical Corporation
         and Magna-Lab, Inc., each of which is a publicly-held company, as well
         as a number of private concerns. Mr. Kanter is the son of Burton W.
         Kanter and the brother of Joshua S. Kanter.

WILLIAM F. BURGE, III                                        Director since 1995

         Mr. Burge has been a director of the Company since February 27, 1995.
         Mr. Burge has been a director of Walnut Capital since 1992. He is on
         the Board of Directors of Wallis State Bank, former Trustee of the
         University of Houston Foundation and Tartan Corp. Recently, he was
         appointed Vice-Chairman of Harris County-Houston Sports Authority. He
         was also appointed to the Honorary Advisory Board of the International
         Business College of Dalian, China. He is also a Board member and past
         Chairman of the West Houston Association. Since 1980, he has been a
         Board member of Sky Ranch and Vice Chairman of the Harris County
         Housing Finance Corporation. Since 1970, Mr. Burge has served as
         Managing Director and Vice Chairman of the Board of Directors of
         Mitsubishi Estate Company Associates, USA, as well as President and
         Managing Director of Ayrshire Corp. From 1987 through 1997, Mr. Burge
         was Chairman of the Houston Metropolitan Transit Authority Board of
         Directors. He also has experience in commercial and residential real
         estate development in Houston, Dallas, New York, New Orleans, Atlanta
         and Los Angeles. He is on the advisory board of the Wharton School of
         the University of Pennsylvania Real Estate Center and a member of the
         Urban Land Institute.

GENE E. BURLESON                                             Director since 1996

         Mr. Burleson has been a director of the Company and a director of
         Walnut Capital since June 1996. Mr. Burleson served as Chairman of the
         Board and Chief Executive Officer of GranCare, Inc., from 1994 to 1997.
         Following the merger of GranCare, Inc.'s pharmacy operations with
         Vitalink Pharmacy Services, Inc., he served as Chief Executive Officer
         of Vitalink Pharmacy Services, Inc. from February 1997 to August 1997.
         His previous experience included serving as President and Chief
         Operating Officer of American Medical International, Inc. Mr. Burleson
         is presently a director of Decker's Outdoor Corp., Alternative Living
         Services Inc., and Mariner Post-Acute Network, Inc., all publicly-held
         companies.

EARL CHAPMAN                                                 Director since 1997

         Mr. Chapman has been a director of the Company and a director of Walnut
         Capital since October 8, 1997. Mr. Chapman is currently the Chief
         Executive Officer and Chairman of Booklines, Hawaii Ltd., a Hawaiian
         distributor of books, music, video tapes and other souvenir products.
         Prior to joining Booklines, Hawaii Ltd., Mr. Chapman was the Chief
         Executive Officer and Chairman of SiLite Corporation, a manufacturer of
         plastic food service products. Mr. Chapman serves as a member of the
         Board of the Neighborhood Justice Center, a volunteer mediation agency
         comprised of approximately 200 volunteer mediators.

ALBERT MORRISON, JR.                                         Director since 1997

         Mr. Morrison has been a director of the Company since August 13, 1997
         and a director of Walnut Capital since 1984. Mr. Morrison is President
         of Morrison, Brown, Argiz & Company, Certified Public Accountants. He
         has more than 30 years experience as an accountant and is a member of a
         number of professional accounting institutes and associations. Mr.
         Morrison is Vice Chairman of the Dade County Industrial Development
         Authority, Treasurer of the Board of Trustees of Florida International
         University, and a member of the Board of Directors of Chicago Holdings,
         Inc., Heico Corporation, Logic Devices Incorporated and a Trustee of
         the Greater Miami Chamber of Commerce.
<PAGE>   42

SOLOMON A. WEISGAL                                           Director since 1995

         Mr. Weisgal has been a director of the Company since February 27, 1995.
         Mr. Weisgal has been a director of Walnut Capital since 1984. Mr.
         Weisgal is a Certified Public Accountant and has been President of
         Solomon A. Weisgal, Ltd., a financial consulting firm, since its
         inception in 1979. Mr. Weisgal is presently a director of The Alta
         Group Ltd. and numerous other privately-held concerns.

ROBERT F. MAUER                                                        Treasurer

         Mr. Mauer has been the Treasurer of the Company and Walnut Capital
         since February 1996 and is currently also the Chief Financial Officer.
         From 1991 to February 1996, he was Director of Corporate Planning of
         Washington Gas Light Company and, concurrently, Vice-President of its
         non-utility subsidiaries. In this planning role, he developed the
         strategic plan for the Washington Gas Light Company and was responsible
         for acquisition and divestiture analysis. The non-utility subsidiaries
         activities included manufacturing, contracting, home improvement and
         real estate. Mr. Mauer was employed by Owens Corning from 1977 until
         1991. While there, he held a variety of financial positions that
         involved both domestic and international assignments. His
         responsibilities included roles of Manager of Consolidated Accounting,
         Controller and Treasurer of British Operations in Wrexham, Wales, which
         encompassed complete financial responsibilities of a manufacturing and
         import/export company. Other financial roles included that of Assistant
         Treasurer in Brussels, Belgium where he was in charge of all foreign
         currency transactions for Owens Corning.

JOSHUA S. KANTER                                   Secretary and General Counsel

         Mr. Kanter has been the Secretary of the Company since February 28,
         1995 and General Counsel of the Company since September 14, 1995. Mr.
         Kanter has been the Assistant Secretary and General Counsel of Walnut
         Capital since June 6, 1996. Since November 1997, Mr. Kanter has been
         Chief Executive Officer of The Alta Group Ltd. and its wholly-owned
         subsidiary, Greenway Environmental, Inc., companies specializing in
         waste management services. Since June 1993, Mr. Kanter has also been of
         counsel to Barack Ferrazzano Kirschbaum Perlman & Nagelberg ("BFKP&N"),
         a Chicago, Illinois law firm specializing in securities, corporate and
         real estate law. Mr. Kanter was an associate at that firm from
         September 1987 to February 1990. Since 1986, Mr. Kanter has also been
         vice-president of WCI. Mr. Kanter is the son of Burton W. Kanter and
         the brother of Joel S. Kanter.

         SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a)
of the Exchange Act requires the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and "greater than ten-percent" stockholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms so
filed. Based solely on review of the copies of such forms furnished to the
Company for 1998, the Company is not aware of any of the Company's officers,
directors or "greater than ten-percent" stockholders who failed to comply with
Section 16(a) filing requirements.

ITEM 11.     EXECUTIVE COMPENSATION

         SUMMARY COMPENSATION. The following table sets forth the compensation
paid by the Company to Messrs. Burton W. Kanter, Joel S. Kanter and Robert F.
Mauer in the last three fiscal years of the Company (collectively, the "Named
Executive Officers"). Such persons were the executive officers of the Company
and its subsidiaries whose cash compensation exceeded $100,000 for the 1997
fiscal year. Amounts paid to Messrs. Burton Kanter, Joel Kanter and Robert Mauer
reflect the fiscal years ended December 31, 1998, 1997 and 1996.


<PAGE>   43

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                              Long Term
                                                                             Compensation
                                                    Annual Compensation         Awards  
   Name and Current Principal                   --------------------------   ------------
            Position                   Year     Salary ($)      Bonus ($)     Options
----------------------------------     ----     ------------    ----------   ------------
<S>                                    <C>      <C>             <C>          <C>    
Burton W. Kanter,                      1998      $100,000(1)       --              --
  Chairman of the Board                1997       100,000(1)       --              --
                                       1996       100,000(1)       --              --
Joel S. Kanter,                        1998       200,000          --              --
  President and Chief Executive        1997       200,000       $50,000(2)         --
  Officer                              1996       200,000          --              --
Robert F. Mauer,                       1998       115,000          --              --
  Chief Financial                      1997       100,000        30,000(2)         --
  Officer and Treasurer                1996        91,667(3)       --             20,833
</TABLE>

---------------

(1) Mr. Burton Kanter's salary for the years 1998, 1997, and 1996 was not paid
   and is being accrued by the Company.

(2) The Company paid bonuses of $50,000 and $30,000 to Mr. Joel Kanter and Mr.
   Mauer, respectively, in January 1998 with respect to their job performance
   for the fiscal year 1997.

(3) Mr. Mauer joined the Company on February 1, 1996. Amounts reported reflect
   an annual salary of $100,000.

         OPTIONS. The following table provides certain information regarding
options granted to the Named Executive Officers.


                   AGGREGATED OPTION EXERCISES IN FISCAL 1998
                     AND FISCAL 1998 YEAR-END OPTION VALUES


<TABLE>
<CAPTION>
                                                        Number of Securities        
                                                       Underlying Unexercised         Value of Unexercised in-the-
                                                          Options at Fiscal              Money Options at Fiscal  
<S>                                                                 <C>                              <C>          
                         Shares                             Year-End(#)                      Year-End($)((1)      
                       Acquired on       Value       ----------------------------   ------------------------------
      Name             Exercise (#)    Realized ($)   Exercisable    Unexercisable   Exercisable     Unexercisable
-----------------     ------------    ------------   -----------    -------------   -----------     --------------
<S>                   <C>            <C>             <C>                <C>         <C>              <C> 
Burton W. Kanter            0         $     0           41,654             0           $   0            $  0

Joel S. Kanter              0               0           33,324             0               0               0

Robert F. Mauer             0               0           20,833             0               0               0
</TABLE>

         (1) No outstanding options were in-the-money as of December 31, 1998.
The closing bid price per share as quoted on The Nasdaq National Market on
December 31, 1998 was $11/32 per share.


         EMPLOYMENT AGREEMENTS WITH MANAGEMENT. The Company had entered into
employment agreements with Burton W. Kanter and Joel S. Kanter. Both agreements
expired by their terms in February 1998.

         STOCK PERFORMANCE GRAPH. The incorporation by reference of this Annual 
Report on Form 10-K into any document filed with the SEC by the Company shall
not be deemed to include the following performance graph unless such graph is
specifically stated to be incorporated by reference into such document.

         The following graph provides a comparison of the cumulative total
stockholder return among the Company, the Nasdaq Stock Market total return index
(the "Nasdaq Stock Market Index") prepared by the Center for Research in
Security Prices ("CRSP") and the Nasdaq Financial Stocks total return index
prepared by CRSP (the "Nasdaq Financial Stocks Index"). The comparison is for
the period from August 22, 1995 (the date the Company's Common Stock first
became listed on the Nasdaq National Market) to December 31, 1998 and assumes
the reinvestment of any dividends. The initial price of the 


<PAGE>   44

Company's Common Stock shown in the graph below is based upon the price of $3.50
as reported on August 22, 1995 on the Nasdaq National Market. The Nasdaq Stock
Market Index comprises all domestic shares traded on the Nasdaq National Market
and The Nasdaq SmallCap Market. The Nasdaq Financial Stocks Index comprises all
shares traded on the Nasdaq National Market and The Nasdaq SmallCap Market which
were issued by companies whose primary business falls within Standard Industrial
Classification (SIC) codes 60 through 67. The historical information set forth
below is not necessarily indicative of future performance. The following graph
was prepared at the Company's request by Research Data Group, Inc., San
Francisco, California.

                        [Graphic Material Presented Here]

                                                Cumulative Total Return

<TABLE>
<CAPTION>
                                                  8/22/95      12/95       12/96        12/97       12/98
<S>                                               <C>          <C>         <C>          <C>         <C>
       Walnut Financial Services, Inc.               100          64          32           44          10
       Nasdaq Stock Market Index                     100         103         127          155         219
       Nasdaq Financial Stock Index                  100         115         147          224         217
</TABLE>












<PAGE>   45




         REPORT OF THE COMPENSATION COMMITTEE. The Compensation Committee of the
Board of Directors is composed of the Company's three independent outside
directors, Messrs. Burge, Burleson and Weisgal. The Compensation Committee is
responsible for administering the policies which govern the Company's executive
compensation.

         Objectives of Executive Compensation. The Compensation Committee has
designed its compensation policy to provide the proper incentives to management
to maximize the Company's performance in order to serve the best interests of
its stockholders. As a result, the Compensation Committee intends to focus on
incentive awards, such as stock option grants, as opposed to large salary
increases or bonuses to emphasize performance related incentive compensation.
The Compensation Committee awarded no cash bonuses for 1998.

         The Company maintains the philosophy that compensation of its executive
officers and others should be directly and materially linked to operating
performance. To achieve this linkage, executive compensation is weighted towards
incentive awards granted on the basis of the Company's performance. Thus, while
annual salary increases are based on personal performance of the executive
officers and general economic conditions, annual bonuses, if any, and incentive
award grants are directly tied to the Company's actual economic performance
during the applicable fiscal year.

         The Incentive Stock Option Committee (currently comprised of the same
members as the Compensation Committee) determines stock options to the
executives under the provisions of the Walnut Capital Corp. 1987 Stock Option
Plan, the NFS Services, Inc. 1989 Incentive Stock Plan and the 1994 Stock Plan
(collectively, the "Stock Plans"). When granted, such incentive awards provide
incentive to improve stockholder value over the long-term and to encourage and
facilitate executive stock ownership. In general, stock options are granted at
the market price of the Common Stock at the date of grant to ensure that
executives can only be rewarded for appreciation in the price of the Common
Stock when the Company's stockholders are similarly benefited. The Incentive
Stock Option Committee determines those executives who will receive incentive
award grants, the size and particular vesting and other requirements of such
awards and the Stock Plan to be utilized.

         Compensation Committee Procedures. The Compensation Committee will
annually evaluate the personal performance of the Chief Executive Officer and
the other executive officers of the Company, as well as the Company's
performance and analyze the total annual compensation and stock ownership of the
Chief Executive Officer and the other executive officers.

         Section 162(m) of the Internal Revenue Code of 1986, as amended, limits
the deductibility on the Company's tax return of compensation over $1 million to
any of the named executive officers of the Company unless, in general, the
compensation is paid pursuant to a plan which is performance-related,
non-discretionary and has been approved by the Company's stockholders. The
Compensation Committee's policy with respect to Section 162(m) is to make
reasonable efforts to ensure that compensation is deductible to the extent
permitted while simultaneously providing Company executives with appropriate
rewards for their performance.

         It is Compensation Committee's desire to create a compensation policy
that will reward executive performance when such performance has provided
tangible benefits for the Company's stockholders.


<PAGE>   46

         Submitted by the Compensation Committee:

                                Gene E. Burleson
                              William F. Burge, III
                               Solomon A. Weisgal

         DIRECTOR COMPENSATION. During the 1998 fiscal year the Company paid its
non-employee directors $2,500 for each regularly scheduled meeting attended in
person or by telephone, $2,500 for each special meeting attended, and $500 for
each committee meeting attended in person or by telephone. The Company
reimburses the directors for reasonable out-of-pocket expenses incurred in
connection with their activities on behalf of the Company. In the past, if a
director was re-elected, such director would receive, upon such re-election, a
10-year option to purchase 1,000 shares of Common Stock at the market price at
the time of grant. Furthermore, any new director elected to the Board of
Directors would receive a 10-year option to purchase up to 1,666 shares of
Common Stock at the market price at the time of grant.

         Since the Company's election to be regulated as a BDC, the Company has
been prohibited from issuing such options.

         COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Compensation Committee currently consists of Messrs. Burleson, Burge and
Weisgal. None of them has served as an officer of the Company or has any other
business relationship or affiliation with the Company, except his service as a
director.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth (i) the number of shares of Common Stock
beneficially owned by Joel S. Kanter, Burton W. Kanter and Robert F. Mauer
(collectively, the "Named Executive Officers"), and each of the directors of the
Company, individually, and the executive officers and directors of the Company,
as a group, and (ii) the percentage of ownership of the outstanding Common Stock
represented by such shares. Except for such persons, no owner of more than five
percent (5%) of the outstanding Common Stock is known to the Company. The share
ownership is reported as of April 13, 1999. All share numbers are provided based
upon information supplied to management of the Company by the respective
individuals and members of the group. Each person named in the table has sole
voting and investment power with respect to all shares shown as beneficially
owned by such person, except as otherwise set forth in the notes to the table.


<PAGE>   47
<TABLE>
<CAPTION>
                 Names and Addresses of Directors and             Number of         Percent of
                          Executive Officers                        Shares            Class
               -----------------------------------------          ---------         ----------
<S>                                                               <C>                <C> 
               Burton W. Kanter(1)                                  224,969            6.6%
               Two North LaSalle St.
               Suite 2200
               Chicago, IL 60602

               Solomon A. Weisgal(2)                                 73,345            2.2%
               120 S. Riverside Plaza
               Suite 1620
               Chicago, IL 60606

               Joel S. Kanter(3)                                    228,965            6.8%
               8000 Towers Crescent Drive Suite 1070
               Vienna, VA  22182

               William F. Burge, III                                     0              0%
               Ayrshire Corporation
               2028 Buffalo Terrace
               Houston, TX  77019

               Gene E. Burleson                                     20,400               *
               Argonne Properties Inc.
               325 Argonne Drive
               Atlanta, GA  30305

               Albert Morrison, Jr.(4)                              90,027             2.7%
               1001 Brickell Bay Drive
               9th Floor
               Miami, FL  33131

               Earl Chapman(5)                                       1,667               *
               2039 Laukahi Street
               Honolulu, HI  96821

               Robert F. Mauer(6)                                    9,375               *
               8000 Towers Crescent Drive
               Suite 1070
               Vienna, VA  22182

               Officers and Directors, as a group(7)               651,815            18.9%
</TABLE>



----------------
*        Less than one percent (1%).


(1)      The number of shares reported includes: (i) 1,503 shares owned by BWK,
         Inc. ("BWK"), (ii) 6,754 shares owned by Carlco, Inc. ("Carlco"), (iii)
         94,350 shares owned by Mr. Kanter, not personally but solely as
         Co-Trustee of each of the general partners of the HAP Trusts
         Partnership ("HAP"), (iv) 59,152 shares owned by THC, (v) 6,680 shares
         owned by TMT, Inc. ("TMT"), (vi) 8,750 shares owned by the Nominee
         Corp. ("Nominee"), (vii) Class A Warrants to purchase up to 6,125
         shares owned by Nominee and (viii) options to purchase up to 41,655
         shares at $10.80 per share, all of which options are presently
         exercisable.

         Mr. Kanter disclaims any and all beneficial interest in any of the
         above referenced shares of Common Stock and Class A Warrants owned by
         BWK, Carlco, HAP, THC, TMT or Nominee. Mr. Kanter, as President of BWK,
         Carlco, TMT, THC and Nominee, has sole voting and investment control of
         the 82,839 shares owned by BWK, Carlco, TMT and THC and, upon exercise
         thereof, will have sole voting and investment control over the 6,125
         shares underlying Nominee's Class A Warrants and the 41,655 shares Mr.
         Kanter's options. Mr. Kanter, as Co-Trustee of each of the general
         partners of HAP, shares voting and investment control of the 94,350
         shares owned by HAP with his fellow co-trustee.
<PAGE>   48

         Each of BWK, Carlco, HAP, THC, and TMT disclaim any and all beneficial
         ownership of the shares owned by the others.

(2)      The number of shares reported includes: (i) 7,534 shares owned by
         Cypress Lane Investments ("Cypress"), (ii) 7,534 shares owned by Nacha
         Investment Company ("Nacha"), the general partners of which are
         individual trusts of which Mr. Weisgal is trustee and Mr. Chapman and
         members of his family are the beneficial owners, (iii) 1,667 shares
         owned by Cana Investors ("Cana"), the general partners of which are a
         revocable trust of which Messrs. Weisgal and Chapman are co-trustees
         and Mr. Weisgal is sole beneficiary, Cypress and Nacha, and (iv) 56,610
         shares owned by the BRT Partnership ("BRT"), the general partners of
         which are individual trusts of which Mr. Weisgal is a trustee and
         members of the Kater family including Joel S. Kanter and Joshua S.
         Kanter, but excluding Burton W. Kanter, are the beneficiaries.

         Mr. Weisgal disclaims any and all beneficial interest in any of the
         shares owned by Nacha or BRT. As such, Mr. Weisgal has a beneficial
         interest only in the 9,201 shares. Mr. Weisgal has sole voting and
         investment control of the 64,144 shares owned by Nacha and BRT. Mr.
         Weisgal, as the trustee of one of the general partners of Cypress,
         shares voting and investment control of the 7,534 shares owned by
         Cypress. Mr. Weisgal, as one of the general partners and as the trustee
         of two of the general partners of Cana, shares with Mr. Chapman the
         voting and investment control of the 1,667 shares owned by Cana.

         Each of BRT, Cana, Cypress and Nacha disclaim any and all beneficial
         ownership in the shares owned by the others.

(3)      The number of shares reported includes: (i) 68,666 shares owned by the
         Kanter Family Foundation ("KFF"), (ii) 121,141 shares owned by Windy
         City, (iii) 5,834 Class A Warrants owned by KFF, and (iv) options to
         purchase up to 33,324 shares at $10.80 per share, all of which options
         are presently exercisable.

         Mr. Kanter disclaims any and all beneficial interest in any of the
         above referenced securities owned by KFF or Windy City. Mr. Kanter, as
         President of KFF and Windy City, has sole voting and investment control
         of the 189,807 shares owned by KFF and Windy City and, upon exercise
         thereof, will have sole voting and investment control over the 39,158
         shares underlying KFF's Class A Warrants and Mr. Kanter's options.

         Each of KFF and Windy City disclaim any and all beneficial ownership of
         the shares owned by the other.

(4)      The number of shares reported consists of 90,027 shares owned by
         Federal Business Investment Company ("FBIC"). Mr. Morrison is the
         president of FBIC and exercises sole voting and investment control over
         such Common Stock. Trusts established for the benefit of members of
         Burton Kanter's family (excluding Mr. Kanter) beneficially own 48% of
         the outstanding common stock of FBIC. Trusts established for the
         benefit of various members of Mr. Morrison's family (excluding Mr.
         Morrison) beneficially own 48% of the outstanding common stock of FBIC.
         The remaining 4% of the outstanding common stock of FBIC and a class of
         preferred stock of FBIC are beneficially owned by unrelated third
         parties. Mr. Morrison disclaims beneficial interest to the 90,027
         shares of Common Stock owned by FBIC.

(5)      The number of shares reported is 1,667 shares owned by Cana, the
         beneficial ownership of which has also been reported by Mr. Weisgal.
         Mr. Chapman, as one of the general partners of Cana, shares voting and
         investment control of the shares owned by Cana.

(6)      The number of shares reported consists of options to purchase 9,375
         shares at $12.00 per share, all of which options are presently
         exercisable.

(7)      Such group consists of nine persons. The number of shares reported
         includes all of the shares reported at footnotes 1 through 6, inclusive
         and shares owned by Joshua Kanter, Secretary and General Counsel of the
         Company.
<PAGE>   49

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company has retained the firm of BFKP&N as its general counsel.
Joshua S. Kanter, the General Counsel and Secretary of the Company, is of
counsel to such firm and his wife, Catherine McNichols Kanter, is a partner of
such firm. The Company and its subsidiaries paid approximately $342,000 in legal
fees and expenses to BFKP&N during 1998 and had current BFKP&N invoices
outstanding as of December 31, 1998 totaling approximately $154,000.

         In April 1997, THC, a company of which Burton W. Kanter is President,
made an unsecured loans to Walnut Capital in the aggregate principal amount of
$400,000. Trusts for the benefit of Mr. Burton Kanter's family control a
majority of the outstanding common stock of THC. The loan accrues interest at
9.5% per annum. Under amended terms, principal payments were to be made on the
loan in four installments of $100,000 following the end of each of the fiscal
quarters of the Company in 1998, with the first installment to be paid on April
1, 1998. The first and second installments were paid on April 1, 1998 and in
July 1998. The third and fourth payments, which were due on October 1, 1998 and
January 1, 1999, respectively, have been deferred pursuant to another amendment
to the agreement between THC and Walnut Capital. The Company is permitted to
further defer the principal payments until June 30, 1999 as long as the Company
makes quarterly interest payments on the balance. Management believes that such
loan is on terms no less favorable than the terms available from institutional
lenders.

         In connection with the transaction through which the Company acquired
Inland Financial, the Company borrowed in October 1998 $250,000 from each of
KFF, an Illinois not-for-profit private charitable foundation established by the
Kanter family and of which Joel Kanter is President and a director, and Joshua
Kanter is Vice President and a director. The Company issued to KFF a promissory
note which matures on October 13, 2001. The promissory notes bear interest at a
rate of 15% per year which is payable quarterly. The loan is unsecured.

         Walnut Capital subleases office space in Vienna, Virginia, which is
also utilized by the Company, from Windy City. Messrs. Joel Kanter and Joshua
Kanter are the President and Vice President, respectively, of Windy City. Trusts
for the benefit of Mr. Burton Kanter's family own indirectly all of the
outstanding common stock of Windy City. Rental under such lease is $4,855 per
month and includes secretarial services, office equipment and furniture and
parking. The Company and Walnut Capital paid Windy City $56,000 in 1998. The
sublease has a one-year term which is renewable annually. Management believes
the terms of such sublease and the amounts paid thereunder are commensurate to
the amounts Walnut Capital would have to pay to unaffiliated third parties for
comparable leased offices and services.

         A wholly-owned subsidiary of Windy City is a general partner of UPLP,
together with Universal Bridge. The partnership agreement provides that each
general partner has the authority to bind UPLP and make decisions on behalf of
UPLP. To date, Universal Bridge has primarily been exercising management control
over UPLP.

         The Company has a term loan with American National Bank and Trust
Company of Chicago ("ANB"), which had a principal amount of $1,025,000
outstanding as of December 31, 1998, following a principal payment of $100,000
on such date. On December 31, 1998, this bank loan was amended to require an
immediate principal payment of $100,000 and quarterly principal payments
thereafter. It has an amended maturity date of December 31, 1999 and an interest
rate equal to ANB's base rate plus 2% (10.5% as of December 31, 1998). Messrs.
Burton W. Kanter and Joel S. Kanter have personally guaranteed such line of
credit. In consideration for such guarantee, the Company has agreed to pay
Messrs. Kanter, in the aggregate, an amount equal to .25% per annum of the
amounts so guaranteed.



<PAGE>   50



                                     PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K.

         (a)(1)  Financial Statements:

         The Company's Consolidated Financial Statements and Notes to
Consolidated Financial Statements appear at pages 22 to 40, inclusive, of this
Report; see Index to Consolidated Financial Statements at page 21 of this
Report.

         (a)(2)  Financial Statement Schedules:

         All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Consolidated Financial
Statements and Notes thereto.

         (a)(3)  Exhibits:

         The exhibits required by Item 601 of Regulation S-K are included with
this Form 10-K and are listed on the "Index to Exhibits" immediately following
the signature page.

         (b)  Reports on Form 8-K:

         No reports on Form 8-K were filed during the last quarter of 1998.




<PAGE>   51



                                   SIGNATURES



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

                                                 WALNUT FINANCIAL SERVICES, INC.



Date:   April 15, 1999                           By:  /s/ Joel S. Kanter      
                                                    ----------------------------
                                                    Joel S. Kanter, President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
Signature                                                     Title                          Date
---------                                                     -----                          ----
<S>                                           <C>                                        <C>         
    /s/ Joel S. Kanter                        Chief Executive Officer, President and     April 15, 1999
-------------------------------               Director (Principal Executive Officer)
    Joel S. Kanter                            


    /s/ Robert F. Mauer                       Treasurer                                  April 15, 1999
-------------------------------               (Principal Financial and Accounting
    Robert F. Mauer                           Officer)

    /s/ Burton W. Kanter                      Director                                   April 15, 1999
-------------------------------
    Burton W. Kanter


    /s/ Solomon A. Weisgal                    Director                                   April 15, 1999
-------------------------------
    Solomon A. Weisgal


    /s/ William F. Burge, III                 Director                                   April 15, 1999
-------------------------------
    William F. Burge, III


    /s/ Albert Morrison, Jr.                  Director                                   April 15, 1999
-------------------------------
    Albert Morrison, Jr.


    /s/ Gene E. Burleson                      Director                                   April 15, 1999
-------------------------------
    Gene E. Burleson


    /s/ Earl Chapman                          Director                                   April 15, 1999
-------------------------------
    Earl Chapman
</TABLE>



<PAGE>   52


                                  EXHIBIT INDEX



 2.1  Agreement and Plan of Reorganization dated November 8, 1994 by and between
      NFS Services, Inc. (Utah) and Walnut Capital Corp.[2.1](1)

 3.1  Articles of Incorporation of Walnut Financial Services, Inc., as
      amended.[3.1, 4](1)(2)

 3.2  Bylaws of Walnut Financial Services, Inc.[3.2](1)

10.1  The Walnut Capital Corporation 1987 Stock Option Plan. [10.6](1)

10.2  The NFS Services, Inc. 1989 Incentive Stock Option Plan. [10.7](1)

10.3  The NFS Services, Inc. (Utah) 1994 Incentive Stock Option Plan, as amended
      [10.8](3)

10.4  Agency Agreement dated October 10, 1997 between Walnut Financial Services,
      Inc. and Walsh Manning Securities, LLC[10.9](4)

10.5  Stock Purchase Agreement dated January 2, 1997 between Jeffrey B. Pyatt,
      Paul J. Zeman, Thomas Maurice, Walnut Financial Services, Inc. and Pacific
      Financial Services Corp.[10.10](3)

21.1  Subsidiaries of Walnut Financial Services, Inc.

23.1  Consent Letter of Richard A. Eisner & Company, LLP.

27.1  Financial Data Schedule.

99.1  Class A Warrant Agreement dated October 15, 1997 between Walnut Financial
      Services, Inc. and Corporate Stock Transfer, Inc.[99.1](4)

99.2  Registration Rights Agreement dated December 18, 1997 between Walnut
      Financial Services, Inc., various purchasers of stock and warrants and
      Walsh Manning Securities, LLC.[99.2](4)

--------------------------

[ ]   Exhibits so marked have been previously filed with the Securities and
      Exchange Commission ("SEC") as exhibits to the filings shown below under
      the exhibit numbers indicated following the respective document
      description and are incorporated herein by reference.

(1)   Previously filed as an Exhibit to the initial filing of the Registrant's
      Registration Statement on Form 10 dated May 10, 1995 as filed with the SEC
      on May 11, 1995.

(2)   Previously filed as an Exhibit to the Registrant's Current Report on Form
      8-K dated January 22, 1999.

(3)   Previously filed as Exhibit B to the 1997 Proxy Statement of Walnut
      Financial Services, Inc. filed with the Securities and Exchange Commission
      on October 30, 1997.

(4)   Previously filed as an Exhibit to the Registrant's Annual Report on Form
      10-K for the fiscal year ended December 31, 1998.