<PAGE>   1
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                     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, 1996

                                       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 Number 0-26072


                        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:

                                            Name of Each Exchange
                  Title of Each Class       on which Registered
               ----------------------  --------------------------
                      NONE                NONE



          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]


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<PAGE>   2

     As of March 17, 1997, the Registrant had issued and outstanding 14,619,172
shares of the Registrant's Common Stock.  The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 17, 1997, was
$12,541,947.*

                     DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference to the Registrant's
definitive proxy statement to be filed with respect to the Annual Meeting of
Stockholders anticipated to be held on June 24, 1997.



* Based on the last reported price of an actual transaction in Registrant's
common stock on March 17, 1997 ($1 1/32), and reports of beneficial ownership
filed by directors and executive officers of Registrant and by beneficial
owners of more than 5% of the outstanding shares of Common Stock of Registrant;
however, such determination of shares owned by affiliates does not constitute
an admission of affiliate status or beneficial interest in shares of
Registrant's Common Stock. 



                                Page 2 of 55
<PAGE>   3

                                   PART I

ITEM 1.  BUSINESS


     GENERAL.  The Company currently has three primary business focuses: (i)
investing in start-up and early stage development companies, (ii) providing
diversified consulting and asset recovery services (recovery of financial
assets, e.g., cash and securities, which had not been accounted for by its
clients) to securities firms, banks and others, and (iii) operating an
investment vehicle that specializes in bridge financing to small to
medium-sized companies.  The Company engages in the investment business through
its wholly-owned subsidiary, Walnut Capital Corp., a Delaware corporation
("Walnut").  Walnut was formed for the purpose of operating as a Small Business
Investment Company (a "SBIC") under the Small Business Investment Act of 1958
(as amended, the "Act"), and is subject to regulations promulgated by the Small
Business Administration ( the "SBA") pursuant to the provisions of the Act.
The Company engages in the consulting and asset recovery business through its
wholly-owned subsidiary, NFS Services, Inc., a New York corporation ("NFS"),
and NFS' wholly-owned subsidiaries: (i) Asset Recovery Services, Inc., a New
York corporation ("ARS"), and (ii) NFS Collection Services, Inc., a New York
corporation ("NFS Collection").  NFS has been in the consulting and asset
recovery business since 1992.  NFS conducts its operations both directly and
through its subsidiaries.  The Company is in the process of re-evaluating the
asset recovery business of NFS and its subsidiaries, and as a result thereof,
the Company has written down NFS' goodwill.  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").  Certain financial information with respect to the
Company's industry segments for each of the Company's last three fiscal years
is contained in footnote 15 of the audited financial statements which are
contained in this Report on Form 10-K.

     BACKGROUND PRIOR TO THE BUSINESS COMBINATION.  The Company was organized
under the laws of the State of Utah on June 26, 1984 under the name DNE
Corporation.  For the period 1984 through 1988, the Company engaged in
manufacturing operations.  After December 1988, the Company ceased all
operations and converted its assets to cash and cash equivalents.  During the
period December 1988 to March 1992, the Company did not engage in operations.

     In March 1992, the Company acquired NFS through a merger of its
wholly-owned subsidiary created for such purpose with and into NFS.  As a
result of such merger, NFS became a wholly-owned subsidiary of the Company.  On
January 6, 1994, the stockholders of the Company approved the change of the
name of the Company from DNE Corporation to NFS Services, Inc. (Utah).

     THE BUSINESS COMBINATION.  The Company and Walnut entered into a business
combination (the "Business Combination") pursuant to a certain Agreement and
Plan of Reorganization dated November 8, 1994 (the "Reorganization Agreement").
Prior to such time, the Company had no ownership interest in Walnut.  Pursuant
to the Reorganization Agreement, the holders of shares of Walnut $.10 par value
common stock ("Walnut Common Stock") exchanged each share of Walnut Common
Stock for 111.327 shares of the Company's Common Stock, on a post-reverse stock
split basis as discussed below.  The Business Combination was consummated on
February 27, 1995.  As a result of the Business Combination, the Company issued
8,826,009 shares of Common Stock (including 333,981 shares issued in August
1995 in connection with the settlement of an appraisal action brought by two
dissenting shareholders) in exchange for all of the outstanding Walnut Common
Stock.


                                Page 3 of 55
<PAGE>   4

     The following is a diagram depicting the corporate organizational
structure of the Company and its subsidiaries immediately after the Business
Combination.


                      WALNUT FINANCIAL SERVICES, INC.
        (formerly known as NFS Services, Inc. (Utah), formerly known
                            as DNE Corporation)
         ----------------------------------------------------------------
                100%   |                                100%    |
                       |                                        |
               NFS SERVICES, INC.                    WALNUT CAPITAL CORP.
          -----------------------                    --------------------
        100%  |         100%  |
              |               |
  ASSET RECOVERY        NFS COLLECTION 
  SERVICES, INC.       SERVICES,  INC.

     The Business Combination was intended to expand and diversify the
Company's business operations and improve its access to clients.  In addition,
the Company gained access to the management expertise of the existing Walnut
management, board of directors and stockholders.

     In order to complete the Business Combination, the Company obtained the
approval of the holders of at least 51% of the then outstanding Common Stock,
at a special stockholders meeting on December 7, 1994 (the "Stockholders
Meeting"), to take the following actions:  (i) consummate the Business
Combination, and (ii) amend the Company's Articles to (a) increase the number
of its authorized shares of Common Stock from 10,000,000 to 50,000,000, (b)
change the Company's name from NFS Services, Inc. (Utah) to Walnut Financial
Services, Inc., (c) incorporate certain restrictions regarding the transfer of
the Company's securities in order to retain the use of Walnut's net operating
losses pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), (d) provide for indemnification of officers and directors of the
Company, and (e) effect a one-for-two reverse stock split (the "Reverse Stock
Split").  Unless otherwise indicated, all references herein to shares of Common
Stock reflect the effect of the Reverse Stock Split.  Such amendment was filed
and became effective on February 27, 1995.  Also at the Stockholders Meeting,
the Company obtained approval of the holders of at least 51% of the then
outstanding Common Stock present at the Stockholders Meeting and entitled to
vote, in person or by proxy, to take the following actions: (x) amend the NFS
Services, Inc. 1989 Incentive Stock Plan (the "1989 Plan"); (y) adopt the NFS
Services, Inc. (Utah) 1994 Incentive Stock Option Plan (the "1994 Plan") which
provides for the issuance of options and other derivative securities entitling
the holders thereof to acquire up to 500,000 shares of Common Stock; and (z)
assume the obligations of Walnut under the Walnut Capital Corporation 1987
Stock Option Plan (the "1987 Plan").

     As a condition precedent to consummating the Business Combination, the
Company initiated a private placement of its Common Stock which was completed
in June 1995 (the "Common Stock Private Placement").  The Company sold
1,015,625 shares of Common Stock to investors in the Common Stock Private
Placement for gross proceeds of $2,031,250.  In addition, the Company issued
125,000 shares of Common Stock as finders' fees in connection with the Business
Combination and 45,270 shares of Common Stock as sales commissions in
connection with the Common Stock Private Placement.

     On June 17, 1996, the Company issued 801,974 shares of Common Stock,
together with five-year warrants to purchase an additional 697,391 shares of
Common Stock at an exercise price of $3.00, in 
      
                                Page 4 of 55
<PAGE>   5

connection with Universal Bridge's purchase of approximately 83% of the
limited partnership interests and 50% of the general partnership interests of
UPLP.  The following is a diagram describing the relationship of the Company
and its subsidiaries after the Universal Acquisition.



                       WALNUT FINANCIAL SERVICES, INC.
(formerly known as NFS Services, Inc.(Utah), formerly known as DNE Corporation)
-------------------------------------------------------------------------------
     100%  |                 100%    |                   100%   |
                                 WALNUT                UNIVERSAL 
   NFS SERVICES, INC.           CAPITAL               BRIDGE FUND, 
                                 CORP.                    INC.
   ------------------                                ------------------------- 
  100% |      100% |                                 83%     |         50%   |
       |           |                                 limited |      general  |
       |           |                                 partner |      partner  |
    ASSET          NFS                                       |               |
  RECOVERY      COLLECTION                                       UNIVERSAL 
SERVICES, INC.  SERVICES, INC.                                  PARTNERS, L.P.



     WALNUT--GENERAL.  Walnut was incorporated on September 18, 1980 and
maintains offices in Chicago, Illinois and Vienna, Virginia.  Since 1984,
Walnut has invested in more than 100 start-up and early stage development
companies (collectively, the "portfolio companies", individually, a "portfolio
company").  Once an investment is made, Walnut's principal objective is to
assist the management of the portfolio company by utilizing the extensive
experience and breadth of professional contacts of Walnut's officers,
directors, consultants and stockholders.  Walnut 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's investment.
Walnut's officers, directors, consultants and stockholders 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's officers,
directors, consultants and stockholders 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 does not maintain a specific investment policy to guide its
investment choices.  Rather, each of Walnut's officers reviews investment
opportunities and, in collaborative fashion, seeks to identify and select the
best among them.  In general, Walnut seeks to maintain a diversified portfolio
of companies from various industries and various geographic locations.  Walnut
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's portfolio companies are located throughout the
United States and in numerous industries.  Initial investment amounts range
from $50,000 to $500,000, and may take the form of debt, equity or some
combination thereof.  The amount currently invested in each such company ranges
from $25,000 to approximately $2,000,000 and takes the form of debt, equity or
some combination thereof as indicated below.  Walnut 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 currently has a representative on the
board of directors of an additional number of such companies although Walnut
has no contractual 


                                Page 5 of 55
<PAGE>   6
right to continue such representation.  Walnut'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'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, 1996, Walnut had a fair market value of  $24.8 million in equity
securities, with a cost basis of $15.4 million.  As of December 31, 1996,
Walnut's debt securities were valued at $0.9 million, with a cost basis of $1.4
million.   Below is a list of certain of Walnut's investments, divided into
business categories, which in the aggregate constitute the principal
investments of Walnut as of December 31, 1996:


                   I.   BIO-TECHNOLOGY COMPANIES
                        ------------------------
                        Cell Therapeutics, Inc.(3)
                        Titan Pharmaceuticals, Inc.(3)
 
                  II.   COMPUTER AND HIGH-TECH COMPANIES
                        -------------------------------------

                        Nhancement Technology Corp.(2)(5)
                        J.L. Wickham Co., Inc.(2)(3)
                        Logic Devices Incorporated (1)(2)(3)
                        Multimedia Games, Inc.(1)(3)
                        SoftKat, Inc. (2)(5)

                 III.   HEALTH CARE COMPANIES
                        -------------------------------------

                        American HealthChoice, Inc.(3)
                        American Psych Systems, Inc.(3)
                        GranCare, Inc.(1)(2)(3)
                        HealthCare COMPARE Corp.(1)(2)(3)
                        Ivonyx Group Services, Inc.(3)
                        Mental Health Management, Inc.(1)(3)


                  IV.   MEDICAL AND HEALTH PRODUCTS COMPANIES
                        -------------------------------------
                        I-Flow Corporation(1)(2)(3)
                        Med Images, Inc.(2)(3)
                        Optiva Corporation(3)
                        Osteoimplant Technology, Inc. (1)(2)(3)

   
                   V.   SERVICE-RELATED AND LOW-TECH 
                        COMPANIES AND OTHER INVESTMENTS
                        -------------------------------
                        Clean America Corporation(1)(5)
                        Consolidated Technology Group, Inc. (1)(3)
                        Concept Technologies Group, Inc.(1)(2)(3)
                        Foster & Gallagher, Inc.(5)(6)
                        Jenna Lane, Inc. (3)
                        Knox International(5)
                        TCOM Services, Inc.(5)
                        Vision III Imaging, Inc. (2)(3)

____________________
(1)  Publicly traded.
(2)  Walnut 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.
(6) Held through an interest in Knox Liquidating Partnership, L.P.


                                Page 6 of 55

<PAGE>   7

     WALNUT--REGULATION BY THE SBA.  Walnut is licensed to operate as a small
business investment company ("SBIC") under the Small Business Investment Act of 
1958, as amended (the "SBA Act"), and is subject to regulation by the Small
Business Administration ("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 has
received financial assistance from the SBA through the SBA's purchase of
certain debentures from Walnut.

     Under the SBIC program, Walnut 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'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 (ii) 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 or a group including Walnut 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, or (c) to
finance certain ownership changes.
     The aggregate annual interest rate and other financing costs Walnut may
charge Small Concerns under the SBIC program is limited by the SBA regulations.
Under these regulations, the maximum annual financing costs (including
interest and commissions, but not management services) of loans to Small
Concerns may not exceed the greater of 15% or seven percentage points above the
"Debenture Rate".  As defined in the SBA regulations, the "Debenture Rate" is
the interest rate announced, from time to time, by the SBA for SBA debentures.
With respect to each loan, the maximum annual financing costs are determined by
reference to the Debenture Rate in effect at the time the loan is made.  This
limitation is applicable to all loans made by Walnut, including loans which are
not funded through the issuance of SBA debentures.  As of December 31, 1996,
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.  As an alternative interest rate ceiling, an SBIC is permitted to
apply a cap on the maximum interest rate which an SBIC can charge on its loans
to Small Concerns based upon the interest rate paid by the SBIC on its own
outstanding SBA debentures rather than the announced Debenture Rate.

     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 

                                Page 7 of 55

<PAGE>   8


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 shareholders, 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's investments in and
loans to any single Small Concern and the affiliates of the Small Concern to
20% of Walnut's common stock and additional paid-in capital ("Private
Capital").

     The SBA regulations require that financing by certain entities deemed to
be affiliates of Walnut cannot be on terms more favorable than the terms on
which Walnut has participated in the financing of a Small Concern.  The burden
is on Walnut 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's financing or within
six months before or after the financing extended by Walnut.

     Walnut follows the SBA-prescribed practice and values its portfolio of
loans and securities owned at fair value based on an SBA-promulgated valuation
policy.  Loans are currently 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, 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.  The fair value of
securities owned, as determined in good faith by the Board of Directors of
Walnut, 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
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 is reflected in Walnut's reserve for unrealized losses.

     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%.  An
increase over 50% causes an SBIC to be in a position of "capital impairment".
Commencing in August 1990, the SBA began to notify Walnut that Walnut's
financial statements showed a trend toward capital impairment.  In May 1992,
the SBA notified Walnut that the SBA had determined 


                                Page 8 of 55

<PAGE>   9
that Walnut was, as of December 31, 1991, in a condition of capital impairment. 
In connection with regularly scheduled audits of Walnut conducted by the SBA
Office of Examinations, the SBA issued a series of findings in July 1994
relating to Walnut's non-conformance with certain of the regulations
promulgated by the SBA.  On July 29, 1994, Walnut entered into an agreement
with the SBA (as amended, the "SBA Agreement") whereby, subject to certain
conditions, the SBA would refrain until June 30, 1995 from declaring an event
of default under 13 CFR 107.203(d) with regard to Walnut's capital impairment.
Principal conditions of the agreement were: (a) Walnut would limit annual
management expenses to $609,295 per year; and (b) Walnut would realize gains
of, or would increase paid-in capital by contributions of cash or marketable
securities, in the aggregate of $4 million (in equal quarterly amounts of $1
million for the quarters ended September 30, 1994, December 31, 1994, March 31,
1995, and June 30, 1995).  Pursuant to an amendment to the agreement
dated September 27, 1994, amounts in excess of $1 million each quarter could be
applied by Walnut to future quarterly requirements, and the annual management
expense was increased to $659,295.  Walnut has fully satisfied the terms of the
SBA Agreement through a combination of realized gains and contributions of
capital and the required limitation on management expenses.  By its terms, the
SBA Agreement expired on June 30, 1995.

     Pursuant to an examination by the SBA, the SBA issued a finding related to
Walnut's capital impairment. Section 107.203(d) of Part 13 of the Code of
Federal Regulations defines capital impairment as a realized earnings deficit
in excess of 50% of private capital.  By letters dated November 9, 1995 and
April 19, 1996, the SBA determined that it would not take any action with
regard to the capital impairment issue under certain circumstances. 
Specifically, the SBA stated that the SBA "would refrain from any action
[against Walnut] if: (1) the market value of [Walnut's] holdings of HealthCare
COMPARE and GranCare in the aggregate exceeds by $10 million the total of all
secured and unsecured third party debt, and (2) the balance in the
Undistributed Net Realized Account does not become negative in an amount
greater than $9,000,000."  As of the year ended December 31, 1996, Walnut's
holdings of HealthCare COMPARE Corp. and GranCare, Inc. in the aggregate
exceeded the total of all secured and unsecured third party debt by
approximately $12 million and the "Undistributed Net Realized Earnings Account"
equaled approximately negative $6 million. Accordingly, management believes
that, by terms of its own statements, the SBA will not take any adverse actions
against Walnut with respect to the capital impairment issue.

     The SBA has issued a finding that the Company has violated Section
107.903(b)(1) and (d) by financing an Associate and paying fees to an
Associate. The Company has provided information to the SBA to show that such
findings are inaccurate. Additionally, the SBA has issued a finding that the
Company has violated Section 107.501(b)(1), (3) and (4) by not seeking prior
approval of the SBA for management services provided by Associates. The Company
believes that such findings are inaccurate and current SBA regulations no
longer require prior approval in such circumstances.

     The last examination report issued to Walnut by the SBA is dated May 14,
1996 and covered the 14-month period ended February 28, 1995. To date, the SBA
has not declared or threatened to declare a default with respect to any of its
findings; however, there can be no assurance that the SBA will be
willing to further refrain from declaring an event of default under the SBA Act
and it is likely that the SBA will continue to deem these issues to be open
until fully resolved to the SBA's satisfaction, irrespective of any continuing
discussions with respect thereto between the SBA and Walnut's management.  If
such a default were to be declared and Walnut failed to cure the same, the SBA
would have the right to accelerate the maturity of the $8 million debentures
issued by Walnut to the SBIC Funding Corp. pursuant to the SBA Act (the "Walnut
Debentures") currently outstanding.  Management believes that Walnut could
immediately remedy fully 

                                Page 9 of 55


<PAGE>   10

the capital impairment issue through the sale of certain of Walnut's portfolio 
securities.  

     NFS--GENERAL.  Since 1971, NFS or its predecessors have offered financial
asset recovery services to securities firms, banks, bankruptcy trustees and
other financial institutions.  Through research and investigation of a client's
records, NFS attempts to recover cash, securities and other property which have
not been properly or fully accounted for by the client.  Clients' needs for
financial asset recovery services arise because financial institutions,
including some of the largest financial institutions, often disregard certain
discrepancies, shortages and uncollected funds and securities in their
day-to-day operations due to time constraints.  Although institutions generally
plan to assign personnel to properly reconcile and rectify those items,
experience has demonstrated that other priorities frequently intervene and the
problem items ultimately are written-off.  Such items are often significant in
the aggregate.

     NFS has developed the expertise to research such financial asset
transactions and to recover uncollected funds and/or securities for its
clients.  Historically, NFS has billed its clients on an hourly fee or
cost-plus basis for these services.  However, over the past four years, NFS has
altered its business and operational strategy and is primarily billing its
clients for these services on a percentage-of-recovery basis.  As a result, NFS
has entered into agreements with a number of large financial institutions to
provide these services for compensation on a percentage-of-recovery basis.  As
of December 31, 1996, NFS had contractual agreements with 15 such financial
institutions.  Such contracts generally provide that they are terminable at
will by either party upon 30 days' prior notice.  For the fiscal year ended
December 31, 1996, NFS received 12.0% of its revenue from Key Investments,
33.0% of its revenue from Chase Manhattan and 15.0% of its revenue from
Citibank. The loss of any of these financial institutions as clients of NFS
would have a material adverse impact on NFS.

     Under the percentage-of-recovery agreements, NFS receives from the client
a percentage of the amounts recovered for the client depending on the size and
nature of each item, generally ranging from 10% to 40% and currently averaging
approximately 25%.  This method of doing business requires a significant
initial investment in working capital.  NFS incurs start-up costs associated
with payroll and other expenses advanced in connection with these projects.
These projects incur the bulk of their expenses within the first nine months of
the engagement.  Even if successful, these financial asset recovery projects
may not attain positive cash flow for up to nine months or more following the
initial engagement of NFS.  However, the profit potential increases
dramatically as the start-up costs are recouped and a substantial portion of
the identified pool of assets are recovered.

     The Company is re-evaluating the asset recovery business of NFS.  As a
result, in accordance with the rules of FAS 121, a write-down of NFS's goodwill
of $1.1 million was recorded in 1996.

     Since 1971, NFS, through its predecessors, has also acted as a consultant
to various firms in the securities operations, financial systems, and related
management areas, primarily concerned with "back-office" operating procedures.
NFS executive officers work with the clients' management to assess their
back-office needs and thereafter make available the services of specialized
consultants on a temporary basis to assist in such back-office areas.  NFS pays
the consultants an hourly wage and bills the client 

                                Page 10 of 55

<PAGE>   11

at a higher negotiated  hourly or per diem rate.  These services are marketed
primarily by personal contact of NFS management with firms requiring these
services.

     NFS provides trained professionals who may assist in the normal daily
back-office operations, particularly during periods of high market activity, or
who render specialized consulting services to brokerage firms with operational,
financial, or regulatory difficulties.  The nature and extent of services
provided vary with the circumstances, but may include analysis of existing
operations, finances, compliance, and management; assignment of NFS consultants
to perform operational functions for which the client lacks trained or adequate
staff, or which the client's own staff has been unable to complete; or the
assumption (from the client's staff) of certain operations or accounting
functions.  NFS' employees and consultants must comply with the rules and
regulations applicable to the customer.  For example, if NFS is providing such
services to banks, then its employees and consultants must comply with
applicable banking regulations.  In addition, NFS' employees and consultants
are often subject to policies regarding confidential information imposed by the
customer.

     NFS--SUBSIDIARIES.  NFS engages in businesses related to asset recovery
through its two wholly-owned subsidiaries.  ARS owns the rights to the residual
assets of approximately sixty defunct entities, all of which were securities
firms, their predecessors and affiliates.  ARS typically purchases such rights
in a bankruptcy or liquidation proceeding relating to the defunct entity.  The
residual assets consist generally of securities (or, in the case of lost
certificates, the right to obtain replacements and the proceeds thereof); sales
or redemption proceeds, dividends, interest, principal, and/or royalty payments
arising from such securities or from other assets (including petroleum
production partnerships and a realty development company), and judgments
against persons indebted to brokerage firms.  ARS pursues the rights of such
defunct entities to realize on the residual assets.  Although the recovery
process begins immediately, in many cases ARS continues to pursue the
realization of such assets for more than 20 years.

     On November 6, 1992, NFS incorporated its subsidiary, NFS Collection,
which is licensed by the Department of Consumer Affairs of the State of New
York and is a member of the American Collectors Association, Inc.  NFS
Collection operates as a collection agency dealing with the recovery of cash
and securities for individual and corporate clients.

     UNIVERSAL BRIDGE.  Universal Bridge owns 50% of the outstanding general
partnership interests and approximately 83% of the limited partnership
interests of UPLP.  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, 1996, UPLP had a fair market value of $1.2 million in
equity securities with a cost basis of  $0.9 million.  UPLP's debt securities
are valued at $0.6 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,
1996:

I.   BIO-TECHNOLOGY COMPANIES
     Cellegy Pharmaceuticals, Inc.(1)(2)
     Innapharma, Inc. (3)
     SunPharm Corporation(1)(2)

II.  COMMUNICATIONS AND MEDIA COMPANIES

     Amplidyne, Inc.(4)




                                Page 11 of 55

<PAGE>   12

     Kideo Productions, Inc.(1)(2)
     Touch Tone America, Inc.(1)(2)


III. COMPUTER AND HIGH-TECH COMPANIES

     Allegro New Media(1)(2)
     Daleen Technologies, Inc.(3)
     Javelin Systems(1)(2)
     Multimedia Games, Inc.(1)(2)
     Palomar Electronics(3)
     ThermoLyte Corporation(2)
     VictorMaxx Technologies, Inc.(1)(2)

IV.  HEALTH CARE COMPANIES

     American HealthChoice, Inc.(1)(4)
     Complete Wellness Centers, Inc.(4)


V.   MEDICAL AND HEALTH PRODUCTS COMPANIES

     Osteoimplant Technology, Inc. (1)(2)
     Thermo BioAnalysis Corporation(1)(2)
     Thermedics Corporation, Inc.(2)

VI.  SERVICE-RELATED AND 
     LOW-TECH COMPANIES AND OTHER 
     INVESTMENTS

     Country Star Restaurants(1)(2)
     Golf Reservations(3)
     IDF International, Inc.(1)(4)
     Jenna Lane, Inc. (2)
     Kat-Man-Du Entertainment(3)
     Kaye Kotts Associates, Inc.(1)(2)
     Ragar Corporation(1)(2)
     Vintage Group(3)
     Weitzer Homebuilders, Inc.(1)(4)

VII. BASIC INDUSTRY

     Clean America Corporation(1)(4)
     Delta-Omega Technologies, Inc.(1)(2)
     Industrial Flexible Materials, Inc.(1)(2)
     Nuecol Corporation(2)
     Smith-Midland Corporation(1)(2)
     Thermo Euro Tech, N.V. (2)

                                Page 12 of 55
<PAGE>   13

___________________
     (1) Publicly traded.
     (2) Investment in form of equity only.
     (3) Investment in form of debt only.
     (4) Investment in form of a combination of equity and debt.


     COMPETITION.  Both Walnut and UPLP engage in the business of investing in
companies through debt and equity participation.  Consequently, each of Walnut
and UPLP competes for investment opportunities with other venture capital
companies, banks and other lenders and private investors.  However, typically
Walnut and/or UPLP works directly with management of the investee companies and
experiences no direct competition.

     Generally NFS is engaged by its clients on a non-exclusive,
project-by-project basis.  NFS may in the future compete with numerous
organizations, which may be larger and have greater financial strength and
resources than NFS.  In addition, NFS clients may deem it advisable to
eliminate the need for services of the type offered by NFS by developing their
own internal staffs to perform the services presently provided by NFS.  To the
extent that NFS attempts to offer specialized services such as bankruptcy and
reorganization services and its various consulting services, it competes with
numerous companies, including many well-known and better financed companies, as
well as individuals offering similar services.  There may be other firms
engaged in similar asset recovery services, although management is unaware of
any significant competitors that perform asset recovery services similar to
NFS.

     OFFICERS AND DIRECTORS.  As of December 31, 1996, the executive officers
and Directors of the Company were:


<TABLE>
<S>                    <C>  <C>
        Name           Age
-------------------   ----  -------------------------------
Burton W. Kanter       66   Director (Chairman) and
                            Chief Executive Officer of
                            Walnut

Joel S. Kanter         40   President and Director and
                            President of Walnut

Eugene N. Scalercio    56   Director and Chief Executive
                            Officer of NFS

William F. Burge, III  54   Director

Gene E. Burleson       56   Director

Solomon A. Weisgal     70   Director

Joshua S. Kanter       34   General Counsel and Secretary

Robert F. Mauer        42   Treasurer
</TABLE>

     EMPLOYEES.  As of December 31, 1996, Walnut employed three people.  As of
December 31, 1996, NFS employed 12 persons and also engaged 18 independent
consultants to the clients of NFS, who are compensated on an hourly basis.
None of the employees of Walnut or NFS are represented by any 


                                Page 13 of 55

<PAGE>   14

collective bargaining agreements and the Company believes that the
relationship of Walnut and NFS with their respective employees is good.  The
Company has one employee, Joel S. Kanter, President and CEO.  The Company
receives any additional required services primarily from Walnut's employees.

     INVESTMENT COMPANY ACT OF 1940.  The Investment Company Act of 1940 (as
amended, the "Investment Company Act"), imposes various registration, filing
and operating requirements on companies which are deemed to be investment
companies thereunder.  Pursuant to Section 3(a)(3) of the Investment Company
Act, the Company may be deemed to be an investment company.  Section 3(a)(3) of
the Investment Company Act generally provides that an issuer will be deemed to
be an investment company if it is engaged in the business of investing,
reinvesting, owning, holding or trading in securities and the issuer owns or
proposes to acquire investment securities having a value exceeding 40% of the
value of the issuer's total assets.  The Company is relying upon an exemption
from the registration, filing and operating requirements imposed by the
Investment Company Act  provided by Rule 3a-2 promulgated by Securities and
Exchange Commission (the "SEC") under the Investment Company Act.  Rule 3a-2
generally provides that an issuer is deemed not to be engaged in the business
of investing, reinvesting, owning, holding or trading in securities for a one
year period provided that the issuer has a bona fide intent to be engaged in a
business other than that of investing, reinvesting, owning, holding or trading
in securities, such intent to be evidenced by the issuer's business activities
and an appropriate resolution of the issuer's board of directors.  The one-year
period has expired, and the Company may be deemed an unregistered investment
company.  The Company believes that other exemptions to the registration
requirements of the Investment Company Act may be available to the Company.
The Board has resolved that the Company's business purpose is to be an
operating company through its subsidiaries and not to be engaged in activities
which would require the Company to register as an investment company and
further resolved that the Company actively seek the acquisition or development
of additional operating assets in furtherance of such purpose.  Should the
Company fail to acquire or develop such assets or otherwise avail itself of an
exemption, the Company may be required to meet the registration, filing and
operating requirements of the Investment Company Act.

     In the event that the SEC determines that either the Company or Walnut is
an investment company and that no exemption from the Investment Company Act is
applicable, the Company may incur substantial costs in connection with the
registration of itself or Walnut as an investment company and otherwise
complying with the provisions of the Investment Company Act.  Specifically, if
the Company or Walnut were to register as an investment company under the
Investment Company Act, the Company and/or Walnut would be subject to, among
other things, certain limitations with respect to (i) capital structure and the
ability to buy or issue securities; (ii) the ownership of securities issued by
other investment companies, insurance companies and organizations engaged in
investment advisory, underwriting and brokerage businesses; and (iii) the
ability to engage in transactions involving persons who are "affiliates" of the
Company or Walnut, or "affiliates" of such persons.  The Company and/or Walnut
would also be subject to certain other operational restrictions and reporting
requirements.  Such limitations might significantly increase the operating
expenses of the Company and limit the Company's ability to, among other things,
repurchase shares of the Common Stock.  The Company may also be required to
discontinue certain of its executive compensation plans, if any are in place.
In addition, certain investments and other actions of the Company or Walnut may
require prior approval of the SEC.



                                Page 14 of 55


<PAGE>   15

ITEM 2.  PROPERTIES

     As of October 13, 1995, NFS entered into an agreement (the "Release
Agreement") with The Bank of New York ("BONY") to terminate its existing
sublease agreement relating to approximately 9,519 square feet, at rent of
approximately $17,250 per month, which otherwise was due to expire on August
30, 1999.  Pursuant to the Release Agreement, NFS agreed to vacate the premises
on October 15, 1995, pay all rent obligations through to October 15, 1995, and
pay an additional $20,000 to BONY (which amounts have been paid).  In addition,
NFS agreed to pay BONY an amount not to exceed $200,000, contingent on certain
events, and payable as follows: $25,000 in each year NFS has net income plus
interest and tax expense equal to or exceeding $600,000, and an additional
$20,000 in each year NFS has net income plus interest and tax expense equal to
or exceeding $850,000, during the tax years 1995-2005.  BONY, therefore, will
not receive any additional sums from NFS if its net income plus interest and
tax expense does not exceed $600,000 per year.  As of March 15, 1997, NFS has
not made any of such payments to BONY.

     As of October 13, 1995, NFS entered into a Sub-sublease Agreement for new
offices at 90 Washington Street, New York, 10006, for approximately 5,354
square feet, at a rent of approximately $8,365 per month, expiring August 29,
1999.  Pursuant to the Sub-sublease Agreement, the sublessor granted a four
month abatement of rent, and NFS agreed to perform all the material non-rent
obligations of the sublessor under the sublessor's sublease with BONY which is
the master lessor of the property.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is not presently involved as plaintiff or defendant in any
legal actions; however, NFS is a defendant in an action to recover management
fees and commissions alleged to be owing by NFS in connection with the Business
Combination and the Common Stock Private Placement.  See Footnote 9 to the
financial statements included elsewhere in this Report on Form 10-K.


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

     No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.


                                    PART II

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

     MARKET PRICE OF COMMON STOCK.  As of March 17, 1997, there were 14,619,172
shares of Common Stock outstanding, held by approximately 694 holders of
record.

     Prior to the Business Combination, the Common Stock was quoted in the
National Quotation Bureau's interdealer system through the Nasdaq "Bulletin
Board" under the symbol NFSS.  From February 27, 1995 until August 21, 1995,
the Common Stock has been quoted in the National Quotation Bureau's interdealer
system through the Nasdaq "Bulletin Board" under the symbol WNUT.  From and


                                Page 15 of 55

<PAGE>   16

after August 22, 1995, the Common Stock has been listed on the Nasdaq National
Market System under the symbol WNUT.  The following table shows the high and
low quotations for Common Stock for each quarter for the period January 1, 1994
through June 30, 1995 and high and low trade prices for each quarter thereafter
until December 31, 1995 based upon information received from the National
Quotation Bureau or the Nasdaq Stock Market, Inc., as applicable.  Such
quotations represent prices between dealers and may not necessarily include
retail markups, markdowns or commissions, and may not represent actual
transactions.  Prices reflect the one-for-five reverse stock split which
occurred in January 1994 and the Reverse Stock Split which occurred on February
27, 1995.



<TABLE>
<CAPTION>
  QUARTER ENDED           HIGH          LOW
<S>                  <C>           <C>     

March 31, 1995        $   3 1/4    $    2 3/8
June 30, 1995             3 1/8         2 1/2
September 30, 1995        3 5/8             2
December 31, 1995         3 1/2             2
March 31, 1996        $  3 3/16    $    2 1/4
June 30, 1996             2 7/8       2 11/32
September 30, 1996        2 7/8         1 1/2
December 31, 1996        2 1/16         1 1/8
</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 is prohibited
from making any dividend or other cash advance to the Company.

ITEM  6.  SELECTED FINANCIAL INFORMATION

     The following selected financial data for the Company for the five-year
period ended December 31, 1996 is presented below.  The information for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 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 Report on Form 10-K.


                                Page 16 of 55

<PAGE>   17


                       WALNUT FINANCIAL SERVICES, INC.

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                        1996             1995           1994*           1993*           1992*
<S>                           <C>               <C>             <C>              <C>              <C>   
Income Statement Data   
(in thousands):         
Income from recovery    
services and operational
support                        $       2,044    $       2,034    $          0    $          0    $          0
Investment income                         96              500             186             265             502
Other income                               0                0             257               0               0
                               ------------------------------------------------------------------------------
Operating income                       2,140            2,534             443             265             502
                               ------------------------------------------------------------------------------
Operating expenses(1)                  4,779            4,342             722             751             721
Interest expense                       2,003            1,840           1,594           1,500           1,349
                               ------------------------------------------------------------------------------
Loss before taxes and   
realized and unrealized 
gains/(losses)                       (4,642)          (3,648)         (1,873)         (1,986)         (1,568)
Income tax benefit                     1,413            1,438             725             729             576
Realized gain/(loss) on 
sale of securities, net 
of                      
tax                                    1,791            2,845             637           (181)             886
                               ------------------------------------------------------------------------------

Income/(loss) before    
unrealized gains                     (1,438)              635           (511)         (1,438)           (106)
Unrealized gain/(loss)  
on                      
investments, net of tax              (1,527)          (2,602)           2,811         (3,583)         (4,674)
                               ------------------------------------------------------------------------------
Net Income/(loss)                    (2,965)          (1,967)           2,300         (5,021)         (4,780)
                               ==============================================================================
Earnings/(loss) per     
Share                                 ($.21)           ($.15)            $.28          ($.62)       
Weighted average shares 
outstanding                       14,247,099       12,747,656       8,353,860       8,130,213       
Balance Sheet Data (in  
thousands except share  
data):                  
Total assets                   $      33,198    $      36,064    $     33,132    $     28,458    $     35,184
                               ==============================================================================
Current liabilities                   14,353           11,387          10,187           6,137           4,499
Long-term liabilities(2)               4,070            9,278          10,680          13,107          16,500
Minority Interest                        387
Shareholders' equity                  14,388           15,399          12,265           9,124          14,185
                               ------------------------------------------------------------------------------
Total liabilities and   
shareholders' equity           $      33,198    $      36,064    $     33,132    $     28,458    $     35,184
                               ==============================================================================

</TABLE>                



                                Page 17 of 55

<PAGE>   18

(1) Includes provision for credit losses and write off of subsidiary goodwill
(2) Includes non-current deferred tax liability
*    Includes the results of operations of Walnut only (see Footnotes 1 and 2
     to the financial statements included elsewhere herein).

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

RESULTS OF COMPANY OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1996 AND
1995.

     Results of Walnut Operations for the Fiscal Years Ended December 31, 1996
and 1995.  Walnut had realized gain income of $1,561,000 net of tax, for the
year ended December 31, 1996, compared to $2,845,000, net of tax, for the year
ended December 31, 1995.  The realized gains result predominately from the sale
of shares of HealthCare COMPARE Corp. which produced approximately $2.2 million
of realized gains in the current period.

     Interest expense decreased $478,000 to $1,217,466 during the year ended
December 31, 1996, representing a 28% decrease under interest expense during
the year ended December 31, 1995.  Interest expense consists of two components:
(1) interest paid to the SBA with respect to the Walnut Debentures ($731,000 and
$1,027,000 for 1996 and 1995, respectively), and (ii) interest paid on margin
accounts and bank lines ($483,000 and $665,000 for 1996 and 1995,
respectively).  The decrease in SBA interest expense was the result of
repayment to the SBA of a $4 million debenture on September 1, 1995.

     General and administrative expense increased $64,000 to $770,000 during
the year ended December 31, 1996, representing a 9% increase over operating
expense during the year ended December 31, 1995.

     Unrealized losses, net of unrealized gains, for the year ended December
31, 1996 were approximately $1.4 million, net of tax, as compared to unrealized
losses for the year ended December 31, 1995 of approximately $2.6 million, net
of tax.  The change is due to a lesser decline in market value of several of
Walnut's larger holdings in 1996 as compared to 1995.

     Results of NFS Operations for the Fiscal Year Ended December 31, 1996 and
the Period from February 28, 1995 to December 31, 1995.  During the period from
January 1, 1996 to December 31, 1996, revenues for NFS were $2,122,000.
Revenue was derived from recovery services ($887,000), operational support
($1,157,000) and other ($78,000).

     For such 12 month period, revenue from recoveries was $887,000 of which
56% was derived from three clients (Chemical Bank, $188,000, or 21%, DBL, 
$167,000, or 19%, and Merrill Lynch, $145,000, or 16%).  Operational support 
revenue was $1,157,000 of which 84% was derived from three clients (Chase Bank 
$512,000, or 44%, Citibank, N.A., $210,000, or 18%, and Key Investments, 
$255,000, or 22%).

     For the ten month period ended December 31, 1995, cost of services was 
$2,450,000.  This amount included an increase in reserve for non-realization of
two products recorded as Work in Progress.  This reserve was due to a change 
in the status of the customers' expectations of the completion of projects.  
NFS management will continue to pursue the collection of these items valued at
$815,000, even though their ultimate collectibility cannot be assured.  General 
and administrative expenses were $610,000 for the period.

     NFS incurred a charge to operations of $1,100,000 in 1996 representing
a write-down of NFS's goodwill, which resulted from the Company's continuing
re-evaluation of the asset recovery business of NFS.  Such write-down was made
in accordance with FAS 121.

     Results of Company Operations for the Fiscal Year ended December 31,
1996 and the Period from February 28, 1995 through December 31, 1995.  The
Company had interest income of $37,000 and general and administrative cost of
$881,000 for the year ended December 31, 1996 as compared to $8,000 and
$575,000, respectively, in the ten month period ended December 31, 1995. 
Consolidated net loss for 

                                Page 18 of 55


<PAGE>   19

the Company was $2.96 million for the year ended December 31, 1996 as
compared to net loss of $1.97 million in the ten month period ended December 31,
1995.

RESULTS OF COMPANY OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995 AND
1994.

     Results of Walnut Operations for the Fiscal Years Ended December 31, 1995
and 1994.  Walnut had realized gain income of $2,895,000, net of tax, for the
twelve months ended December 31, 1995, compared to $636,000, net of tax, for
the twelve months ended December 31, 1994.  The increase in realized gains
results predominately from the sale of shares of HealthCare COMPARE Corp. which
produced approximately $5.3 million of realized gains in the current period.

     Investment and other income increased $2,000 to $445,000 for the twelve
months ended December 31, 1995.  The results for 1995 included realization of
interest income from prior years on debt securities which was simultaneously
converted to an equity position.  The results for 1994 included conversion to
equity securities of an income producing partnership investment.

     Interest expense decreased $64,000 to $1,529,000 during the twelve months
ended December 31, 1995, representing a 4% decrease under interest expense
during the twelve months ended December 30, 1994.  Interest expense consists of
two components: (1) interest paid to the SBA with respect to the Walnut
Debentures ($1,529,000 and $1,593,000 for 1995 and 1994, respectively), and
(ii) interest paid on margin accounts and bank lines ($504,000 and $424,000 for
1995 and 1994, respectively).  The decrease in SBA interest expense was the
result of repayment of a $4 million debenture on September 1, 1995, while the
increase in margin and bank line interest was due to a rise in interest rates.

     General and administrative expense decreased $16,000 to $706,000 during
the twelve months ended December 31, 1995, representing a 2% decrease under
operating expense during the twelve months ended December 31, 1994.

     Unrealized losses for the twelve months ended December 31, 1995 were
approximately $2.65 million, net of tax, versus unrealized gains for the twelve
months ended December 31, 1994 of approximately $2.8 million, net of tax.  The
change is due to the decline in market value of several of Walnut's larger
holdings.

     Results of NFS Operations for the Period from February 28, 1995 to
December 31, 1995.  During the period from February 28, 1995 to December 31,
1995, revenues for NFS were $2,081,439.  Revenue was derived from recovery
services ($312,581), operational support ($1,763,319) and other ($5,539).

     For such ten month period, revenue from recovery services was $312,581 of
which 54% was generated from predominately two clients (Chemical Bank,
$117,990, or 38%, and Citibank, N.A., $51,525, or 16%).  Operational support
revenue was $1,763,319 of which 90% was derived from three clients (Citibank,
N.A., $1,120,847, or 64%, Chemical Bank, $246,789, or 14%, and Key Investments,
$215,214, or 12%).

     For such ten month period, cost of services was $2,450,000.  This amount
included an increase in reserve for non-realization of two products recorded as
Work in Progress.  This reserve was due to a change in the status of the
customers' expectations of the completion of projects.  NFS management will
continue to pursue the collection of these items valued at $815,000, even
though their ultimate collectibility cannot be assured.  General and
administrative expenses were $610,034 for the period.


                                Page 19 of 55


<PAGE>   20

     Results of Company Operations for the Period from February 28, 1995 to
December 31, 1995.  During the ten months from February 28, 1995 to December
31, 1995, the Company had interest income of approximately $7,845 and general
and administrative expenses of approximately $575,483.  Consolidated net loss
for the Company was $1.9 million for the twelve months ended December 31, 1995
compared to net income of $2.3 million for the twelve months ended December 31,
1994.



                                Page 20 of 55



<PAGE>   21
LIQUIDITY AND CAPITAL RESOURCES.

     Liquidity and Capital Resources of Walnut.  As part of the SBIC program,
Walnut has, from time to time, issued $12 million of debentures to the SBA.  On
September 1, 1995, debentures in the principal amount of $4 million had been
repaid and debentures in the principal amount of $8 million are currently
outstanding.  The amounts, maturities and interest rates of such Walnut
Debentures are set forth below:


<TABLE>
<S>                <C>          <C>       <C>
Principal Balance  Date Issued  Maturity  Interest Rate
$4,000,000          04/29/87    04/01/97      8.95%
2,000,000           06/08/88    06/01/98      9.80%
2,000,000           09/27/89    09/01/99      8.80%
</TABLE>

Interest on the Walnut Debentures is paid semi-annually, and principal is due
at maturity.  Walnut has been current in all of its interest payments to the
SBA.  Walnut intends to sell certain of its portfolio securities in order to
repay the $4 million of Walnut Debentures which mature on April 1, 1997.

     The Walnut Debentures prohibit the distribution of earnings or other
assets of Walnut 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 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 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 can incur.  The Walnut
Debentures cannot be prepaid without payment of a substantial prepayment
penalty related to the time of such prepayment.  Although Walnut has no future
plans to issue additional debentures to the SBA, Walnut is not currently
eligible to borrow additional funds under the SBIC program due to Walnut's
capital impairment.  Management believes that even if Walnut were eligible for
additional loans, the SBA may be unwilling or unable to provide additional
loans to Walnut due to the SBA's budgetary restraints.

     During its normal examination process, the SBA has made a number of      
findings regarding Walnut's compliance with certain regulations promulgated
under the Act.  Walnut is in the process of resolving such findings with the
SBA.  If it is ultimately determined that Walnut has violated the SBA Act, the
SBA has the authority, upon written notice and expiration of applicable cure
periods, to declare the Walnut Debentures immediately due and payable.  In that
case, Walnut would likely be forced to sell some of its portfolio securities to
repay the Walnut Debentures.  In such an event, Walnut would realize gains and
reduce its liabilities in a corresponding amount.  As a result, management
believes that the net worth of Walnut calculated in accordance with generally
accepted accounting principles would not significantly change.  Walnut,
however, would lose the opportunity to obtain further gains, if any, on the
portfolio securities so sold.

                                 Page 21 of 55

<PAGE>   22



     One of the findings of the SBA relates to Walnut's capital impairment.
Section 107.203(d) of Part 13 of the Code of Federal Regulations defines
capital impairment as a realized earnings deficit in excess of 50% of private
capital. By letters dated November 9, 1995 and April 19, 1996, the SBA
determined that it would not take any action with regard to the capital
impairment issue under certain circumstances. Specifically, the SBA stated that
the SBA "would refrain from any action (against Walnut) if: (1) the market
value of [Walnut's] holdings of HealthCare COMPARE and GranCare in the
aggregate exceeds by $10 million the total of all secured and unsecured third
party debt, and (2) the balance in the Undistributed Net Realized Account does
not become negative in an amount greater than $9,000,000." As of December 31,
1996, Walnut's holdings of HealthCare COMPARE Corp. and GranCare, Inc. in the
aggregate exceeded the total of all secured and unsecured third party debt by
approximately $12 million, and the "Undistributed Net Realized Earnings Account
" equaled approximately negative $6 million. Accordingly, management believes
that, by terms of its own statements, the SBA will not take any adverse actions
against Walnut with respect to the capital impairment issue.

     Liquidity and Capital Resources of NFS.  NFS derives its revenues from
consulting and financial asset recovery services.  These services involve the
research and analysis of books, records and transaction documents of financial
institutions for the purpose of locating and recovering uncollected or
wrongfully delivered financial assets, many of which have been improperly
accounted for and written off.  Historically, NFS has been compensated for its
consulting services and financial asset recovery services by the reimbursement
of the actual costs incurred plus a premium ("cost-plus" method).  Over the
past three years, NFS has negotiated, where possible, arrangements whereby NFS
absorbs the costs of providing the financial asset recovery services, and
receives a percentage of any recoveries obtained through its efforts
("percentage-of-recovery" method).

     Under the percentage-of-recovery agreements, NFS receives from a client a
percentage of the amounts identified and/or recovered for the clients depending
on the size and nature of each item.  This method of doing business requires a
significant initial investment in working capital.  This working capital is
needed primarily to compensate, on a bi-weekly basis, NFS's consultants who
provide the services.  The initial revenues generated by these consultants are
from a specific pool of assets and are typically generated more than ninety
days after commencing the project.  As NFS expands its percentage-of-recovery
business, its working capital requirements will increase commensurately.  NFS
has historically supported its working capital requirements through debt
financing and cash flows from operations.  Working capital was $206,000 at
December 31, 1996.

     As of December 31, 1996, NFS owed taxes, penalties and interest of
approximately $89,000 to the State of New York Department of Taxation and
Finance.  On January 27, 1997, NFS paid the State of New York Department of
Taxation and Finance its outstanding obligation in full.  This payment was made
under New York State's tax amnesty program, as such, NFS has no further
past-due obligations to the State of New York Department of taxation and
Finance.

     Liquidity and Capital Resources of the Company.  Through June 1995, the
Company sold 1,015,625 shares of Common Stock in the Common Stock Private
Placement at an offering price of $2.00 per share.  The proceeds of the Common
Stock Private Placement were used primarily to (i) repay indebtedness of the
Company, (ii) advance funds to NFS to allow NFS to pay indebtedness and accrued
federal, state and city taxes, interest and penalties, and (iii) increase
working capital 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.  The line of credit
requires interest only payments due monthly at the bank's base rate plus 2%
(10.5% at December 31, 1996).  Quarterly principal payments of

                                 Page 22 of 55

<PAGE>   23



$575,000 are due beginning December 31, 1995, with all remaining principal
due June 30, 1996.  The Company extended the maturity date to June 30, 1997.
As of December 31, 1996, the outstanding principal under the line of credit was
$2,850,000.

     As of December 31, 1996, the Company had outstanding a promissory note to
a third party representing principal owed of $875,000.  The note was issued in
connection with an acquisition by the Company of a limited partnership interest
in Knox Liquidating Partnership, L.P., which, in turn, has an ownership
interest in a catalog company known as Foster & Gallagher, Inc.  Such note
accrues interest at 8% per annum.  Principal is payable in two installments,
$175,000 on January 31, 1997 (which amount was timely paid) and the remaining
$700,000 on July 31, 1997.

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                                     24

     Consolidated Balance Sheets, December 31, 1996 and 1995            27

     Consolidated Statements of Operations,
     years ended December 31, 1996, 1995 and 1994                       28

     Consolidated Statements of Changes in Shareholders' Equity,
     years ended December 31, 1996, 1995 and 1994                       29

     Consolidated Statements of Cash Flows,
     years ended December 31, 1996, 1995 and 1994                       30

     Notes to Consolidated Financial Statements                         31


     Financial Statement Schedules:

     Schedule I - Condensed Financial Information of Registrant         51


     Schedule II - Valuation and Qualifying Accounts and Reserves       53
</TABLE>


                                 Page 23 of 55

<PAGE>   24
                         REPORT OF INDEPENDENT AUDITORS



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

     We have audited the accompanying consolidated balance sheets of Walnut
Financial Services, Inc. and subsidiaries (the "Company") as at December 31,
1996 and December 31, 1995, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 at December 31, 1996 and
December 31, 1995, 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, 1996 and December 31, 1995, 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, 1996 in conformity with generally accepted
accounting principles.

     As discussed in Note 1, the Company may have Investment Company Act of
1940 (the "Act") considerations.  The Act imposes certain registration, filing
and operating requirements on subject companies.


<PAGE>   25


     As discussed in Note 5, the U.S. Small Business Administration (the "SBA")
has issued its finding that a subsidiary, Walnut Capital Corporation ("Walnut
Capital") has violated Section 107.903(b)(1) and (d) of Part 13 of the Code of
Federal Regulations by financing an associate and paying fees to an associate.
The Company believes that no such violation occurred and the matter is being
discussed with the SBA.

     In addition, the SBA has issued a finding that Walnut Capital has violated
Section 107.501(b)(1), (3) and (4) by not seeking prior approval of the SBA for
management services provided by associates.  The Company believes that no such
violation occurred and the matter is being discussed with the SBA.

     Further, the SBA has issued a finding that Walnut Capital has violated
Section 107.203(d) relating to capital impairment. The SBA has indicated that
under certain circumstances it would refrain from any action against the
Company with regard to capital impairment.

     As explained in Note 2, the consolidated financial statements include
securities, valued at $5,981,000 (18% of total assets), whose values have been
estimated by the Board of Directors in the absence of readily ascertainable
market values.  We have reviewed the procedures used by the Board of Directors
in arriving at its estimate of value of such securities and have inspected
underlying documentation and, under the circumstances, we believe the
procedures are reasonable and the documentation appropriate.  However, because
of the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material, either
reflecting a lower or a higher valuation.



Richard A. Eisner & Company, LLP

New York, New York
January 24, 1997

<PAGE>   26


                      REPORT OF INDEPENDENT AUDITORS WITH
                       RESPECT TO SUPPLEMENTARY SCHEDULES



Board of Directors and Shareholders


     The audits referred to in our report dated January 24, 1997 includes
Schedule I for the year ended December 31, 1996 and Schedule II for each of 
the years in the two-year period ended December 31, 1996.  In our opinion, the
schedules referred to above present fairly the information set forth therein, 
in conformity with the applicable accounting regulation of the Securities and 
Exchange Commission.



Richard A. Eisner & Company, LLP

New York, New York
January 24, 1997
<PAGE>   27

                        WALNUT FINANCIAL SERVICES, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                December 31,       December 31, 1995
                                                                    1996
<S>                                                           <C>                 <C>
ASSETS

Portfolio securities:
  Marketable equity securities (cost of $11,864,004
  in 1996 and $12,564,401 in 1995 )                                 23,842,962              26,622,030
  Non-marketable equity securities (cost of $6,760,208             
  in 1996 and $6,832,836 in 1995)                                    4,468,692               4,486,237
  Non-marketable debt securities (less reserve of  $806,711    
  in 1996 and $384,008 in 1995)                                $     1,512,081        $        846,694   
                                                               ---------------        ----------------
    Total portfolio securities                                      29,823,735              31,954,961
                                                               ---------------        ----------------
CURRENT ASSETS:
  Cash and cash equivalents                                            840,225                 396,440
  Accounts receivable (net of allowance for doubtful                   
    accounts $547,074 in 1996 and $305,273 in 1995)                    420,612                 630,092
  Interest receivable (net of allowance for doubtful                   
    accounts $14,030 in 1996 and $14,030 in 1995)                       26,603                  27,549
  Unbilled receivables                                                 770,754                 501,332
  Other current assets                                                 208,078                  76,420
                                                               ---------------        ----------------
    Total current assets                                             2,266,272               1,631,833
                                                               ---------------        ----------------
Fixed assets (net of accumulated depreciation of
$149,604 in 1996 and $123,382 in 1995)                                  43,431                  54,935
                                                               ---------------        ----------------
Other assets                                                           208,489                 355,283
                                                               ---------------        ----------------
Intangible assets, net of accumulated amortization                     856,548               2,066,492
                                                               ---------------        ----------------
    TOTAL ASSETS                                                 $  33,198,475        $     36,063,504
                                                               ===============        ================
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Margin payable to brokers                                          5,459,118               5,131,783
  Notes payable to banks                                             2,850,000               4,933,791
  Notes payable to other                                               875,000                 270,000
  Accounts payable, accrued expenses, and                            
    other current liabilities                                        1,119,785               1,003,088
  Current portion of long-term debt                            $     4,049,500        $         47,953
                                                               ---------------        ----------------
    Total current liabilities                                       14,353,403              11,386,615

Long-term debt, net of current portion                               4,013,321               8,013,285
Non-current deferred tax liability                                      37,689               1,247,967
Deferred rent, net of amortization                                      19,651                  16,311
                                                               ---------------        ----------------
    Total liabilities                                               18,424,064              20,664,178
                                                               ---------------        ----------------
Minority Interest                                                      386,750                       0
                                                               ---------------        ----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no stated value, 1,000,000 shares
  authorized, no shares issued
Common stock, $.01 stated value, 50,000,000 shares
  authorized, 14,616,687  issued in 1996 and 13,800,713                     --                      --
  issued in 1995                                                       146,167                 138,007
Additional paid in capital                                          15,030,269              13,085,428
Retained earnings (deficit)                                           (788,775)              2,175,891
                                                               ---------------        ----------------
    Total shareholders' equity                                      14,387,661              15,399,326
                                                               ---------------        ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                      $   33,198,475        $     36,063,504
                                                               ===============        ================
</TABLE>

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

                                 Page 27 of 55

<PAGE>   28

                        WALNUT FINANCIAL SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                            For the year ended
                                                             12/31/96             12/31/95          12/31/94*
<S>                                                 <C>                      <C>               <C>

Revenues:
  Recovery services                                                886,800           270,716                --
  Operational support                                            1,157,210         1,763,320                --
  Investment and other income                        $              96,162    $      500,011    $      443,354
                                                     ---------------------    --------------    --------------
                                                                 2,140,172         2,534,047           443,354
                                                     ---------------------    --------------    --------------
Costs and expenses:
  Cost of services                                               1,663,663         2,450,364                --
  General and administrative expenses                            3,115,424         1,892,080           722,250
                                                     ---------------------    --------------    --------------
                                                                 4,779,087         4,342,444           722,250
                                                     ---------------------    --------------    --------------
Operating (loss)                                                (2,638,915)       (1,808,397)         (278,896)
Interest and other financial costs                               2,003,189         1,839,649         1,593,419
                                                     ---------------------    --------------    --------------
(Loss) before taxes and realized gain and
unrealized gain/(loss)                                          (4,642,104)       (3,648,046)       (1,872,315)
Income tax benefit                                               1,413,456         1,438,252           725,000
Realized gain/(loss) on sale of securities, net
of tax                                                           1,791,169         2,845,417           636,932
                                                     ---------------------    --------------    --------------
Income (Loss) before unrealized gain/(loss)                     (1,437,479)          635,623          (510,383)
Unrealized (loss)/gain on investments, net of tax               (1,527,187)       (2,602,589)        2,810,823
                                                     ---------------------    --------------    --------------
NET (LOSS)/INCOME                                     $         (2,964,666)    $  (1,966,966)   $    2,300,440
                                                      ====================     =============    ==============
(Loss)/Income per share                               $              (0.21)    $       (0.15)   $         0.28
                                                      ====================     =============    ==============
Weighted average shares outstanding                             14,247,099        12,747,656    $    8,353,860
                                                      ====================     =============    ==============
</TABLE>

*    Includes the results of operations of Walnut Capital Corp. only (see
     Footnotes 1 and 2).

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

                                 Page 28 of 55

<PAGE>   29

                        WALNUT FINANCIAL SERVICES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>                                                                                                         
                                                       Common Stock                    Treasury Stock
                                                                                Additional                        
                                                                Par Value          Paid in          Retained      
                                                Shares           at $.01           Capital       Earnings (Deficit)     

<S>                                          <C>                <C>           <C>                 <C>           
Balance, December 31, 1993*                     8,158,047        $ 81,580      $ 7,290,220         $ 1,842,417 
Net income                                             --              --               --           2,300,440
Issuance of common stock                          667,962           6,680          743,320              --
                                                ---------        --------       ----------         -----------
Balance, December 31, 1994*                     8,826,009          88,260        8,033,540           4,142,857    
Net loss                                               --              --               --          (1,966,966)   
Exchange of shares for business combination     3,190,504          31,905        1,591,000              --        
Treasury stock at business combination                 --              --               --              --        
Sale of treasury stock                                 --              --            (105)              --        
Issuance of common stock and warrants in                                                                          
exchange for marketable securities                452,533           4,525        1,013,675              --        
Issuance of common stock for legal fees            69,000             690          127,310              --        
Issuance of common stock for finders' fees        125,000           1,250          248,750              --        
Issuance of common stock for litigation                                                                           
settlement                                         22,500             225           44,775              --        
Issuance of common stock, net of                                                                                  
commissions                                     1,060,895          10,609        1,951,881              --        
Exercise of stock options                          54,272             543           74,602              --        
                                                ---------        --------       ----------         -----------
Balance, December 31, 1995                     13,800,713         138,007       13,085,428           2,175,891    
Net loss                                                                                            (2,964,666)   
Issuance of common stock for legal fees            14,000             140           34,860                        
Issuance of compensatory warrants for                                                                             
consulting                                                                         125,000                        
Issuance of common stock for Universal                                                                            
acquisition                                       801,974           8,020        1,784,981                        
                                                ---------        --------       ----------         -----------
Balance, December 31, 1996                     14,616,687        $146,167      $15,030,269         $  (788,775)    
                                               ==========        ========       ==========         ===========
</TABLE>
<TABLE>                                      
<CAPTION>
                                                Shares          Value       Total
<S>                                            <C>         <C>          <C>
Balance, December 31, 1993*                       --             --     $  9,214,217
Net loss                                          --             --        2,300,440
Issuance of common stock                          --             --          750,000
                                               -------     -----------   -----------
Balance, December 31, 1994*                       --             --       12,264,657
Net Loss                                          --             --      (1,966,966)
Exchange of shares for business combination       --             --        1,622,905
Treasury stock at business combination          50,000     $  (100,000)    (100,000)
Sale of treasury stock                         (50,000)        100,000        99,895
Issuance of common stock and warrants in     
exchange for marketable securities                --             --        1,018,200
Issuance of common stock for legal fees           --             --          128,000
Issuance of common stock for finders' fees        --             --          250,000
Issuance of common stock for litigation      
settlement                                        --             --           45,000
Issuance of common stock, net of             
commissions                                       --             --        1,962,490
Exercise of stock options                         --             --           75,145
                                               -------     -----------   -----------
Balance, December 31, 1995                            0           0       15,399,326
Net loss                                                                  (2,964,666)
Issuance of common stock for legal fees                                       35,000
Issuance of compensatory warrants for        
consulting                                                                   125,000
Issuance of common stock for Universal       
acquisition                                                                1,793,001
                                               -------     -----------   -----------
Balance, December 31, 1996                        0      $        0       14,387,661
                                               =======     ===========   ===========
</TABLE>

* Includes the results of operations of Walnut Capital Corp. only (see
Footnotes 1 and 2).

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

                                 Page 29 of 55

<PAGE>   30


                        WALNUT FINANCIAL SERVICES, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  For the years ended December 31,
                                                                              1996                  1995              1994*
<S>                                                                   <C>                        <C>               <C>
Operating activities:
  Net (loss)/income                                                    $ (2,964,666)    $  (1,966,966)   $    2,300,440

Adjustments to reconcile net income/(loss) to net cash (used
  in) operating activities:
  Depreciation/amortization                                                 141,510           152,873             1,685
  Issuance of stock as litigation settlement                                                   45,000
  Provision for loss of receivables                                                            45,099            39,046
  Unrealized gain/(loss)                                                  2,545,313         4,321,192        (4,633,835)
  Realized gains                                                         (2,985,283)       (5,596,760)       (1,766,329)
  Write off of investments                                                                    879,714           825,305
  Write off of NFS Goodwill                                               1,100,000
  Issuance of compensatory warrants                                         125,000
  Receipt of securities in lieu of interest                                                  (437,287)
  Provision for loss in unbilled receivables                                                  814,474
  Write off of deferred rent                                                                 (180,466)
  Effect on Minority Interest from Net Income in Subsidiaries                (7,673)

Changes in operating assets and liabilities:
  Decrease in interest and accounts receivable                              212,137           322,626             2,596
  Decrease in deposits and other assets                                      19,296            49,112            37,754
  Decrease in interest payable                                               (2,740)         (140,168)
  Increase/(decrease) in accounts payable                                   123,744       (1,075,715)            39,805
  Increase in deferred rent                                                   3,340            15,844
  Increase/(decrease) in net deferred tax liability                      (1,253,383)       (1,285,142)        1,498,000
  (Increase)/decrease in unbilled receivables                              (269,422)           82,922
                                                                        -----------       -----------       ------------
    Net cash (used in) operating activities                              (3,212,827)       (3,953,648)       (1,655,533)
                                                                        -----------       -----------       ------------
Investing activities:
  Costs in connection with the acquisition of NFS                                            (291,739)
  Additions to property and equipment                                        (9,393)           (3,356)           (1,491)
  Purchases of investments                                               (2,027,940)       (7,694,007)       (1,250,718)
  Proceeds from sale of investments                                       6,269,661         9,672,259         2,669,514
  Advances to officers                                                                        (23,076)
  Cash Acquired in Universal Acquisition                                    575,740
                                                                        -----------       -----------       ------------
    Net cash provided by investing activities                             4,808,068         1,660,081         1,417,305
                                                                        -----------       -----------       ------------
Financing activities:
  Deferred private placement costs                                                            (15,000)
  Net proceeds from sale of common stock                                                    1,962,490           750,000
  Borrowings/(repayments) of short term debt                             (1,478,791)          209,569                (1)
  Increase/(decrease) in margin accounts                                    327,335           (88,733)           11,058
  Exercise of stock options                                                                    75,146
                                                                        -----------       -----------       ------------
    Net cash provided by/(used in) financing activities                  (1,151,456)        2,143,472           761,057
                                                                        -----------       -----------       ------------
  Net increase/(decrease) in cash and cash equivalents                      443,785         (150,095)           522,829
  Cash and cash equivalents, at the beginning of the year                   396,440           546,535            23,706
                                                                        -----------       -----------       ------------
  Cash and cash equivalents at the end of the year                     $    840,225    $      396,440    $      546,535
                                                                       ============    ==============    ==============
Supplemental Information:
  Cash paid for Interest                                               $  1,626,419    $    1,675,965    $    1,287,339
                                                                       ============    ==============    ==============
  Receipt of equity securities in lieu of cash interest                                $      437,287    $      119,565
                                                                       ============    ==============    ==============
Receipt of equity securities in lieu of cash                                                             $      221,547
                                                                       ------------    --------------    ==============
Exchange of debt securities for equity securities                                                        $      624,438
                                                                       ------------    --------------    ==============
Issuance of common stock and warrants for marketable securities                        $    1,018,200
                                                                       ============    ==============    
Issuance of common stock and warrants for Universal Acquisition        $  1,793,001
                                                                       ============    
</TABLE>

*    Includes the results of operations of Walnut Capital Corp. only (see
     Footnotes 1 and 2).

Attention is directed to the foregoing accountants' report and to the   
accompanying notes to the financial statements

                                 Page 30 of 55

<PAGE>   31

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION

     Walnut Financial Services, Inc., a Utah corporation (the "Company"),
currently has three primary business focuses: (i) investing in start-up and
early stage development companies, (ii) providing diversified consulting and
asset recovery services (recovery of financial assets, e.g., cash and
securities, which had not been accounted for by its clients) to securities
firms, banks and others, and (iii) operating an investment vehicle that
specializes in bridge financing to small to medium-sized companies.  The
Company engages in the investment business through its wholly-owned subsidiary
Walnut Capital Corp., a Delaware corporation ("Walnut").  Walnut was formed for
the purpose of operating as a Small Business Investment Company (an "SBIC")
under the Small Business Investment Act of 1958 (as amended the "Act"), and is
subject to regulations promulgated by the Small Business Administration (the
"SBA") pursuant to the provisions of the Act.  The Company engages in the
consulting and asset recovery business through its wholly-owned subsidiary NFS
Services, Inc., a New York corporation ("NFS").  NFS currently has two
wholly-owned subsidiaries: (i) Asset Recovery Services, Inc., a New York
corporation ("ARS"), and (ii) NFS Collection Services, Inc., a New York
corporation ("NFS Collection").  NFS conducts its operations both directly and
through its subsidiaries.  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").

     The Company has relied on an exemption from the registration, filing and
operating requirements Imposed by the Investment Company Act of 1940 (as
amended, the "Investment Company Act") provided by Rule 3a-2 promulgated by
Securities and Exchange Commission (the "SEC") under the Investment Company
Act.  The Company's one-year exemption period has expired, and the Company may
be deemed an unregistered investment company.  The Board of Directors of the
Company (the "Board") has resolved that the Company's business purpose is to be
an operating company through its subsidiaries and not to be engaged in
activities which would require the Company to register as an investment
company.  The Company believes that other exemptions to the registration
requirements of the Investment Company Act may be available to the Company.
Should the Company fail to acquire or develop such assets or otherwise avail
itself on an exemption, the Company may be required to meet the registration,
filing and operating requirements of the Investment Company Act.

     In the event that the SEC determines that either the Company or Walnut is
an investment company and that no exemption from the Investment Company Act is
applicable, the Company may incur substantial costs in connection with the
registration of itself or Walnut as an investment company and otherwise
complying with the provisions of the Investment Company Act.  Specifically, if
the Company or Walnut were to register as an investment company under the
Investment Company Act, the Company and/or Walnut would be subject to, among
other things, certain limitations with respect to (i) capital structure and the
ability to buy or issue securities; (ii) the ownership of securities issued by
other investment companies, insurance companies and organizations engaged in
investment advisory, underwriting and brokerage businesses; and (iii) the
ability to engage in transactions involving persons who are "affiliates" of the
Company or Walnut, or "affiliates" of such persons.  The Company and/or Walnut
would also be subject to certain other operational restrictions and reporting
requirements.

                                 Page 31 of 55

<PAGE>   32


     On February 27, 1995, the Company issued 8,826,009 shares of its Common
Stock (including 333,981 shares issued in August 1995 in settlement of an
appraisal action brought by two dissenting shareholders) in exchange for all of
the outstanding common stock of Walnut (such transaction is referred to herein
as the "Business Combination.")  The Company also issued 125,000 shares of
Common Stock as finders' fees in connection with the Business Combination.

     In connection with the Business Combination, the Company engaged in a
private placement (completed in June 1995) of its Common Stock for net proceeds
of $1,962,490 (the "Common Stock Private Placement"). In addition, the Company
issued 45,270 shares of Common Stock in lieu of the payment of cash commissions
in connection with the Common Stock Private Placement.

     For financial accounting purposes, in accordance with applicable
accounting standards, the Business Combination has been accounted for as a
reverse acquisition of the Company by the stockholders of Walnut.  Immediately
after the consummation of the Business Combination, and without taking into
account any sales in the Common Stock Private Placement, the stockholders of
Walnut owned approximately 73% of the Company.  In connection with the Business
Combination, the Company recorded goodwill of approximately $2,200,000.  As a
result, on February 27, 1995, Walnut was deemed to have acquired the Company in
exchange for 3,190,504 shares of Common Stock and incurred acquisition costs of
approximately $700,000.  The net assets of the Company, exclusive of goodwill,
were valued at approximately $100,000. If the acquisition of the Company had
taken place on January 1, 1995, pro forma revenues, net loss, and loss per
share would have been approximately $2,975,000, ($2,200,000), and ($.18),
respectively.  Goodwill is being amortized, using the straight-line method,
over 20 years.  Proforma revenues, net income and income per share for 1994
would have been approximately $6,222,000, $1,495,000 and $0.12, respectively.

     On June 17, 1996, the Company issued 801,974 shares of Common Stock,
together with five-year warrants to purchase an additional 697,391 shares of
Common Stock at an exercise price of $3.00, in connection with Universal
Bridge's purchase of approximately 83% of the limited partnership interests and
50% of the general partnership interests of UPLP.  Had the acquisition of the
UPLP partnership interest occurred as of January 1, 1996, the results for the
Company for the twelve  month period ended December 31, 1996 would have been a
loss of ($2,434,703) or ($0.17) per share.  Universal Bridge's purchase of
interests in UPLP has been accounted for as a purchase according to Accounting
Principles Board Opinion 16.  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.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION.  The financial statements include the
accounts of the Company, Walnut, Universal Bridge (from date of acquisition)
and its subsidiary, UPLP, NFS and its wholly-owned subsidiaries, ARS and NFS 
Collection.  Intercompany transactions and balances have been eliminated in 
consolidation. Th Company accounts for its controlling partnership's interest 
in UPLP on a consolidated basis.

     REVERSE STOCK SPLIT AND BUSINESS COMBINATION.  In January 1994, the
Company effected a one-for-five reverse stock split.  In February 1995, the
Company effected a one-for-two reverse stock split.  All references to the
number of common shares and per common share amounts have been restated to
reflect the reverse stock splits. The  accompanying financial statements also
reflect, as outstanding for all periods presented, the common stock of Walnut
as adjusted for the exchange ratio (111.327 shares for 1 share of Walnut)
applicable to the Business Combination.

                                 Page 32 of 55

<PAGE>   33

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     NET INCOME (LOSS) PER SHARE.  Net income (loss) per share is computed
based on the weighted average number of shares outstanding for each period.
Common stock equivalents have been considered where they are not anti-dilutive.

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

     INVESTMENT VALUATION.  The non-marketable investments are stated at fair
value as determined by the Board at December 31, 1996.  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 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 values are determined based on the average of the
closing quotations as of December 31, 1996 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 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.

     REVENUES AND COSTS.  Under its asset recovery agreements, the Company
charges its customers an agreed-upon percentage of the customers' recoverable
amounts.  The Company records, as unbilled receivables, amounts representing
its share of customers' recoverable amounts when the recovery process is
substantially complete and the realization of the amounts is reasonably
assured.  The recovery process is substantially complete when the Company
receives third party acknowledgement of pending recoveries.  Revenues from
operational support are recognized when billed.  Accounts receivable represent
amounts actually billed to customers.  Allowances are provided for amounts not
expected to be realized.

     Costs of services include salaries, commissions, employee benefits and
payroll taxes and are charged to expense as incurred.

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

     Cash and cash equivalents approximate fair value.  The cost and fair value
     of investments are disclosed in Note 4.

     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.

                                 Page 33 of 55

<PAGE>   34

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




     INCOME TAXES.  Deferred tax liabilities 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 consists of the taxes payable for the
current period and the change in deferred tax assets and liabilities during the
period.

     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 approximately $693,500 of temporary cash on deposit in excess
of insured amounts as of December 31, 1996.

     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 straightline method over the estimated economic lives of the
assets, which range from 5 to 7 years.

     DEFERRED FINANCING COSTS.  Deferred financing costs are being amortized by
the straight-line method over the five year term of the related debt.

     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 the notes to the
financial statements for further information.

                                 Page 34 of 55

<PAGE>   35

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3.   FIXED ASSETS

     Fixed assets as of December 31 consisted of the following:




<TABLE>
<CAPTION>
                                     1996            1995       
                                --------------  --------------  
<S>                             <C>             <C>             
Office furniture & equipment          $193,035        $178,317  
Less: accumulated depreciation       (149,604)       (123,382)  
                                --------------  --------------  
                                       $43,431         $54,935  
                                ==============  ==============  
</TABLE>


                                 Page 35 of 55

<PAGE>   36

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




4.   SECURITIES.  Securities as of December 31 consisted of the following:



<TABLE>
<CAPTION>
                                            1996                               1995  
                                   Market/                           Market/
                                 Fair Value          Cost          Fair Value          Cost
<S>                           <C>               <C>              <C>              <C>
Equity:   Healthcare           $  21,549,896    $   6,613,021    $  25,941,009    $   9,648,427 
          Other                    2,728,738        4,034,952        1,600,523        3,740,782 
          Communications           1,630,703        4,013,187        1,963,396        4,060,639 
          High technology          1,746,317        2,971,548        1,471,439        1,754,201 
          Biotechnology              607,132          922,656          131,100          150,000 
          Environmental               48,867           50,848                0           25,188 
          Gold                             1           18,000              800           18,000 
                                 -----------       ----------       ----------       ----------
                Total equity      28,311,654       18,624,212       31,108,267       19,397,237 
                                 -----------       ----------       ----------       ----------
Debt:     Healthcare                 150,000          155,546               --            5,460 
          Other                      953,486        1,447,526          552,314          690,392 
          Service                    329,970          339,970          294,380          312,350 
          Environmental               53,625          350,750               --          222,500 
          Communication               25,000           25,000               --               -- 
          Gold                            --               --               --               -- 
                                 -----------       ----------       ----------       ----------
                Total debt         1,512,081        2,318,792          846,694        1,230,702 
                                 -----------       ----------       ----------       ----------
Total securities               $  29,823,735    $  20,943,004    $  31,954,961    $  20,627,939 
                                 ===========       ==========       ==========       ==========
</TABLE>

5.   LONG-TERM DEBT.

      A) SBA DEBENTURES

     Total debentures payable were $8,000,000 at December 31, 1996 (the "Walnut
Debentures").  One Walnut Debenture with a principal balance of $4,000,000 is
payable to SBIC Funding Corp. or its designee on April 1, 1997 and bears
interest at 8.95%, payable semiannually on April 1 and October 1 of each year.
One Walnut Debenture with a principal balance of $2,000,000 is payable to SBIC
Funding Corp.

                                 Page 36 of 55

<PAGE>   37

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     or its designee on June 1, 1998 and bears interest at 9.80%, payable
semiannually on June 1 and December 1 of each year.  One Walnut Debenture with
a principal balance of $2,000,000 is payable to SBIC Funding Corp. or its
designee on September 1, 1999 and bears interest at 8.8%, payable semiannually
on March 1 and September 1 of each year.  Additionally, eight debentures with
an aggregate principal balance of $4,000,000 were due to the SBA, as agent for
the holders, on September 1, 1995, and were so repaid in accordance with their
terms (the "September Debentures").

     All principal and interest payments due pursuant to the Walnut Debentures
and the September Debentures have been paid as required.  Payment of the Walnut
Debentures is guaranteed by the SBA.  Under the terms of the Walnut Debentures,
Walnut 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.

     Pursuant to an examination by the SBA, the SBA issued a finding related to
Walnut's capital impairment. Section 107.203(d) of Part 13 of the Code of
Federal Regulations defines capital impairment as a realized earnings
deficit in excess of 50% of private capital.  On July 29, 1994, Walnut entered
into an agreement with the SBA (as amended, the "SBA Agreement") whereby,
subject to certain conditions, the SBA would refrain until June 30, 1995 from
declaring an event of default under 13 CFR 107.203(d) with regard to Walnut's
capital impairment.  Principal conditions of the agreement were: (a) Walnut
would limit annual management expenses to $609,295 per year; and (b) Walnut
would realize gains of, or would increase paid-in capital by contributions of
cash or marketable securities, in the aggregate of $4 million (in equal
quarterly amounts of $1 million for the quarters ended September 30, 1994,
December 31, 1994, March 31, 1995, and June 30, 1995).  Pursuant to an
amendment to the agreement dated September 27, 1994, amounts in excess of $1
million each quarter could be applied by Walnut to future quarterly
requirements, and the annual management expense was increased to $659,295.

     Effective as of June 30, 1995, the Company entered into a transaction with
Windy City, Inc. ("WCI"), an affiliate, pursuant to which WCI subscribed to
purchase 452,533 units valued at $2.25 per unit, each unit consisting of one
share of Common Stock and one three-year common stock purchase warrant
entitling the holder thereof to purchase one share of Common Stock at $3.00 per
share.  WCI made payment for said subscription by delivering to the Company
45,000 shares of Logic Devices Incorporated common stock (Nasdaq - LOGC) and
500,000 shares of Consolidated Technology Group, Inc. common stock (Nasdaq -
TGSI), having an aggregate market value of approximately $1,018,000 as of said
date. Immediately thereafter, the Company contributed these securities to
Walnut in order to satisfy Walnut's June 30, 1995 obligation pursuant to the
SBA Agreement.

     As of June 30, 1995, Walnut had realized gains and increased paid-in
capital by an amount in excess of $4,000,000 and had otherwise fully complied
with the terms of the SBA Agreement.  The SBA Agreement expired, by its terms,
on June 30, 1995.

     By letters dated November 9, 1995 and April 19, 1996, the SBA
determined that it would not take any action with regard to the capital
impairment issue under certain circumstances.  Specifically, the SBA stated
that the SBA "would refrain from any action [against Walnut] if: (1) the market
value of [Walnut's] holdings of HealthCare COMPARE and GranCare in the
aggregate exceeds by $10 million the total of all secured and unsecured third
party debt, and (2) the balance in the Undistributed Net Realized Account does
not become negative in an amount greater than $9,000,000."  As of the year
ended

                                 Page 37 of 55

<PAGE>   38

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     December 31, 1996, Walnut's holdings of HealthCare COMPARE Corp. and
GranCare, Inc. in the aggregate exceeded the total of all secured and unsecured
third party debt by approximately $12 million and the "Undistributed Net
Realized Earnings Account" equaled approximately negative $6 million.
Accordingly, management believes that, by terms of its own statements, the SBA
will not take any adverse actions against Walnut with respect to the capital
impairment issue.

     The SBA has issued a finding that the Company has violated Section
107.903(b)(1) and (d) by financing an Associate and paying fees to an
Associate. The Company has provided information to the SBA to show that such
findings are inaccurate. Additionally, the SBA has issued a finding that the
Company has violated Section 107.501(b)(1), (3) and (4) by not seeking prior
approval of the SBA for management services provided by Associates. The Company
believes that such findings are inaccurate and current SBA regulations no
longer require prior approval in such circumstances.
        
     The last examination report issued to Walnut by the SBA is dated May
14, 1996 and covered the 14-month period ended February 28, 1995.  To date, the
SBA has not declared or threatened to declare a default with respect to any of
its findings; however, there can be no assurance that the SBA will be willing
to further refrain from declaring an event of default under the SBA Act and it
is likely that the SBA will continue to deem these issues to be open until
fully resolved to the SBA's satisfaction, irrespective of any continuing
discussions with respect thereto between the SBA and Walnut's management.  If
such a default were to be declared and Walnut failed to cure the same, the SBA
would have the right to accelerate the maturity of the $8 million debentures
issued by Walnut to the SBIC Funding Corp. pursuant to the SBA Act (the "Walnut
Debentures") currently outstanding.  Management believes that Walnut could
immediately remedy fully the capital impairment issue through the sale of
certain of Walnut's portfolio securities.  

      B) NOTES TO OTHERS

     NFS has a note payable outstanding to an individual in the amount of
$50,050.  This note is due in monthly installments of $2,000 with interest at
11%.  No payments have been made pursuant to this note since August 1994.

     NFS has payments due on capital leases in monthly installments through May
2000.  The leases bear interest at 12%.  The balance outstanding at December
31, 1996 was $12,771.

     As of December 31, 1996, the Company had outstanding a promissory note to
a third party representing principal owed of $875,000.  The note was issued in
connection with an acquisition by the Company of a limited partnership interest
in Knox Liquidating Partnership, L.P., which, in turn, has an ownership
interest in a catalog company known as Foster & Gallagher, Inc.  Such note
accrues interest at 8% per annum.  Principal is payable in two installments,
$175,000 on January 31, 1997 (which amount was timely paid) and the remaining
$700,000 on July 31, 1997.

                                 Page 38 of 55

<PAGE>   39

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Long-term debt as of December 31 was as follows:


<TABLE>
<CAPTION>
                                        1996          1995
<S>                            <C>  <C>        <C>  <C>
Debentures payable to the SBA    $  8,000,000    $  8,000,000
Installment note payable               50,050          44,845
Capital leases                         12,771          16,393
                                 ------------    ------------
TOTAL                               8,062,821       8,061,238
Less:  current portion              4,049,500          47,953
                                 ------------    ------------
Long-term portion                $  4,013,321    $  8,013,285
                                 ============    ============
</TABLE>

     As of December 31, 1996, the aggregate principal maturities of long-term
debt are as follows:


<TABLE>
<S>   <C>  <C>
            Amount
1997    $  4,049,500
1998       2,005,660
1999       2,006,129
2000           1,532
           ---------
        $  8,062,821
           =========
</TABLE>

     C) 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 credit
line was replaced as of September 8, 1996 with a term loan of $2,850,000.  This
loan required interest only payments as of September 30, 1996 and December 31,
1996.  A principal payment of $575,000 is due on March 31, 1997, with the
balance due on June 30, 1997.  The interest rate associated with this loan is
ANB's base rate plus 2% (10.25% as of December 31, 1996).  This loan is
personally guaranteed by two Directors of the Company.

     On December 31, 1993, Walnut entered into a $600,000 revolving credit
agreement with ANB, which accrued interest at ANB's base rate plus 2% (10.25%
at December 31, 1996).  Interest is payable monthly, with the principal balance
due on July 31, 1996.  The line is collateralized by a variety of securities
having a fair market value in excess of $600,000.  The balance of this note was
$585,000 at December 31, 1995 and was repaid in full as of December 31, 1996.

                                 Page 39 of 55

<PAGE>   40

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     On September 7, 1995, NFS established a $350,000 line of credit with ANB.
The line of credit accrued interest at ANB's base rate plus 2% (10.25% at
December 31, 1996).  The amount borrowed was due on July 31, 1996.  The balance
of this note was $348,791 at December 31, 1995 and was repaid in full as of 
December 31, 1996.

     D) NOTES PAYABLE TO RELATED PARTIES

     In November 1995, the Company received two unsecured loans from a related
party for an aggregate amount of $270,000.  The loans accrued interest at 8.75%
and mature through April 1996.  The aggregate balance of these notes was
$270,000 at December 31, 1995; these notes were repaid upon maturity in April 
1996.

6.   MARGIN BROKERAGE ACCOUNTS

     Brokerage margin payable to one investment banker consists of advances of
$2,586,362 under a line of credit as of December 31, 1996.  The brokerage
account accrues interest on a monthly basis at the brokers' call rate plus 1%
(7.75% at December 31, 1996) and was collateralized by 182,500 shares of
HealthCare COMPARE Corp. common stock, having a fair market value of
approximately $7,733,000 at December 31, 1996, and 15,000 shares of GranCare,
Inc. common stock, having a fair market value of approximately $268,000 at
December 31, 1996.

     Brokerage margin  payable to a second investment banker consists of
advances of $2,872,756 under a line of credit as of December 31, 1996.
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% (7.75% at December 31, 1996)
and is collateralized by 170,000 shares of HealthCare COMPARE Corp. common
stock, having a fair market value of approximately $7,204,000 at December 31,
1996, and 91,916 shares of GranCare, Inc. common stock, having a fair market
value of approximately $1,643,000 at December 31, 1996.


                                 Page 40 of 55

<PAGE>   41

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

     Accounts payable, accrued expenses and other current liabilities as at
December 31 consisted of the following :

<TABLE>
<CAPTION>
                                   1996             1995
<S>                        <C>  <C>        <C>  <C>
Accounts payable             $    324,581    $    364,073
Accrued interest                  163,118         165,858
Accrued payroll taxes(1)          144,302         211,705
Accrued taxes payable             113,692         157,835
Accrued professional fees         148,237          55,153
Accrued payroll                   146,640          31,224
Other accrued expenses             79,215          17,240
                             ------------    ------------
Total                        $  1,119,785    $  1,003,088
                             ============    ============
</TABLE>

(1) NFS had a tentative deferred payment agreement with the State of New York
Department of Taxation and Finance for delinquent payroll taxes, and the
related interest and penalties. The agreement called for monthly installments
of $33,465 with interest at 7.3%.  NFS has been current with the terms of this
tentative agreement since November 1994.  On February 20, 1996 NFS signed an
installment agreement with the State of New York Department of Taxation and
Finance for 18 monthly payments of $8,851.58 effective March 15, 1996.

8.   INCOME TAXES

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


<TABLE>
                                             1996             1995
<S>                                   <C>               <C>
Deferred tax liabilities:
  Unrealized gains                    $   3, 680,832    $    4,518,621

Deferred tax asset:
  Net operating loss benefit              (3,060,400)       (2,942,400)
  Allowance for doubtful accounts           (224,442)         (127,721)
  Accounts receivable and other             (358,301)         (200,533)     
                                      --------------    --------------
Deferred tax liability                $       37,689    $    1,247,967
                                      ==============    ==============
</TABLE>

     The difference between book and tax accounting for investments and
allowances is the primary source of the non-current deferred tax liability.  
For financial statement purposes, investments are carried at market and for

                                 Page 41 of 55

<PAGE>   42

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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



<TABLE>
<CAPTION>
                                             1996              1995            1994
<S>                                   <C>                 <C>               <C>  
Tax (benefit) on income:
                             Federal        (1,201,438)       (1,177,608)       (594,000)
                               State    $     (212,018)    $    (260,644)    $  (131,000)
                                        --------------     -------------     -----------
                               Total    $   (1,413,456)    $  (1,438,252)    $  (725,000)
                                        ==============     =============    ============      
Tax expense on realized gain:
                             Federal         1,014,996         1,491,524         328,000
                               State    $      179,711    $      330,192    $     72,000
                                        --------------     -------------     -----------
                               Total    $    1,194,707    $    1,821,716    $    400,000
                                        ==============     =============    ============      
Tax expense (benefit) on unrealized
loss: 
                             Federal          (865,406)       (1,366,361)      1,493,000
                               State    $     (152,719)    $    (302,483)   $    330,000
                                        --------------     -------------     -----------
                               Total    $   (1,018,125)    $  (1,668,844)   $  1,823,000
                                        ==============     =============    ============      
</TABLE>

     In 1996, current tax expense approximated $27,000.

     The Company's effective federal tax rate was 24% in 1996, compared to an
overall statutory rate of 34%.  This difference was primarily due to the
reserve for write-off of goodwill at NFS.


<TABLE>
<S>                       <C>  <C>      <C>  <C>      <C>  <C>
                                1996          1995         1994
Pre-tax (loss)/gain         $  (4,202,000)    $  (3,252,000)    $  2,988,000
Federal tax                 =============     =============     ============
expense/(benefit)at
statutory rate of 34%          (1,428,000)       (1,106,000)       1,019,000
Federal tax effect of
write-off of goodwill             374,000                 0                0
                            -------------     -------------     ------------
                               (1,054,000)       (1,106,000)       1,019,000
Other - net                         3,000            54,000           64,000
                            -------------     -------------     ------------
Tax (benefit)/expense       $  (1,051,000)    $  (1,052,000)    $  1,083,000
                            =============     =============     ============
</TABLE>


                                 Page 42 of 55

<PAGE>   43

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     As of December 31, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes as follows:



<TABLE>
<S>         <C>  <C>
Expiration
   2006       $  2,192,000
   2007          2,588,000
   2008          1,933,000
   2009            643,000
   2011            295,000
              ------------
              $  7,651,000
              ============
</TABLE>

     In addition, NFS has net operating loss carryforwards of approximately
$3,700,000 at December 31, 1996 for federal income tax purposes which may only
be used to offset income earned by NFS.  Such net operating loss carryforwards 
are subject to limitation under Section 382 of the Internal Revenue Code of 
1986 (the "Code"), as amended and expire in various amounts from the years 
2002 to 2009.  NFS has a deferred tax asset of  approximately $1,000,000 which
has been fully reserved due to uncertainty about future operating results.

9.   COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

     A. LEASE

     The Company leases office facilities for NFS, ARS and NFS Collection under
an operating lease expiring in August 1999.  The annual minimum rentals under
noncancelable operating leases at December 31, 1996 were as follows:




<TABLE>
<S>           <C>  <C>
Year ending
December 31,
    1997        $  85,664
    1998           85,664
    1999           57,109
</TABLE>

     The Company leases office space and services for Walnut from an affiliate
at $4,550 per month as of December 31, 1996.  The lease is renewable annually 
at the discretion of the parties.  The Company

                                 Page 43 of 55

<PAGE>   44

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     paid $56,544, $51,482, and  $49,020 for rent for the years ended December
31, 1996, 1995, and 1994, respectively, and $8,505, $70,051, and $43,626 for
services for the years ended December 31, 1996, 1995 and 1994, respectively.


      B. LITIGATION

     NFS is the defendant in an action entitled Josephberg Grosz & Co., Inc. v.
NFS Services, Inc. which was filed on September 19, 1996 in the Supreme Court
of the New York, County of New York, Index No. 604744/96 (the "Action").  In
the Action, Josephberg Grosz & Co. ("JGC") asserts, among other things, that,
pursuant to the terms of a 1990 agreement between JGC and NFS Services (as
amended, the "JGC Agreement"), JGC was entitled to manage, and be compensated
in connection with the Business Combination and the Common Stock Private
Placement.  In the Action, JGC claims potential damages of $600,000 to
$1,000,000.

     On or about November 15, 1996, NFS filed a Memorandum in Support of NFS
Services' Motion to Dismiss (the "Motion to Dismiss").  Pursuant to the Motion
to Dismiss, NFS asserted, among other things, that JGC was not entitled to
manage, or receive compensation in connection with, either the Business
Combination or the Private Placement.  In particular, in the Motion to Dismiss,
NFS asserted that NFS was not a party to either the Business Combination or the
Private Placement and that NFS did not, and could not, bind the Company as a
party to the Business Combination and the issuer pursuant to the Common Stock
Private Placement, to the terms of the JGC Agreement.

     The Motion to Dismiss was denied on February 18, 1997, and NFS will be
required to file an answer to JGC's original complaint and substantive
discovery will commence. The Action is in the preliminary stages and the
outcome cannot be determined at this time.

     In March 1994, a former employee commenced an action against NFS for
failure to pay bonuses (No. 94 CIV 1503, William D. Riley v. NFS Services,
Inc., United States District Court for the Southern District of New York) The
complaint sought damages in excess of $400,000 plus an additional 25% for wages
and legal fees.  The claim was settled for a cash payment of $10,000 and the
issuance of 22,500 shares of the Company's Common Stock having a fair value of
$45,000 at the time of issuance in 1995.

     In connection with the merger of Walnut and FAO Corp. immediately after
the Business Combination, two former shareholders of Walnut commenced appraisal
proceedings on June 30, 1995 to determine the fair value of their Walnut common
stock pursuant to Section 262 of the Delaware General Corporation Law.  (Civil
Action No. 14391, The Lee and Rose Warner Foundation and Space Center, Inc. v.
Walnut Capital, Court of Chancery of the State of Delaware in and for New
Castle County.)  The parties settled this matter.  The Company issued 333,981
shares of Common Stock in the aggregate to the plaintiffs in connection with
such settlement (the same number of shares of Common Stock the plaintiffs would
have received in connection with the Business Combination).

      C. EMPLOYMENT AGREEMENTS

     The Company has entered into employment agreements with Burton W. Kanter
and Joel S. Kanter.  In addition, Walnut had entered into an employment
agreement with Michael Faber.  Effective December

                                 Page 44 of 55

<PAGE>   45

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     31, 1996, Michael A. Faber resigned from Walnut and Walnut has no further
contractual obligations to him.  Mr. Burton Kanter's employment agreement
provides that he is 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 10 - 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.  The
agreement expires in February 1998, unless terminated at an earlier date
pursuant to terms and conditions of the agreement.  Amounts due under Mr.
Burton Kanter's employment agreement were not currently paid in 1996 and are
being accrued by the Company.  The terms and conditions of the employment
agreement of Mr. Joel Kanter is generally identical to that of Burton Kanter
except that Joel Kanter is 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 1996 (see Footnote 10 - Related Party Transactions).
Joel Kanter's agreement also differs in that Joel Kanter has agreed not to
compete with the Company or NFS (but not Walnut) for a period of three years
after his termination of employment with Walnut.  In the event of termination
of any of the agreements without cause, Messrs. Kanter would be entitled to one
year's salary.

     Eugene N. Scalercio has entered into a noncompetition agreement with NFS,
which provide that Mr. Scalercio will not compete with the Company, or its
subsidiaries (other than Walnut), for a period of three years after termination
of his employment with the Company.  Neither the Company nor NFS has entered
into any employment agreement with Mr. Scalercio.

     D. MAJOR CUSTOMERS.

     Approximately 60% and 73% of the Company's revenues were derived from three
customers for the year ended December 31, 1996 and 1995, respectively.  
Accounts receivable from such customers were approximately $131,000 and
$181,000 in the aggregate at December 31, 1996 and 1995, respectively.

10.  RELATED PARTY TRANSACTIONS

     The Company and its subsidiaries retain a law firm at which an officer has
been of counsel since 1993.  Expenses of $165,692 and $165,127 were incurred by
the Company for reimbursement of expenses and legal services for the years
ended December 31, 1996 and 1995, respectively.

     The Company and its subsidiaries retained an additional law firm at which
another officer is of counsel.  Expenses of $34,759, were incurred by the
Company for reimbursement of expenses and legal services incurred during the
year ended December 31, 1995.  No such expenses were incurred in 1996.

     At December 31, 1996 and 1995, approximately $128,000 and $116,000,
respectively, were due to the law firms and are included in accounts payable,
accrued expenses and other current liabilities in the accompanying financial
statements.

     As described above at Footnote 9.c., 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.  Salary to
Mr. Kanter and fee payments to such sole proprietorship of $15,000 and
$135,000, respectively, were paid for the years ended December 31, 1995 and
1994.  There were no payments in 1996, but $100,000 in salary was accrued by
the Company for fiscal 1996.

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

                                 Page 45 of 55

<PAGE>   46

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     Prior to March 1, 1995, Walnut retained Mr. Joel S. Kanter on a consulting
basis to perform due diligence and monitor certain investment matters.  Fees
paid to Mr. Kanter for professional services performed for the period from
January 1, 1995 through February 28, 1995 were $20,059.  As of March 1, 1995,
Mr. Kanter became an officer of Walnut and received salary payments of $49,941
for the period March 1, 1995 through December 31, 1995.  (See Footnote 9.c. -
Employment Agreements.)

11.   GUARANTY OF LOANS

     The Company has guaranteed $318,000 of a secured loan obtained by an
investee company as of December 31, 1996.

12.   CONCENTRATION OF CREDIT RISK

     The Company has significant holdings of investments in the health care
industry.  Total investments in debt and equity were approximately $21,700,000
as of December 31, 1996 (including unrealized appreciation of approximately
$14,931,000 as of December 31, 1996).

13.   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 to the financial instrument for commitments to extend credit is
represented by the contractual notational amount of these instruments.  As of
December 31, 1996, 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.

14.  SHAREHOLDERS' EQUITY

     a. Preferred Stock.

           The Company is authorized to issue up to 1,000,000 of its preferred
      stock in one or more series.  As of December 31, 1996, no shares of
      preferred stock were outstanding.

     b. Common Stock Options and Warrants.

      (1) In 1989, the Company adopted the NFS Services, Inc. 1989 Incentive
      Stock Option Plan (as amended, the "1989 Plan").  The 1989 Plan is
      administered by a stock incentive plan administrative committee appointed
      by the Company's Board of Directors (the "1989 Plan Committee").  The
      1989 Plan Committee has the authority, subject to approval by the
      Company's Board of Directors and the terms of the 1989 Plan, to select
      the persons to whom awards may be granted, to determine the terms of each
      award, to interpret the provisions of the 1989 Plan and to make all other
      determinations that it may deem necessary or advisable for the
      administration of the 1989 Plan.  The 1989 Plan provides for the grant of
      "incentive stock options," as defined under

                                 Page 46 of 55

<PAGE>   47

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           Section 422(b) of the Internal Revenue Code ("incentive options"),
      and options that do not so qualify ("nonstatutory options"), as
      determined in each individual case by the 1989 Plan Committee.  The
      Company's Board of Directors has reserved 33,700 shares of Common Stock
      for issuance under the 1989 Plan.  Awards of stock options to purchase
      33,700 shares of Common Stock have been granted pursuant to the 1989 Plan
      to various officers, employees and consultants of the Company, or its
      subsidiaries.  All of said options are fully vested and presently
      exercisable into shares of Common Stock and expire on November 23, 1998.
      The exercise price of the options granted pursuant to the 1989 Plan is
      $2.50 per share of Common Stock.  As a result of the Business
      Combination, no further awards will be granted under the 1989 Plan.

      (2) In 1994, the Company adopted the NFS Services, Inc. (Utah) 1994
      Incentive Stock Option Plan (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 and the terms of the 1994 Plan, 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 500,000 shares of Common Stock for issuance under the 1994 Plan.
      The Company has granted options under the 1994 Plan as follows:


<TABLE>
<CAPTION>

                                      1996                  1995
                             -----------------------------------------
                                          Average               Average 
                              Number of  Exercise   Number of  Exercise   
                                Shares     Price      Shares     Price
<S>                         <C>            <C>       <C>        <C>
Outstanding at January 1       119,500      $2.76      
Granted                        134,000       2.36     119,500    $2.76
                               -------                -------
Outstanding at December 31     253,500       2.55     119,500     2.76
                               =======                =======
Exercisable                    129,500       2.76      35,000     2.79
                               =======                =======
</TABLE>


     (3) 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

                                 Page 47 of 55

<PAGE>   48

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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 149,958 shares of Common Stock, and awards of nonstatutory options to
purchase 656,972 shares of Common Stock, have been granted pursuant to the 1987
Plan to various officers, directors, employees, and consultants of Walnut.  All
of said options are subject to a variety of vesting requirements and at
December 31, 1996, 665,238 shares were exercisable.  The exercise price of the
options granted pursuant to the 1987 Plan ranges from $.90 to  $1.80 per share
of Common Stock.  The average exercise price of options outstanding under the
1987 Plan was $1.63.  As a result of the Business Combination between the 
Company and Walnut, no further awards will be granted under the 1987 Plan.  
During the year ended December 31, 1996, no options to acquire Common Stock were
exercised.

     (4) In addition to the options granted pursuant to the 1989 Plan, the 1994
Plan and the 1987 Plan, the Company has issued certain options and warrants to
purchase (i) 95,000 shares of Common Stock at $2.00 per share, which options
expire on July 14, 1998, (ii) 225,269 shares of Common Stock at $1.81 per share
which warrants expired on March 13, 1997, (iii) 452,533 shares of Common Stock
at $3.00 per share which options expire June 30, 1998, (iv) 100,000 shares of
Common Stock at $2.50 per share which options expire August 31, 2001, (v)
50,000 shares of Common Stock at $3.00 per share which options expire June 30,
2001, and (vi) 697,391 shares of Common Stock at $3.00 per share which warrants
expire June 17, 2001.

15.  SEGMENT INFORMATION

     The Company is engaged primarily in two segments:  (1) investment
activities; and (2) providing consulting and asset recovery services through
NFS.  The following table shows certain operating information for each segment
for the years ended December 31, 1996 and 1995.
 .

<TABLE>
<CAPTION>
                                              1996
                       ------------------------------------------------------------------
                                                           Consulting and
                          Corporate       Investing        Asset Recovery        Total
<S>                    <C>             <C>              <C>                        <C>         
Revenues               $      3,636    $      79,115    $    2,057,421    $    2,140,172
Operating (loss)          (877,235)        (750,036)        (1,011,644)       (2,638,915)
Identifiable Assets       2,405,224       28,530,591         2,262,660        33,198,475
Depreciation                     --            2,008            18,889            20,897

</TABLE>


                                 Page 48 of 55

<PAGE>   49

                        WALNUT FINANCIAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




<TABLE>
<CAPTION>

                                            1995
                       ----------------------------------------------------------------
                                                           Consulting and
                          Corporate       Investing        Asset Recovery       Total
<S>                    <C>             <C>              <C>              <C>         
Revenues               $      7,845    $     444,762    $   2,081,440    $    2,534,047
Operating (loss)           (567,639)        (261,800)        (978,958)       (1,808,397)
Identifiable Assets       4,132,014       28,526,894        3,404,596        36,063,504
Depreciation                     --            1,910           22,146            24,056
</TABLE>

     Prior to the acquisition of NFS in February 1995, the Company was in one
line of business and therefore no segment information is provided for those
years.

16.  STOCK OPTIONS

     The Company applies APB 25 in accounting for its stock option plans and,
accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant exercise price of the 
option at the date of grant.  The effect of applying SFAS No. 123 on 1995 and 
1996 pro forma net loss as stated above is not necessarily representative of 
the effects on reported net loss for future years due to, among other things, 
(1) the vesting period of the stock options and (2) the fair value of 
additional stock options in future years.  Had compensation cost for the 
Company's stock option plans been determined based upon the fair value at the 
grant date for awards under the plans consistent with the methodology 
prescribed under SFAS No. 123, the Company's net loss in 1996 and 1995 would 
have been approximately $3,226,041 and $2,105,544, or $(.23) per share and 
$(.17) per share, respectively.  The fair value of the options granted during 
1996 and 1995 are estimated at $1.16 and $1.95, respectively, on the date of 
grant using the Black-Scholes option-pricing model with the following 
assumptions: dividend yield 0%, volatility of 67% for 1996 and 62% for 1995, 
risk-free interest rate of 5.9% - 7.9% for 1996 and 5.3% - 6.6% for 1995, and 
expected life of 5 years.

17. LONG-TERM ASSETS

     The Company is re-evaluating the asset recovery business at NFS.  As a
result of the calculations required under FAS 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed of," 
NFS recorded an expense of $1,100,000 representing a write-down of its 
goodwill.  Management believes that the remaining NFS goodwill of 
approximately $800,000 is consistent with the accounting requirements of 
FAS 121.


                                 Page 49 of 55

<PAGE>   50




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

     In February 1995, Walnut dismissed Coopers & Lybrand, L.L.P. as its
principal accountant, in favor of Richard A. Eisner LLP which had been the
principal accountant for the Company and NFS since March 1993.  Management made
this change in order to consolidate the accounting and auditing functions for
the Company and each of its subsidiaries with one independent accountant.  The
Walnut Board of Directors approved such dismissal.  During the Company's three
most recent fiscal years, no report issued by Coopers & Lybrand, L.L.P. to
Walnut  contained an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's two most recent fiscal years, Walnut and Coopers &
Lybrand, L.L.P. have had no disagreements on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.

                                    PART III

     As permitted by General Instruction G to Form 10-K, the information
required by Part III of Form 10-K will be included in the Company's definitive
proxy statement relating to its 1997 annual meeting of stockholders, which the
Company anticipates will be filed no later than April 30, 1997, and thus is
incorporated herein by this reference.

                                    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 27 to 49, inclusive, of this Report; see
Index to Consolidated Financial Statements at page 23 of this Report.

     (a)(2)  Financial Statement Schedules:

     Schedules I and II appear at pages 51 and 53 of this Report; see Index
to Consolidated Financial Statement Schedules at page 23 of this Report.  All
other financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.

     (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 have been filed during the three-month period ended
December 31, 1996.

                                 Page 50 of 55

<PAGE>   51




                        WALNUT FINANCIAL SERVICES, INC.
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                               DECEMBER 31, 1996
                                 BALANCE SHEET


<TABLE>
<S>                                                <C>  <C>
ASSETS
Cash and cash equivalents                            $      11,105
Other current assets                                        71,435
                                                     -------------
Total current assets                                        82,540
Due from subsidiaries                                      875,831
Investment in subsidiaries                              14,292,513
Investment in securities                                 2,358,125
Non-current deferred tax liability                       1,064,266
                                                     -------------
                                                        18,590,735
TOTAL ASSETS                                         $  18,673,275
                                                     ============= 
LIABILITIES AND SHAREHOLDERS' EQUITY
Margin payable to brokers                                  204,169
Notes payable                                            3,725,000

Accounts payable                                           356,445
                                                     -------------
                                                         4,285,614
                                                     -------------

SHAREHOLDERS' EQUITY:
Preferred stock, no stated value, 1,000,000
shares authorized, no shares issued
Common stock $.01 stated value, 50,000,000 shares
authorized, 14,616,687 issued                              146,167
Additional paid in capital                              15,030,269
Retained earnings                                        (788,775)
Total shareholders' equity                              14,387,661
                                                     -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $  18,673,275
                                                     =============
</TABLE>

Attention is directed to the foregoing accountants' report and to the 
accompanying notes to the financial statements included elsewhere in this 
Report on Form 10-K.

                                 Page 51 of 55

<PAGE>   52



                        WALNUT FINANCIAL SERVICES, INC.
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                               DECEMBER 31, 1996
                            STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>
                                                     Year Ended December 31, 1996
                                                     -----------------------------

<S>                                                       <C>

Income                                                     $               37,626
                                                           ----------------------
Costs and Expenses
General and administrative                                                880,871
Interest                                                                  379,623
Unrealized gain on investments                                             53,435
Realized loss on investments                                             (301,320)
                                                           ----------------------
Loss before equity in net loss of subsidiaries                           (974,983)
Equity in net loss of subsidiaries                                     (2,379,676)
Income tax benefit                                                        389,993
                                                           ----------------------
Net loss                                                   $           (2,964,666)
                                                           ======================
</TABLE>

                            STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
                                                          Year Ended December 31, 1996
                                                          ----------------------------
<S>                                                        <C>
Net cash provided (used in) by operating activities        $                 (695,844)
Cash flows from financing activities
Issuance of compensatory warrants                                             125,000
Net proceeds from sale of common stock for cash                                35,000
Borrowings of short term bank debt                                           (275,000)
Increase in margin accounts                                                  (909,600)
                                                           --------------------------
                                                                           (1,720,444)
                                                           --------------------------

Cash flows from investing activities
Costs in connection with acquisition of NFS                                         0
Additional investments in subsidiaries                                              0
Net advances to subsidiaries                                                  320,397
Purchases of investments                                                     (875,000)
Proceeds from sales of investments                                          2,766,760
                                                           --------------------------
Deferred private placement costs                                                    0
                                                           --------------------------
                                                                            1,617,160
                                                           --------------------------
Net increase/(decrease) in cash                                              (103,284)
Cash and cash equivalents at beginning of period                              114,389
                                                           --------------------------
Cash and cash equivalents at end of period                 $                   11,105
                                                           --------------------------

</TABLE>

Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements included elsewhere in this 
Report on Form 10-K.

                                 Page 52 of 55

<PAGE>   53

                        WALNUT FINANCIAL SERVICES, INC.
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES



<TABLE>
<CAPTION>
             Column A                Column B      Column C                          Column D     Column E
                                                   Additions
---------------------------------------------------------------------------------------------------------------
                                                         (1)              (2)
                                     Balance at    --------------------------------
                                     Beginning of  Charged to Costs    Charged to                  Balance at
            Description                 Period       and Expenses    Other Accounts  Deductions   End of Period
---------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>               <C>             <C>          <C>
Year ended December 31,1996:
Allowances for doubtful receivables    $  703,310          $421,337     $243,168                     $1,367,815
                                       ==========                                                    ==========
Year ended December 31, 1995:                                                        
Allowances for doubtful receivables    $1,431,188          $462,689    $ 235,163(c)  $879,710(a)       $703,310
                                       ==========                                     546,020(b)       ======== 
</TABLE>
--------------------------
(a) Write offs.
(b) Conversion of debt securities to equity securities.
(c)  Opening valuation balance of acquired company (see Note 1 to consolidated
     financial statements).



     Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements included elsewhere in this
Report on Form 10-K.

                                 Page 53 of 55

<PAGE>   54



                                   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:  March 27, 1997  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.



       Signature                 Title                          Date
       ---------                 -----                          ----


       /s/Joel S. Kanter         President and Director
       ------------------        (Principal Executive Officer)  March 27, 1997
       Joel S. Kanter            


       /s/Robert F. Mauer        Treasurer
       ------------------        (Principal Financial and 
       Robert F. Mauer           Accounting Officer)            March 28, 1997
                                 

       /s/Burton W. Kanter       Director                       March 27, 1997
       ------------------------
       Burton W. Kanter


       /s/Solomon A. Weisgal     Director                       March 27, 1997
       ------------------------
       Solomon A. Weisgal

       /s/William F. Burge, III  Director                       March 27, 1997
       ------------------------
       William F. Burge, III

       /s/Eugene N. Scalercio    Director                       March 27, 1997
       ------------------------
       Eugene N. Scalercio

       /s/Gene E. Burleson       Director                       March 27, 1997
       ------------------------
       Gene E. Burleson

                                 Page 54 of 55

<PAGE>   55




                                 EXHIBIT INDEX

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

  3.1  Articles of Incorporation of Walnut Financial Services, Inc., as
       amended.*

  3.2  Bylaws of Walnut Financial Services, Inc.*

  10.1 Agreement dated July 29, 1994 between Walnut Capital Corp. and U.S.
       Small Business Administration.*

  10.2 Employment Agreement dated January 1, 1996 between Walnut Financial
       Services, Inc. and Burton W. Kanter.

  10.3 Employment Agreement dated February 27, 1995 between Walnut Financial
       Services, Inc. and Joel S. Kanter.

  10.5 Noncompetition Agreement dated February 27, 1995 between NFS
       Services, Inc. and Eugene N. Scalercio.*

  10.6 The Walnut Capital Corporation 1987 Stock Option Plan.*

  10.7 The NFS Services, Inc. 1989 Incentive Stock Option Plan.*

  10.8 The NFS Services, Inc. (Utah) 1994 Incentive Stock Option Plan.*

  21   Subsidiaries of Walnut Financial Services, Inc.

  23.1 Consent Letter of Richard A. Eisner LLP.

  27   Financial Data Schedule

__________________________

*    Previously filed as an Exhibit (with the same Exhibit reference number as
     contained herein) to the initial filing of the Registrant's Registration
     Statement on Form 10 dated May 10, 1995 as filed with the Securities and
     Exchange Commission on May 11, 1995.



                                 Page 55 of 55