<PAGE>   1
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549

                                   FORM 10-Q

(Mark One)
[x]  Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934 For the quarterly period ended  March 31, 1997 or
                                             --------------
[ ]  Transition report under Section 13 or 15(d) of the Exchange Act 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 No.)

8000 Towers Crescent Drive, Suite 1070
Vienna, Virginia                                                        22182
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                              (Zip Code)
 
                                (703) 448-3771
              --------------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)
                                      N/A
  ---------------------------------------------------------------------------
  (Former Name, Former Address and Former Fiscal Year, if Changed Since Last
                                    Report)

  Indicate by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes     X   No 
     -----    -----
                      APPLICABLE ONLY TO CORPORATE ISSUERS
  As of May 8, 1997, the registrant had 14,619,172 shares of Common Stock
issued and outstanding.
<PAGE>   2

                Walnut Financial Services, Inc. and Subsidiaries
                               Index To Form 10-Q

                                 March 31, 1997




<TABLE>
<CAPTION>
                                                                                                                 Page
                                                                                                                 Number
                                                                                                                 -----
<S>                                                                                                              <C>
                                                         Part I - Financial Information                          
                                                                                                                 
Item 1 - Financial Statements                                                                                    
                                                                                                                 
Condensed Consolidated Balance Sheets at March 31, 1997 and December 31, 1996                                     3
                                                                                                                 
Condensed Consolidated Statements of Operations for the three months                                             
ended March 31, 1997 and 1996                                                                                     4
                                                                                                                 
Condensed Consolidated Statements of Cash Flows for the three months ended                                       
March 31, 1997 and 1996                                                                                           5
                                                                                                                 
Condensed Consolidated Statement of Changes in Stockholders' Equity for                                          
the three months ended March 31, 1997                                                                             6
                                                                                                                 
Notes to Condensed Consolidated Financial Statements                                                              7
                                                                                                                 
Item 2 - Management's Discussion and Analysis of Financial Condition                                             
and Results of Operations                                                                                        10
                                                                                                                 
                                                           Part II - Other Information                           
                                                                                                                 
Item 1 - Legal Proceedings                                                                                       16
                                                                                                                 
Item 6 - Exhibits Required by Item 601 and Reports on Form 8-K                                                   16
                                                                                                                 
Signatures                                                                                                       17
</TABLE>





                                  Page 2 of 17
<PAGE>   3

                         PART 1 - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
                        WALNUT FINANCIAL SERVICES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                             March 31, 1997       December 31, 1996
                                                                                             --------------       -----------------
<S>                                                                                <C>                      <C>          
ASSETS

 Portfolio securities:
   Marketable equity securities                                                    $           15,207,960   $         23,842,962

   Non-marketable securities                                                                    5,358,303              4,468,692
   Non-marketable debt securities                                                               1,383,201              1,512,081
                                                                                   ----------------------   --------------------
     Total portfolio securities                                                                21,949,464             29,823,735

Current assets:
   Cash and cash equivalents                                                                    4,532,293                840,225

   Accounts receivable (net of allowance)                                                         382,792                420,612
   Interest receivable (net of allowance)                                                           3,981                 26,603
   Unbilled receivables                                                                           668,688                770,754

   Other current assets                                                                           232,675                208,078
                                                                                   ----------------------   --------------------
     Total current assets                                                                       5,820,429              2,266,272

Non-current deferred taxes                                                                        581,996                      0
Fixed assets, net of accumulated depreciation                                                      45,358                 43,431
Long term assets                                                                                  208,489                208,489
Intangible assets                                                                                 808,117                856,548
                                                                                   ----------------------   --------------------
         TOTAL ASSETS                                                              $           29,413,853   $         33,198,475
                                                                                   ======================   ====================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:

   Margin payable to brokers                                                       $            3,722,380   $          5,459,118
   Notes payable to banks and current portion of long term debt                                 2,275,000              2,850,000
   Notes payable to other                                                                         493,913                875,000

   Accounts payable, accrued expenses and other current liabilities                             1,125,416              1,119,785
     Current Portion of long - term debt                                                        4,049,050              4,049,500
                                                                                   ----------------------   --------------------
     Total current liabilities                                                                 11,665,759             14,353,403
Long-term debt, net of current portion                                                          4,014,165              4,013,321
Non-current deferred tax liability                                                                      0                 37,689

Deferred rent, net of amortization                                                                 17,808                 19,651
                                                                                   ----------------------   --------------------
     Total liabilities                                                                         15,697,732             18,424,064


Minority Interest                                                                                 363,891                386,750


Shareholders' equity:
   Preferred stock, no stated value, 1,000,000 shares authorized, no shares
   issued                                                                                         146,167                146,167
   Common stock, $.01 stated value, 50,000,000 shares authorized, 14,616,687
    issued in 1997 and 14,616,687 issued in 1996

   Additional paid in capital                                                                  15,030,269             15,030,269
   Retained earnings                                                                           (1,824,206)              (788,775)
                                                                                   ----------------------   --------------------
         Total shareholders' equity
                                                                                               13,352,230             14,387,661
                                                                                   ----------------------   --------------------

 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                        $           29,413,853   $         33,198,475
                                                                                   ======================   ====================

</TABLE>

 Attention is directed to the accompanying notes to these financial statements





                                 Page 3 of 17  
<PAGE>   4

                        WALNUT FINANCIAL SERVICES, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                              For the Three Months Ended
                                          ------------------------------------
                                           March 31, 1997        March 31, 1996
                                           --------------        --------------
 <S>                                     <C>                    <C>
 Revenue:                              
    Recovery services                    $        150,368       $       219,395
                                       
    Operational support                           188,921               219,167
    Investment and other income                    37,723                 5,638
                                         ----------------       ---------------
                                                  377,012               444,200
                                         ----------------       ---------------
                                       
 Costs and Expenses:                   
    Cost of services                              385,963               394,527
                                       
    General and administrative                    358,695               412,788
                                         ----------------       ---------------
                                       
                                                  744,658               807,315
                                         ----------------       ---------------
 Operating loss                                  (367,646)             (363,115)
                                       
 Interest and other financial costs               362,375               481,938
                                         ----------------       ---------------
                                       
                                                 (730,021)             (845,053)
 Minority Interest                                 (6,618)                    0
                                         ----------------       ---------------
                                       
                                       
                                       
 Loss before taxes and realized and              (736,639)             (845,053)
   unrealized gain and loss            
 Income tax benefit                               285,894               336,791
                                       
 Realized gain/(loss) on sale of       
   securities, net of tax                       3,526,056               442,932
                                         ----------------       ---------------
 Gain/(loss) before unrealized loss             3,075,311               (65,330)
                                       
 Unrealized gain on investments, net of        
   tax                                         (4,110,742)            1,689,503
                                         ----------------       ---------------
                                       
 Net income/(loss)                       $     (1,035,431)      $     1,624,173
                                         ----------------       ---------------
 Income/(loss) per share                 $          (0.07)      $          0.11
                                         ----------------       ---------------
                                       
 Weighted average shares outstanding           14,616,687            14,239,578
                                         ----------------       ---------------
</TABLE>

 Attention is directed to the accompanying notes to these financial statements





                                 Page 4 of 17  
<PAGE>   5

                        WALNUT FINANCIAL SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                               For the Three Months ended March
                                                                                              31,
                                                                               --------------------------------
                                                                                  1997                  1996
                                                                               ----------            ----------
 <S>                                                                      <C>                  <C>
 Operating activities:
   Net increase/(decrease) in net assets resulting from operations        $   (1,035,431)      $     1,624,173

 Adjustments to reconcile net income/(loss) to net cash
     provided by (used in) operating activities:
   Depreciation/amortization                                                      51,491                37,096
   Net unrealized (depreciation)/appreciation                                  6,851,237            (2,815,839)
   Realized gains                                                             (5,876,761)             (738,220)
    Other                                                                              0                     0
 Changes in operating assets and liabilities                                    (557,589)            1,105,077
                                                                           -------------        --------------
          Net cash (used in) operating activities                               (567,053)             (787,713)
                                                                           -------------        --------------
 Investing activities:

   Costs in connection with the acquisition of NFS                                     0                     0
   Additions to property and equipment                                            (4,987)                3,084
   Purchases of investments                                                     (389,975)             (193,741)
   Proceeds from sale of investments                                           7,350,765             1,698,646
                                                                           -------------        --------------

 Net cash provided by investing activities                                     6,955,803             1,507,989
                                                                           -------------        --------------

 Financing activities:

   Net proceeds from sale of common stock                                              0                35,000
   Borrowings/(repayments) of short term debt                                   (959,944)             (197,988)
   Increase/(decrease) in margin accounts                                     (1,736,738)             (201,633)
                                                                           -------------        --------------
 Net cash (used in) financing activities                                      (2,696,682)             (364,621)
                                                                           -------------        --------------

   Net increase/(decrease) in cash and cash equivalents                        3,692,068               355,655
   Cash and cash equivalents, at the beginning of the year                       840,225               396,440
                                                                           -------------        --------------

   Cash and cash equivalents at the end of the year                            4,532,293               752,095
                                                                           =============        ==============

 Supplemental Information:
 Cash paid for interest                                                    $     264,917        $      303,490
                                                                           =============        ==============
</TABLE>

 Attention is directed to the accompanying notes to these financial statements





                                 Page 5 of 17  
<PAGE>   6

                        WALNUT FINANCIAL SERVICES, INC.

      CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                  (Unaudited)




<TABLE>
<CAPTION>
                                                   Common Stock
                                           ------------------------------
                                                                                  Additional
                                                              Par Value            Paid In            Retained
                                             Shares            at $0.01            Capital            Earnings             Total
                                           ----------        -----------         -----------          --------          ----------
<S>                                        <C>          <C>                <C>                <C>                 <C>
Balance, December 31, 1996                 14,616,687   $        146,167   $      15,030,269   $       (788,775)  $      14,387,661
                                  
Net income/(loss)                                                                                    (1,035,431)         (1,035,431)
                                           ----------   ----------------   -----------------   ----------------   -----------------
 Balance, March 31, 1997                   14,616,687   $        146,167   $      15,030,269   $     (1,824,206)  $      13,352,230
                                           ==========   ================   =================   ================   =================
                                  
</TABLE>                            




 Attention is directed to the accompanying notes to these financial statements





                                 Page 6 of 17  
<PAGE>   7

                        WALNUT FINANCIAL SERVICES, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. BASIS OF PREPARATION.

         The accompanying consolidated financial statements as of March 31,
1997 and March 31, 1996, and for the three months ended March 31, 1997 and
March 31, 1996, are unaudited; however, in the opinion of the management of
Walnut Financial Services, Inc., a Utah corporation (the "Company"), such
statements include all adjustments (consisting of normal recurring accruals)
necessary to present a fair statement of the information presented therein.
The balance sheet at December 31, 1996 was derived from the audited financial
statements at such date.

         Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
generally accepted accounting principles for audited financial statements.
Accordingly, these statements should be read in conjunction with the Company's
most recent audited financial statements included in its Form 10-K for the
fiscal year ended December 31, 1996, as amended.

         Results of operations for interim periods are not necessarily
indicative of those to be achieved for fiscal years.

2.       ORGANIZATION.

         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 "SBA Act"), and is subject to regulations promulgated by the
Small Business Administration (the "SBA") pursuant to the provisions of the SBA
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 conducts its operations both directly
and through its subsidiaries.  The Company pursues its bridge financings
through its wholly-owned subsidiary, Universal Bridge Funds, 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").





                                 Page 7 of 17  
<PAGE>   8


3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

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

         REVERSE STOCK SPLIT AND BUSINESS COMBINATIONS.  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 each share of Walnut)
applicable to the business combination between Walnut and the Company (the
"Business Combination"), whereby the shareholders of Walnut exchanged their
stock in Walnut for shares of Common Stock of the Company and, as a result,
Walnut ultimately became a wholly-owned subsidiary of the Company.

         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.  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 $2,226,000 and liabilities were $75,000. UPLP's activities are
fully consolidated in 1997's results.

         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.

         A new accounting pronouncement FAS 128 (Accounting for Earnings per
Share) will provide a simplified standard for accounting for earnings per
share. This will be effective December 31, 1997.





                                 Page 8 of 17  
<PAGE>   9

4.       SECURITIES.

Securities as of March 31, 1997 consisted of the following:

<TABLE>
<CAPTION>
                                                                   Market/Fair Value                Cost
                                                                   -----------------            ------------
              <S>                                                    <C>                       <C>              
              Equity:
                                   Biotechnology         $                519,875  $                519,875
                                   Communications                       1,496,041                 3,666,887
                                   Environmental                          206,121                    75,848
                                   Health care                         13,687,061                 5,546,110
                                   High technology                      1,788,385                 2,919,881
                                   Other                                2,868,779                 4,599,632
                                   Gold                                         1                    18,000
                                                         ------------------------  ------------------------
                                     Total equity        $             20,566,263  $             17,346,233
                                                         ========================  ========================
              Debt:
                                   Environmental          $                93,465   $               400,590
                                   Health care                            100,000                   105,460
                                   Other                                  852,396                 1,325,392
                                   Services                               337,340                   347,340
                                                         ------------------------  ------------------------
                                     Total debt                         1,383,201                 2,178,782
                                                         ------------------------  ------------------------
              Total Securities                           $             21,949,464  $             19,525,015
                                                         ========================  ========================
</TABLE>

5. RELATED PARTY TRANSACTIONS.

  The Company and its subsidiaries retain a law firm at which a Company officer
is of counsel. Payments of $60,300 were paid to such firm by the Company for
reimbursement of expenses and legal services incurred during the three months
ended March 31, 1997. Such expenses and fees were incurred in connection with
normal business activities.





                                 Page 9 of 17  
<PAGE>   10

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

RESULTS OF COMPANY OPERATIONS FOR THE FISCAL THREE MONTHS ENDED MARCH 31, 1997
AND 1996.

         RESULTS OF COMPANY AND WALNUT OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996. Walnut had realized gains of $3,526,000, net of tax,
for the three-month period ended March 31, 1997, compared to a gain of
$374,000, net of tax, for the same period in 1996.  Both the 1997 and 1996
gains were primarily attributable to sales of securities of HealthCare COMPARE
Corp.; however, during the three-month period ended March 31, 1997, Walnut sold
more shares of HealthCare COMPARE Corp. than for the prior period in order to
repay certain debentures issued by Walnut to an affiliate of the SBA (the
"Walnut Debentures") which matured in April 1997.

         Unrealized losses for the three-month period ended March 31, 1997 were
$4,110,000, net of tax. This compares with gains of $1,351,000, net of tax, for
same period in 1996. The losses in 1997 resulted primarily from a decrease in
portfolio company share values, primarily health care companies.  The gains in
1996 resulted primarily from an increase in the value of  various health care
portfolio shares, most notably HealthCare COMPARE.

         Interest expense decreased at Walnut and the Company to $362,400 for
the three-month period ended March 31, 1997.  This compares to interest expense
of $421,000 for the same period in 1996. Interest expense consists of two major
components: (i) interest paid to the SBA with respect to the Walnut Debentures
and (ii) interest paid on margin accounts and bank lines.  The reduction in
interest expense in 1997 is attributable to reduced borrowings.

         Aggregate general and administrative expenses at Walnut and the
Company decreased by $50,000 to $358,700 for the three-month period ended March
31, 1997.  Such expenses at Walnut decreased $60,000 to $123,700.  This
decrease was due to lower personnel costs at Walnut.  Such expenses at the
Company were $167,400 for the period ended March 31, 1997, compared to $137,500
for the same period in 1996.  This increase was due to higher personnel costs.

         Consolidated net loss for the Company was $1,035,400 compared with a
profit of $1,600,000 for the same period in 1996.  The Company has realized and
unrealized losses of $15,000, net of tax, in addition to those recorded at
Walnut.  These were due to a decrease in the value of HealthCare COMPARE Corp.

         As of March 31, 1997, Walnut had outstanding a promissory note to a
third party representing principal owed of $494,000. The note was issued in
connection with an acquisition by Walnut 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.  As of January 31, 1997, $381,000 of the principal
had been repaid.  The remaining principal of $494,000 is due on July 31, 1997.





                                Page 10 of 17  
<PAGE>   11


         RESULTS OF NFS OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1996. During the three months ended March 31, 1997 revenue for NFS was
$341,900. Revenue, for such period was derived from operational support
($189,000), recovery services ($150,000) and other ($2,000).

         For the three months ended March 31, 1997, 76% of revenue from
operational support was derived from two clients: Chase ($89,200), or 47%, and
Radix Systems ($54,500) or 29%. Ninety-three percent of revenue from recovery
services was derived from two clients: The DBL Liquidating Trust ($114,900), or
76%, and Citibank, N.A. ($25,000), or 17%.

         During the three months ended March 31, 1996, revenue for NFS was
$441,100. Revenue was derived from recovery services ($219,900), operational
support ($219,100) and other ($2,500).  The decrease was due to a decline in
temporary staffing needs at WFS' major clients.

         For the three months ended March 31, 1996, 52% of revenue from
recovery services was derived from two clients: The DBL Liquidating Trust,
$90,000, or 41%, and Nationsbank, $24,500, or 11%. Ninety-four percent of
revenue from operational support revenue was derived from two clients:
Citibank, N.A., $132,400, or 60%, and Key Investments, $74,500, or 34%

         For the three months ended March 31, 1997, cost of services was
$385,900 or 113% of revenues. General and administrative expenses for the
period were $73,900.  For the three months ended March 31, 1996, cost of
services were $394,500 or 89% of revenues and general and administrative
expenses were $88,000.


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 an
affiliate of the SBA.  On September 1, 1995, debentures in the principal amount
of $4 million had been repaid and the Walnut Debentures in the principal amount
of $8 million were outstanding as of March 31, 1997.  The amounts, maturities
and interest rates of such Walnut Debentures are set forth below:

<TABLE>
<CAPTION>
                                   Principal Balance        Date Issued         Maturity         Interest Rate
                                   -----------------        -----------         --------         -------------
                                      <S>                    <C>                <C>                  <C>
                                      $ 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.  Payment of the Walnut Debentures is guaranteed by the SBA.
Walnut has been current in all of





                                Page 11 of 17  
<PAGE>   12

its interest payments on the Walnut Debentures.  Walnut repaid the $4 million
Walnut debenture due at April 1, 1997, in accordance with its terms.
Additionally, Walnut reduced its broker margin account by $1.74 million.  The
source of funds were primarily from the sale of HealthCare COMPARE Corp.
securities. creating a realized capital gain of approximately $6 million in the
first quarter.

         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.

         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"), a related party, 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





                                Page 12 of 17  
<PAGE>   13

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 that date.

         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 in HealthCare COMPARE Corp. And GranCare, Inc. in the
aggregate exceeded the total of all secured and unsecured third party debt of
approximately $12 million.

         As of March 31, 1997 Walnut realized gains of approximately $6
million, due primarily to the sale of some of its securities in HealthCare
COMPARE Corp.  This gain is taken into consideration in the calculation of the
capital impairment.  As such, Walnut is no longer in capital impairment as of
March 31, 1997.

         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 finding; however, there can be 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 Walnut Debentures then outstanding.
Another SBA examination covering the period from March 1, 1995 until February
28, 1997 was completed in April 1997.  A written report is expected to be
issued by the SBA in the near future.  Management believes that any findings
from this examination will not have a material affect on the Company or Walnut.





                                Page 13 of 17  
<PAGE>   14

         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 of NFS was $140,000 at March 31, 1997.

         LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY.  Through June 1995,
the Company sold 1,015,625 shares of Common Stock in a private placement at an
offering price of $2.00 per share.  The proceeds of such private placement were
used primarily to (i) repay indebtedness, (ii) pay accrued federal, state and
city taxes, interest and penalties, and (iii) increase working capital.

         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 requires interest only payments of September 30, 1996 and
December 31, 1996. A principal payment of $575,000 was made 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 March 31, 1997).  This loan is
personally guaranteed by two Directors of the Company.





                                Page 14 of 17  
<PAGE>   15

                          PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS.

         There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to which the
Company or any of the subsidiaries is a party or of which any of their property
is the subject.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.

         (a)     Exhibit 11 - Statement re:  Computation of Per Share Earnings
         (b)     Exhibit 27 - Financial Data Schedule
         (c)     No reports on Form 8-K have been filed during the quarter for
                 which the report is filed.





                                Page 15 of 17  
<PAGE>   16

                                   SIGNATURES

         In accordance with the requirements 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.
                                          (Registrant)



Date: May 13, 1997                        /s/ Joel S. Kanter        
                                          ------------------------------------
                                          Joel S. Kanter
                                          President (Chief Executive Officer)



Date: May 13, 1997                        /s/ Robert F. Mauer   
                                          ------------------------------------
                                          Robert F. Mauer
                                          Treasurer (Chief Accounting Officer)





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