<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  June 30,1998 or 
                                                ------------------- 
[]   Transition report under Section 13 or 15(d) of the Exchange Act For 
     the transition period from -------------- to ------------------
                 Commission file number          0-26072 and 814-00157
                                             ------------------------------

                        Walnut Financial Services, Inc.
_____________________________________________________________________________
             (Exact Name of Registrant as Specified in Its Charter)


                  Utah                                    87-0415597
_____________________________________________________________________________
     (State or Other Jurisdiction of                   (I.R.S. Employer
     Incorporation or Organization)                   Identification 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 July 30, 1998, the registrant had 18,890,824 shares of Common Stock
issued and outstanding.


<PAGE>   2

                WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                               INDEX TO FORM 10-Q

                                 JUNE 30, 1998
<TABLE>
<CAPTION>

                                                                     Page Number
                         Part I - Financial Information             ------------

Item 1 - Financial Statements


<S>                                                                          <C>
Consolidated Statements of Assets and Liabilities for the six months and
twelve months as of June 30, 1998 and December 31, 1997                        3

Investment in Securities for the six months as of  June 30, 1997               4

Consolidated Statements of Operations for the six months ended June 30, 1998
and 1997                                                                       5

Consolidated Statement of Changes in Net Assets for the six months ended
June 30, 1998 and 1997                                                         6

Consolidated Statement of Cash Flows for the six months ended June 30, 1998
and 1997                                                                       7

Notes to Condensed Consolidated Financial Statements                           8

Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations                                                     11

                                Part II - Other Information

Item 5 - Other Information                                                    14

Item 6 - Exhibits Required by Item 601 and Reports on Form 8-K                14

Signatures                                                                    15
</TABLE>


                                       2
<PAGE>   3
 
                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>
                                                                      JUNE 30,                DECEMBER 31, 
                                                                        1998                     1997
                                                                    (UNAUDITED)
                                                                 ----------------           ----------------
<S>                                                            <C>                    <C>        <C>
Assets:
Investments at Market or Fair Value:
    Marketable equity securities (cost of $1,573,000 in 1998 and
    $1,448,000 in 1997 )                                          $     11,476,000       $        13,554,000
    Non-marketable equity securities (cost of $11,237,000 in
    1998 and $8,183,000 in 1997)                                        6,478,000                  3,384,000  
    Non-marketable debt securities (cost of $1,130,000 in 1998        
    and $1,329,000 in 1997)                                               459,000                    659,000
    Partnership interests (cost of $1,762,000 in 1998 and               
    $1,862,000 in 1997)                                                 1,951,000                  2,389,000
                                                                ______________________________________________ 
        Total portfolio securities                                     20,364,000                 19,986,000


Cash and cash equivalents                                                 241,000                  6,479,000
Deferred tax asset                                                        659,000                          0
Other assets                                                              130,000                     44,000
                                                                ______________________________________________
        Total assets                                                   21,394,000                 26,509,000


Liabilities:
    Margin payable to brokers                                             878,000                  2,297,000
    Notes payable to banks                                              1,351,000                  2,025,000
    Notes payable to related party                                        300,000                    400,000
    Accounts payable, accrued expenses and other current                  890,000                  1,069,000 
    liabilities                                                        
    Debentures payable                                                  2,000,000                  4,000,000     
    Deferred tax liability                                                      0                     44,000
                                                               _______________________________________________
        Net assets                                                $    15,975,000        $        16,674,000
                                                               _______________________________________________
                                                               _______________________________________________

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

Common stock, $.01 par value, 50,000,000 shares authorized,
18,890,824 and 18,656,687 issued and outstanding                  $      189,000         $          187,000

Additional paid in capital                                            18,461,000                 18,237,000   

Accumulated deficit:                                            
                                                                     
    Net investment loss                                              (13,219,000)               (12,676,000)
    Net realized gain on investment                                    8,964,000                  8,263,000
    Net unrealized appreciation of investments                         1,580,000                  2,663,000
                                                              ________________________________________________
Net assets applicable to outstanding common shares
(equivalent to $0.85 and $0.89 per share based on 18,890,824
and 18,656,687 outstanding common shares at June 30, 1998
and December 31, 1997, respectively)                              $   15,975,000         $        16,674,000
                                                              _________________________________________________
                                                              _________________________________________________
</TABLE>


                                       3
<PAGE>   4

                        WALNUT FINANCIAL SERVICES, INC.
                            INVESTMENT IN SECURITIES
                                 JUNE 30, 1998
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    Shares          Value
                                                                   --------     ------------
<S>                                                             <C>            <C>
Common and Preferred Stocks - 88%
Healthcare - 61%
----------------
    American Psych Systems, Inc.                                   122,950       $   150,000
    Paragon Health Network, Inc. (formerly Grancare, Inc.)         140,757         2,352,000
    Greystone Medical Group, Inc.                                  200,000           100,000
    First Health Group Corp.                                       300,000         8,550,000
    I-Flow Corporation                                             300,000           541,000
    Ivonyx Group Services, Inc.                                    100,000           100,000
    Med Images, Inc.                                               241,530           474,000
    MHM Services, Inc.                                             131,955            44,000
    Optiva Corporation                                              10,000            63,000
    Osteoimplant Technology, Inc.                                   80,000            96,000
    Rainbow Medical, Inc.                                           25,000            50,000
                                                                               -------------
                                                                                  12,520,000
                                                                               -------------

                                                                      
High technology- 3%
-------------------
    Madison Info. Tech. Preferred A                                 60,000           150,000
    Madison Info. Tech. Preferred B                                 60,000           150,000
    Logic Devices Incorporated                                      45,000           132,000
    Nhancements Technology Corp.                                    16,185            34,000
    Thermo Information Solutions, Inc.                              10,000            90,000
    J.L. Wickham Co., Inc. Common                                  250,696                 -
    J.L. Wickham Co., Inc. Preferred                               281,788                 -
                                                                               -------------
                                                                                     556,000
                                                                               -------------
Communications- 6%
------------------
    International Business Network                                  70,000           105,000
    Site Based Media, Inc.                                         321,108            19,000
    Trans Global Services, Inc.                                     62,003           273,000
    Vision III Imaging, Inc.                                        10,835           867,000
                                                                               -------------
                                                                                   1,264,000
                                                                               -------------
Biotechnology- 2%
-----------------
    Vaxgen, Inc.                                                    20,000            70,000
    BioHorizon Implant Systems, Inc.                               193,934           300,000
                                                                               -------------
                                                                                     370,000
                                                                               -------------
Finance - 12%
-------------
    Pacific Financial Services Corporation. (wholly owned
    sub).                                                              300         2,459,000
                                                                               -------------
                                                                                   2,459,000
                                                                               -------------
Other- 4%
---------
    Linter's, Inc.                                                  42,784            75,000
    SoftKat, Inc.                                                  155,309           311,000
    International Business Network                                  70,000           105,000
    VINnet Inc. Common                                              25,000           125,000
    VINnet Holding, Inc. Preferred A                                   180           180,000
    VINnet Holding, Inc. Preferred B                                37,643            94,000
                                                                               -------------
                                                                                     785,000
                                                                               -------------

     Total common and preferred stocks (cost $12,810,000)                         17,954,000
                                                                               -------------
Partnership Interests - 10%
    Universal Partners, L.P. (majority-owned subsidiary)                           1,951,000
                                                                               -------------
     Total partnership interests (cost $1,762,000)                                 1,951,000  
                                                                               -------------
Debt Securities - 2%                                                                          
    TCOM Services, Inc.                                                              276,000  
    SoftKat, Inc.                                                                    160,000  
    VINnet Holding, Inc.                                                              23,000  
                                                                               -------------
     Total debt securities (cost $1,130,000)                                         459,000  
                                                                               -------------
                                                                                     
     Total - 100% (cost $15,702,000)                                             $20,364,000
                                                                               =============                                        
</TABLE>

 
                                       4
<PAGE>   5

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




<TABLE>
<CAPTION>
                                                       FOR  THE SIX MONTHS ENDED                FOR THE THREE MONTHS ENDED
                                                      ----------------------------             ----------------------------
                                                      JUNE 30, 1998  JUNE 30, 1997             JUNE 30, 1998  JUNE 30, 1997
<S>                                                    <C>             <C>                       <C>          <C>  
Investment income:
  Interest income                                            67,000         41,000                    33,000          5,000
  Dividend income                                             3,000         13,000                     3,000          9,000
                                                       ----------------------------            -----------------------------
Total income                                                 70,000         54,000                    36,000         14,000
Expenses:
  Interest expense                                          307,000        607,000                   130,000        247,000
  General and administrative                                668,000        492,000                   364,000        238,000
                                                       ----------------------------            -----------------------------
Net investment (loss) before taxes                         (905,000)    (1,045,000)                 (458,000)      (471,000)
Income tax benefit                                          362,000        418,000                   183,000        188,000
                                                       ----------------------------            -----------------------------
Net investment (loss)                                      (543,000)      (627,000)                 (275,000)      (283,000)
                                                       ----------------------------            -----------------------------
Realized and unrealized gains on investments:
  Realized gain on sale of investments
   before income tax                                      1,168,000      6,900,000                   209,000      1,092,000
Income tax provision                                       (467,000)    (2,760,000)                  (83,000)      (437,000)
                                                       -----------------------------           ------------------------------   
Net realized gain on sale of investments                    701,000      4,140,000                   126,000        655,000
                                                       -----------------------------           ------------------------------
Unrealized appreciation/(depreciation) on
  investments before income tax                          (1,805,000)    (6,135,000)                 (877,000)       784,000
Income tax benefit                                          722,000      2,109,000                   351,000       (634,000)
                                                       -----------------------------           ------------------------------
Net unrealized appreciation/(depreciation)
  on investments                                         (1,083,000)    (4,026,000)                 (526,000)        150,000
                                                       -----------------------------           ------------------------------
Net realized and unrealized gains  (losses) on
  investments                                              (382,000)       114,000                 (400,000)        805,000
                                                       -----------------------------           ------------------------------
Net increase (decrease) in net assets resulting
  from operations                                          (925,000)      (513,000)                 (675,000)        522,000
                                                       ==============================          ==============================
Loss per share - basic and diluted                            (0.05)         (0.04)                    (0.04)           0.04
                                                       ------------------------------          ------------------------------
Weighted average shares outstanding                      18,851,827     14,616,687                18,890,824      14,638,512
                                                       ==============================          ==============================
</TABLE>

                                       5
                                        
<PAGE>   6

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



<TABLE>
<CAPTION>
                                                                             FOR THE SIX MONTHS ENDED
                                                                                     JUNE 30,
                                                                    ---------------------------------------
                                                                           1998                   1997
                                                                    ---------------------------------------
<S>                                                                <C>                    <C>


Decrease in net assets resulting from operations:

   Net investment loss                                               $    (543,000)         $    (344,000)
   Net realized gains on investments                                       701,000              3,485,000
   Net unrealized depreciation on investments                           (1,083,000)            (4,176,000)
                                                                    -----------------------------------------
                                                                          (925,000)            (1,035,000)
                                                                    -----------------------------------------
Increase in net assets resulting from capital share transactions:
 Issuance of  234,137 shares of common stock for Pacific
   Financial Services Corporation                                          300,000                      0
 Expenditures attributable to issuance of common stock                     (74,000)                     0
                                                                    -----------------------------------------
                                                                           226,000                      0
                                                                    -----------------------------------------
Total increase (decrease) in net assets                                   (699,000)            (1,035,000)

Net assets at beginning of period                                       16,674,000             14,387,000
                                                                    -----------------------------------------
Net assets at end of period                                            $15,975,000            $13,352,000
                                                                    =========================================
</TABLE>

                                       6

      
<PAGE>   7
 
                  WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                         FOR THE SIX MONTHS ENDED
                                                                                 JUNE 30,
                                                                 ---------------------------------------
                                                                         1998              1997
                                                                 ---------------------------------------
<S>                                                              <C>                    <C>

Cash flows from operating activities:
  Net increase (decrease) in net assets resulting from operations   $    (925,000)      $     (513,000)
  Adjustments to reconcile net increase (decrease) in net assets
  resulting from operations to net cash provided by operating
  activities:
    Net unrealized depreciation of investments                          1,805,000            6,135,000
    Net realized gain on investments                                   (1,168,000)          (6,900,000)
    Change in net deferred tax liability                                 (703,000)             187,000
    Changes in assets and liabilities:
      Other assets                                                        (86,000)             (15,000)
      Other liabilities                                                  (180,000)              15,000
                                                                 -----------------------------------------
        Net cash provided by (used in) operating activities            (1,257,000)          (1,088,000)
                                                                 -----------------------------------------
Cash flows from investing activities:
  Purchases of common stock, healthcare                                  (140,000)            (120,000)
  Purchases of common stock, high tech                                   (300,000)                  --
  Purchases of common stock, bio tech                                    (300,000)                  --
  Purchases of common stock, communications                              (125,000)            (110,000)
  Purchase of equity and debt securities, wholly-owned subsidiary      (2,159,000)                  --
  Proceeds from sale of general partnership interest                      122,000                   --
  Proceeds from sale of common stock, healthcare                        1,914,000            7,818,000
  Proceeds from sale of common stock, high tech                            22,000                2,000
  Proceeds from sale of common stock, other                                53,000              510,000
  Expenditures attributable to issuance of common stock                   (75,000)                  --
  Collections from debt securities                                        200,000                   --
                                                                 ------------------------------------------
        Net cash provided by (used in) investing activities              (788,000)           8,100,000
                                                                 ------------------------------------------
Cash flows from financing activities:
  Borrowings (repayments) of short term debt                             (674,000)            (560,000)
  Borrowings from (repayments to) related party                          (100,000)                  --
  Increase (decrease) in margin accounts                               (1,419,000)          (1,990,000)
  Repayments of long term debt                                         (2,000,000)          (4,000,000)
                                                                 ------------------------------------------
        Net cash provided by (used in) financing activities            (4,193,000)          (8,550,000)
                                                                 ------------------------------------------
Net increase (decrease) in cash and cash equivalents                   (6,238,000)             462,000
Cash and cash equivalents, beginning                                    6,479,000              350,000
                                                                 ------------------------------------------
Cash and cash equivalents, end                                      $     241,000       $      812,000
                                                                 ==========================================
Supplemental Information:
Cash paid for interest                                              $     307,000       $      481,000
                                                                 ==========================================
Issuance of common stock and warrants for equity in wholly owned
subsidiary                                                          $     300,000       $           --
                                                                 ==========================================
</TABLE>

                                       7

<PAGE>   8
                        WALNUT FINANCIAL SERVICES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.   BASIS OF PREPARATION

     The accompanying consolidated financial statements as of March 31, 1998 and
March 31, 1997 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, 1997 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, 1997.

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

2.   ORGANIZATION.

     The Company is a closed-end management investment company, which elected on
October 15, 1997 to be regulated as a business development company (a "BDC")
under the Investment Company Act of 1940 (as amended, the "Investment Company
Act").  As such, the Company is, among other requirements, required to invest at
least 70% of its total assets in certain prescribed "Eligible Assets," which
generally include securities of privately-held companies and cash items,
government securities and high-quality short-term debt.  As of March 31, 1998,
the Company has three primary business focuses: (i) investing in start-up and
early stage development companies, (ii) operating an investment vehicle that
specializes in bridge financing to small to medium-sized companies and (iii) to
a lesser extent, providing accounts receivable factoring services to small and
medium-sized businesses.  The Company engages in its investment business (x)
primarily through its wholly-owned subsidiary, Walnut Capital Corp., a Delaware
corporation ("Walnut Capital"), which was formed in 1980 for the purpose of
operating as a Small Business Investment Company (an "SBIC") under the Small
Business Investment Act of 1958 (as amended, the "SBIA") and is subject to
regulations promulgated by the Small Business Administration (the "SBA")
pursuant to the provisions of the SBIA, and (y) to a lesser extent, through its
wholly-owned subsidiary, Walnut Funds, Inc., a Delaware corporation ("Walnut
Funds"), which has a 40% ownership interest in and indirectly (through WGP
Management Company, Inc., a Delaware corporation, in which Walnut Funds has a
40% ownership interest) provides investment management services to Walnut Growth
Partners Limited Partnership, an Illinois limited partnership ("Walnut Growth"),
a $30 million investment fund and discussed more fully below. Walnut Growth is
currently not active and management believes that it may not resume activities
and, as a result, the Company may not have access to Walnut Growth's remaining
investment capital.  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 engages in its accounts receivable factoring business through its
wholly-owned subsidiary, Pacific Financial Services Corporation, a Washington
corporation based in Seattle ("Pacific"), which was acquired by the Company in
January 1998.  The Company engages in the human resources and quality assurance
consulting business through its wholly-owned subsidiary, Walnut Consulting,
Inc., a Delaware corporation ("Walnut Consulting").  The activity of Walnut
Consulting has not been significant to date.  Management anticipates that the
Company 


                                       8
<PAGE>   9
                        WALNUT FINANCIAL SERVICES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

may seek to cease to be a BDC upon the acquisition of additional operating
businesses; however, the Company may not change the nature of its business so as
to cease to be a BDC unless such change is approved by the Company's
shareholders in accordance with the Investment Company Act.  As a result of the
technical nature of the Investment Company Act, the Company's wholly-owned
subsidiaries, Walnut Capital, Walnut Funds and Universal Bridge, also have each
elected to be regulated as a BDC.  On September 28, 1997, the Company sold all
of the outstanding stock of its wholly-owned subsidiary, NFS Services, Inc., a
Delaware corporation ("NFS"), which performed consulting and asset recovery
services.

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

     On October 27, 1997, the Company initiated a private placement to
accredited investors (the "1997 Private Placement") of 80 units (the "Units") at
$50,000 per Unit.  Each Unit consisted of 50,000 shares of Common Stock and
35,000 Class A Redeemable Common Stock purchase warrants (a "Class A Warrant"
and collectively, the "Class A Warrants").  Pursuant to the 1997 Private
Placement, the Company issued 4,000,000 shares of Common Stock and 2,800,000
Class A Warrants for gross proceeds of $4,000,000.  The Company used a portion
of the proceeds of the 1997 Private Placement to acquire all of the issued and
outstanding capital stock of Pacific.  Also on December 18, 1997, the Company
consummated the sale of an additional 1,000,000 Class A Warrants to certain
investors for $100,000.

     On January 28, 1998 the Company entered into a Stock Purchase Agreement to
acquire all outstanding common stock of Pacific for $3,000,000 consisting of
$1,500,000 in cash, $300,000 of the Company's common stock, $300,000 in short
term notes and $900,000 in Pacific notes payable January 2, 2002.  Since the
1997 Private Placement occurred prior to the closing of Pacific, the $300,000
short-term notes were paid at the Pacific closing in accordance with the terms
of the acquisition agreement.  The remaining notes are unsecured and bear
interest at 8%. Pacific is in the business of accounts receivable factoring in
the Northwest United States.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

     PRINCIPLES OF CONSOLIDATION.  The financial statements of the Company
include the accounts of Walnut, Walnut Funds and Universal Bridge. Intercompany
transactions and balances have been eliminated in consolidation.

     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.

                                       9
<PAGE>   10
                        WALNUT FINANCIAL SERVICES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


4.   RELATED PARTY TRANSACTIONS.

     The Company and its subsidiaries retain a law firm at which a Company
officer is of counsel. Payments of $178,000 and $259,000 were paid to such firm
by the Company during the three months and six months ended June 30, 1998,
respectively, for reimbursement of expenses and legal services incurred prior to
each respective payment.  Such expenses and fees were incurred in connection
with normal business activities, costs associated with the 1997 Private
Placement and costs related to the status of the Company and certain of its
subsidiaries as BDCs.

     In April 1997, the Company received an unsecured loan from a related party
in the amount of $400,000.  The loan bears interest at 9.5%.  The note will be
repaid in four quarterly payments. The first payment was commenced and paid on
April 1, 1998, of $100,000, and the second payment of $100,000 was made in July
1998.

                                       10
<PAGE>   11

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

Results of Operations for the Six Months Ended June 30, 1998  and 1997.

     For the six months ended June 30, 1998, the net decrease in net assets
resulting from operations was $925,000 or  $.05 per share as compared to a net
decrease in net assets resulting from operations of $513,000, or $.04 per share
for the six months ended June 30, 1997.

     Earnings from the six months ended June 30, 1998 as compared to June 30,
1997 is due to the realized gains recognized in connection with the sale of
marketable securities and changes in valuation of portfolio investments.
Realized gains were $1,168,000 and unrealized depreciation was $1,805,000 for
the six months ended June 30, 1998.  Realized gains were $6,900,000 and
unrealized depreciation was $6,135,000 for the six months period ended June 30,
1997.  For the six months period ended June 30, 1998, the unrealized
depreciation attributable to the Company's wholly-owned subsidiary, Universal
Bridge, and its majority owned subsidiary, UPLP, was $339,000.

     Interest expense for the six months ended June 30, 1998 was $307,000 as
compared to $607,000 for the same period in the prior fiscal year. The decrease
of $300,000 is attributable to a repayment of $4,000,000 of the SBA debentures
on April 1, 1997 and a reduction in margin payable to brokers.

     General and administrative expenses increased $176,000 for the six months
ended June 30, 1998 as compared to the comparable period in 1997 from $492,000
to $668,000 primarily due to an increase in legal fees associated with the 1997
Private Placement and the BDC status of the Company and certain of its
subsidiaries.

Results of Operations for the Three Months Ended June 30, 1998  and 1997.

     For the three months ended June 30, 1998, the net decrease in net assets
resulting from operations was $675,000 or  $.04 per share as compared to a net
increase in net assets resulting from operations of $522,000, or $.04 per share
for the three months ended June 30, 1997.

     The decrease in earnings from the three months ended June 30, 1998 as
compared to June 30, 1997 is due to the realized gains recognized in connection
with the sale of marketable securities and changes in valuation of portfolio
investments. Realized gains were $209,000 and unrealized depreciation was
$877,000 for the three months ended June 30, 1998.  Realized gains were
$1,092,000 and unrealized appreciation was $784,000 for the three months period
ended June 30, 1997.  For the three month period ended June 30, 1998, the
unrealized depreciation attributable to the Company's wholly-owned subsidiary,
Universal Bridge, and its majority owned subsidiary, UPLP, was $217,000.

     Interest expense for the three months ended June 30, 1998 was $130,000 as
compared to $247,000 for the same period in the prior fiscal year. The decrease
of $117,000 is attributable to a repayment of $4,000,000 of the SBA debentures
on April 1, 1997 and a reduction in margin payable to brokers.

     General and administrative expenses increased $126,000 for the three months
ended June 30, 1998 as compared to the comparable period in 1997 from $238,000
to $364,000 primarily due to an increase in legal fees associated with the 1997
Private Placement and the BDC status of the Company and certain of its
subsidiaries.

                                       11
<PAGE>   12

LIQUIDITY AND CAPITAL RESOURCES.

     Liquidity and Capital Resources of Walnut Capital.  As part of the SBIC
program, Walnut Capital has, from time to time, issued $12 million of debentures
to the SBA (the "Walnut Debentures"). Walnut Debentures in the principal amount
of $4 million had been repaid on September 1, 1995,  April 1, 1997, and an
additional Walnut Debentures in the principal amount of $2 million were repaid
on June 1, 1998.  Walnut Debentures in the principal amount of $2 million were
outstanding as of June 30, 1998.  Such Walnut Debentures were originally issued
in September 1989, bear interest at a rate of 8.80% per annum and are due on
September 1, 1987.

     Interest on the Walnut Debentures is paid semi-annually, and principal is
due at maturity.  Walnut Capital has been current in all of its interest
payments to the SBA.  Walnut Capital repaid the $2 million Walnut Debentures due
at June 1, 1998 in accordance with its terms.  Additionally, Walnut Capital
reduced its broker margin account by $1.419 million.  Walnut Capital had cash
and a broker margin account available to repay the $2 million of Walnut
Debentures due June 1, 1998.

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

     Liquidity and Capital Resources of the Company.  On August 31, 1995, the
Company established a $4 million line of credit with American National Bank and
Trust Company of Chicago ("ANB").  This line was replaced as of September 8,
1996 with a term loan of $2,850,000.  This loan required interest only payments
on September 30, 1996 and December 31, 1996.  A principal payment of $575,000
was made on March 31, 1997, with the balance due on July 31, 1997.  The interest
rate associated with this loan is ANB's base rate plus 2% (10.5% as of June 30,
1998).  This loan was renewed and amended to provide for an initial principal
payment of $250,000 and quarterly principal payments thereafter, commencing
December 31, 1997, of $250,000.  This loan has an amended maturity date of June
30, 1999 and a current principal amount outstanding of $1,275,000. Two Directors
of the Company personally guarantee the loan.  In April 1997, the Company
received an unsecured loan from a related party in the amount of $400,000. Such
loan bears interest at 9.5%.  The loan will be repaid in four quarterly
payments, which commenced with a payment on April 1, 1998, of $100,000, and a
second payment of $100,000 in July 1998.

     Pursuant to the 1997 Private Placement, the Company sold 4,000,000 shares
of Common Stock and 2,800,000 Class A Warrants for gross proceeds of $4,000,000.
The 1997 Private Placement closed in December 1997.  Approximately $1,200,000 of
the net proceeds of the 1997 Private Placement were used in connection with the
acquisition of Pacific.  Also, in December 1997, the Company sold an additional
1,000,000 Class A Warrants for total proceeds of $100,000.


                                       12
<PAGE>   13
     In March 1998, Walnut Capital issued a promissory note in an original
principal amount of $30,000 in favor of a third party as partial consideration
in connection with the purchase of certain securities by Walnut Capital.

     The Company does not anticipate any significant costs relating to upgrading
or reprogramming of its software for the year 2000.

INVESTMENT PORTFOLIO CHANGES

     The sale of certain portfolio investments resulted in unrealized
depreciation and the recognition of realized gains during the six months ended
June 30 as follows:

<TABLE>
<CAPTION>
                                      Unrealized
                                      Appreciation
                                      (Depreciation)        Realized Gain/(Loss)
                                      --------------------  --------------------
<S>                                   <C>                   <C>
Vitalink Pharmacy Services, Inc.          $(1,620,000)          $1,386,000
Consolidated Technology Group, Ltd.           292,000             (277,000)
Others, net                                         0               23,000
</TABLE>

The Company's equity investments that appreciated/(depreciated) in value during
the six months ended June 30, 1998  were as follows:


<TABLE>
<CAPTION>
                              Unrealized Appreciation/(Depreciation)
                              --------------------------------------
<S>                                  <C>
First Health Group Corp.                    $819,000
Paragon Health Network, Inc.                (368,000)
I-Flow Corporation                          (403,000)
Others, net                                 (147,000)
</TABLE>

     There were unrealized losses of $339,000 recorded in connection with
Universal Bridge's partnership interest in UPLP.

                                       13
<PAGE>   14

                          PART II - OTHER INFORMATION

ITEM 5 - OTHER PROCEEDINGS.

     On April 15, 1998, the Company, Walnut Capital and The Holding Company
filed a complaint in the District Court for the Northern District of Illinois
against Michael A. Faber, a former  officer of Walnut Capital and a current
stockholder, officer, director and member, as applicable, of WGP Management
Company, Inc. ("WGPMC") and Walnut GP, L.L.C. ("Walnut GP"), each of which
entities are 40% owned by Walnut Funds.  Walnut GP and WGPMC are the sole
general partner and manager of Walnut Growth, respectively. In June 1998, the
parties reached a settlement pursuant to which such action is to be dismissed.


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

     (a)  Exhibit 27 - Financial Data Schedule
     (b)  No reports on Form 8-K have been filed during the quarter for
          which the report is filed.

<PAGE>   15

                                   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:  July 30, 1998             /s/ Joel S. Kanter
                                 -----------------------------------
                                 Joel S. Kanter
                                 President (Chief Executive Officer)



Date:  July 30, 1998             /s/ Robert F. Mauer
                                 -----------------------------------
                                 Robert F. Mauer
                                 Treasurer (Chief Accounting Officer)


                                       15