<PAGE>
 
                                                                    EXHIBIT (13)

                          FORWARD-LOOKING STATEMENTS

     The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements.  Certain information included in this
1998 Annual Report to Stockholders may be deemed forward-looking, such as:
information relating to the future prospects of the aircraft lessees of PS
Group, Inc. (PSG), the aircraft leasing subsidiary of PS Group Holdings, Inc.
(the Company); the possible consequences of any unscheduled return of aircraft
under lease; the possibility of 1999 sales of six BAe 146 aircraft owned by PSG
or the potential future phase-out of six MD-80 aircraft owned by PSG from the
fleet of the applicable lessee and the impact of such sales or phase-out on
PSG's financial condition, results of operations, and net operating loss
carryforwards; the potential liability for environmental contamination at the
San Francisco International Airport (SFIA), the related cost of remediation and
pending and potential litigation, and the recoverability of any portion of this
cost from third parties; the estimated income tax liabilities due to the State
of California for the tax years 1987 through 1990 and the estimated amounts due
for other deferred tax liabilities; the tax treatment of the Company's special
distributions to stockholders in 1995, 1996, 1997, and 1998; the availability of
certain tax benefits, and the amount of otherwise-taxable income against which
such benefits may be offset; the amount of 1999 capital additions; the estimated
fair value of oil and gas properties owned by Statex Petroleum, Inc. (Statex),
the oil and gas production and development segment of the Company, that was used
in computing the impairment loss; the quantities of oil and gas reserves owned
by Statex, and the related future net cash inflows from oil and gas producing
activities; the volatility of the prices of crude oil and natural gas and the
resultant effect on Statex including its ability to remain in compliance with
financial loan covenants contained in its separate bank credit agreement and the
Company's ability to pay the principal and interest outstanding under this
credit agreement if the bank is unwilling to grant future waivers and declares
the loan due and payable; and the impact of Year 2000 issues on the Company.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties, including, but not limited to: the impact of the financial
condition and results of operations of the lessees of PSG's aircraft; the effect
of any 1999 sales of BAe 146 aircraft or the potential future phase-out of six
MD-80 aircraft from the fleet of the applicable lessee on the Company's
financial condition, results of operations, and net operating loss
carryforwards; the uncertainties inherent in estimating the cost of
environmental remediation and related pending and potential litigation at SFIA;
the possibility that the final disposition of tax deficiencies asserted by the
State of California will involve litigation or will be for an amount in excess
of the amount estimated by the Company; the possibility of future adjustments to
the deferred income tax liability; the possibility that the ultimate tax
treatment of the special distributions to stockholders would be different than
that determined by the Company; the efficacy of the transfer restrictions on the
Company's common stock in preserving the Company's substantial tax benefits, the
Company's ability to realize such benefits, and the possible effect of the
availability of such benefits if stockholders of the Company do not vote to
extend such transfer restrictions beyond their scheduled expiration in the year
2000; the impact on 1999 cash flow and borrowings to finance capital additions
if capital additions vary from the current estimate; the impact of the actual
quantities of oil and gas reserves and the related impact of the volatility of
the prices of crude oil and natural gas on Statex, including the possibility of
future impairment losses, the possibility of future non-compliance with
financial loan covenants by Statex,  and the possible inability of Statex to
obtain waivers from its bank with respect to such noncompliance; the impact on
the business, financial condition and results of operations of the Company if
the Company or its subsidiaries, or third parties with which they have material
business relationships, are unsuccessful in solving the Year 2000 issues in a
timely manner; the impact of economic conditions on each business segment; the
impact of competition; the impact of governmental legislation and regulation and
possible future changes therein; and other risks detailed in this 1998 Annual
Report to Stockholders and in filings the Company has made with the Securities
and Exchange Commission.  Should any of such risks or uncertainties materialize
or should other assumptions prove incorrect, actual results or outcomes may vary
materially from those contemplated in such forward-looking statements.  The
Company does not undertake to publicly update or revise its forward-looking
statements.


                 RESTRICTIONS ON THE TRANSFER OF COMMON SHARES

     There are certain restrictions imposed on the transfer of common shares of
the Company.  In general, and subject to an exemption for certain dispositions
of shares by persons who were "pre-existing 5% shareholders" (as defined in the
Company's Restated Certificate of Incorporation) on June 5, 1996, the transfer
restrictions prohibit, without prior approval of the Board of Directors, the
direct or indirect disposition or acquisition of any stock of the Company by or
to any holder who owns, or would, as a result thereof, own (either directly or
through the tax attribution rules) 5% or more of the stock upon such
acquisition.  These restrictions have been imposed in order to help preserve the
Company's substantial net operating loss and investment tax credit carryforwards
and other tax benefits by decreasing the risk of an "ownership change" for
federal income tax purposes.  The transfer restrictions, by their terms, are
scheduled to expire immediately following the conclusion of the Company's annual
meeting of stockholders for the year 2000, unless the stockholders pass a
resolution extending such expiration date.

                              (inside front cover)
<PAGE>
 
PS GROUP HOLDINGS, INC.
CONSOLIDATED FINANCIAL HIGHLIGHTS
================================================================================
 
The Company (NYSE Symbol: PSG) operates, through subsidiaries, three reportable
segments - aircraft leasing, oil and gas production and development, and fuel
storage and distribution (principally at two California airports).

<TABLE>
<CAPTION>
FOR THE YEAR                                  1998      1997       1996       1995       1994
-----------------------------------------------------------------------------------------------
                     (in thousands, except per share data and ratios)
<S>                                       <C>         <C>        <C>        <C>        <C>
Revenues from continuing operations         $ 32,251  $ 43,765   $ 48,031   $ 46,189   $ 47,116
Income (loss) from continuing
  operations                                   3,161      (562)    10,276      2,696     (5,178)
Income (loss) from discontinued
  operations                                            (2,048)      (666)       336     12,414
                                          -----------------------------------------------------
     Net income (loss)                         3,161    (2,610)     9,610      3,032      7,236
Basic and diluted earnings (loss) per 
share:                            
  Continuing operations                          .52      (.09)      1.69        .44       (.85)
  Discontinued operations                                 (.34)      (.11)       .06       2.04
                                          -----------------------------------------------------
     Net income (loss) per share                 .52      (.43)      1.58        .50       1.19
Cash distributions per share/(a)/               3.00      4.00       1.50       1.50
Capital additions                              1,897     5,409      4,110      1,263        448

AT YEAR END
-----------------------------------------------------------------------------------------------
Total assets                                 171,729   225,022    280,083    299,312    351,347
Total debt                                    56,311    73,722    105,785    122,609    137,225
Stockholders' equity                          81,664    96,708    123,591    123,082    129,151
Stockholders' equity per share                 13.46     15.94      20.37      20.28      21.28
Debt to equity ratio                        .69 to 1  .76 to 1   .86 to 1     1 to 1  1.06 to 1
</TABLE> 

COMPARABILITY
--------------------------------------------------------------------------------
 
  As more fully described elsewhere in this Annual Report to Stockholders, the
income (loss) from continuing operations is not comparable between years due, in
part, to the following significant unusual items (all amounts except (ii) are
pretax): (i) in 1998 and 1997, impairment losses of $12.8 million and $.5
million, respectively, were recorded on oil and gas properties; (ii) in 1998 and
1996, an $8 million and $5.6 million, respectively, reduction of income tax
liabilities was recorded; (iii) in 1997 and 1996, $5.5 million and $1.2 million,
respectively, of environmental remediation expenses were recorded; (iv) in 1998
and 1997, $.7 million and $3.5 million, respectively, of additional depreciation
expense was recorded on five (two in 1998) BAe 146 aircraft; (v) in 1997, a $.5
million gain was recorded on the sale of one BAe 146 aircraft; (vi) in 1996, a
$1.8 million gain was recorded on the sale of an interest in six 737-200
aircraft; (vii) in 1995, a $1.7 million loss on disposition of 747 aircraft was
recorded and in 1994, a write-down of $7.2 million was recorded related to 747
aircraft previously leased to airlines which had declared bankruptcy; (viii) in
1994, an accrual of $5 million was made for the settlement of securities
litigation; and (ix) in 1994, a gain (net of losses) of $.6 million was recorded
on marketable equity securities' transactions.

  During the fourth quarter of 1997 and the first quarter of 1998, the assets of
the wholesale and aviation fuel sales divisions, respectively, of PS Trading,
Inc. (PST), a wholly-owned subsidiary of PSG, were sold.  Accordingly, fuel
sales is shown as discontinued in all periods presented.  In 1994, the assets of
the travel management segment and the major asset of the metallic waste
recycling segment were sold.  Accordingly, these two segments are shown as
discontinued operations in 1994.

(a) The special cash distributions in 1998, 1997, 1996, and 1995 are not
    precedents for future distributions. See page 43 for additional information
    on these distributions.

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

                                                                              1.
<PAGE>
 
AIRCRAFT LEASING 
================================================================================

The aircraft leasing business, conducted by PSG, represents the major portion of
the Company's assets and its largest source of cash flow and revenues.  Aircraft
leasing contributed $23.9 million to 1998's consolidated revenues from
continuing operations, or 74% of the total. As of December 31, 1998, twelve PSG
aircraft were under lease to US Airways, Inc. (US Airways), two to Continental
Airlines, Inc. (Continental), and one to America West Airlines, Inc. (America
West).  All of these aircraft meet Federal Stage 3 noise requirements and
qualify for operation in the United States without modification beyond 1999.  Of
the 15 aircraft, nine are operated by the lessees in scheduled passenger service
in the continental United States.  The remaining six aircraft are subleased by
US Airways although US Airways continues to be responsible for the leases.
Refer to Management's Discussion and Analysis of Financial Condition for
information on the operating results of the leasing segment for the years 1996
to 1998 and known trends.

The PSG aircraft leases expire in the following years:

<TABLE>
<CAPTION> 
            Aircraft Type     1999  2000  2001  2004  2006  2008  Total
            -------------     ----  ----  ----  ----  ----  ----  -----
            <S>               <C>   <C>   <C>   <C>   <C>   <C>   <C> 
               BAe 146-200             6                              6
               MD-80             1           3     2           1      7
               737-300                                   1     1      2
                                                                    ---
                                                                     15
                                                                    ===
</TABLE>

POTENTIAL EARLY LEASE TERMINATIONS AND AIRCRAFT SALES.  US Airways has advised
the Company that it may exercise its lease termination rights during the first
half of 1999 to acquire the remaining six BAe 146 aircraft it currently leases
from PSG at specified lease termination values.  If all six of these aircraft
were acquired by US Airways under its lease termination rights in 1999, there
would be a net gain of approximately $.9 million and the net cash proceeds would
aggregate approximately $13.8 million after debt repayment of approximately $9.3
million. The tax gains on these sales would utilize all of the remaining
estimated $15.5 million net operating loss carryforwards and approximately $2
million of the investment tax credit carryforward.  PSG has no control over US
Airways' possible additional sales of any of the remaining six leased BAe 146
aircraft and there are no assurances such sales will occur.

TYPE OF AIRCRAFT LEASES.  In general, substantially all the obligations
connected with the operation and maintenance of the leased aircraft, including
maintaining insurance at specified levels in the leases, are assumed by the
lessee and minimal obligations are imposed upon PSG. PSG carries supplemental
total loss insurance coverage on certain leased aircraft when the insured value
specified in the lease and provided by the lessee is less than the current
estimated market value of the aircraft.  The leases also generally provide
options to the lessee to extend the lease at stipulated or fair market value
lease rates or purchase the aircraft at a stipulated amount or at fair market
value at the end of the lease term or earlier in certain cases.  Most of the PSG
leases and related aircraft are encumbered by debt that will be fully amortized
on or before the end of the lease term.


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

6.
<PAGE>
 
AIRCRAFT LEASING - CONTINUED
================================================================================

PSG'S AIRCRAFT LESSEES.  Since PSG's leases are relatively long-term and are
net leases, PSG is affected by both the current and long-term futures of its
three lessees.  A summary of the recent results and current status of each of
PSG's lessees follows.  ALL INFORMATION (EXCEPT AS OTHERWISE EXPRESSLY
INDICATED) CONTAINED IN THIS ANNUAL REPORT RELATING TO PSG'S THREE AIRCRAFT
LESSEES WAS OBTAINED FROM PUBLISHED MEDIA REPORTS.  PSG REFERS READERS TO PUBLIC
INFORMATION REGARDING US AIRWAYS, CONTINENTAL, AND AMERICA WEST FOR FURTHER
DETAILS RELATING TO THEIR FINANCIAL CONDITION AND ASSUMES NO RESPONSIBILITY FOR
THE ACCURACY OF SUCH INFORMATION.

 . US AIRWAYS leases six MD-80 aircraft and six BAe 146-200 aircraft from PSG.
  Lease revenues from US Airways were 81% of total lease revenues for 1998.

  All of the BAe 146 aircraft are subleased and generally the subleases extend
  through US Airways' primary lease term which expires in the fall of 2000.
  These sublessees are smaller commuter airlines, most of which are start-up
  carriers. Three of the BAe 146's are subleased by US Airways to a U.S. airline
  and the remainder are subleased to two European airlines.

  In October 1997, US Airways announced an agreement to acquire up to 400 A320-
  type aircraft manufactured by Airbus Industrie G.I.E. (Airbus). In a press
  release dated February 2, 1999, US Airways confirmed that it has 128 Airbus
  aircraft on firm order. In its Form 10-K for the year ended December 31, 1998,
  it had indicated that, as of March 19, 1999, ten of these aircraft had been
  delivered, 29 were scheduled to be delivered during the remainder of 1999, and
  89 were scheduled to be delivered in the years 2000-2002. US Airways has also
  announced that the Airbus aircraft deliveries would result in the phase-out of
  US Airways' MD-80's, as well as its earlier generation DC-9-30's and 737-200
  aircraft. US Airways has advised PSG that it is not currently in a position to
  indicate to PSG the specific effect of the aircraft phase-out on the six MD-
  80's which are leased from PSG. US Airways operates 31 MD-80's. PSG believes
  that US Airways' older aircraft (DC-9-30's and 737-200's) will be phased-out
  first as US Airways takes delivery of Airbus aircraft.

  US Airways reported record pretax income of $936 million for 1998. US Airways'
  unit costs declined slightly in 1998 but remain the highest of the major U.S.
  airlines. During 1997, US Airways reached agreement with its pilots on a new
  five-year labor contract which provides concessions in pay increases and work
  rules. The agreement also allows US Airways to establish a low-cost, low-fare
  product to compete directly against Southwest, Delta Express, and AirTran
  Airlines. As part of the labor contract, US Airways agreed to "grow" the
  airline by at least 2.5% per year. As a result of this growth commitment, US
  Airways ordered the 128 new Airbus aircraft, as mentioned above. US Airways is
  continuing negotiations with its other labor unions for similar concessions to
  those received from the pilots. US Airways' third quarter 1998 Form 10-Q
  stated, in part: "The Company continues to be highly leveraged, as evidenced
  by the Company's high debt burden. The Company and its subsidiaries require
  substantial working capital in order to meet scheduled debt and lease payments
  and to finance day-to-day operations. The Company's agreements to acquire up
  to 430 new Airbus aircraft, accompanying jet engines and ancillary assets will
  increase the Company's financing needs and result in a significant increase in
  its financial obligations and debt burden. Adverse changes in certain factors
  that are generally outside the

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

                                                                              7.
<PAGE>
 
AIRCRAFT LEASING - CONTINUED
================================================================================

  Company's control, such as an economic downturn, additional government
  regulations, intensified competition from lower-cost competitors or increases
  in the cost of aviation fuel, could have a material adverse effect on the
  Company's results of operations, financial condition, and future prospects.
  The Company's results of operations and financial condition are particularly
  susceptible to adverse changes in general economic and market conditions due
  to US Airways' high cost structure relative to its major competitors." In US
  Airways' January 20, 1999 press release reporting 1998 results, the President
  and CEO of US Airways indicated that progress was made in 1998 by stating, in
  part: "During this year a comprehensive, fundamental platform for improved
  market position was established, and the professionalism and team spirit of
  our employees are reflected in these results and other accomplishments of
  1998." At December 31, 1998, US Airways' cash, cash equivalents, and short-
  term investments remained strong totaling approximately $1.2 billion.

 . CONTINENTAL leases one MD-80 and one 737-300 from PSG. Continental reported a
  record pretax profit of $770 million for 1998. Continental's cash and cash
  equivalents were approximately $1.4 billion at December 31, 1998. While still
  highly leveraged, Continental has strengthened its financial position and
  operating results.

 . AMERICA WEST leases one 737-300 aircraft from PSG. America West is partially
  owned by Continental (1% ownership interest, 8.3% voting interest) and both
  carriers have implemented various programs to cross-feed passengers and reduce
  common costs. America West continued to expand operations in 1998. America
  West reported record pretax profits of $185 million for 1998. Cash, cash
  equivalents, and short-term investments totaled approximately $183 million at
  Septembber 30, 1998. America West continues to be one of the lowest-cost
  airline operators.

<TABLE>
<CAPTION>
OPERATING STATISTICS (at year-end)                 1998  1997  1996  1995  1994
-------------------------------------------------------------------------------
<S>                                                <C>   <C>   <C>   <C>   <C>
NET AIRCRAFT LEASED:/(a)/
 BAe 146-200 aircraft/(b)/                          6.0   6.0  10.0  10.0  10.0
 MD-80 aircraft                                     7.0   7.0   7.0   7.0   7.0
 737-300 aircraft                                   2.0   2.0   2.0   2.0   2.0
 737-200 aircraft/(c)/                                -     -     -   2.0   2.3
                                                 ------------------------------
   Total aircraft leased                           15.0  15.0  19.0  21.0  21.3

 Aircraft leased under operating leases            10.0  10.0  14.0  16.0  16.3
 Aircraft leased under financing leases             5.0   5.0   5.0   5.0   5.0
AIRCRAFT HELD FOR SALE - 747-100 aircraft/(d)/        -     -     -     -   2.0
</TABLE>

  (a) At December 31, 1998, PSG had a 100% interest in all aircraft shown.
  (b) These aircraft have not been operated by US Airways since the spring of
      1992 and at December 31, 1998, all are subleased by US Airways to other
      airlines. In the fourth quarter of 1997, US Airways exercised its lease
      termination rights by purchasing (and subsequently selling) four of the
      BAe 146 aircraft.
  (c) During 1996, PSG sold its 1/3 interest in the six 737-200 aircraft to the
      lessee and, during 1995, one 737-200 aircraft, in which PSG had a 1/3
      interest, was declared a casualty loss.
  (d) During 1995, the two 747-100 aircraft were sold.


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

8.
<PAGE>
 
OIL AND GAS PRODUCTION AND DEVELOPMENT
================================================================================

Oil and gas operations are conducted by Dallas-based Statex Petroleum, Inc.
(Statex), a wholly-owned subsidiary of PSG.  Statex had 1998 revenues of $6.1
million which represented 19% of the Company's 1998 consolidated revenues.
Statex is an independent oil and gas producing company which focuses primarily
on properties with secondary recovery and/or development potential.  Most of
Statex's oil and gas properties are located in North-Central and West Texas, and
in Western Oklahoma.  Statex sells its oil and gas at the point of production.

Statex was materially affected by the significant decrease in the prices of
crude oil and natural gas during 1998.  The average 1998 price for oil was 34%
less than in 1997 and the average price for gas was 21% less.  Principally as a
result of these declines, Statex recorded impairment losses totaling $12.8
million during 1998 versus a $.5 million impairment loss in 1997 (refer to Note
1 of the Notes to the Consolidated Financial Statements for complete
information).  Statex's pretax results, before the impairment losses, were also
significantly affected.  In 1998, there was a pretax loss (before impairment
loss) of $1.6 million versus a pretax profit of  $1.1 million in 1997.  Refer to
Management's Discussion and Analysis of Financial Condition for additional
information on Statex's operating results for 1996 to 1998 and known trends.  As
a result of these lower prices, management has instituted strict cost control
procedures especially since the main Statex properties involve secondary
recovery with extremely high volumes of water injection which results in high
operating costs.  During the latter part of 1998, a number of wells were "shut-
in" and the volume of water injected was reduced in order to trim costs.

During 1998, Statex borrowed $.8 million under its bank credit agreement
bringing the total borrowings to $5.8 million.  Due to losses in the third and
fourth quarters of 1998, Statex did not meet a financial covenant contained in
this agreement relating to the fixed charge ratio - refer to Management's
Discussion and Analysis of Financial Condition for additional information,
including the waiver of this covenant by the bank for the fourth quarter of
1998.

PRODUCTION AND RESERVES.  The dramatic drop in oil and gas prices affected both
the volumes produced as well as Statex's economic remaining reserves at December
31, 1998.  December 1998 net sales volumes declined 26% from the December 1997
levels (776 barrels of oil per day (BOPD) compared to 1,051 BOPD in 1997).  Over
all, yearly production decreased from 1,066 BOPD and 1,942 MCF of gas per day
(MCFPD) in 1997 to 985 BOPD and 1,408 MCFPD in 1998.  This represented an 8%
decline in oil and a 27% decline in gas production.  The low oil prices have
also rendered several undeveloped projects uneconomic, thereby significantly
reducing the total oil reserves as of December 31, 1998.  As shown in Note 10 of
the Notes to the Consolidated Financial Statements, there was a 16% reduction in
oil reserves due to revisions of prior estimates, which were largely
attributable to certain undeveloped projects becoming uneconomic.

ACTIVITIES.  The decline in oil and gas prices also sharply reduced Statex's
acquisition and development programs during 1998.  Reduction of costs and
maximization of injection effectiveness were the key priorities.  Capital
additions decreased from $5.3 million in 1997 to $1.9 million in 1998.  The 1998
capital additions were principally for infield and lease maintenance drilling,
as well as for the acquisition of an interest in two producing properties
described below.  1999 capital additions are budgeted at $1.6 million,
approximately $.6 million of which is for lease maintenance drilling and
approximately $1 million is for acquisitions.  Any

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

                                                                              9.
<PAGE>
 
================================================================================

Any additional drilling or acquisitions in 1999 will be based on the economics
of the current lower market prices for oil and gas. If available, State's bank
credit agreement will be used to finance or assist in financing its planned
capital additions.

As a result of the lower oil and gas prices, only 12 wells were drilled in 1998
compared to 29 in 1997.  No drilling was done at State's 100%-owned core
property, Eliasville, located in Stephens County, Texas.  Six wells were drilled
in Viejos, a Pecos County, Texas outside operated property, which is primarily
gas.  In addition, at the beginning of 1998 Statex drilled two wells in Howard
County, Texas.

Two small acquisitions were made by Statex late in 1998, both operated by
others; one in West Texas, the other in North Dakota.  While both have
substantial reserves, future market prices will determine the final economics.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
OPERATING STATISTICS                                    1998      1997      1996      1995      1994
----------------------------------------------------------------------------------------------------
<S>                                                   <C>       <C>       <C>       <C>       <C>
Proved reserves at year-end:
 Crude oil (Mbbls)                                     4,106     4,912     5,051     4,886     5,082
 Natural gas (MMcf)                                    4,255     4,653     2,811     2,960     3,026
Undeveloped oil and gas acreage at year-end:
 Gross/(a)/                                            5,486     6,006     6,235     3,388     6,586
 Net/(b)/                                              2,512     2,592     2,494       615       902
Producing wells at year-end:
 Gross/(a)/                                              316       260       214       121       107
 Net/(b)/                                                164       175       147        83        81
Production:
 Crude oil (Mbbls)                                       365       395       338       337       405
 Natural gas (MMcf)                                      566       767       469       552       520
 
Wells drilled:/(c)/
 Gross/(a)/                                              12        29        15         2         -
 Net/(b)/                                                 5        21        12         1         -
Average price during year:
 Crude oil - per barrel                               $13.18    $20.07    $21.90    $17.56    $16.21
 Natural gas - per thousand cubic feet                $ 2.02    $ 2.56    $ 2.11    $ 1.59    $ 1.99
Year-end price:
 Crude oil - per barrel                               $ 9.50    $15.50    $24.25    $18.00    $16.00
 Natural gas - per thousand cubic feet                $ 1.86    $ 2.23    $ 3.27    $ 1.90    $ 1.50
 
Average production costs per equivalent barrel        $10.36     $ 9.49    $ 9.07    $ 8.74    $ 7.88
Employees at year-end                                      9          9         8         8         8
</TABLE>

Mbbls = thousands of barrels
MMcf = millions of cubic feet

 (a) Gross refers to the total amount owned by all participants.
 (b) Net refers to Statex's ownership interest in the gross amount.
 (c) One of the wells drilled in 1998 was an exploratory well and it was a dry
     hole.  There were no wells in process at year-end.

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

10.
<PAGE>
 
FUEL STORAGE AND DISTRIBUTION
================================================================================

The fuel storage and distribution segment is operated by PST.  PST owns limited
fuel storage and distribution facilities at San Francisco International Airport
(SFIA), Los Angeles International Airport (LAX), Oakland International Airport
(OAK), and Sacramento International Airport (SMF).  Revenues of this segment
amounted to only $.8 million, or 2% of 1998's total revenues.

PST's revenues, which are primarily based on usage, are derived from the SFIA
and LAX facilities which are operated or maintained by third parties under
agreements that specify that PST is responsible for the cost of all repairs and
maintenance.

SFIA is constructing a major new international terminal which, when completed,
will result in the demolition of the existing terminal served by PST's fuel
distribution lines.  The latest estimate provided by SFIA is that the new
international terminal will be completed in 2000. PST has been advised by the
third-party operator of its fuel storage tanks at SFIA that its current estimate
is that these tanks will be taken out of service as early as 2001 when new fuel
storage tanks are constructed by third parties.  When the existing SFIA terminal
is demolished and when the PST storage tanks are taken out of service, PST will
then be required to remove its fuel pipelines and storage tanks and remediate
known soil and ground water contamination. The liability for the estimated cost
of removal and site remediation is included in the environmental remediation
liability described in Note 4 of the Notes to the Consolidated Financial
Statements.

The ground lease for the LAX fuel distribution lines extends through 2016, but
under the terms of the lease, the airport would have the right to terminate the
lease early if it so desires.  PST is attempting to sell its OAK fuel storage
facility which is on property leased through January 2011.  The ground lease for
the SMF fuel storage facility has expired and the two small above ground tanks
will be sold or demolished.

Refer to Management's Discussion and Analysis of Financial Condition for
information on PST's operating results for 1996 to 1998 and known trends.

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

                                                                             11.
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================


Reference is made to the item captioned "Forward-Looking Statements" on the
inside front cover of this Annual Report to Stockholders.

In addition to the information set forth below, reference is made to the
individual sections on each reportable segment presented elsewhere in this
Annual Report (which are incorporated by reference herein) for a description of
each of the Company's reportable segments and certain risks and uncertainties.

FINANCIAL CONDITION

Refer to the Consolidated Statements of Cash Flows for detailed components of
the Company's cash flow activities.  At December 31, 1998, the Company's
principal sources of liquidity were cash, cash equivalents, and U.S. Government
securities totaling $4.4 million, a $12.4 million decrease from December 31,
1997.  The major components of the change in liquidity are as follows (in
thousands):

<TABLE>
<S>                                                         <C>
From continuing operations:
   Sources of liquidity:
      Operations, before tax payment shown below              $ 14,454
      Financing leases and other                                 7,501
      Sales of securities and reduction in cash collateral       2,091
      Bank borrowings by Statex                                    800
   Uses of liquidity:
      Payment of long-term obligations                         (18,211)
      Cash distributions to stockholders                       (18,205)
      Payment of prior years' state income tax liability        (6,040)
      Capital additions                                         (1,897)
                                                            ----------
    Net use by continuing operations                           (19,507)
Cash provided from discontinued operations                       7,154
                                                            ----------
    Net decrease in liquidity                                 $(12,353)
                                                            ==========
Components of net decrease in liquidity:
  Decrease in cash and cash equivalents                       $ (7,174)
  Decrease in U.S. Government securities                        (5,179)
                                                            ----------
    Net decrease in liquidity                                 $(12,353)
                                                            ==========
</TABLE>

At December 31, 1998, PSG had $1.4 million outstanding under its October 1995
bank credit agreement consisting entirely of letters of credit (LC's).  No
additional LC's or any borrowings are permitted under the agreement which
expires in 2000.  All outstanding LC's require cash collateralization and PSG is
required to maintain at least $1 million in cash and cash equivalents.

Statex has a separate bank credit agreement collateralized by its major oil and
gas properties. As of December 31, 1998, $5.8 million was borrowed under this
agreement.  Due to losses in the third and fourth quarters of 1998, Statex did
not meet a financial covenant contained in its bank loan agreement relating to
the fixed charge ratio.  In November 1998 and March 1999, Statex obtained
waivers from the bank relating to its non-compliance with this financial

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

12.
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
================================================================================

covenant in the third and fourth quarters of 1998.  It is possible that future
losses could cause Statex to again be out of compliance with this financial
covenant or with other covenants in its bank credit agreement.  There can be no
assurances that the bank will be willing to grant additional waivers in the
future.  If any needed additional waivers are not granted, the bank could by
notice to Statex declare the outstanding principal and interest due and payable.
The Company believes that if the bank declared the Statex note due and payable,
and if the Company felt it was appropriate, then it would have adequate funds to
advance to Statex to pay the outstanding principal and interest.

PSG's aircraft lease portfolio represents the major portion of the Company's
assets and its largest source of cash flow.  The lease portfolio consists of 15
aircraft, the preponderance of which are 12 aircraft leased to US Airways.  As
of December 31, 1998, PSG had $92.3 million of assets related to aircraft leased
to US Airways for which realization is substantially dependent upon the future
performance of US Airways.

Refer to Note 6 of Notes to the Consolidated Financial Statements for a
description of the payment of prior years' state income tax liability.

The Company believes that its cash, cash equivalents, and U.S. Government
securities, plus projected cash flow, are adequate to meet the operating and
capital needs of the Company in both the short and long-term.  All of the
Company's budgeted 1999 capital additions of approximately $1.6 million relate
to Statex.  If available, Statex's bank credit agreement will be used to finance
or assist in financing its planned capital additions.

YEAR 2000 ISSUES

The Company and each of its subsidiaries are working to resolve the potential
impact of the Year 2000 on the ability of their computerized information systems
to accurately process information that may be date sensitive.  Any system that
recognizes a date using "00" as the year 1900 rather than the year 2000 could
result in errors or systems failures.  The Company, PSG and PST share a number
of common computer systems in their operations.   In addition, Statex uses a
number of computer systems in its operations.  Since all of these systems use
only standardized computer programs developed by major software vendors, the
Company and its subsidiaries are dependent on those software vendors to make the
needed modifications to accommodate the Year 2000.  Some of these programs have
already been modified.  For other programs, the vendors have indicated that the
modifications will be completed in advance of the Year 2000, although some of
the vendors have stated that there are no assurances that this will be
accomplished.  As a contingency, if any vendor does not modify its software to
address the Year 2000 issues on a timely basis, the Company believes that there
will be appropriate alternative software available that is Year 2000 compliant
and that can be substituted with no material effect on operations.  The Company
and its subsidiaries believe, based on advice from outside consultants, that
their computer hardware is already Year 2000 compliant.  Based on information
currently available, the Company believes that the costs to address the Year
2000 issues discussed above will be less than $100,000 and that the software
modifications using existing or substitute vendors will be completed by mid-
1999.

The Company and its subsidiaries are dependent upon third party providers to
perform many services including insurance coverage, employee benefit programs,
shareholder related services, printing, utilities, and communications.  The
Company has received correspondence from most 

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

                                                                             13.
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
================================================================================

of these providers which indicates that they expect to address their significant
Year 2000 issues on a timely basis. The Company will continue to monitor the
progress of all of its significant third party providers. The Company has no
control over these providers becoming Year 2000 compliant. As a contingency, if
a provider does not become Year 2000 compliant in a timely manner, the Company,
in many cases, may be able to change to another service provider that is
compliant. Such a contingency plan is expected to be in place by mid-1999.

The Company's largest revenue source is aircraft lease revenue from US Airways,
America West Airlines, and Continental Airlines.  Lease revenue represented 74%
of total revenues for the year ending December 31, 1998.  Revenue from US
Airways alone represented 60% of total revenues for the same period.  The
Company has approached each lessee regarding its compliance with Year 2000
issues.  Each has indicated to the Company and in filings made with the
Securities and Exchange Commission that it is not currently Year 2000 compliant.
However, each has disclosed that they are working toward becoming compliant.
These lessees have further indicated that they could suffer material adverse
effects on their results of operations and financial condition if they or third
parties they rely upon are not Year 2000 compliant.  Such an adverse effect
could jeopardize the lessees' ability to make lease payments to the Company.
The Company has no control over these lessees becoming Year 2000 compliant and
there is no contingency plan.  In the event that failure to become Year 2000
compliant on the part of any lessee adversely affects its ability to make lease
payments to the Company, the Company is unable to estimate the amount of lease
revenue, if any, that would not be paid.  It is possible that the Company could
sustain a significant interruption in its revenue stream that would affect the
Company's ability to make its debt payments on loans secured by leased aircraft.

Oil and gas revenues generated by Statex amounted to 19% of consolidated
revenues for the year ending December 31, 1998.  Approximately 66% of Statex's
revenues comes directly or indirectly from Sunoco, Inc.  Sunoco has disclosed in
public filings that, while it is not yet compliant, it is working to resolve its
Year 2000 issues.  To the extent that Sunoco or other current purchasers from
Statex were unable to purchase oil and gas due to Year 2000 issues, Statex
expects that, at least in most cases, it will be able to find alternative
purchasers. However, there is no assurance that this could be done or that
pricing from alternative purchasers would be the same as that obtained from
current purchasers.  A contingency plan for alternative purchasers is expected
to be in place by mid-1999.  Most of Statex's power to operate its production
equipment comes from one large Texas utility.  In public filings, this utility
has disclosed that, while it is not yet Year 2000 compliant, it is working to
resolve these issues. Statex's operations could be negatively impacted if this
utility company or any of its other utility providers were not Year 2000
compliant and could not provide their services.  The Company is unable to
estimate the potential  impact on its operations if Statex's customers or its
utility providers are not Year 2000 compliant.

If the Company or its subsidiaries, or any third parties with which they have
material business relationships, are unsuccessful in solving the Year 2000
issues in a timely manner it could have a material adverse effect on the
Company's business, financial condition, and results of operations.  Beyond the
information disclosed above, the Company is unable to determine the extent of
such potential adverse effects.

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

14.
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
================================================================================

USAGE OF TAX LOSS CARRYFORWARDS

The Company has substantial net operating loss carryforwards, investment tax
credit carryforwards, and other tax benefits (the Tax Benefits) for use in
offsetting future taxable income.  As discussed in Note 6 of the Notes to
Consolidated Financial Statements, as of December 31, 1998, the Company believes
it had approximately $15.5 million of federal net operating loss carryforwards
and $12.5 million of federal investment tax credit carryforwards, plus other
state and federal tax benefits.  Besides the customary financial and legal
difficulties ordinarily involved in using these Tax Benefits, there is a special
limitation on the use of these Tax Benefits that arises when an  "ownership
change" occurs for federal income tax purposes. Generally speaking, an
"ownership change" occurs whenever, within a three-year period, the aggregate
ownership of a company's stock by its "5-percent shareholders" (as defined by
the applicable federal income tax regulations) increases by more than 50
percentage points. Making the calculation is complex and uncertain.   The
Company believes that as of December 31, 1998, no "ownership change" had
occurred with respect to the Company, but that the aggregate percentage point
increase in the ownership of the Company's stock by "5-percent shareholders"
during the preceding three-year period was approximately 7%.   Certain "5-
percent shareholders' " ownership interests are not included in the 7% because
such shares have been held for more than three years.  If such shares (held more
than three years by "5-percent shareholders"), which approximate 45% ownership
at December 31, 1998, are sold, they would be reflected in the change in
ownership percentage calculation for three years from the date of sale and
could, dependent on the number of shares sold, result in an "ownership change."
The sole purpose of the Reorganization, described in Note 1 of Notes to the
Consolidated Financial Statements, was to help preserve the Tax Benefits by
decreasing the risk of an ownership change for federal income tax purposes.  The
Reorganization was intended to accomplish this purpose by imposing certain
Transfer Restrictions (as described in Note 1 of  Notes to the Consolidated
Financial Statements) on the transfer of shares of the Company. The transfer
restrictions, by their terms, are scheduled to expire immediately following the
conclusion of the Company's annual meeting of stockholders for the year 2000,
unless the stockholders pass a resolution extending such expiration date.  While
the Company believes that the Transfer Restrictions will be enforceable, if the
binding nature of the Transfer Restrictions were challenged, there is no
assurance that a court would hold that the Transfer Restrictions are
enforceable.  Furthermore, while the Company believes that the remedies provided
in the Transfer Restrictions are generally sufficient, it is possible that the
relevant tax authorities will take the position the Transfer Restrictions do not
provide adequate remedies for tax purposes with respect to every transaction
that the Transfer Restrictions purport to prevent.  Therefore, even with the
Transfer Restrictions in place, it is possible that transactions could occur
that would severely limit the Company's ability to utilize the Tax Benefits.  In
addition, there can be no assurance that legislation will not be adopted that
would limit the Company's ability to utilize the Tax Benefits in future periods.
However, the Company is not aware of any proposed legislation for changes in the
tax laws that could materially impact the ability of the Company to utilize the
Tax Benefits.

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

                                                                             15.
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
================================================================================

RESULTS OF OPERATIONS FROM 1996 TO 1998 AND KNOWN TRENDS

Refer to Note 7 of Notes to the Consolidated Financial Statements for revenues;
interest; depreciation, depletion, and amortization; and segment profit or loss
shown by reportable segment.


AIRCRAFT LEASING SEGMENT

Aircraft leasing revenues declined each year since 1996 for the following
reasons: (i) certain lease revenues were discontinued during the last three
years due to the sale of four BAe 146 aircraft in the fourth quarter of 1997 and
the sale of an interest in six 737-200 aircraft in December 1996; (ii) there was
reduced revenue recognition associated with aircraft leased under financing
leases; (iii) there were lease rate resets on certain aircraft leases tied to
lower interest rates (these lower lease rates were matched by lower interest
expense amounts on the related debt); and (iv) 1996 included a $1.8 million gain
from the sale of an interest in six 737-200 aircraft while 1997 included a $.5
million gain from the sale of a BAe 146 aircraft. In future years, leasing
revenues will decline from the 1998 level because of the reduced revenue
recognition associated with aircraft leased under financing leases, lease rate
resets on certain aircraft, and potential future aircraft sales.

Interest expense related to aircraft leasing has decreased each year as a result
of (i) lower levels of outstanding debt which resulted from normal loan
amortization and aircraft sales and  (ii) the lease rate resets described above.

The decrease in depreciation, depletion, and amortization expense between 1997
and 1998 primarily reflects the reduction in the number of aircraft owned due to
the sale of the four BAe 146 aircraft in the fourth quarter of 1997 and a $2.8
million reduction in 1998 in the effect of a change in estimate for depreciation
expense recorded on five BAe 146 aircraft described in Note 1 of Notes to the
Consolidated Financial Statements.  The increase in depreciation expense between
1996 and 1997 was due to a $3.5 million 1997 effect of the depreciation change
described above.

The segment profit for aircraft leasing is greater in 1998 than in 1997
principally because of the change in depreciation described above.  The segment
profit is lower in 1997 than in 1996 also because of the change in depreciation
and because 1996 includes $1.3 million more in aircraft sale gains than 1997.

US Airways has advised the Company that it may exercise its lease termination
rights during the first half of 1999 to acquire the remaining six BAe 146
aircraft it currently leases from PSG at specified lease termination values.  If
all six of these aircraft were acquired by US Airways under its lease
termination rights in 1999, there would be a net gain of approximately $.9
million and the net cash proceeds would aggregate approximately $13.8 million
after debt repayment of approximately $9.3 million. The tax gains on these sales
would utilize all of the remaining estimated $15.5 million net operating loss
carryforwards and approximately $2 million of the investment tax credit
carryforward.  PSG has no control over US Airways' possible additional sales of
any of the remaining six leased BAe 146 aircraft and there are no assurances
such sales will occur.  As additional aircraft are sold, leasing revenues and
operating results will be reduced.

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

16.
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
================================================================================

Because of the cyclical nature of the airline business, the long-term prospects
of all airlines, except for the largest and best capitalized, are uncertain.
The long-term prospects for US Airways (which has the highest unit cost
structure in the industry and limited equity for its size) and Continental and
America West (both of which emerged from bankruptcy in 1993 and 1994,
respectively, and remain highly leveraged) are even more unpredictable.  It is
possible that all of the leased aircraft will remain with PSG's existing lessees
and, based on recent publicly reported financial results, prospects are
significantly improved as to that possibility. On the other hand, if there is
economic deterioration of PSG's lessees, some or all of the aircraft could be
returned to PSG or the leases could be renegotiated on terms less favorable to
PSG.

While the unscheduled return of aircraft appears unlikely at present, should
PSG's lessees default on their leases, or file bankruptcy and reject certain
aircraft leases, there could be a material decrease in the market value of the
aircraft leased to PSG's lessees due to an increased availability of those
aircraft for lease or sale.  In such a case, PSG could suffer significant losses
on the ultimate disposal of the related aircraft or upon the ultimate
repossession of the aircraft by the lenders.  Should any of PSG's leased
aircraft be returned before the end of the respective lease terms, PSG would
have to continue to make the principal and interest payments to the aircraft
lenders to be able to pursue a sale or lease of the aircraft in order to
maintain or salvage some of PSG's equity interest (most of PSG's leased aircraft
have debt obligations - all non-recourse debt except for $3.9 million at
December 31, 1998 of recourse debt on two BAe 146's).  Whether PSG undertook
such a course of action would be dependent on PSG having sufficient liquidity to
maintain the debt payments and a viable market for the specific type of used
aircraft PSG would be marketing.  Both of these factors are uncertain.  If the
lenders took control and sold the aircraft, PSG would likely lose most or all
its equity in the aircraft.  If, in the future, PSG had sufficient liquidity
after a lessee defaulted and elected to pay the scheduled debt service to the
lender(s), then PSG would be required to find purchasers or new lessees for the
aircraft.  When marketing aircraft, PSG competes with many airline and leasing
companies that have greater financial resources and broader marketing and
support capabilities to effect a sale or lease than PSG.  To the extent that
sales prices were less than PSG's carrying value or less favorable lease rates
were obtained, PSG would be negatively affected.

OIL AND GAS PRODUCTION AND DEVELOPMENT SEGMENT
----------------------------------------------

Oil and gas revenues decreased 40% from 1997 to 1998 due to a 34% decrease in
oil prices, a 21% decrease in gas prices, and reduced production which was
largely attributable to the lower prices.  Lower prices made some secondary
recovery production uneconomic.  Revenues increased 17% from 1996 to 1997 due to
a 17% increase in oil production, a 64% increase in gas production, and a 21%
increase in average gas prices.  These increases were partially offset by an 8%
decrease in average crude oil prices.  There is significant volatility in oil
and gas prices and such volatility is expected to continue.

Depreciation, depletion, and amortization varied in each year because of changes
in levels of production.

Interest expense was higher each year because of increased borrowings under
Statex's bank credit agreement.

The segment loss in 1998 is the result of the $12.8 million impairment loss for
oil and gas properties described in Note 1 of Notes to the Consolidated
Financial Statements and the loss 

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

                                                                             17.
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
================================================================================

from operations which occurred primarily because of the significant decrease in
the market price of oil and gas. Segment results for 1997 were lower than in
1996 due to the $.5 million impairment loss, higher interest expense, and
increased well maintenance costs.


FUEL DISTRIBUTION SEGMENT

Fuel distribution revenues were 21% higher in 1998 than in 1997 and 18% lower in
1997 than in 1996, in each case because several fuel storage tanks at SFIA were
out of service for repairs and upgrade during most of 1997.  It is estimated
(based on information provided by SFIA and the third-party operator) that the
SFIA fuel distribution lines and storage tanks will be taken out of service in
2000 and 2001, respectively, and the related revenues eliminated.  Such revenues
amounted to $.4 million in 1998.

The fuel distribution segment recorded losses in 1997 and 1996 because of
environmental remediation expenses at SFIA totaling $5.5 million in 1997 and
$1.2 million in 1996.  As described in Note 4 of Notes to the Consolidated
Financial Statements, these remediation efforts will continue for several years
and the estimated future SFIA environmental remediation expenses which have been
recorded may require future revision.


OTHER

INTEREST AND OTHER REVENUES (EXCEPT FROM REPORTABLE SEGMENTS).  Interest income
varied in each year as a result of changes in the amounts of outstanding cash,
U.S. Government securities, and notes receivable, and the interest rates earned.
1996 also included non-recurring items classified as other income.

UNALLOCATED CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES.  The increase in
unallocated general and administrative expenses from 1997 to 1998 is due to
increases in employee benefits which were partially offset by reduced legal
services. The decrease in unallocated general and administrative expenses from
1996 to 1997 was primarily because of $.6 million of expenses associated with
the 1996 Reorganization described in Note 1 of Notes to the Consolidated
Financial Statements.  In addition, 1997 reflected reduced legal services, fees
for professional tax services, and employee benefits.

CREDIT FOR TAXES.   Refer to Notes 1 and 6 of Notes to the Consolidated
Financial Statements for an explanation of the elements included in the credit
for taxes including an $8 million and a $5.6 million reduction in the income tax
liability recorded in the years ended December 31, 1998 and 1996, respectively.


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

18.
<PAGE>
 
PS GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNT)
================================================================================

<TABLE>
<CAPTION>
                                                            1998          1997
                                                         -----------------------
<S>                                                      <C>            <C>
                             ASSETS                      
Current assets:                                          
 Cash and cash equivalents                               $   3,747      $ 10,921
 U.S. Government securities, partially pledged                 636         5,815
 Accounts and notes receivable                               4,894         6,090
 Current portion of aircraft leases, pledged                 8,366         8,630
 Prepaid expenses and other current assets                   1,271         1,631
 Net current assets of discontinued operation                  139         7,293
                                                         -----------------------
   Total current assets                                     19,053        40,380
                                                         
Oil and gas properties, at cost, pledged                    46,135        44,364
 Less accumulated depreciation, depletion, and             
  amortization                                             (35,916)      (21,658)
                                                         -----------------------
                                                            10,219        22,706
                                                         
Other property and equipment, at cost                        6,001         6,190
 Less accumulated depreciation                              (5,240)       (5,124)
                                                         -----------------------
                                                               761         1,066
                                                         
Aircraft under operating leases, at cost, partially        171,264       171,264
 pledged                                                 
 Less accumulated depreciation                            (108,905)      (98,820)
                                                         -----------------------
                                                            62,359        72,444
                                                         
Investment in aircraft financing leases, pledged            74,944        82,067
Other assets                                                 4,393         6,359
                                                         -----------------------
                                                         $ 171,729      $225,022
                                                         =======================
         LIABILITIES AND STOCKHOLDERS' EQUITY            
                                                         
Current liabilities:                                     
 Accrued interest                                        $   1,023      $  4,404
 Accounts payable and other accrued liabilities              1,897         2,057
 Environmental remediation liability                         1,076         1,384
 Current portion of long-term obligations                   19,706        18,211
                                                         -----------------------
   Total current liabilities                                23,702        26,056
                                                         
Long-term obligations                                       36,605        55,511
Deferred income taxes                                       18,680        36,450
Environmental remediation liability                          3,498         3,716
Other liabilities                                            7,580         6,581
Commitments and contingencies                            
Stockholders' equity:                                    
 Preferred stock, 1,000 shares authorized, none issued   
 Common stock, par value $1 per share, 10,500 shares     
   authorized, 6,068 shares issued and outstanding           6,068         6,068
 Additional paid-in capital                                 75,596        90,640
 Retained earnings                                       
                                                         -----------------------
   Total stockholders' equity                               81,664        96,708
                                                         -----------------------
                                                         $ 171,729      $225,022
                                                         =======================
</TABLE>

================================================================================
See accompanying Notes to Consolidated Financial Statements.

                                                                             19.
<PAGE>
 
PS GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATION
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
================================================================================

<TABLE>
<CAPTION>
                                                       1998              1997             1996
                                                    -------------------------------------------
<S>                                                 <C>                 <C>             <C>
Continuing operations:
 Revenues:
   Aircraft leasing                                  $  23,855          $30,605         $34,073
   Gain on aircraft sales                                                   514           1,846
   Oil and gas production                                6,054           10,016           8,573
   Fuel storage and distribution                           790              655             776
   Interest and other income                             1,552            1,975           2,763
                                                    -------------------------------------------
                                                        32,251           43,765          48,031
                                                    -------------------------------------------
 Costs and expenses:
   Cost of sales                                        5,131             5,899           4,471
   Depreciation, depletion, and                        11,892            18,202          16,250
    amortization
   Impairment loss on oil and gas  properties          12,800               489
   Environmental remediation expenses                                     5,533           1,238
   General and administrative expenses                  3,452             3,129           4,225
   Interest expense                                     6,957            11,370          13,800
                                                    -------------------------------------------
                                                       40,232            44,622          39,984
                                                    -------------------------------------------
 Income (loss) from continuing operations
   before taxes                                        (7,981)             (857)          8,047
 (Credit) for taxes                                   (11,142)             (295)         (2,229)
                                                    -------------------------------------------
   Income (loss) from continuing operations             3,161              (562)         10,276
Discontinued operation, net of tax:
 Loss from operations                                                    (1,465)           (666)
 Loss on disposition                                                       (583)
                                                    -------------------------------------------
   Loss from discontinued operation                                      (2,048)           (666)
                                                    -------------------------------------------
       Net income (loss)                             $  3,161           $(2,610)        $ 9,610
                                                    ===========================================
 
Basic and diluted earnings (loss) per share:
 Continuing operations                               $    .52           $  (.09)        $  1.69
 Loss from operations of discontinued                                   
  operation                                                                (.24)           (.11) 
 Loss on disposition of discontinued                                    
  operation                                                                (.10)
                                                    -------------------------------------------
       Net income (loss) per share                   $    .52           $  (.43)        $  1.58
                                                    ===========================================
Shares used in determination of basic and
  diluted earnings (loss) per share                     6,068             6,068           6,068
                                                    ===========================================
</TABLE>

================================================================================
See accompanying Notes to Consolidated Financial Statements.

20.
<PAGE>
 
PS GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
================================================================================

<TABLE>
<CAPTION>
                                                       1998          1997        1996
                                                     ----------------------------------
<S>                                                  <C>          <C>          <C>
Cash flows from operating activities:
 Income (loss) from continuing operations            $  3,161     $   (562)    $ 10,276
 Payment of prior years' state income tax              (6,040)
  liability
 Non-cash items:
   Depreciation, depletion, and amortization           11,892       18,202       16,250
   Impairment loss for oil and gas properties          12,800          489
   (Gains) losses on aircraft sales                                   (514)      (1,846)
   Environmental remediation liability                               5,100          250
   Deferred taxes and other                           (10,826)       2,198       (2,434)
 Changes in non-cash working capital affecting
  cash from operating activities:
   Accounts receivable                                  1,128        2,373          280
   Prepaid and other current assets                       175         (290)        (550)
   Other current liabilities                           (3,876)      (1,387)         425
                                                     ----------------------------------
     Net cash provided from operating activities        8,414       25,609       22,651
                                                     ----------------------------------
Cash flows from investing activities:
 Purchase of available-for-sale securities            (21,096)
 Sales proceeds from available-for-sale securities      3,492          956        7,225
 Maturity of available-for-sale securities             23,011
 Maturity of held-to-maturity securities                  891          940        1,090
 Reduction in collateral for letters of credit            972        3,111          156
 Proceeds from disposition of equipment                             18,514        3,154
 Capital additions                                     (1,897)      (5,409)      (4,110)
 Changes in finance leases and other                    7,501        9,035        5,900
                                                     ----------------------------------
     Net cash provided from investing activities       12,874       27,147       13,415
                                                     ----------------------------------
Cash flows from financing activities:
 Additions to long-term obligations                       800        2,000        3,000
 Reductions in long-term obligations                  (18,211)     (34,063)     (19,825)
 Special cash distributions to stockholders           (18,205)     (24,273)      (9,101)
                                                     ----------------------------------
     Net cash used in financing activities            (35,616)     (56,336)     (25,926)
                                                     ----------------------------------
Discontinued operation:
 Loss from operations                                               (1,465)        (666)
 Loss on disposition                                                  (583)
 Deferred taxes                                                     (1,418)        (436)
 (Increase) decrease in net assets                      7,154       10,677       (5,739)
                                                     ----------------------------------
     Net cash provided from (used in) discontinued        
      operation                                         7,154        7,211       (6,841) 
                                                     ----------------------------------
Net increase (decrease) in cash and cash               
 equivalents                                           (7,174)       3,631        3,299 
Cash and cash equivalents at beginning of year         10,921        7,290        3,991
                                                     ----------------------------------
Cash and cash equivalents at end of year             $  3,747     $ 10,921     $  7,290
                                                     ==================================
</TABLE>

================================================================================
See accompanying Notes to Consolidated Financial Statements.

                                                                             21.
<PAGE>
 
PS GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
================================================================================

<TABLE>
<CAPTION>
                                                     Common Stock         Additional               
                                                  -------------------                             
                                                                           Paid-In      Retained  
                                                    Shares     Amount      Capital      Earnings 
                                                  ----------------------------------------------- 
<S>                                               <C>          <C>       <C>            <C>        
Balance at December 31, 1995                         6,068     $6,068      $ 98,420      $ 18,594 
 Net income                                                                                 9,610 
 Special cash distribution ($1.50 per share)                                               (9,101)
                                                  ----------------------------------------------- 
Balance at December 31, 1996                         6,068      6,068        98,420        19,103 
 Net loss                                                                                  (2,610)
 Special cash distributions ($4.00 per share)                                (7,780)      (16,493)
                                                  ----------------------------------------------- 
Balance at December 31, 1997                         6,068      6,068        90,640             - 
 Net income                                                                                 3,161 
 Special cash distribution ($3.00 per share)                                (15,044)       (3,161)
                                                  ----------------------------------------------- 
Balance at December 31, 1998                         6,068     $6,068      $ 75,596      $      - 
                                                  ===============================================  
</TABLE>

================================================================================
See accompanying Notes to Consolidated Financial Statements.

22.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION - These consolidated financial statements include the accounts of
PS Group Holdings, Inc. (PSGH) and its subsidiaries.  As used in the following
footnotes, "the Company" refers to PS Group Holdings, Inc. and its subsidiaries,
"PSG" refers to PS Group, Inc., "Statex" refers to Statex Petroleum, Inc., and
"PST" refers to PS Trading, Inc.

BUSINESS AND BASIS OF PRESENTATION - PSGH operates, through subsidiaries, three
reportable segments - aircraft leasing through PSG, oil and gas production and
development through Statex, and fuel storage and distribution through PST.  As
more fully described in Note 2, the fuel sales divisions of PST are shown as a
discontinued operation.

REORGANIZATION AND RESTRICTIONS ON THE TRANSFER OF COMMON SHARES - On June 5,
1996, PSGH and PSG completed a holding company reorganization (the
Reorganization).  As a result of the Reorganization, each share of PSG was
converted, on a tax-free basis, into one share of PSGH.  The Reorganization did
not result in any change in the consolidated financial condition, business, or
assets of PSG.  The Reorganization was accounted for on an historical cost basis
and thus the financial statements for periods prior to the Reorganization have
not been restated and represent the consolidated financial statements of PSG.
The sole purpose of the Reorganization was to help preserve PSG's substantial
net operating loss and investment tax credit carryforwards and other tax
benefits by decreasing the risk of an "ownership change" for federal income tax
purposes.  The Reorganization was intended to accomplish this purpose by
imposing certain restrictions on the transfer of common shares of PSGH.  In
general, and subject to an exemption for certain dispositions of shares by
persons who were "pre-existing 5% shareholders" (as defined in PSGH's Restated
Certificate of Incorporation) on June 5, 1996, the transfer restrictions
prohibit, without prior approval of the Board of Directors, the direct or
indirect disposition or acquisition of any stock of PSGH by or to any holder who
owns, or would, as a result thereof, own (either directly or through the tax
attribution rules) 5% or more of the stock upon such acquisition.  The transfer
restrictions, by their terms, are scheduled to expire immediately following the
conclusion of the Company's annual meeting of stockholders for the year 2000,
unless the stockholders pass a resolution extending such expiration date.

RECLASSIFICATION - Certain reclassifications have been made to the 1997 and 1996
financial statements to make them comparable to the presentation of the 1998
financial statements.

ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements.  Actual results could differ from those estimates.

CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.

DEPRECIATION AND AMORTIZATION - Depreciation is generally recorded to estimated
residual values (which is sometimes equal to the stipulated lease termination
values) using the 

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

                                                                             23.
<PAGE>
 
================================================================================

straight-line basis over the estimated useful lives of the related assets, which
are generally 15 to 18 years for leased aircraft and from 3 to 20 years for
other property and equipment. See the discussion below for the depreciation
method used for five BAe 146 aircraft.

CHANGE IN ACCOUNTING ESTIMATE FOR DEPRECIATION - In the second quarter of 1997,
PSG started to record increased depreciation expense on five of the ten BAe 146
aircraft which were then leased to US Airways, Inc. (US Airways) to reflect
lower interim termination values.  With respect to these five aircraft, the
specified lease termination values were below the net book values of the
aircraft.  This additional depreciation was recorded to reflect the notification
received in the second quarter of 1997 from US Airways that it might exercise
its lease termination rights with respect to four of the ten BAe 146 aircraft
(including three of these five aircraft on which additional depreciation is
being recorded) at specified lease termination values. In light of the
notification and the improved market for possible sales by US Airways, PSG
adjusted its depreciation to reflect the lease termination values on these five
aircraft (two in 1998).  PSG was previously depreciating all ten aircraft to the
final lease termination amounts on a straight-line basis.  The additional pretax
depreciation expense relating to this change was $.7 million in 1998 and $3.5
million in 1997.  The after-tax effect was $.4 million ($.07 per share) in 1998
and $2.1 million ($.34 per share) in 1997.  In the fourth quarter of 1997, US
Airways did exercise its lease termination rights on four of the aircraft (see
Note 5).

ACCOUNTING FOR OIL AND GAS PRODUCING ACTIVITIES - The Company follows the
successful efforts accounting method for oil and gas producing activities, as
described below:

     LEASE ACQUISITIONS - The Company defers the costs of acquiring unproven oil
     and gas leases until they are either assigned or sold to other parties or
     retained by the Company for possible future development.  An allowance for
     the abandonment of unproven leases is provided using the straight-line
     method over the life of the leases.

     EXPLORATION AND DEVELOPMENT COSTS - The costs of drilling and equipping all
     development wells are capitalized.  The costs of drilling exploratory wells
     are initially deferred.  If proved reserves are discovered, the costs of
     the wells are capitalized.  If proved reserves are not discovered, the
     costs of drilling the wells, net of any salvage value, are charged to
     expense.

     DEPRECIATION, DEPLETION, AND AMORTIZATION - Depletion of producing leases
     is computed for individual properties using the unit-of-production method
     based on estimated proved reserves. Depreciation of wells and related
     equipment is computed using the unit-of-production method, based on proved
     developed reserves.

HELD-TO-MATURITY SECURITIES - At December 31, 1998, PSG had $1.2 million of U.S.
Treasury bills maturing on January 7, 1999 ($.6 million was carried as non-
current pursuant to a collateral agreement).  At December 31, 1997, PSG had $2
million of U.S. Treasury bills maturing on January 8, 1998 ($1.2 million were
carried as non-current pursuant to a collateral agreement).  The fair market
value of these investments approximated cost.

AVAILABLE-FOR-SALE SECURITIES - At December 31, 1997, PSG had $5 million of U.S.
Government securities.  These securities matured in August 1998.  At December
31, 1998 there were no available-for-sale securities.

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

24.
<PAGE>
 
================================================================================

ENVIRONMENTAL EXPENDITURES - The Company complies with Statement of Position 96-
1, "Environmental Remediation Liabilities," issued by the American Institute of
Certified Public Accountants.  In accordance with that statement and, as more
fully described in Note 4, PST recorded environmental remediation expenses of
$5.5 million in 1997 and $1.2 million in 1996.

IMPAIRMENT LOSS - In accordance with Statement of Financial Accounting Standard
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company reviews the carrying value of its long-
lived assets whenever events or changes in circumstances indicate that such
carrying value may not be recoverable.  This review consists of a comparison of
the carrying value of the asset with the asset's expected future undiscounted
cash flow.  If the carrying value of the asset exceeds the expected future cash
flow, an impairment exists and is measured by the excess of the carrying value
over the estimated fair value of the asset.  During the third and fourth
quarters of 1998, Statex recorded noncash impairment losses of $10.2 and $2.6
million, respectively, relating to the impairment of specific oil and gas
properties owned by Statex.  The impairment occurred primarily because of the
significant decrease in the market value of oil and gas and related properties.
Fair value was based on the current indicated price for oil and gas properties,
estimated discounted future net cash flows, and input and discussions with oil
and gas professionals. In 1997, Statex recorded a $.5 million impairment loss
related to one oil and gas property.

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE - Basic and diluted earnings (loss)
per share are based on the weighted-average number of common shares outstanding
during the period. Because the Company has no dilutive securities, basic and
diluted earnings (loss) per share are the same.

INVESTMENT TAX CREDITS - Investment tax credits are accounted for using the
flow-through method.


2.  SALE OF THE ASSETS OF THE FUEL SALES DIVISIONS OF PST

In October 1997, PST completed the sale of the assets of its wholesale fuel
sales division located in Sacramento, California.  This division was primarily
engaged in the sale of diesel fuel and gasoline. As a result of the sale, the
realization of accounts receivable, and the liquidation of fuel inventories, PST
recorded a third quarter 1997 pretax loss of $1 million.  The loss included
severance and benefits for terminated employees and the estimated losses on the
future collection of accounts receivable which were indemnified by PST.

In February 1998, PST sold the assets of its aviation fuel sales division
located in Dallas, Texas. The shut-down did not result in any material gain or
loss.

The sale of both fuel sales divisions of PST resulted in the discontinuance of
that reportable segment.  Operating revenues of the discontinued fuel sales
divisions of PST were $163.3 million in 1997 and $227 million in 1996.  The loss
from discontinued operation shown on the Consolidated Statement of Operations is
net of applicable income tax credits of $1 million in 1997 and $.4 million in
1996.  The loss on disposition shown for 1997 is net of tax credits of $.4

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

                                                                             25.
<PAGE>
 
================================================================================

million.  Intercompany interest expense, based on outstanding advances from PSG,
recorded by the discontinued operation was $.2 million in 1997 and $.3 million
in 1996.

As of December 31, 1998 and 1997, the net assets and liabilities of the
discontinued operation were as follows (in thousands):

<TABLE>
<CAPTION>
                                                       1998      1997
                                                   -------------------
      <S>                                            <C>       <C>
      Accounts receivable                            $ 1,395   $ 7,557
      Fuel inventory                                             3,504
      Other current assets                                       2,424
      Office condominium and equipment, net of
         accumulated depreciation                                  727
      Current liabilities                             (1,256)   (6,919)
                                                   -------------------
         Net assets                                  $   139   $ 7,293
                                                   ===================
</TABLE>


3.  LONG-TERM OBLIGATIONS

At December 31, 1998, PSG had $1.4 million outstanding under its October 1995
amended bank credit agreement consisting entirely of letters of credit (LC's).
No additional LC's or any borrowings are permitted under the agreement which
expires in 2000.  All outstanding LC's require cash collateralization and, in
addition, PSG is required to maintain at least $1 million in cash and cash
equivalents.

Statex has a separate bank credit agreement collateralized by its major oil and
gas properties. As of December 31, 1998, $5.8 million was borrowed under this
agreement.  Due to losses in the third and fourth quarters of 1998, Statex did
not meet a financial covenant contained in its bank loan agreement relating to
the fixed charge ratio.  In November 1998 and March 1999, Statex obtained
waivers from the bank relating to its non-compliance with this financial
covenant in the third and fourth quarters of 1998.  It is possible that future
losses could cause Statex to again be out of compliance with this financial
covenant or with other covenants in its bank credit agreement.  There can be no
assurances that the bank will be willing to grant additional waivers in the
future.  Therefore, the outstanding balance of this debt is classified as
current even though it is not due until September 2000.  If any needed
additional waivers are not granted, the bank could by notice to Statex declare
the outstanding principal and interest due and payable.  The Company believes
that if the bank declared the Statex note due and payable, and if the Company
decided the bank should be paid, then it would have adequate funds to advance to
Statex to pay the outstanding principal and interest.

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

26.
<PAGE>
 
================================================================================
 
Long-term obligations at December 31, excluding current maturities, consist of
the following (in thousands):

<TABLE>
<CAPTION>
                                                                            1998          1997
                                                                         -----------------------
     <S>                                                                   <C>           <C>
     Loans secured by six BAe 146 aircraft; bearing interest at                   
        6.4% to 12%; due 2000                                              $ 4,738       $ 9,253
     Loans secured by two MD-80 aircraft; bearing interest at                     
        6.9% and 6.5%; due 2004 and 2006                                    16,516        18,251
     Note payable secured by one Boeing 737 aircraft; bearing                     
        interest at 6.1%; due 2006                                          10,129        10,909
     Note payable secured by one Boeing 737 aircraft; bearing                     
        interest at 11.6%; due 2002                                          5,222         7,090
     Loan secured by two MD-80 aircraft; bearing interest at                      
        10.7%; due 1999                                                                    5,008
     Bank credit agreement secured by producing oil and gas                       
        property; bearing interest at prime plus 1%; due 2000                              5,000
                                                                         -----------------------
                                                                           $36,605       $55,511
                                                                         =======================
</TABLE>

Interest payments of $9.7 million, $9.9 million, and $14.3 million were made in
1998, 1997, and 1996, respectively.

Principal payments on existing long-term obligations in each of the four years
after 1999 are as follows: $9.6 million in 2000; $5 million in 2001; $4.8
million in 2002; and $5.2 million in 2003.  Payments after 2003 total $12
million.


4.  ENVIRONMENTAL REMEDIATION LIABILITY AND RELATED LITIGATION

Environmental remediation expenses of $5.5 million and $1.2 million were
recorded in 1997 and 1996, respectively.  These expenses relate to actual and
estimated costs for the investigation and remediation (I&M) of potential soil
and groundwater pollution at San Francisco International Airport (SFIA) where
PST, as the operator of various fuel storage and distribution facilities, has
been named as a potentially responsible party (PRP) and has been sued in the
lawsuit discussed below.  The environmental liability has not been discounted
since the expected amounts to be paid are not subject to a stipulated payment
plan.  During 1998, PST paid $.5 million of environmental expenses related to
SFIA which reduced the estimated accrued environmental remediation liability to
approximately $4.6 million at December 31, 1998.  Payment of portions of the
remaining estimated amounts accrued as environmental remediation expenses is
expected to continue through 2005.

PST's remaining estimate of the I&M costs ($4.6 million)  relates primarily to
expenditures incurred or anticipated to be incurred in response to claims by the
City and County of San Francisco (CCSF) and other SFIA tenants for: (i) the
removal or cementing-in-place of a 3.4 mile underground pipeline which has not
been used since 1987; (ii) PST's estimated portion of claims by CCSF for both
specific projects and airport-wide I&M expenditures through April 30, 1998 for
consultant costs and May 31, 1998 for construction costs (this is the latest
update of costs 

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

                                                                             27.
<PAGE>
 
================================================================================

in which CCSF is seeking a total reimbursement in excess of $23.6 million from
31 tenants, and other firms which operated at SFIA), plus PST's estimated
portion of estimated future CCSF claims subsequent to the spring of 1998; (iii)
PST's portion of additional estimated I&M expenses related to future SFIA
construction that will continue past the year 2000; and (iv) claims by other
SFIA tenants contending that PST is liable for contamination at particular
locations at SFIA. There is a substantial likelihood that PST's estimate of SFIA
expenditures may change in the near and long-term to reflect updated information
concerning: (i) the level, area, and method of remediation of contamination;
(ii) possible changes in PST's allocation of remediation expenses; (iii) the
possibility of claims, other than the Atlantic Richfield Company (ARCO) claims
described below, being filed against PSG or PST by other PRPs; (iv) other PRPs
not being able or willing to fund their allocated portion of expenses; and (v)
the size and complexity of the litigation described below, particularly if
current efforts to mediate a resolution of claims, also described below, are
unsuccessful.

On July 11, 1997, CCSF filed a complaint  against various present and former
tenants who had operated fuel storage and other facilities at SFIA seeking to
recover costs incurred in connection with the investigation and cleanup of
contamination in and around SFIA (the CCSF Action). The CCSF Action is pending
in the United States District Court for the Northern District of California (the
Court), and alleges claims based on the California Water Code, breach of
contract, violation of CCSF rules and regulations, nuisance, waste, trespass,
negligence, equitable indemnity, and declaratory relief.  Neither the Company
nor any of its subsidiaries is a named defendant in the CCSF Action.  PSG and
PST, along with the majority of present and former tenants at SFIA, have entered
into a tolling agreement with CCSF which tolls the statute of limitations and
other time-based defenses that any of the parties to the tolling agreement have
against the others, and permits the parties to attempt to resolve their disputes
regarding environmental cleanup at SFIA without the necessity of litigation.
None of the parties to the tolling agreement are named defendants in the CCSF
Action, but the tolling agreement does not stop the future filing of lawsuits
against PST or PSG by CCSF or others. The defendants in the CCSF Action are all
present and former tenants who declined to sign the tolling agreement.  The
tolling agreement tolls any claims by CCSF and other participating tenants
against PST or PSG arising out of PST's fuel storage and distribution facilities
at SFIA. It also tolls any claims PST or PSG may have against CCSF or any of the
participating tenants relating to environmental investigatory and cleanup costs
at SFIA.

In September 1997, a defendant in the CCSF Action, ARCO, filed two related
cross-actions.  In the first cross-action, which is a counterclaim against PSG
and other parties, ARCO denies that it has any liability for any investigatory
or remediation costs at SFIA and it also denies that it is jointly and severally
liable for any environmental costs.  ARCO seeks a judicial declaration stating
the rights, obligations, and responsibilities of all of the parties for the
contamination-related costs alleged in the CCSF Action.  The second cross-action
is a third party complaint against PSG, in which ARCO alleges that PSG agreed to
defend and indemnify ARCO in various lease agreements (covering certain
pipelines, equipment, and facilities at SFIA) for all the contamination claims
alleged against ARCO in the CCSF Action.  ARCO seeks unspecified damages for
breach of contract, a declaration of ARCO's rights under such contracts, and
ARCO's costs and attorney's fees in the CCSF Action.

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

28.
<PAGE>
 
================================================================================

On October 21, 1997, the Court entered an order, based upon a stipulation,
staying discovery in the CCSF Action and the related ARCO cross-actions, staying
the parties' disclosure obligations, staying any motion practice, and staying
any parties' obligations to file responsive pleadings or cross-actions to permit
the parties and potential parties to meet and confer for the purpose of
developing a mediation and/or case management plan for the case.  Consequently,
PSG has not filed a responsive pleading to the counterclaim or the third party
complaint, and it has not filed any cross-actions.

On December 12, 1997, the Court, with the consent of the parties, issued a Case
Management Order (Order).  This Order provided for the parties to undertake a
process which might ultimately lead to the claims being settled by alternative
dispute resolution.  This process involved additional fact gathering and
settlement negotiation prior to entering into a mediation phase.  In early 1998,
there was an informal production of documents by the parties.  On May 28, 1998,
the Court, at the request of the parties, issued another Case Management Order
(New Order).  This New Order provided additional time for (i) the parties to
investigate and analyze the CCSF claims and (ii) the parties to meet and attempt
to negotiate final settlements and confer regarding selection of a mediator, a
structure and schedule for mediation and a methodology to allocate mediator
fees.  Subsequently, a mediator was selected and initial mediation sessions were
held in September 1998.  The mediation process has continued into 1999, with
subsequent sessions with the mediator, some of which included PST.  In early
December 1998, CCSF announced settlement with five tenants.  Some of these
settlements involved future claims as well as past claims by CCSF.  If the
parties to the CCSF Action and the related ARCO cross-actions are unsuccessful
in resolving all of the claims in the mediation process, then litigation of the
unresolved claims will proceed in the CCSF Action.  CCSF has also petitioned the
Court to set pretrial and trial dates in the CCSF Action.  The Court is
considering CCSF's request which includes the trial starting in May 2000.  PST
and CCSF are continuing to mediate.  CCSF is also continuing the mediation
process with other tenants.

The Company is unable to determine the extent, if any, to which any expenditures
which PST incurs in connection with environmental costs at SFIA may be
recoverable from third parties, including the prior lessees of the facilities
that PST took by way of assignment, other tenants at SFIA, or PST's insurers.
Both the prior lessees and PST insurers have disputed PST's claims for recovery
of SFIA environmental costs.  One of the prior lessees, ARCO, has asserted
indemnification claims against PSG and the remaining prior lessee has indicated
that it will assert a similar claim against PST.

The Company is subject to numerous local, state, and federal environmental laws,
rules, and regulations, which expose the Company to the possibility of judicial
or administrative actions for remediation and/or penalties.  As a result of
other future remediation projects or changes in regulatory requirements, the
Company could incur additional future liabilities.

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

                                                                             29.
<PAGE>
 
================================================================================

5. AIRCRAFT LEASES AND AIRCRAFT SOLD

At December 31, 1998, PSG leased 15 jet aircraft to three commercial airlines
under agreements accounted for as operating or financing leases.

The future minimum lease payments scheduled to be received on aircraft currently
under lease are as follows (in thousands):

<TABLE>
<CAPTION>
                                          Operating  Financing
                                           Leases     Leases
                                        ----------------------
               <S>                      <C>          <C>
               1999                         $18,856    $11,519
               2000                          18,650      8,737
               2001                           8,228      8,789
               2002                           2,424      8,844
               2003                           2,424      9,166
               Later years                    6,868     24,532
                                        ----------------------
                  Total                     $57,450    $71,587
                                        ======================
</TABLE>

Information on financing leases at December 31 (in thousands):

<TABLE>
<CAPTION>
                                                   1998      1997
                                                -----------------
   <S>                                          <C>       <C>
   Total investment                             $83,310   $90,697
   Unguaranteed residual values
     (included in total investment)              28,240    28,240
   Unearned income                               16,517    26,903
</TABLE>

Aircraft under operating leases are depreciated to estimated residual values
(which is sometimes equal to the stipulated lease termination values) totaling
$31.2 million, or 18% of original cost.

During the fourth quarter of 1997, US Airways exercised its lease termination
rights on four BAe 146 aircraft.  As described in Note 1, three of these
aircraft were being depreciated at a rate such that the net book values would
equal the termination values and, accordingly, there were no gains or losses on
the sale of these aircraft.  PSG recorded a pretax gain of $.5 million on the
sale of the fourth aircraft.  Gross proceeds to PSG for the four aircraft,
including debt repaid, totaled $18.5 million.

On December 31, 1996, PSG sold its one-third interest in six Boeing 737-200
aircraft at the end of the lease term to the lessee and recorded a pretax gain
of $1.8 million on gross proceeds of $3.1 million.

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

30.
 
<PAGE>
 
================================================================================

6.  CREDIT FOR TAXES

The credit for taxes from continuing operations was comprised of (in thousands):

<TABLE>
<CAPTION>
                                1998          1997          1996
                            -------------------------------------
<S>                           <C>            <C>          <C> 
Current:                                            
   Federal taxes              $    128       $ 515        $   396
   State taxes                      29          94             23
Deferred taxes                  (3,299)       (904)         2,916
Reduction of tax liability      (8,000)                    (5,564)
                            -------------------------------------
                              $(11,142)      $(295)       $(2,229)
                            =====================================
</TABLE>

The credit for income taxes in 1998 and 1996 was increased by $8 million and
$5.6 million, respectively, due to the reduction of income tax liabilities
recorded in prior years, but estimated to be no longer required.  In 1998, the
reduction was due to a revised estimate based on a tentative settlement with the
State of California (described below) and a current evaluation of other deferred
tax liabilities.  In 1996, the reduction was due primarily to the completion of
Internal Revenue Service audits and an evaluation of the pending assessment from
the State of California (described below).

Income taxes and related interest of $6.7 million, $.4 million, and $.4 million
were paid in 1998, 1997, and 1996, respectively.  In addition, refunds of prior
years' income taxes of $1 million and $.1 million were received in 1997 and
1996, respectively.

A reconciliation between the amount computed by multiplying income (loss) from
continuing operations before taxes by the statutory federal rate, and the amount
of reported taxes is as follows:

<TABLE>
<CAPTION>
                                                       Percent of Pretax
                                                         Income (Loss)
                                                    ------------------------
                                                      1998   1997   1996
                                                    ------------------------
<S>                                                   <C>    <C>    <C>
Statutory federal rate                                 (35)%  (35)%   35%
Increase (reductions) in taxes resulting from:
   Reduction of tax liability                         (100)          (70)
     State taxes net of federal income tax benefit      (6)     1      6
   Other                                                 1             1
                                                    ------------------------
                                                      (140)%  (34)%  (28)%
                                                    ========================
</TABLE>

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

                                                                             31.
<PAGE>
 
================================================================================

Significant components of deferred tax liabilities and assets for federal and
state income taxes as of December 31, 1998 and 1997 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                   1998       1997
                                               ---------------------
<S>                                              <C>        <C> 
Deferred tax liabilities:
  Finance leases                                 $ 34,038   $ 42,540
  Depreciation                                     15,062     21,203
  Intangible drilling costs                         1,011      1,154
  Net effect of tax benefit transfer agreements     1,404
  Assessment by the State of California                        3,718
  Other                                             1,195      1,194
                                               ---------------------
     Total deferred tax liabilities                52,710     69,809
Deferred tax assets:
  Investment tax credit carryforward              (12,524)   (12,524)
  Write-down of subsidiary                         (9,943)    (9,943)
  Impairment losses                                (5,828)      (644)
  Net operating loss carryforward                  (6,040)    (9,945)
  AMT credit carryforward                          (4,525)    (4,007)
  Accrued benefits                                 (2,455)    (2,486)
  Environmental remediation reserve                (1,882)    (2,485)
  Capital loss carryforward                        (1,470)    (3,129)
  Other                                            (1,439)    (1,931)
                                               ----------------------
     Total deferred tax assets                    (46,106)   (47,094)
  Valuation allowance                              12,076     13,735
                                               ----------------------
     Net deferred tax assets                      (34,030)   (33,359)
                                               ----------------------
     Net deferred tax liability                  $ 18,680   $ 36,450
                                               ======================
</TABLE>

Certain reclassifications were made in the 1997 presentation of deferred tax
assets to be consistent with the way the actual 1997 income tax returns were
filed and to make them comparable to the 1998 presentation.

The valuation allowance against deferred tax assets relates principally to
capital losses for which future realization is uncertain.

There was a federal tax net operating loss carryforward (NOL) of approximately
$15.5 million at December 31, 1998, which expires beginning in 2005.  A Separate
Return Limitation Year net operating loss carryforward in the amount of $5.1
million (related to the discontinued metallic waste recycling segment) expires
in 2005.  A California net operating loss carryforward of approximately $10.4
million starts expiring in 1999.  The unused investment tax credit (ITC) at
December 31, 1998 was $12.5 million, which can be used to offset up to 75% of
federal tax liability, expires from 2000 to 2002.

Because the Company has NOLs it is subject to certain tax regulations which
could severely limit the usage and carryforward of NOLs and ITCs.  Pursuant to
Internal Revenue Code 

================================================================================
32.
<PAGE>
 
================================================================================

Sections 382 and 383, if, within a three year period, ownership changes in
certain defined ways by more than 50 percentage points of the Company's
outstanding shares, the future annual use of the NOLs and tax credits may be
significantly limited. Refer to Note 1 for a discussion of restrictions on the
transfer of common stock of the Company which were imposed through the June 5,
1996 Reorganization and designed to decrease the risk of an ownership change for
federal income tax purposes.

In February 1996, the State of California issued notices of net tax deficiencies
to PSG for the years 1987 through 1990.  The net deficiencies totaled $5.9
million plus estimated interest of $9.2 million through December 31, 1997.  In
November 1998, PSG reached a tentative settlement of approximately $6 million
with the State of California relating to the notices of net tax deficiencies
and, in accordance with the tentative settlement terms, PSG paid the amount of
the tentative settlement.  The tentative settlement is subject to a final
approval process by the State of California.  The Company's current estimate of
its net tax deficiencies to the State of California for the years 1987 to 1990
is based on this tentative settlement, the outcome of which is indeterminable.


7.  DISCLOSURES ABOUT REPORTABLE SEGMENTS

The Company operates, through subsidiaries, three reportable segments: aircraft
leasing, oil and gas production and development, and fuel storage and
distribution.  The Company's reportable segments are strategic business units
that offer different products and services.

The aircraft leasing segment, operated by PSG, leases 15 jet aircraft to three
commercial airlines under agreements accounted for as operating or financing
leases.  The oil and gas production and development (oil and gas) segment,
operated by Statex, is an independent oil and gas producing company which
focuses primarily on properties with secondary recovery and/or development
potential.  Most of Statex's oil and gas properties are located in North-Central
and West Texas, and in Western Oklahoma.  The fuel storage and distribution
(fuel) segment, operated by PST, owns and operates limited fuel storage and
distribution facilities with primary operations at the San Francisco
International Airport and Los Angeles International Airport.

The revenues and segment profit shown as other in the following schedules relate
principally to interest income earned on cash, cash equivalents, marketable
securities, and intercompany advances.  The segment assets are principally cash,
cash equivalents, and marketable securities.

The accounting policies of the segments are the same as those described in Note
1.  The Company evaluates performance of each segment based on profit or loss
from operations of that segment before taxes.  There are no intersegment sales.

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

                                                                             33.
<PAGE>
 
================================================================================

   DISCLOSURE OF REPORTED SEGMENT PRETAX PROFIT OR LOSS, AND SEGMENT ASSETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                   Aircraft   Oil and
                                                    Leasing      Gas      Fuel    Other    Total
                                                 -------------------------------------------------
<S>                                                <C>       <C>        <C>       <C>     <C>
1998

Revenues                                           $ 23,855  $  6,054   $   790           $ 30,699
Interest revenue                                         97                        2,651     2,748
Interest expense                                      6,147       867              1,139     8,153
Depreciation, depletion, and
 amortization                                        10,084     1,580       205       23    11,892
 
Segment profit (loss)                                 7,607   (14,391)      393    1,592    (4,799)
Significant non-cash item:
   Impairment loss                                             12,800                       12,800
Segment assets                                      150,588    12,254       906    7,842   171,590
Expenditures for segment assets                                 1,897                        1,897
--------------------------------------------------------------------------------------------------

1997

Revenues                                           $ 31,119  $ 10,016   $   655           $ 41,790
Interest revenue                                        104         4              2,871     2,979
Interest expense                                     10,707       747                920    12,374
Depreciation, depletion, and
 amortization                                        15,155     2,641       355       51    18,202
Segment profit (loss)                                 4,982       643    (5,920)   2,340     2,045
Significant non-cash items:
  Environmental remediation expense                                       5,533              5,533
  Impairment loss                                                 489                          489
Segment assets                                      168,421    25,906       859   22,543   217,729
Expenditures for segment assets                                 5,294        97       18     5,409
--------------------------------------------------------------------------------------------------

1996

Revenues                                           $ 35,919  $  8,573   $   776           $ 45,268
Interest revenue                                        182                        3,504     3,686
Interest expense                                     13,416       404       306      597    14,723
Depreciation, depletion, and
 amortization                                        13,902     2,010       292       46    16,250
Segment profit (loss)                                11,232     1,823    (1,138)      61    11,978
Significant non-cash item:
  Environmental remediation expense                                       1,238              1,238
Segment assets                                      211,382    24,386     1,081   26,200   263,049
Expenditures for segment assets                                 4,077                 33     4,110
--------------------------------------------------------------------------------------------------
</TABLE>

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

34.
<PAGE>
 
================================================================================

   RECONCILIATION OF REPORTABLE SEGMENT REVENUES, PROFIT OR LOSS, AND ASSETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  1998              1997               1996
                                              -----------------------------------------------
<S>                                           <C>                 <C>                <C>
REVENUES                                                                       
Total revenues for reportable segments          $ 30,699          $ 41,790           $ 45,268
Interest revenue                                   1,552             1,975              2,763
                                              -----------------------------------------------
  Consolidated total                            $ 32,251          $ 43,765           $ 48,031
                                              ===============================================
PROFIT OR LOSS                                                                 
Total profit or loss for reportable segments    $ (6,391)         $   (295)          $ 11,917
Other profit or loss                               1,592             2,340                 61
Unallocated corporate expenses                    (3,182)           (2,902)            (3,931)
                                              -----------------------------------------------
  Consolidated total                            $ (7,981)         $   (857)          $  8,047
                                              ===============================================
ASSETS                                                                         
Total assets for reportable segments            $163,748          $195,186           $236,849
Other assets                                       7,842            22,543             26,200
Discontinued operations                              139             7,293             17,034
                                              -----------------------------------------------
  Consolidated total                            $171,729          $225,022           $280,083
                                              ===============================================
OTHER SIGNIFICANT ITEMS                                                        
Interest revenue:                                                              
  Reportable segments                           $     97          $    108           $    182
  Other                                            2,651             2,871              3,504
  Adjustment for intercompany interest            (1,196)           (1,004)              (923)
                                              -----------------------------------------------
  Consolidated total                            $  1,552          $  1,975           $  2,763
                                              ===============================================
Interest expense:                                                              
  Reportable segments                           $  7,014          $ 11,454           $ 14,126
  Other                                            1,139               920                597
  Adjustment for intercompany interest            (1,196)           (1,004)              (923)
                                              -----------------------------------------------
  Consolidated total                            $  6,957          $ 11,370           $ 13,800
                                              ===============================================
Expenditures for assets:                                                       
  Reportable segments                           $  1,897          $  5,391           $  4,077
  Other                                                                 18                 33
                                              -----------------------------------------------
  Consolidated total                            $  1,897          $  5,409           $  4,110
                                              ===============================================
Depreciation, depletion, and amortization:                                     
  Reportable segments                           $ 11,869          $ 18,151           $ 16,204
  Other                                               23                51                 46
                                              -----------------------------------------------
  Consolidated total                            $ 11,892          $ 18,202           $ 16,250
                                              ===============================================
</TABLE>

All revenues are derived from activities in the United States.

Revenues from two customers were each greater than 10% of consolidated revenues.
Revenues 

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

                                                                             35.
<PAGE>
 
================================================================================

from US Airways, which are included in the leasing segment, totaled
$19.4 million, $24.8 million, and $26.7 million in the years 1998, 1997, and
1996, respectively.  Revenues from Sunoco, Inc., which are included in the oil
and gas production and development segment, totaled $3.6 million, $6.2 million,
and $6.4 million in the years 1998, 1997, and 1996, respectively.


8.   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the Consolidated
Statement of Financial Position, when it is practicable to estimate such value.
In cases where quoted market prices are not available, fair value is based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flow.  In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the financial
instrument.  Statement 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements.  Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.  The following methods and assumptions were used by the Company in
estimating fair value disclosures for its financial instruments:

  CASH AND CASH EQUIVALENTS -  The carrying amounts approximate fair value
  because of the short maturity of these items.

  U.S. GOVERNMENT SECURITIES -  The fair value for U.S. Government securities is
  based on quoted market prices.

  NOTES RECEIVABLE -  The fair value for notes receivable is estimated using
  discounted cash flow analyses, using interest rates which might be offered if
  the notes were renegotiated.

  CASH COLLATERAL ACCOUNT -  The cash collateral account is invested in a fund
  which holds U.S. Government securities.  The market value of the fund is equal
  to the cost.

  DEBT INSTRUMENTS - The fair value of debt is estimated using discounted cash
  flow analyses, based on management's best estimate of current market rates for
  similar types of borrowing arrangements.

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

36.
<PAGE>
 
The estimated fair value of financial instruments at December 31, 1998 and 1997
is as follows
(in thousands):

<TABLE>
<CAPTION>
                                        1998                1997
                               ----------------------------------------
                                 Carrying    Fair    Carrying    Fair
                                  Value     Value     Value     Value
                               ----------------------------------------
<S>                            <C>          <C>      <C>        <C>
Financial assets:
   Cash and cash equivalents      $ 3,747   $ 3,747   $10,921   $10,921
   U.S. Government securities       1,231     1,231     7,015     7,015
   Notes receivable                 1,579     1,682     2,041     1,994
   Cash collateral account          1,388     1,388     2,360     2,360
                               ----------------------------------------
                                  $ 7,945   $ 8,048   $22,337   $22,290
                               ========================================
Financial liabilities:
   Debt instruments               $56,311   $57,140   $73,722   $77,390
                               ========================================
</TABLE>


9.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
    (In thousands except per share data)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
1998 QUARTERS                                    First      Second      Third     Fourth
----------------------------------------------------------------------------------------
<S>                                             <C>       <C>          <C>       <C> 
Continuing operations:
  Revenues                                      $ 8,508   $ 8,273      $ 8,180   $ 7,290
  Gross profit (loss)                             3,979     3,867       (6,602)    1,184
Net income (loss)                                   514       793       (5,376)    7,230

Basic and diluted earnings (loss) per share         .08       .13         (.89)     1.20

----------------------------------------------------------------------------------------
1997 QUARTERS                                   First     Second       Third     Fourth
----------------------------------------------------------------------------------------
 
Continuing operations:
  Revenues                                      $11,002   $10,575      $11,446   $10,742
  Gross profit                                    6,019       111        2,529     4,983

Net income (loss) from continuing operations    $ 1,022   $(2,111)     $  (676)  $ 1,203
Net loss from discontinued operation                (14)   (1,658)        (329)      (47)
                                              ------------------------------------------
  Net income (loss)                             $ 1,008   $(3,769)     $(1,005)  $ 1,156
                                              ==========================================
Basic and diluted earnings (loss) per share:
  Continuing operations                         $   .17   $  (.35)     $  (.11)  $   .20
 
  Discontinued operation                                     (.27)        (.06)     (.01)
                                              ------------------------------------------
     Net income (loss)                          $   .17   $  (.62)     $  (.17)  $   .19
                                              ==========================================
</TABLE>

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

                                                                             37.
<PAGE>
 
Gross profit (loss) is income (loss) from continuing operations before interest
expense, general and administrative expenses, and taxes.

As described in Note 6, in the fourth quarter of 1998 the provision for income
taxes was reduced by $8 million due to the reduction of income tax liabilities
recorded in prior years, but estimated by the Company to be no longer required.
Also in the fourth quarter of 1998, Statex recorded $2.6 million of the
impairment loss described in Note 1.  As described in Note 5, US Airways
exercised its termination rights on four BAe 146 aircraft in the fourth quarter
of 1997.  A pretax gain of $.5 million was recorded on one of the aircraft and
no gain or loss was recorded on the other three.


10.   OIL AND GAS OPERATIONS (UNAUDITED)

CHANGES IN ESTIMATED NET PROVED DEVELOPED AND UNDEVELOPED RESERVES BASED ON
INTERNAL RESERVE REPORTS (in thousands):

<TABLE>
<CAPTION>
                                                        Oil       Gas
                                                      (Bbls)*   (Mcf)*
                                                    ------------------
<S>                                                 <C>         <C>
December 31, 1995                                       4,886    2,960
      Revisions of previous estimates                    (555)     237
      Extensions, discoveries, and other additions        371
      Purchases of reserves in place                      688       83
      Sales of reserves in place                           (1)
      Production                                         (338)    (469)
                                                    ------------------
December 31, 1996                                       5,051    2,811
      Revisions of previous estimates                    (102)   1,445
      Extensions, discoveries, and other additions        335      427
      Purchases of reserves in place                       23      737
      Production                                         (395)    (767)
                                                    ------------------
December 31, 1997                                       4,912    4,653
      Revisions of previous estimates                    (805)      99
      Extensions, discoveries, and other additions         45
      Purchases of reserves in place                      319       69
      Production                                         (365)    (566)
                                                    ------------------
December 31, 1998                                       4,106    4,255
                                                    ==================
<CAPTION>  
                                                       Oil       Gas
                                                      (Bbls)    (Mcf)
                                                    ------------------
<S>                                                 <C>         <C>   
Net proved developed reserves at December 31, 1996      3,407    2,811
                                                    ==================
Net proved developed reserves at December 31, 1997      3,408    4,313
                                                    ==================
Net proved developed reserves at December 31, 1998      3,407    4,255
                                                    ==================
</TABLE>

* Bbls = barrels; Mcf = one thousand cubic feet

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

38.
<PAGE>
 
================================================================================

CAPITALIZED COSTS AND COSTS INCURRED - The capitalized costs at December 31,
1998, 1997, and 1996 relating to oil and gas producing activities (all of which
are in the continental United States) and costs incurred for the years ending
December 31, 1998, 1997, and 1996 are presented below (in thousands):

<TABLE>
<CAPTION>
                                                       1998       1997       1996
                                                   --------------------------------
<S>                                                <C>          <C>        <C>
Capitalized costs:
  Proved properties                                  $ 46,096   $ 44,325   $ 38,810
  Unproved properties net of allowance for
    abandonments                                           39         39         15
                                                   ---------------------------------
     Total                                             46,135     44,364     38,825
Accumulated depreciation, depletion, and
    amortization                                      (35,916)   (21,658)   (18,549)
                                                   ---------------------------------
     Net capitalized costs                           $ 10,219   $ 22,706   $ 20,276
                                                   =================================
Costs incurred:
 
  Property acquisition costs                         $    516   $  2,062   $  1,805
  Exploration costs, including unsuccessful wells          20          6          6
  Development costs                                     1,361      3,341      2,299
                                                   ---------------------------------
   Total expenditures                                $  1,897   $  5,409   $  4,110
                                                   =================================
</TABLE>


RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES - The results of
operations for oil and gas producing activities (excluding general and
administrative expenses and interest costs) for the years ended December 31,
1998, 1997, and 1996 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                            1998       1997      1996
                                                        -------------------------------
<S>                                                     <C>          <C>       <C>
Oil and gas revenues                                      $  6,054   $10,016   $ 8,573
Production costs                                            (4,905)   (5,298)   (4,050)
Exploration costs                                              (20)       (6)       (6)
Impairment loss                                            (12,800)     (489)
Depreciation, depletion, and amortization                   (1,580)   (2,641)   (2,010)
                                                        -------------------------------
Income before income tax expense                           (13,251)    1,582     2,507
Income tax (expense) benefit                                 4,638      (554)     (877)
                                                        -------------------------------
Income (loss) from operations for producing activities    $ (8,613)  $ 1,028   $ 1,630
                                                        ===============================
</TABLE>

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS - Pursuant to Statement
of Financial Accounting Standards No. 69, all publicly-traded enterprises having
significant oil and gas producing activities are required to present a
standardized measure of the discounted future net cash flows relating to proved
oil and gas reserve quantities, as well as the changes in significant components
of the standardized measure from prior periods.  There are numerous
uncertainties inherent in estimating quantities of proved reserves and in
projecting the future rates of production and timing of development
expenditures.  The future cash inflows determined from such reserve data
represent estimates only.  Moreover, the present values should not be construed
as the current market values of the Company's oil and gas reserves or 

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

                                                                             39.
<PAGE>
 
================================================================================

the costs that would be incurred to obtain equivalent reserves. A market value
determination would include many additional factors including: (i) anticipated
future increases or decreases in oil and gas prices and production and
development costs; (ii) an allowance for return on investment; (iii) regulatory
actions; (iv) the value of additional reserves, not considered proved at the
present time, which may be recovered as a result of further exploration and
development activities; and (v) other business risks. The future cash inflows
are calculated using the market price of oil and gas at the end of the year
presented. The following tables present the required information relating to
proved oil and gas reserves as of December 31, 1998, 1997, and 1996 (in
thousands):

<TABLE>
<CAPTION>
                                                       1998       1997       1996
                                                   ---------------------------------
<S>                                                <C>          <C>        <C>
Future cash inflows                                  $ 51,798   $ 92,560   $139,650
Future production costs                               (36,490)   (51,685)   (59,125)
Future development and abandonment costs               (1,360)    (6,582)    (7,667)
                                                   ---------------------------------
Future net cash inflows before income taxes /(a)/      13,948     34,293     72,858
Future income tax expenses                                  -     (5,936)   (18,146)
                                                   ---------------------------------
Future net cash inflows                                13,948     28,357     54,712
Discount factor at 10%                                 (7,171)   (13,621)   (24,139)
                                                   ---------------------------------
Standardized measure of discounted future
   net cash inflows                                  $  6,777   $ 14,736   $ 30,573
                                                   =================================
</TABLE>
 
(a) The present value of future net cash inflows before income taxes discounted
    at 10% was $6,777, $17,006, and $38,276 as of December 31, 1998, 1997, and
    1996, respectively.

<TABLE>
<CAPTION>
                                                        1998    1997     1996
                                                     --------------------------
<S>                                                  <C>        <C>      <C>
Year-end market price used for future cash inflows:
   Crude oil - per barrel                               $9.50   $15.50   $24.25
   Natural gas - per thousand cubic feet                 1.86     2.23     3.27
</TABLE>

The following are the principal sources of change in the standardized measure of
discounted future net cash inflows for the years ended December 31, 1998, 1997,
and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                          1998       1997       1996
                                                      -------------------------------
<S>                                                   <C>          <C>        <C>
Standardized measure at beginning of the year           $ 14,736   $ 30,573   $17,849
  Revenues less production costs for the year             (1,084)    (4,627)   (4,404)
  Net change in sales prices net of production costs     (11,395)   (21,573)   11,819
  Extensions and discoveries                                 101      1,367     2,147
  Changes in estimated future development costs            3,369         45      (304)
  Costs incurred that reduced future development costs       247      1,760     1,976
  Revisions of previous quantity estimates                (1,263)       511    (3,572)
  Accretion of discount                                    1,701      3,828     2,134
  Net change in income tax expense                                    4,184    (4,210)
  Purchase of reserves in place                              340      1,583     5,115
  Sale of reserves in place                                                        (3)
  Changes in production rates (timing) and other              25     (2,915)    2,026
                                                      -------------------------------
Standardized measure at end of year                     $  6,777   $ 14,736   $30,573
                                                      ===============================
</TABLE>

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

40.
<PAGE>
 
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
================================================================================

The Board of Directors and Stockholders
PS Group Holdings, Inc.

We have audited the accompanying consolidated statements of financial position
of PS Group Holdings, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PS Group Holdings,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.



/s/ Ernst & Young LLP


San Diego, California
February 5, 1999

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

                                                                             41.
<PAGE>
 
PS GROUP HOLDINGS, INC.
DIRECTORS AND OFFICERS
================================================================================

<TABLE> 
<CAPTION> 
DIRECTORS                               OFFICERS                                OFFICERS                                           
PS GROUP HOLDINGS, INC.                 PS GROUP HOLDINGS, INC.                 STATEX PETROLEUM, INC.                             
                                        AND PS GROUP, INC.                                                                         
<S>                                     <C>                                     <C> 
Charles E. Rickershauser, Jr.           Charles E. Rickershauser, Jr.           B. Andrew Wilkinson                                
Chairman of the Board &                 Chairman of the Board &                 President & Chief Operating                        
Chief Executive Officer                 Chief Executive Officer                 Officer                                            
                                                                                                                                   
J.P. Guerin/(a)/                        Lawrence A. Guske                       Dhar Carman                                        
Vice Chairman of the Board,             Vice President - Finance &              Executive Vice President & 
Private Investor                        Chief Financial Officer                 Chief Financial Officer 
                                                                                
William H. Borthwick                    Johanna Unger                           Stephanie Bronson                                  
Attorney-at-Law                         Vice President, Controller &            Controller
                                        Secretary                        
Steven D. Broidy
Private Investor

Robert M. Fomon
President, Robert M. Fomon
and Company (a private
investment company)

Donald W. Killian, Jr. /(a)/
Retired Attorney-at-Law

Gordon C. Luce /(a)/
Independent Financial
Advisor

Christopher H.B. Mills
Chief Executive Officer
North Atlantic Smaller 
Companies Investment 
Trust (a United Kingdom 
publicly-traded investment company)  

Joseph S. Pirinea
Certified Public Accountant
</TABLE> 

(a)  Member of the Audit Committee

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

42.
<PAGE>
 
PS GROUP HOLDINGS, INC.
INVESTOR INFORMATION
================================================================================

COMMON STOCK TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR

Questions regarding stockholder's accounts should be directed to:
  ChaseMellon Shareholder Services, L.L.C.
  P.O. Box 3315
  South Hackensack, New Jersey 07606
  800-356-2017
  www.chasemellon.com

The Common Stock is listed on the New York Stock Exchange and the Pacific
Exchange under the symbol:  PSG.  As of March 1, 1999, there were 1,339 holders
of record of the Company's Common Stock.

CORPORATE OFFICES

4370 La Jolla Village Drive, Suite 1050
San Diego, California  92122
619-642-2999
619-642-1955 (facsimile)

AUDITORS

Ernst & Young LLP
501 West Broadway, Suite 1100
San Diego, California  92101

ANNUAL MEETING

May 27, 1999
9:00 a.m.
Los Angeles Marriott - Downtown
333 South Figueroa Street
Los Angeles, California 90071

               _________________

The Company will supply to stockholders, upon written request to the Corporate
Secretary at the corporate offices in San Diego, California, without charge, a
copy of the 1998 Annual Report on Form 10-K (without exhibits).


MARKET PRICES OF COMMON STOCK

<TABLE>
<CAPTION>
                   High        Low    High        Low 
                   -----      -----   -----      ----- 
                         1998              1997
                   -----------------  -----------------
 <S>               <C>     <C>        <C>        <C> 
 First quarter     13 3/4  11 11/16   14 1/2     12 1/2
 Second quarter    13 1/4  12         13 7/8     12 1/8 
 Third quarter     12 1/4  11 1/16    14 15/16   12 3/8 
 Fourth quarter    12 3/4   9 3/4 *   16 3/8     11 1/8
</TABLE>

* Net of $3 due bill (for settlement on January 4, 1999) attached to stock
trades beginning December 14, 1998.

DIVIDENDS AND CASH DISTRIBUTIONS ON COMMON STOCK

Special cash distributions were declared and paid in 1998, 1997, 1996, and 1995.
However, they are not precedents for future distributions. Following is a
summary of these special cash distributions:

<TABLE>
<CAPTION>
                                                      Form
                                                      1099
                   Year                    Tax       mailing
Distribution    distributed    Year      status       date
 per share      by Company   received      (a)         (e)
--------------  -----------  --------  ----------   --------
<S>             <C>          <C>       <C>          <C>  
December           1995       1996     Return of    Jan. '97
  1995-$1.50                           capital (b)
                                     
December           1996       1997     Return of    Jan. '98
  1996-$1.50                           capital (b)
                                     
August             1997       1997     Taxable      Jan. '98
  1997-$1.50                           dividend
                                     
December           1997       1998     (c)          Jan. '99
  1997-$2.50                         
                                     
December           1998       1999     (d)          Jan. '00
  1998-$3.00
</TABLE>

(a) Tax status is subject to review by the IRS. Stockholders are advised to
    consult their tax advisors.
(b) Subject to disclosures in note (a), constitutes a return of capital and is
    not taxable as a dividend.
(c) Subject to disclosures in note (a), $.85 is return of capital and $1.65 is a
    taxable dividend.
(d) Tax status to be determined.
(e) Form 1099 is mailed in January of the year following the calendar year in
    which the distribution is received.

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

                                                                             43.