<PAGE>   1

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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                          -------------------------

                                 FORM 10-KSB

[X]                 ANNUAL REPORT UNDER SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997

COMMISSION FILE NUMBER 33-98346C

                    BERTHEL FISHER & COMPANY LEASING, INC.
                (Name of small business issuer in its charter)

                        IOWA                                    43-1312639
           (State or other jurisdiction of                   (I.R.S. Employer
           incorporation or organization)                   Identification No.)

       100 SECOND STREET SE, CEDAR RAPIDS, IA                      52401
      (Address of principal executive offices)                  (Zip Code)

Issuer's telephone number: (319) 365-2506

Securities registered under Section 12(g) of the Exchange Act:

                      SERIES A SUBORDINATED 5 YEAR NOTES
                      SERIES B SUBORDINATED 8 YEAR NOTES

     Check whether the issuer (1) files all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
  Yes [X]     No [ ]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [X]

     Issuer's revenues for its most recent fiscal year were: $2,856,291

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 21, 1997, excluding the reported beneficial ownership
of all directors, officers and beneficial owners of more than 5% of the
registrant's voting stock, was $62,400. The Common Stock of the registrant,
which is the registrant's only voting stock, is not actively traded or regularly
quoted.

     The number of shares outstanding of the registrant's Common Stock as of
March 21, 1998 was 403,900.

     Transitional Small Business Disclosure Format  Yes [ ]     No [X]

                  THE EXHIBIT INDEX MAY BE FOUND ON PAGE 43.

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                    BERTHEL FISHER & COMPANY LEASING, INC.

                               1997 FORM 10-KSB

                              TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>        <C>                                                           <C>
                                    PART I
Item 1.    Business....................................................    2
Item 2.    Properties..................................................    5
Item 3.    Legal Proceedings...........................................    5
Item 4.    Submission of Matters of a Vote of Shareholders.............    5
                                   PART II
           Market for the Registrant's Common Equity and Related
Item 5.    Shareholder Matters.........................................    5
           Management's Discussion and Analysis of Financial Condition
Item 6.    and Results of Operations...................................    7
Item 7.    Financial Statements and Supplementary Data.................   12
           Changes in and Disagreements with Accountants on Accounting
Item 8.    and Financial Disclosure....................................   32
                                   PART III
Item 9.    Directors and Executive Officers of the Registrant..........   32
Item 10.   Executive Compensation......................................   35
           Security Ownership of Certain Beneficial Owners and
Item 11.   Management..................................................   35
Item 12.   Certain Relationships and Related Transactions..............   36
Item 13.   Exhibits and Reports on Form 8-K............................   37
SIGNATURES.............................................................   39
</TABLE>

                                      1
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

     The Company was incorporated under the laws of the State of Iowa on
February 5, 1988, as a wholly owned subsidiary of Berthel Fisher & Company
("BFC"). The Company has been generally engaged in the equipment leasing
business since its inception in 1988, continuing the operations of the leasing
division that had been operated by BFC during 1986 and 1987. The address of the
Company is 100 Second Street SE, Cedar Rapids, Iowa 52401. The Company's
telephone number is (319) 365-2506.

GENERAL

     The Company provides a variety of lease financing for telecommunications
and general equipment. The Company's operation is located in the Midwest,
however, its lease portfolio includes leases throughout the United States. As of
December 31, 1997, the Company employed 10 full time employees.

     Telecommunications represents the largest percentage of the business
generated by the Company for its own portfolio and for its affiliates. Since the
Company's formation in 1988, approximately 90% of the leases and finance
contracts originated by the Company for itself and for its affiliates has been
in the Public Communications Industry. The Public Communications Industry
includes companies that provide independent private payphone services and
telecommunications services to hotels, universities, hospitals and inmate
confinement facilities. The Company's leasing and financing programs are
marketed primarily to end-users on a nationwide basis. The marketing involves
visiting in person with these end-users, direct mail campaigns, attending trade
shows and advertising in selected trade publications. In addition, the Company
works closely with, and receives referrals from manufacturers that provide
equipment to the Public Communications Industry. The Company does not have any
formal business agreements with manufacturers. The Company relies upon its
customers to select the equipment the customers desire to lease from the
Company, and does not seek to influence a customer's choice of equipment.
Financing arrangements with individual customers can exceed 5% of the Company's
loan and lease portfolio.

     Although the Company has provided leasing and financing programs of general
equipment since 1988, the General Equipment Group was not formally established
until 1995. This division specializes in providing lease financing on equipment
in the $5,000 to $250,000 range. This lease financing is primarily marketed to
manufacturers and vendors of equipment in this targeted dollar range. Once a
manufacturer or vendor relationship is established the manufacturer or vendor
refers their customers to the Company for the lease or financing of specific
equipment. The Company has working relationships, but no formal agreements, with
several manufacturers and vendors. The lease financing programs are marketed to
manufacturers and vendors by calling directly on those companies, attending
industry specific trade shows, and utilizing direct mail and advertising. The
Company has one salesperson in this division. The General Equipment Group
currently has relationships with banks that permit the Company and the banks to
work together to offer leasing to the bank's customers. The Company handles all
of the administration of leasing programs for the banks. It negotiates the lease
with the customer, closes the transaction and does the billing and collections.
The participating bank normally provides up to 80% of the funding for these
specific lease transactions. In selected transactions the bank will receive a
referral fee, but will not provide any of the funding for the transaction. The
Company has recently expanded its business in the ATM industry. In 1995, the
Company began a relationship with a manufacturer of ATM cash dispensing
equipment. The distributors for this manufacturer refer their lease applicants
to the Company for approval. If approved, the distributors work together with
their customers and the Company to complete the lease transaction and install
the ATM equipment. Lease customers are typically owners of convenience stores,
restaurants, bars or gas stations. The average transaction size is $10,000.
Because the transaction size is small, the Company limits its ATM business to
credit worthy customers, and relies heavily on background checks and personal
guarantees. The Company has originated over $4,000,000 of ATM business. This
portion of the Company's business has increased gradually, and represented
approximately 21% of the Company's lease and notes receivable portfolio as of
December 31, 1997. Approximately 43% of the Company's lease portfolio was
comprised of telecommunications equipment as of December 31, 1997.

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<PAGE>   4

     Since 1991 the Company has sponsored three limited partnerships,
Telecommunications Income Fund IX, L.P. ("TIFIX"), Telecommunications Income
Fund X, L.P. ("TIFX"), and Telecommunications Income Fund XI, L.P. ("TIFXI")
(collectively referred to as the "TIFS") whose purpose is to own leasing
contracts. As the sponsor and general partner of these partnerships, the Company
has originated and managed lease portfolios owned by the partnerships. The
partnerships benefit from the ownership of the portfolio of leases generated by
the Company, and the Company has been compensated for its efforts by receipt
from the partnerships of fees for origination of lease contracts, fees for
management of the lease portfolios during the partnerships' operating phase and
a general partner's interest.

     TIFIX and TIFX have been operating since 1991 and 1993, respectively. TIFIX
and TIFX are required under the terms of the partnership agreements to be
liquidated by December 31, 1999 and December 31, 2002, respectively. TIFXI began
offering units to the public on December 23, 1997. The minimum offering of
$1,200,000 was reached on February 13, 1998. As of March 21, 1998, 2,701 units
have been sold at a value of $2,701,000.

     The Company has certain conflicts of interest, including conflicts with its
parent company, Berthel Fisher & Company. The Company has addressed these
conflicts by establishing a board of directors that includes independent
directors. The Board addresses conflicts carefully, with a view to having
contractual relationships between the Company and its parent meet reasonable
standards that would be imposed if the Company were contracting with unrelated
third parties. The Company has the fiduciary duty of a general partner with
respect to the TIFS. The main conflict between the Company and these limited
partnerships exists because the Company has a duty to supply lease contracts to
these partnerships to utilize cash generated for investment by the partnerships.
If there are insufficient lease contracts, in order to meet its fiduciary duty
to the partnerships, the Company will originate leases for the partnerships
before it originates leases for its own portfolio.

     From January 1995 through December, 1996, instead of sponsoring additional
funds such as the TIFS, the Company pursued a business plan that focused on
originating leases and finance contracts for the Company's own portfolio while
continuing to provide lease originations to utilize cash available for lease
originations in the TIFS. In December, 1996, primarily because the Company did
not have sufficient cash to continue implementing this plan, the Board of
Directors turned its efforts to reestablish the business plan that the Company
followed prior to 1995, i.e., to sponsor funds such as the TIFS for which it
will originate leases from which the Company will derive management fees and
origination fees. The Company will continue to originate leases for its own
portfolio.

     The telecommunications industry, particularly the pay telephone and long
distance facets of the industry, is heavily regulated by the Federal
Communications Commission and by various state public utility commissions.
Regulation is not directed at the ownership or leasing of telecommunications
equipment, but is focused primarily on the business of the Company's customers
that operate in the telecommunications industry. Generally, regulation affects
rates that can be charged and the relationship of the regional Bell operating
companies ("RBOC's") to the rest of the pay telephone industry. The FCC has
proposed regulations affecting long distance rates. The majority of the
customers of the Company are operating within the range of rates proposed by the
FCC. Some customers are below the proposed range and will be able to increase
their rates. Those customers whose rates exceed the highest rates permitted by
the FCC will reduce their rates, but management does not expect such reductions
to affect those customers' ability to make lease payments.

     The Company's results of operations depend in part upon its ability to
realize the residual equipment value reflected on its balance sheet. At the
inception of a direct finance lease, the Company estimates the fair market value
of the underlying equipment that would be obtained at the end of the initial
lease term. This estimate is based upon the Company's judgement, as supported by
data from the used equipment market, discussions with manufacturers, and
consultations with equipment users. The estimated residual value is recorded on
the Company's balance sheet. Residual values ascribed to individual items of
equipment depend upon various variables including, but not limited to, the
technical specifications of the equipment, potential obsolescence of the
equipment, performance and capabilities of the equipment, the scientific and
financial

                                        3
<PAGE>   5

strength and reputation of the equipment's manufacturer and the widespread
availability of long-term maintenance for the equipment.

     Realization of residual values depends on many factors, several of which
are not within the Company's control, including general market conditions at the
time of the original contract's expiration, the cost of comparable new
equipment, the extent, if any, to which the equipment has become technologically
or economically obsolescent during the contract term and the effects of any
additional or amended government regulations. Although it is possible that
technological obsolescence could affect the residual value of telecommunications
equipment, the Company's experience is that obsolescence does not have a
significant effect on residual values. Telecommunications equipment can
generally be upgraded to current technology using software or hardware
enhancements that can be installed on a cost effective basis.

     Upon the expiration of an equipment lease contract for which a residual
value has been recorded, the original lease customer will (i) purchase the
equipment outright, (ii) extend the lease for an additional term, or (iii)
return the equipment to the Company. Should the equipment be returned to the
Company, the Company seeks to sell or re-lease it. At the end of the initial
lease term, when the equipment is either sold or re-leased, the amount by which
the net proceeds exceed or fall short of the residual value is recorded as a
gain or loss, respectively. When equipment for which a gain has been recorded is
re-leased, the Company recognizes the gain ratably over the term of the new
lease.

     To date the Company's primary source of funding has been its revolving
credit line. At December 31, 1997, the Company had a $10,000,000 revolving
credit line (the "Credit Agreement") with Firstar Bank Milwaukee, N.A.
("Firstar"). As of December 31, 1997, $221,262 was available under this line.
The revolving credit line can be terminated by Firstar upon the giving of ninety
days notice. The Company expects to renew the agreement which expires April 30,
1998.

     From time to time the Company will consolidate a portion of its lease
portfolio to be used as collateral for fixed rate and fixed term loans. The
Company determines the average maturity of the consolidated leases and obtains
fixed rate and fixed term loans using the consolidated leases as collateral. The
term and interest rate of the financing offered by banks financing this
collateral is matched to the average maturity of the leases. Utilizing this type
of financing allows the Company to establish a spread between the financing
interest rate and the rates of return on a certain portfolio of its lease
portfolio but also to better utilize its revolving credit line to write new
lease business. At December 31, 1997, the Company had outstanding borrowings of
$1,517,398 from various banks in fixed rate loan transactions.

     In June, 1996, the Company began raising funds pursuant to a registration
statement on Form SB-2 filed with the Securities and Exchange Commission. The
Company terminated sales of the Company's Series A Subordinated 5 Year Notes
with detachable warrants and sales of Series B Subordinated 8 Year Notes with
detachable warrants (collectively the "Notes") in October after the Company had
sold $3,001,000 of the Notes. Series A Notes pay interest on a monthly basis at
an annual rate of 9.5% and are due 5 years from issuance. Series B Notes pay
interest on a monthly basis at an annual rate of 10% and are due 8 years from
issuance. The termination of the sales of the notes was deemed necessary by the
Company as it pursued its plans to slow the growth of the Company to better
match its funding capacity.

     The Company has completed a private placement best efforts offering for the
issuance of $2 million of Series A preferred stock and warrants. The Company
issued $424,774 of preferred stock and $60,682 of warrants to its Parent in
exchange for the conversion of the subordinated note payable to its Parent of
$264,980 and the contribution of restricted stock of a public company with an
estimated fair value of $220,476. The Company has issued a total of $1,750,000
of preferred stock and $250,000 of warrants totalling $2,000,000 out of a total
registered amount of $2,000,000.

     The Company has not identified any single major competitor of the Company
in the Public Communications Industry. However, telecommunications industry
financing is extremely competitive and many of the Company's competitors are
larger. Banks are competitors on a local basis for the leasing business of
individual companies, and many other sources of capital are used by business.
The leasing industry is very capital intensive, and banks limit the amount of
credit they will provide to any one borrower. Therefore, management

                                        4
<PAGE>   6

believes that in many cases the Company is able to provide lease financing to
customers after customers reach their limit with their normal bank lenders.

     Management believes that its experience in the telecommunications industry
permitted it to compete favorably with other leasing companies that provide
lease financing. This experience allowed the Company to analyze lease
opportunities more quickly and thoroughly than its competition and to propose
lease terms that were advantageous to the Company. The Company's experience in
the telecommunications market enabled it to write leases that other lease
companies may decline because of their lack of experience in analyzing the
collateral and other factors that effect the efficacy of lease opportunities.
The Company uses its salesperson and managerial staff to find potential lease
candidates, and it receives a significant portion of its lease opportunities as
a result of its reputation for providing lease financing and advertising that it
places in telecommunications industry publications. There is aggressive
competition in the general equipment leasing market, and the Company expects to
meet that competition by providing competitive lease rates and service.

ITEM 2. PROPERTIES

     The Company's headquarters are located in downtown Cedar Rapids, Iowa. The
premises are leased at a cost of $4,864 per month.

ITEM 3. LEGAL PROCEEDINGS

     None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

     No matters were submitted to a vote of shareholders through the
solicitation of proxies or otherwise during the period covered by this report.

                                    PART II

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

     There is no public trading market for any of the Company's debt or equity
securities.

<TABLE>
<CAPTION>
                                                                        NUMBER OF SHARES OF
                                             NUMBER OF SHAREHOLDERS    BENEFICIAL INTEREST AT
             TITLE OF CLASS                   AT DECEMBER 31, 1997       DECEMBER 31, 1997
             --------------                  ----------------------    ----------------------
<S>                                          <C>                       <C>
Class A Common...........................               2                     403,900
Class B Nonvoting Convertible............              31                      75,500
Series A Preferred.......................              38                     125,000
</TABLE>

     The Company has never paid or declared any dividends on its Common Stock
and does not intend to pay dividends on its Common Stock in the foreseeable
future.

     The Class B Stock carries a 12% noncumulative dividend limited to 25% of
the Company's income before taxes each year up to a maximum of $1.20 per share.
The Class B Stock is convertible to Class A Common Stock of the Company on a one
for one basis. The Class B Stock is redeemable at $10.00 per share for a 30 day
period after the tenth anniversary of the issuance date (April 1990 to December
1991) at the option of the holder. Class B Stock not redeemed during that time
is automatically converted to Class A Common Stock on a one for one basis. The
Company declared dividends on Class B Stock of $-0- in 1997, $-0- in 1996, and
$-0- in 1995.

     The Company paid dividends of $58,810 on the Series A Preferred Stock in
1997. The Company has also accrued $35,288 of dividends payable at December 31,
1997.

                                        5
<PAGE>   7

     Securities sold within the past three years not registered under the
Securities Act:

<TABLE>
<CAPTION>
                                                            NUMBER OF        TOTAL
  DATE                    TITLE OF CLASS                   SHARES SOLD   OFFERING PRICE   COMMISSIONS
  ----                    --------------                   -----------   --------------   -----------
<S>       <C>                                              <C>           <C>              <C>
12/31/96  Units consisting of Series A Preferred Stock,
          "A" Warrants and "B" Warrants and "B"
          Warrants.......................................    31,250        $  500,000      $ 33,750
01/01/97  Units consisting of Series A Preferred Stock,
Thru      "A" Warrants and "B" Warrants..................    93,750         1,500,000       101,250
12/31/97
</TABLE>

     The Company granted Berthel Fisher & Company Financial Services, Inc., an
affiliate of the Company, the exclusive right to sell the Units on a best
efforts basis. The Units were sold only to accredited investors within the
meaning of 17 code of Federal Regulations (CFR) 230.501(a) promulgated pursuant
to the Securities Act of 1933.

     Berthel Fisher & Company subscribed for $500,000 of the Units. $264,980 was
issued upon conversion of debt, $220,476 of which was issued upon the
contribution to the Company of restricted stock of a public company having a
value of $220,476, and $14,544 in cash.

     Exemption from registration from the Securities Act of the Units was
claimed under Regulation D. The Units consisting of Series A Preferred Stock,
"A" Warrants and "B" Warrants was offered only to accredited investors.

SERIES A PREFERRED STOCK

     The Company's undesignated Preferred Stock may be issued in one or more
series, to bear such title or designation as may be fixed by resolution of the
Board of Directors prior to the issuance of any shares thereof. Each series of
Preferred Stock will have such voting powers, if any, preferences, and other
rights as determined by the Board of Directors, with such qualifications,
limitations or restrictions as may be stated in the resolutions of the Board of
Directors adopted prior to the issuance of any shares of such series of
Preferred stock.

     The Series A Preferred Stock is the first series of Preferred Stock
designated by the Board of Directors. The Board has no present plans to issue
any other series of Preferred Stock. However, holders of the Preferred Shares
should be aware that the holders of any series of the Preferred Stock which may
be issued in the future could have voting rights, rights to receive dividends or
rights to distribution in liquidation superior to those of holders of the
Preferred Shares or Common Stock, thereby diluting or negating the voting
rights, dividend rights or liquidation rights of the holders of the Preferred
Shares of Common Stock.

Dividends

     Each Share of Series A Preferred Stock is entitled to cumulative annual
dividends of 8% payable if, as and when declared by the Board of Directors on
March 31, June 30, September 30, and December 31, with dividends to be
distributed April 15, July 15, October 15 and January 15. With respect to the
first dividend to be paid after issuance of a particular share of Series A
Stock, the 8% dividend shall be prorated from the date of issuance to the March
31, June 30, September 30, or December 31 immediately following such date of
issuance. Unpaid dividends will accumulate and be payable prior to the payment
of dividends on the Common Stock. Series A Stock does not participate in
dividends declared on Common Stock or any other class of stock issued by the
Company. At December 31, 1997, the Company had paid $58,810 of dividends on the
Series A Preferred Stock and had accrued an additional $35,288.

Conversion Rights

     Unless previously redeemed by the Company, the holders of shares of Series
A Preferred Stock are entitled at any time to convert each share of Series A
Preferred Stock into .875 share of Class A common

                                        6
<PAGE>   8

stock. No fractional shares of common stock will be issued but in lieu thereof
the Company shall pay an equivalent amount in cash.

A & B Warrants

     Each "A" Warrant grants the holder of the "A" Warrant the right to purchase
one share of Class A Common Stock ("Common Stock") of the Company for $12.00 per
Share. Each "B" Warrant grants the holder of the "B" Warrant the right to
purchase one share of Common Stock of the Company for $14.00 per share. The "A"
Warrants and "B" Warrants may be referred to herein collectively as the
"Warrants".

     Each "A" Warrant expires on April 30, 1998. An "A" Warrant may be exercised
at any time prior to its expiration date. From and after the expiration date of
each "A" Warrant, each "A" Warrant not theretofore exercised shall be void and
of no effect. Each "B" Warrant expires on April 30, 1999. A "B" Warrant may be
exercised at any time prior to its expiration date. From and after the
expiration date of each "B" Warrant, each "B" Warrant not theretofore exercised
shall be void and of no effect. Each Warrant may expire on an earlier date upon
certain changes in control or in the event of an initial public offering.

     The exercise price with respect to each "A" Warrant is $12.00 per Share of
Common Stock. The exercise price with respect to each "B" Warrant is $14.00 per
Share of Common Stock. A Warrant may be exercised by paying the exercise price
and surrendering the Warrant Certificate to the Company and its principal office
with the Election to Purchase form set forth on the Warrant Certificate duly
completed and exercised by the Holder. Upon exercise of a Warrant and payment of
the exercise price, the number of Shares of Common Stock as to which the Warrant
is exercised will be issued. The payment of the exercise price must be made in
full and in cash at the principal office of the Company. As of December 31,
1997, there were no Warrants exercised.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     Total revenues for the year ended December 31, 1997 decreased approximately
20% from the same period in 1996. Total revenues in 1996 increased by
approximately 12% over the same period in 1995.

     The decline in lease and interest income in 1997 is attributed to the
decline in the Company's investments in direct financing leases and notes
receivable. The decline in direct financing investments and notes receivable is
due to early termination of leases and decreased available capital in 1997.
Lease and interest income increased from 1995 to 1996 as the Company increased
its investment in direct financing leases and notes receivable. The increase in
these investments in 1996 was made possible through the use of proceeds of its
subordinated note offering and its line of credit.

     In 1997, the gains on early termination of leases declined from 1996 due to
fewer sales of direct financing leases as compared to 1996 and 1995.

     Management and lease acquisition fees represent fees paid to the Company by
TIFIX and TIFX. The Company earns management fees from TIFIX and TIFX based upon
lease rentals received by the partnerships. Management fees have decreased in
1997 and 1996 compared to 1995 due primarily to early termination of leases in
1997 and 1996 as well as delinquent lease payments from lessees in 1997 and
1996. Lease acquisition fees were approximately $124,000 in 1995 and $0 in 1996
and 1997. The Company earned lease acquisition fees equal to 4% of the cost of
equipment in leases originated for TIFIX and TIFX initial lease originations.
The acquisition fees were only payable to the Company on leases originated and
funded with original debt and equity funds of TIFIX and TIFX and not on
reinvested capital. The Company ceased earning acquisition fees from TIFIX in
1994 and TIFX in April, 1995 when their respective original equity and debt
funds were fully utilized, and originations began to be funded with reinvested
capital.

     The growth in the number of leases and finance contracts originated in 1995
required the Company to hire additional personnel, primarily in the sales,
credit and documentation areas. The increase in the number of personnel resulted
in $710,863 of employee compensation in 1995, and an increase of $143,939 in
employee compensation in 1996 compared to 1995. The Company's primary business
has historically been in the telecommunications industry with a minor emphasis
on general equipment. However, in 1995, the Company

                                        7
<PAGE>   9

increased the size of its general equipment sales force from one to six. The
dollar size of each of the leases and finance contracts originated within the
General Equipment Division is typically smaller than those in the
telecommunications industry, and there exists more competition for the Company
in this division. Accordingly, the Company needed additional sales personnel and
credit and documentation personnel in order to manage the anticipated increased
volume.

     On October 25, 1996, the Board of Directors of the Company resolved to
significantly downsize the staff of the Company in order to reduce employment
costs in an effort to bring the Company to a break even level of operations.
This reduction has decreased employee compensation and benefits by $456,167 from
1996.

     The Company pays its Parent one-half of the management fees it receives
from TIFIX and TIFX. The management fee income decreased from 1995 to 1997, as
discussed above has, therefore, resulted in a decrease in management fee
expense. Also, the Parent company agreed to forego its share of these management
fees beginning March 1, 1997.

     The sale in 1995 of alarm monitoring contracts resulted in the elimination
of associated costs of approximately $83,000.

     Other general and administrative expenses decreased $377,983 from 1996 to
1997. The primary reason for this decrease is due to the costs associated with
managing the decreased size of the direct financing lease portfolio. Also, the
Company charged to expense in 1996 approximately $78,000 of securitization fees.
These securitization costs were associated with the Company's attempt to
securitize its assets. Since a definitive agreement could not be finalized,
costs associated with the securitization process were expensed.

     During 1994 the Company made the decision to raise funds within the Company
to originate the majority of its new lease and finance contract business rather
than to raise funds through the sponsorship of new limited partnerships. In
March 1995, therefore, the Company negotiated an increased availability in its
revolving line of credit from $2,800,000 to $10,000,000. This increased line of
credit provided the Company with the funds necessary to increase its lease and
financing contract portfolios during 1995 and 1996. See note number 5 in the
Notes to Consolidated Financial Statements for further information. Such volume
increase is the primary reason why other general and administrative expenses
increased from 1995 to 1996.

     Since the Company's inception in 1988, four of its customers have filed for
protection of the Bankruptcy Act while lease or finance transactions with the
Company were outstanding. These bankruptcies are discussed below. Because of the
potentially serious ramifications to the Company of a customer bankruptcy, the
Company strives to place itself in a position to be able to avoid losses in a
bankruptcy situation. The Company relies primarily on personal guarantees and
first security interests in equipment to ameliorate the effects of bankruptcy.
In lease or finance transactions involving pay telephones, the Company also
obtains agreements from the owners of pay telephone locations that permit the
Company to operate the pay telephones after a default of the Company's customer.
This allows the Company to obtain the most protection possible for the ongoing
operation of equipment.

     The first of the Company's customers to file for protection of the
Bankruptcy Act was ValueAdded Communications ("VAC"), which filed a petition
under Chapter 11 of the Bankruptcy Act on October 10, 1995 in the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division. At the
time VAC's petition for bankruptcy was filed, VAC had several leases with the
Company. Measured at December 31, 1995, VAC's leases had a net investment
balance of $927,731, which represented approximately 6.2% of the Company's total
net investment in leases and financing contracts. As a result of the Company's
secured position with respect to its VAC leases and because VAC's leases had
been guaranteed by a strong guarantor, the Company was able to negotiate a
settlement with VAC that resulted in the VAC leases being paid in full and the
equipment being leased to MCI Telecommunication Corporation. This lease was
subsequently sold.

     On May 6, 1996, a lessee of the Company, United Tele-Systems of Virginia,
Inc. ("UTS") filed a Voluntary Petition for Relief under Chapter 11 of the
Bankruptcy Code. This bankruptcy petition was dismissed on May 22, 1996 and, in
connection therewith, the Company exercised its right to manage the assets
leased to UTS. The net investment in the leases at the time the assets were
repossessed was approximately

                                        8
<PAGE>   10

$432,000. The Company, two affiliated partnerships for which the Company acts as
General Partner, and UTS were named in a lawsuit, filed by another creditor of
UTS. The creditor was claiming $360,000 in compensatory damages and $350,000 in
punitive damages. Based on offers to purchase the pay telephone equipment and an
expected settlement offer related to the lawsuit, the Company expected to incur
a loss upon the sale or re-lease of this equipment. Management charged $324,000
to the provision for possible loan and lease losses for the expected loss in
1996 and reclassified its net investment in the equipment, net of the specific
allowance, to equipment under operating leases pending the equipment's ultimate
sale or re-lease. The equipment was sold during 1997 with no further loss to the
Company and the lawsuit was settled pending the outcome of an audit which is in
process. Management believes any loss as a result of the audit is adequately
covered by the Company's general allowance.

     On October 31, 1996, a lessee of the Company, Soil Recovery Services, Inc.
("SRS"), had an involuntary Petition for Relief under Chapter 7 of the U.S.
Bankruptcy Code filed against it. This was converted to a voluntary Chapter 11
on November 25, 1996. At the time the first petition was filed, SRS had various
leases with the Company that had a net investment totaling $256,500 and
represented 1.4% of the Company's total net investment in leases and finance
contracts. A specific allowance for losses of $100,000 was established through a
charge to the provision for possible loan and lease losses in 1996 based on
estimates of the fair value of the equipment under lease. The Company has
obtained the right to repossess the equipment and is in the process of selling
the equipment. Management believes the specific allowance is adequate to cover
any loss on sale.

     During the fourth quarter of 1996, management of the Company provided a
specific allowance for a lease with a certain customer for which the Company had
not been receiving lease payments. Management is actively working with such
customer to arrange for a sale of the assets under lease. A charge of $50,000
was recorded to the provision for possible loan and lease losses representing
management's best estimate of the loss on the expected sale of the equipment.
Also, due to the uncertainty as to the timing and amount of future payments from
such customer and as to the sale of the assets under lease, the Company
reclassified its net investment in the lease at December 31, 1996 of $144,972,
net of the specific allowance, to equipment leased under operating leases. The
Company is in the process of selling the equipment and expects no further loss
on sale.

     In March 1997, the Company foreclosed on a lease with a customer. The net
investment in this lease was $545,189. The Company entered into a management
agreement with a pay phone operator to manage the equipment with the intent to
purchase. The equipment was subsequently sold to such entity for approximately
$150,000 less than the carrying value of the lease. The Company attempted to
collect the deficiency balance from the guarantor under the original lease.
However, since no payments were received, the Company charged $150,000 to the
provision for possible loan and lease losses and wrote off the balance at
December 31, 1997.

     During 1997, a lessee of the Company filed for bankruptcy. Due to the
uncertainty over a possible prior lien on the equipment under lease and the
proceeds which may result from sale of the equipment, the Company charged
$150,000 to the provision for possible loan and lease losses and wrote off the
lease balance of $150,000 at December 31, 1997.

     As of December 31, 1997 there were thirty-nine customers with payments owed
to the Company which were over 90 days past due. When payments are past due more
than 90 days, the Company discontinues recognizing income on those customer
contracts. The contract balance remaining on these contracts was $784,189 at
December 31, 1997. The Company's net investment in these contracts at December
31, 1997 was $637,486. Management is monitoring these contracts and at the
present time has determined the Company's investment in these contracts is
sufficiently collateralized. Management will continue to monitor these contracts
and take the necessary steps to protect the Company's investment.

     One customer, SRS, has five contracts with amounts past due over 90 days.
The contract balance remaining on these contracts was $258,470 at December 31,
1997. The Company's remaining net investment in these contracts was $199,492 at
December 31, 1997. The Company has established a reserve of $100,000 for this
customer at December 31, 1997. See Item 6 for further discussion.

                                        9
<PAGE>   11

     The Company recognizes that the arrival of the Year 2000 poses a unique
challenge to the ability of all systems to recognize the date change from
December 31, 1999 to January 1, 2000 and, like other companies, has assessed and
is repairing its computer applications and business processes to provide for
their continued functionality. An assessment of the readiness of external
entities which it interfaces with, such as vendors, counterparties, customers
payment systems, and others, is ongoing. The Company does not expect the cost to
address the Year 2000 will be material.

     The Company has determined that the software it utilizes in its operations
is compatible with the Year 2000. The Company has not yet determined whether the
Year 2000 issue has been addressed by its customers. If the Company's customers
have not addressed this issue, it could lead to nonpayments of amounts owed to
the Company. The Company intends to contact all of its customers regarding this
issue by the middle of 1998.

LIQUIDITY AND CAPITAL RESOURCES:

     The Company relies primarily upon debt financing to originate its leases
and notes receivable. At December 31, 1997, the Company had a $10,000,000
revolving line of credit with Firstar Bank Milwaukee, N.A. with an expiration
date of April 30, 1998. At December 31, 1997, $221,262 was available under this
line of credit. The line of credit bears interest at prime plus 1.76% and is
collateralized by substantially all of the Company's assets. It can be canceled
by Firstar on 90 days notice. The line of credit agreement is guaranteed by the
Company's parent and a major stockholder of the Company's parent. The line of
credit is discussed further below.

     From time to time the Company will consolidate a portion of its lease
portfolio to be used as collateral for fixed rate and fixed term loans. The
Company determines the average maturity of the consolidated leases and obtains
fixed rate and fixed term loans using the consolidated leases as collateral. The
term and interest rate of the financing offered by banks financing this
collateral is matched to the average maturity of the leases. Utilizing this type
of financing allows the Company to establish a spread between the financing
interest rate and the rates of return on a certain portfolio of leases. This
type of financing permits the Company not only to plan for a specific return on
a portion of its lease portfolio but also to better utilize its revolving credit
line to write new lease business. At December 31, 1997, the Company had
outstanding borrowings of $1,517,398 from various banks in fixed rate loan
transactions.

     The Company has also raised funds via private placement debt offerings. At
December 31, 1997, the Company was obligated on approximately $2,725,000 of
notes issued pursuant to private placement debt offerings, including $2,000,000
payable to its parent. The amount due the parent is payable in 2005 while the
other obligations are due at various dates through 1998.

     The Company has completed a private placement best efforts offering for the
issuance of $2 million of Series A preferred stock and warrants. The Company has
issued a total of $1,750,000 of preferred stock and $250,000 of warrants
totalling $2,000,000 out of a total registered amount of $2,000,000. The Company
issued $437,500 of preferred stock and $62,500 of warrants to its Parent.

     In June, 1996, the Company's registration statement on Form SB-2 was
declared effective, and the Company began raising funds through the best efforts
public offering of its subordinated notes (the "Notes"). Through October 1996,
when sales in this offering were terminated by the Company, the Company had
raised $3,001,000 on a best efforts basis. These Notes were offered in two
series. Series A Notes pay interest on a monthly basis at an annual rate of 9.5%
and are due 5 years from issuance. Series B Notes pay interest on a monthly
basis at an annual rate of 10% and are due 8 years from issuance. Sales of these
Notes were suspended after management became aware of the pending resignation of
the president and chief financial officer, and after the Company had decided to
pursue plans to slow the growth of the Company to better match its funding
capacity and decrease the size of its workforce.

     The Company is currently sponsoring a limited partnership,
Telecommunications Income Fund XI, L.P. ("TIFXI") for which the Company will
serve as general partner. TIFXI is offering a minimum of $1,200,000 and a
maximum of $25,000,000 in units of limited partnership interest ("Units") in the
partnership. As of

                                       10
<PAGE>   12

March 21, 1998, 2,701 Units were sold. The Company, as general partner, will
originate leases and finance contracts for TIFXI. This will result in the
Company realizing acquisition fees and management fees.

     The Company obtains a portion of its financing under a line-of-credit
agreement with a bank. The amount available to borrow under the line-of-credit
is limited to 75% of its qualified accounts, as defined in the agreement
(primarily leases and notes receivable), but, in no case, can exceed $10
million. The line-of-credit bears interest at prime plus 1.76% and 1.7% at
December 31, 1997 and 1996, respectively, and is collateralized by substantially
all of the Company's assets. The line-of-credit agreement is guaranteed by the
Company's parent and a major stockholder of the Company's parent. The agreement
is also cancelable by the lender after giving a 90-day notice. The agreement
expires on April 30, 1998. If the line-of-credit is renewed with the existing
lender, the agreement requires the Company to refinance approximately $363,000
of existing subordinated debt maturing in 1998. Such refinance would have to be
on the same terms as they presently exist with new maturity dates of not less
than two years. The Company intends to offer to the subordinated debt holders
the opportunity to renew the debt for an additional two year term at the same
interest rate. The interest rate on amounts outstanding at December 31, 1997 and
1996 under the line-of-credit agreement was 10.26% and 9.95%, respectively.

     The loan agreement contains various restrictive covenants which, among
others, restrict dividend payments except to Class B shareholders and Series A
preferred shareholders and requires the Company to maintain certain financial
ratios including a total liabilities to tangible net worth ratio of not greater
than 2.5, a minimum stockholders' equity (including redeemable stock) of
$1,702,000 and an interest coverage ratio of 1.2. As of December 31, 1997 the
Company was in violation of its minimum stockholders' equity and interest
coverage ratio. The Company has obtained waivers for such covenants from the
lender for 1997.

     There can be no assurance that the Company will not continue to be in
violation of one or more of these covenants. Continued adverse operating results
could cause continued non-compliance with these covenants, in which event the
bank could immediately accelerate the maturity of the entire outstanding balance
under the line of credit or deny or restrict the Company's access to funds under
the line of credit, thus materially and adversely affecting the Company's
financial condition and continuing business operations. Also, certain other debt
obligations of the Company contain standard cross-default provisions.
Non-compliance with these covenants could result in the immediate acceleration
of the maturity of such other debt.

OUTLOOK

     This Section and other portions of this Annual Report on Form 10-KSB
contains statements relating to future results of the Company that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties, including but not limited to
changes in economic conditions, changes in interest rates, availability to the
Company of lease business, changes in personnel, regulation of the
telecommunications industry, and the success or failure of the Company's
customers as well as other risks and uncertainties. The Company does not
undertake, and specifically disclaims, any obligation to update any forward
looking statements to reflect events or circumstances occurring after the date
of such statements.

     The business of the Company is dependent upon being able to continue
originating leases, both for its own portfolio and for the portfolios of third
party entities, such as the TIFS. If the Company cannot continue to originate
leases, the Company will not be able to grow, either through the expansion of
its portfolio of leases or by deriving revenue from originating and managing
leases for other entities. The successful completion of the Company's business
plan is dependent upon having sufficient funds available to enable the Company
to continue to originate leases. The Company's primary source of capital for
itself was the private placement offering for the issuance of $2 million of
Class A preferred stock and warrants. If these funds are not sufficient, the
Company will have to consider the alternatives for obtaining capital, including
the sale of existing leases owned by the Company and obtaining new capital from
the Company's parent. Such alternative capital may not be available depending
upon a variety of factors, including without limitation the possibility that
purchasers of leases cannot be found, interest rates increase, the Company's
parent has no funds available to it or the Company fails to operate effectively
in 1998.

                                       11
<PAGE>   13

     The Company's current business plan includes the Company's sponsorship of
TIFXI, for which the Company serves as general partner. The Company registered
interests in TIFXI under the Securities Act of 1933 and is offering those
interests publicly. If the offering is successful, the Company, as general
partner, will originate leases and finance contracts for TIFXI, resulting in the
Company realizing acquisition fees and management fees. The Company may not be
able to rely upon the availability of TIFXI's capital to originate leases. TIFXI
could be abandoned due to several factors, including the failure of the TIFXI
offering due to lack of investor interest. If the public offering is not
successful, the Company would not be able to originate leases for TIFXI, and
would not realize revenue from management fees and origination fees. The
Company's long term success is highly dependent upon the successful offering of
TIFXI.

     The best-efforts public offering of TIFXI is in process and through March
21, 1998, approximately $2,701,000 has been raised out of a maximum offering
amount of $25,000,000. No assurance can be provided that such offering will be
completed as planned.

     The credit agreement establishing the line of credit contains various
restrictive covenants that include, among others, restrictions on divided
payments except to the holders of Class B and Series A Preferred shares,
maintaining an interest coverage ratio and maintaining minimum stockholders
equity measured on a quarterly basis. The Company was in violation of the
minimum stockholders equity and interest coverage covenants at December 31,
1997, and received an amendment to permit compliance from the bank. Management
expects, based on discussion with the lender, to renew the line of credit when
it comes due in April 1998. However, the Company may continue to be in violation
of one or more of these covenants, and if it does, the bank may not continue to
grant the amendments and waivers requested by the Company. Continued adverse
operating results could cause continued noncompliance with these covenants, in
which event the bank could immediately accelerate the maturity of the entire
outstanding balance under the line of credit or deny or restrict the Company's
access to funds under the line of credit, thus materially and adversely
affecting the Company's financial condition and continuing business operations.
Also, certain other debt obligations of the Company contain standard
cross-default provisions. Non-compliance with these covenants could result in
the immediate acceleration of the maturity of such other debt.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following financial statements and related information as of and for
the years ended December 31, 1997, 1996 and 1995 are included in Item 7:

     Report of Independent Auditors'
     Consolidated Balance Sheets
     Consolidated Statements of Operations
     Consolidated Statements of Changes in Stockholders' Equity (Deficit)
     Consolidated Statements of Cash Flows
     Notes to Consolidated Financial Statements

                                       12
<PAGE>   14

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Berthel Fisher & Company Leasing, Inc.

     We have audited the accompanying consolidated balance sheets of Berthel
Fisher & Company Leasing, Inc. (a majority-owned subsidiary of Berthel Fisher &
Company) and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Berthel Fisher & Company
Leasing, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.



Deloitte & Touche LLP

Cedar Rapids, Iowa
March 5, 1998

                                      13
<PAGE>   15

                     BERTHEL FISHER & COMPANY LEASING, INC.

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                 1997          1996
                                                                 ----          ----
<S>                                                           <C>           <C>
ASSETS (Note 5):
  Cash and cash equivalents.................................  $        --   $   342,726
  Notes receivable (Note 2).................................    6,836,307     6,530,354
  Net investment in direct financing leases (Note 2)........    7,725,276     9,850,360
  Allowance for possible loan and lease losses (Note 3).....     (435,292)     (412,916)
                                                              -----------   -----------
  Notes receivable and direct financing leases, net.........   14,126,291    15,967,798
  Equipment under operating leases, less accumulated
    depreciation of $31,136 in 1997 and $50,517 in 1996.....      117,978       277,964
  Due from affiliates.......................................       61,932        30,930
  Receivable from parent under tax allocation agreement.....      425,000            --
  Investments in:
    Limited partnerships (Notes 4 and 12)...................      174,826       153,771
    Not readily marketable securities, at cost..............       30,100       250,477
    Available-for-sale security, at fair value..............       51,817            --
  Furniture and equipment, less accumulated depreciation of
    $167,548 in 1997 and $120,200 in 1996...................      190,760       222,853
  Deferred income taxes (Note 6)............................      388,362       515,911
  Deferred costs, less accumulated amortization of $335,469
    in 1997 and $158,924 in 1996 (Note 11)..................      520,935       635,194
  Other assets..............................................      319,963       331,702
                                                              -----------   -----------
         Total..............................................  $16,407,964   $18,729,326
                                                              ===========   ===========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) LIABILITIES:
  Line-of-credit agreement (Note 5).........................  $ 6,761,493   $ 9,276,031
  Demand note payable to parent.............................      230,000            --
  Outstanding checks in excess of bank balance..............      126,982            --
  Trade accounts payable....................................       29,619       158,227
  Due to affiliates.........................................       99,427       102,038
  Accrued expenses..........................................      197,438       228,014
  Lease security deposits...................................      358,243       374,876
  Notes payable (Note 5)....................................    1,529,930     2,310,805
  Subordinated debentures (Note 5)..........................      725,000       725,000
  Subordinated notes payable (Note 5).......................    2,996,564     2,995,522
  Subordinated debenture payable to parent (Note 5).........    2,000,000     2,000,000
                                                              -----------   -----------
    Total liabilities.......................................   15,054,696    18,170,513
                                                              -----------   -----------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK (NOTE 7).....      730,929       722,905
                                                              -----------   -----------
STOCKHOLDERS' EQUITY (DEFICIT):
  Series A preferred stock, no par value -- authorized
    125,000 shares, issued and outstanding 125,000 and
    30,341 shares at December 31, 1997 and 1996,
    respectively, (Note 8) ($1,750,000 and $424,774
    liquidation value, convertible into 109,375 and 26,548
    shares of Class A common stock at December 31, 1997 and
    1996, respectively).....................................    1,621,422       422,835
  Class A common stock, no par value-authorized 1,000,000
    shares, issued and outstanding 403,900 and 400,000
    shares at December 31, 1997 and 1996, respectively......       63,400         1,000
  Common stock warrants (Note 9)............................      237,660        66,684
  Accumulated deficit.......................................   (1,192,484)     (654,611)
  Unrealized loss on available-for-sale security, net of tax
    effect..................................................     (107,659)           --
                                                              -----------   -----------
    Total stockholders' equity (deficit)....................      622,339      (164,092)
                                                              -----------   -----------
         Total..............................................  $16,407,964   $18,729,326
                                                              ===========   ===========
</TABLE>

                See notes to consolidated financial statements.

                                       14
<PAGE>   16

                     BERTHEL FISHER & COMPANY LEASING, INC

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                               1997          1996           1995
                                                               ----          ----           ----
<S>                                                         <C>           <C>            <C>
REVENUES:
  Income from direct financing leases...................    $1,049,329    $ 1,376,154    $  946,271
  Interest income.......................................       838,265      1,060,118       655,986
  Management and lease acquisition fees from affiliates
     (Note 4)...........................................       772,768        849,266     1,156,632
  Income from monitoring contracts......................            --             --        66,978
  Gain on early termination of leases...................        54,554        147,300        79,874
  Gain on disposal of investments.......................            --             --        65,585
  Other.................................................       141,375        139,114       201,650
                                                            ----------    -----------    ----------
          Total revenues................................     2,856,291      3,571,952     3,172,976
                                                            ----------    -----------    ----------
EXPENSES:
  Employee compensation and benefits....................       398,635        854,802       710,863
  Management fees to affiliates (Note 11)...............       287,146        561,134       682,419
  Expenses of monitoring contracts......................            --             --        82,712
  Other general and administrative expenses (Note 11)...       684,315      1,062,298       879,233
  Interest expense (Note 5).............................     1,743,345      1,791,120     1,227,530
  Provision for possible loan and lease losses (Note
     3).................................................       415,052        592,874       175,139
                                                            ----------    -----------    ----------
          Total expenses................................     3,528,493      4,862,228     3,757,896
                                                            ----------    -----------    ----------
LOSS BEFORE INCOME TAXES................................      (672,202)    (1,290,276)     (584,920)
INCOME TAXES (NOTE 6)...................................      (236,451)      (453,720)     (191,200)
                                                            ----------    -----------    ----------
NET LOSS................................................      (435,751)      (836,556)     (393,720)
LESS DIVIDENDS ON SERIES A PREFERRED STOCK..............       (94,098)            --            --
                                                            ----------    -----------    ----------
NET LOSS ATTRIBUTABLE TO CLASS A COMMON STOCK...........    $ (529,849)   $  (836,556)   $ (393,720)
                                                            ==========    ===========    ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..............       403,900        400,000       400,000
                                                            ==========    ===========    ==========
LOSS PER COMMON SHARE:
  Basic.................................................    $    (1.31)   $     (2.09)   $     (.98)
  Diluted...............................................         (1.31)         (2.09)         (.98)
</TABLE>

                See notes to consolidated financial statements.

                                       15
<PAGE>   17

                     BERTHEL FISHER & COMPANY LEASING, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                                         UNREALIZED
                                                                            RETAINED      LOSS ON         TOTAL
                                         SERIES A    CLASS A    COMMON      EARNINGS     AVAILABLE-   STOCKHOLDERS'
                                        PREFERRED    COMMON     STOCK     (ACCUMULATED    FOR-SALE       EQUITY
                                          STOCK       STOCK    WARRANTS     DEFICIT)      SECURITY      (DEFICIT)
                                        ---------    -------   --------   ------------   ----------   -------------
<S>                                     <C>          <C>       <C>        <C>            <C>          <C>
BALANCE AT DECEMBER 31, 1994..........               $1,000               $   543,985                   $ 544,985
  Net loss............................                   --                  (393,720)                   (393,720)
  Amortization of Class B stock
    issuance costs....................                   --                    (8,023)                     (8,023)
  Gain on redemption of Class B stock
    (Note 7)..........................                   --                    27,270                      27,270
  Gain on redemption of redeemable
    preferred stock of subsidiary
    (Note 1)..........................                   --                    20,457                      20,457
                                        ----------   -------   --------   -----------    ---------      ---------
BALANCE AT DECEMBER 31, 1995..........                1,000                   189,969                     190,969
  Net loss............................                   --                  (836,556)                   (836,556)
  Amortization of Class B stock
    issuance costs....................                   --                    (8,024)                     (8,024)
  Issuance of Series A preferred stock
    and warrants, net of issuance
    costs of $1,939...................  $  422,835       --    $ 60,682            --                     483,517
  Subscription for Series A preferred
    stock and warrants................      12,726       --       1,818            --                      14,544
  Subscription receivable.............     (12,726)      --      (1,818)           --                     (14,544)
  Issuance of common stock warrants...          --       --       6,002            --                       6,002
                                        ----------   -------   --------   -----------    ---------      ---------
BALANCE AT DECEMBER 31, 1996..........     422,835    1,000      66,684      (654,611)                   (164,092)
  Net loss............................          --       --          --      (435,751)                   (435,751)
  Amortization of Class B stock
    issuance costs....................          --       --          --        (8,024)                     (8,024)
  Issuance of Series A preferred stock
    and warrants, net of issuance
    costs of $144,981 (including
    $14,544 of cash received on
    subscriptions receivable).........   1,198,587       --     170,976            --                   1,369,563
  Issuance of Class A common stock....          --   62,400          --            --                      62,400
  Change in unrealized loss on
    available-for-sale security, net
    of tax effect.....................          --       --          --            --    $(107,659)      (107,659)
  Dividends on Series A preferred
    stock.............................          --       --          --       (94,098)          --        (94,098)
                                        ----------   -------   --------   -----------    ---------      ---------
BALANCE AT DECEMBER 31, 1997..........  $1,621,422   $63,400   $237,660   $(1,192,484)   $(107,659)     $ 622,339
                                        ==========   =======   ========   ===========    =========      =========
</TABLE>

                See notes to consolidated financial statements.

                                       16
<PAGE>   18

                     BERTHEL FISHER & COMPANY LEASING, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                   1997           1996           1995
                                                                   ----           ----           ----
<S>                                                             <C>            <C>            <C>
OPERATING ACTIVITIES:
 Net loss...................................................    $  (435,751)      (836,556)   $  (393,720)
 Adjustments to reconcile net loss to net cash provided by
   operating activities:
   Gain on early termination of leases......................        (54,554)      (147,300)       (79,874)
   Gain on disposal of investments..........................             --             --        (65,585)
   Loss on abandonment of leasehold improvements............             --             --         20,672
   Amortization of investment in monitoring contracts.......             --             --         57,090
   Depreciation of furniture and equipment..................         83,192        106,970         35,723
   Amortization of deferred costs...........................        176,659        102,273         93,131
   Amortization of deferred revenue.........................             --             --        (15,785)
   Other amortization.......................................         30,440         36,006         36,312
   Provision for possible loan and lease losses.............        415,052        592,874        175,139
   Deferred income taxes....................................        188,549       (457,871)      (211,200)
   Changes in operating assets and liabilities:
     Due from affiliates....................................        (31,002)        58,914         46,864
     Receivable from parent under tax allocation
       agreement............................................       (425,000)            --         43,460
     Other assets...........................................         11,739         79,389       (242,089)
     Outstanding checks in excess of bank balance...........        126,982             --             --
     Trade accounts payable, excluding equipment purchase
       costs accrued........................................       (128,608)       (70,558)       180,336
     Due to affiliates......................................         (2,611)        25,540         (3,988)
     Accrued expenses.......................................        (30,576)       (17,877)        16,485
                                                                -----------    -----------    -----------
       Net cash from operating activities...................        (75,489)      (528,196)      (307,029)
                                                                -----------    -----------    -----------
INVESTING ACTIVITIES:
 Purchases of equipment for direct financing leases.........     (2,327,220)   (11,687,165)    (6,532,872)
 Repayments of direct financing leases......................      2,944,913      2,102,819      2,455,454
 Proceeds from sale or early termination of direct financing
   leases and notes receivable..............................      1,299,597      9,439,276      2,954,920
 Issuance of notes receivable...............................     (1,609,538)    (3,746,893)    (5,543,306)
 Repayments of notes receivable.............................      1,303,585      1,899,901      1,380,182
 Investments in limited partnerships........................        (10,000)            --       (418,381)
 Repayment (issuance) of loans to limited partnerships......        (43,775)       308,165             --
 Distributions from limited partnerships....................          2,280          2,280         16,636
 Proceeds from sale of monitoring contracts.................             --             --        478,652
 Net lease security deposits collected......................        (16,633)       244,916          7,882
 Purchases of furniture and equipment.......................        (21,540)      (123,200)      (134,560)
                                                                -----------    -----------    -----------
       Net cash from investing activities...................      1,521,669     (1,559,901)    (5,335,393)
                                                                -----------    -----------    -----------
FINANCING ACTIVITIES:
 Financing costs incurred...................................             --       (500,365)       (87,123)
 Proceeds from line-of-credit agreement.....................      8,223,772     18,323,060     16,928,589
 Repayments of line-of-credit agreement.....................    (10,738,310)   (17,622,529)   (10,263,089)
 Proceeds from issuance of subordinated notes payable and
   related warrants.........................................             --      3,001,524             --
 Proceeds from issuance of other borrowings.................        650,884      1,365,413      2,317,241
 Repayments of other borrowings.............................     (1,200,717)    (2,290,129)    (3,057,300)
 Redemption of redeemable preferred stock of subsidiary.....             --             --       (129,543)
 Redemption of Class B stock................................             --             --       (172,730)
 Proceeds from issuance of Series A preferred stock and
   warrants.................................................      1,484,544             --             --
 Issuance costs for Series A preferred stock and warrants...       (114,981)            --             --
 Cash dividends paid on Class B stock.......................             --             --       (114,600)
 Cash dividends paid on Series A preferred stock............        (94,098)            --             --
                                                                -----------    -----------    -----------
       Net cash from financing activities...................     (1,788,906)     2,276,974      5,421,445
                                                                -----------    -----------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........       (342,726)       188,877       (220,977)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..............        342,726        153,849        374,826
                                                                -----------    -----------    -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................    $        --    $   342,726    $   153,849
                                                                ===========    ===========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid during the year for -- Interest..................    $ 1,588,809    $ 1,656,418    $ 1,082,229
 Noncash investing and financing activities:
   Parent note receivable offset against subordinated note
     payable to parent......................................             --             --        415,000
   Gain on redemption of redeemable preferred stock of
     subsidiary recorded directly to retained earnings......             --             --         20,457
   Gain on redemption of Class B stock recorded directly to
     retained earnings......................................             --             --         27,270
   Equipment reclassified from direct financing leases to
     operating leases.......................................             --        328,481             --
   Conversion of a note payable to preferred stock..........             --        264,980             --
   Contribution of a not readily marketable security for
     preferred stock........................................             --        220,477             --
   Increase (decrease) in trade accounts payable attributed
     to equipment purchase costs............................             --       (300,000)       300,000
   Amortization of Class B stock issuance costs.............          8,024          8,024          8,023
   Reclassification of security as available-for-sale.......        220,476             --             --
   Change in unrealized loss on available-for-sale security,
     net of tax effect......................................        107,659             --             --
   Deferred tax benefit of change in unrealized loss on
     available-for-sale security............................         61,000             --             --
   Issuance of common stock in connection with underwriting
     of subordinated notes payable offering.................         62,400             --             --
</TABLE>

                See notes to consolidated financial statements.

                                       17
<PAGE>   19

                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION AND NATURE OF OPERATIONS -- Berthel Fisher & Company Leasing,
Inc. (the "Company") is a majority-owned subsidiary of Berthel Fisher & Company.
The Company finances, through direct financing leases or notes receivables,
telecommunications, agricultural, and general equipment throughout the United
States. The financing agreements with individual customers can be large in
relation to the portfolio as a whole and certain agreements exceed 10% of the
Company's direct financing lease and note receivable portfolio (see Note 2). The
leases may be sold to other entities or retained by the Company for its own
portfolio.

     During 1993, the Company formed a wholly-owned subsidiary, Security Finance
Corporation. Security Finance Corporation was established to provide financing
services to the home security industry. During 1995, as discussed below, all
assets and liabilities of Security Finance Corporation were assumed by the
Company and the subsidiary was dissolved. During 1994, the Company formed a
wholly-owned subsidiary, Communications Finance Corporation. All of the assets
and liabilities of Communications Finance Corporation have been assumed by the
Company. The Company intends to keep Communications Finance Corporation as a
shell for use in future financing transactions.

     BASIS OF PRESENTATION -- The accompanying financial statements have been
prepared on the basis that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.

     The Company's line of credit agreement is due on April 30, 1998. Also,
during the years ended December 31, 1995, 1996 and 1997, the Company incurred
net losses of $393,720, $836,556 and $435,751, respectively. The Company's
continuation as a going concern is dependent upon its ability to extend its line
of credit or obtain refinancing as may be required and ultimately to attain
profitable operations. Management is negotiating an extension of the Company's
line of credit agreement with its existing lender. Management believes it will
be able to reach a line of credit agreement on terms at least comparable to its
existing line of credit with a lender prior to April 30, 1998. Management
anticipates that upon renewal or refinancing of its line of credit that existing
capital resources, cash flows from operations, and financing from the Company's
parent, will be adequate to satisfy the Company's minimum capital requirements
for the next twelve months.

     Management's plans for future profitability anticipate the need for the
sponsorship of another public limited partnership, Telecommunications Income
Fund XI, for which the Company will generate fee income. The best-efforts public
offering is in process and through March 5, 1998 approximately $1,437,000 has
been raised out of a maximum offering amount of $25,000,000. No assurance can be
provided that such offering will be completed as planned.

     DISSOLUTION OF SUBSIDIARY -- On April 21, 1995, Security Finance
Corporation sold its alarm monitoring contracts (the "Contracts") to Monitronics
International, Inc. ("Monitronics") and recognized a gain on the sale of
$65,585. This sale terminated the former agreement between Security Finance
Corporation and Monitronics and released each other from liability for
performance thereunder. Furthermore, Security Finance Corporation fully
relinquished the monitoring responsibilities and maintenance and servicing
responsibilities to Monitronics.

     The Contracts served as collateral for Security Finance Corporation's
collateral trust bonds which were redeemed on May 19, 1995.

     On July 1, 1995, Security Finance Corporation transferred its remaining
assets and liabilities to the Company, and the Company subsequently dissolved
Security Finance Corporation. In conjunction with the

                                       18
<PAGE>   20
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

dissolution, the Company redeemed the convertible preferred stock of Security
Finance Corporation and recognized a gain of $20,457 directly to retained
earnings.

     CONSOLIDATION -- The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.

     USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimated. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for possible loan and lease losses and the estimated unguaranteed residual
values of the Company's leased equipment.

     Most of the Company's leases and finance contracts are with customers that
are in the entrepreneurial stage and, therefore, are highly leveraged and
require lease or other financing in place of or to supplement financing from
banks. Although the Company attempts to mitigate its credit risk through the use
of a variety of commercial credit reporting agencies when processing the
applications of its customers, failure of the Company's customers to make
scheduled payments under their equipment leases and finance contracts could have
a material near-term impact on the allowance for possible lease and loan losses.

     Realization of residual values depends on many factors, several of which
are not within the Company's control, including general market conditions at the
time of the original lease contract's expiration, whether there has been unusual
wear and tear on, or use of, the equipment, the cost of comparable new
equipment, the extent, if any, to which the equipment has become technologically
or economically obsolete during the contract term and the effects of any
additional or amended government regulations. These factors, among others, could
have a material near-term impact on the estimated unguaranteed residual values.

     CERTAIN RISK CONCENTRATIONS -- The Company's direct financing leases and
notes receivables are concentrated in the telecommunications industry, primarily
pay telephones, representing approximately 43% and 42% of the Company's direct
finance lease and notes receivable portfolio at December 31, 1997 and 1996,
respectively. The Company has also significantly expanded its financing of
automated teller machines which represents approximately 21% and 22% of the
Company's direct finance lease and notes receivable portfolio at December 31,
1997 and 1996, respectively.

     CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.

     NOTES RECEIVABLE -- Notes receivable are carried at the principal balance
outstanding. Interest income on notes receivable is accrued based on principal
amounts outstanding.

     NET INVESTMENT IN DIRECT FINANCING LEASES -- The Company's primary activity
consists of leasing telecommunications and other types of equipment, under
direct financing leases, generally over a period of three to five years. At the
time of closing a direct financing lease, the Company records the gross lease
contract receivable, an estimated unguaranteed residual value and unearned lease
income. The unearned lease income represents the excess of the gross lease
receivable plus the estimated unguaranteed residual value over the carrying
value of the equipment leased. In addition, the Company capitalizes all initial
direct costs associated with originating the direct financing lease. The
unearned income and initial direct costs are amortized to income over the lease
term so as to produce a constant periodic rate of return on the net investment
in the lease. Lessees are responsible for all taxes, insurance and maintenance
costs.

                                       19
<PAGE>   21
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

     The realization of the estimated unguaranteed residual value of leased
equipment depends on the value of the leased equipment at the end of the lease
term and is not a part of the contractual agreement with the lessee.
Unguaranteed residual values are based on estimates of amounts historically
realized by the Company for similar equipment and are periodically reviewed by
management for possible impairment.

     Certain of the Company's leases are accounted for as operating leases for
income tax purposes.

     ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES -- The Company performs credit
evaluations prior to approval of a lease or finance contract. As with all direct
financing leases, the Company continues to own the equipment under lease. The
Company will generally obtain a security interest in future revenues generated
from each site in which the equipment is physically located and in the equipment
under a finance contract. Subsequently, the creditworthiness of the customer and
the value of the underlying assets are monitored on an ongoing basis. The
Company maintains an allowance for possible loan and lease losses which could
arise should customers become unable to discharge their obligations under the
agreements. The allowance for possible loan and lease losses is maintained at a
level deemed appropriate by management to provide for known and inherent risks
in the portfolio. The allowance is based upon a continuing review of past loan
and lease loss experience, current economic conditions, delinquent loans and
leases, an estimate of potential loss exposure on significant customers in
adverse situations, and the underlying asset value. The consideration of such
future potential losses also includes an evaluation for other than temporary
declines in value of the underlying assets. Leases and notes receivable which
are deemed uncollectible are charged off and deducted from the allowance. The
provision for possible loan and lease losses and recoveries are added to the
allowance.

     EQUIPMENT UNDER OPERATING LEASES -- Equipment leased under operating leases
is stated at cost less accumulated depreciation. The equipment is depreciated
using the straight-line method over the estimated useful lives of the assets
(five years) to the estimated residual value of the equipment at the end of the
lease term. Estimated residual values are based on estimates of amounts
historically realized by the Company for similar equipment and are periodically
reviewed by management for possible impairment.

     INVESTMENTS -- The Company accounts for its general partnership interests
in Telecommunications Income Fund IX, L.P. ("TIF IX") and Telecommunications
Income Fund X, L.P. ("TIF X") under the equity method of accounting. Under the
equity method of accounting, the Company initially records its investment at
cost and subsequently adjusts the carrying value of its investments for its pro
rata share of earnings or losses.

     The Company also owns equity interests in entities over which it does not
have the ability to exert significant influence over the operations of such
entities; therefore, such investments are accounted for at cost.

     Should these investments experience a decline in value that is other than
temporary, the Company will recognize a loss in its consolidated statements of
operations to reflect such a decline. As these investments are not readily
marketable, no market value can be readily determined.

     The Company also has an investment in a marketable equity security
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses reported as a separate component of
stockholders' equity, net of related tax effects. At December 31, 1997, the
security had a cost of $220,476 and an estimated fair value of $51,817,
resulting in an unrealized loss of $168,659. Fair value is determined using
published market prices.

     FURNITURE AND EQUIPMENT -- Furniture and equipment are stated at cost less
accumulated depreciation. For financial reporting purposes, depreciation is
computed by the straight-line method over the estimated useful lives of the
assets (generally five to ten years). The Company uses accelerated methods in
computing depreciation for income tax purposes.

                                       20
<PAGE>   22
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

     DEFERRED INCOME TAXES -- The provision for deferred income taxes is based
on an asset and liability approach. Deferred tax assets or liabilities are
computed based on the difference between the financial statement and income tax
bases of assets and liabilities using the enacted marginal tax rate. Deferred
income tax expense or credit is based on the changes in the asset or liability
from period to period including the effect of enacted tax rate changes.

     DEFERRED COSTS -- Deferred costs consist of financing costs incurred in
connection with the issuance of long-term debt. Deferred financing costs are
being amortized over the life of the related obligation, which ranges from three
to eight years.

     STOCK ISSUANCE COSTS -- The costs incurred in connection with the issuance
of redeemable Class B nonvoting convertible stock have been deducted from the
proceeds. Such amounts are being amortized by a charge to retained earnings over
a period of ten years, at which time the carrying value of stock will be equal
to its cash redemption value (see Note 7).

     STOCK-BASED COMPENSATION -- The Company measures stock based compensation
costs for employees as the excess of the fair value of the parent's common stock
at date of grant over the amount the employee must pay for the stock related to
Berthel Fisher & Company's stock option plans. The pro forma net loss and loss
per share amounts assuming the fair value method was adopted are immaterial and,
therefore, are not disclosed.

     SALE OF DIRECT FINANCE LEASES -- The Company at times sells future direct
financing lease payments, on a limited recourse basis, to lenders in return for
a cash payment. In the case of default by the lessee, the lender has a first
lien on the underlying leased equipment. In the event the sale or re-lease
proceeds from the underlying equipment do not satisfy the remaining lessee's
obligation to the lender, the Company is responsible for a predetermined amount
of that obligation. When the sale of direct finance leases occurs, proceeds from
the sale, less the net book value of direct finance leases sold and an estimated
loss allowance, are recorded as a component of gain on early termination of
leases.

     NET LOSS PER COMMON SHARE -- During 1997 the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Basic net loss per
common share is based on the weighted average number of shares of Class A common
stock outstanding during the year. Diluted net loss per common share is the same
as basic net loss per share due to the antidilutive effect on net loss per share
of any assumed conversion of convertible securities. The adoption of this
statement had no impact on the Company's reported loss per share amounts.

     IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company is in the process of determining its preferred format. The adoption
of SFAS No. 130 will have no impact on the Company's results of operations,
financial position or cash flows.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15,1997. Financial statement disclosures for prior periods are
required to be restated. The Company is in

                                       21
<PAGE>   23
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

the process of evaluating the disclosure requirements. The adoption of SFAS No.
131 will have no impact on the Company's consolidated results of operations,
financial position or cash flows.

2. NOTES RECEIVABLE AND DIRECT FINANCING LEASES

     Notes receivable are comprised of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                      ---------------------------
                                                         1997             1996
                                                         ----             ----
<S>                                                   <C>              <C>
Notes receivable, collateralized primarily by
  telephone equipment and related site agreements,
  13.9% to 16.5%, maturing through December 2000....  $6,836,307       $6,530,354
                                                      ==========       ==========
</TABLE>

     The Company's net investment in direct financing leases consists of the
following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                    -----------------------------
                                                       1997              1996
                                                       ----              ----
<S>                                                 <C>               <C>
Minimum lease payments receivable.................  $ 8,502,371       $11,526,828
Estimated unguaranteed residual values............      981,806           954,502
Unamortized initial direct costs..................      177,817           236,910
Unearned income...................................   (1,936,718)       (2,867,880)
                                                    -----------       -----------
Net investment in direct financing leases.........  $ 7,725,276       $ 9,850,360
                                                    ===========       ===========
</TABLE>

     The balance of direct financing leases sold with recourse that remain
uncollected at December 31, 1997 and 1996 was $3,209,258 and $4,269,468,
respectively.

     At December 31, 1997, future minimum lease payments to be received under
the direct financing leases and the estimated unguaranteed residuals to be
realized at the expiration of the direct financing leases are as follows:

<TABLE>
<CAPTION>
                                                                   MINIMUM           ESTIMATED
                                                                LEASE PAYMENTS     UNGUARANTEED
                                                                  RECEIVABLE      RESIDUAL VALUES
                                                                --------------    ---------------
<S>                                                             <C>               <C>
Year ending December 31:
       1998.................................................      $3,235,551         $277,262
       1999.................................................       2,386,533           75,852
       2000.................................................       1,910,619          181,104
       2001.................................................         861,899          376,380
       2002.................................................         105,032           71,208
       Thereafter...........................................           2,737               --
                                                                  ----------         --------
       Total................................................      $8,502,371         $981,806
                                                                  ==========         ========
</TABLE>

     The Company and certain affiliates purchase a substantial portion of
telecommunications equipment for lease from Intellicall, Inc., a publicly-held
company. The Company's parent is an investor in a limited partnership which owns
approximately 7% of the outstanding common stock of Intellicall, Inc. In
addition, a principal stockholder of the Company's parent is also an investor in
this limited partnership.

     Additionally, the Company provides financing to certain companies for which
the parent or its affiliates have an ownership interest in, provide financing
to, or provide investment advisory services for such companies. The Company's
net investment in direct financing leases and notes receivable with these
companies approximated $1,355,860 and $1,253,000 at December 31, 1997 and 1996,
respectively.

                                       22
<PAGE>   24
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

     One customer accounted for 10% or more of the amount of income from direct
financing leases during one or more of the years presented, as follows:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                                  ------------------------
                                                                  1997      1996      1995
                                                                  ----      ----      ----
<S>                                                               <C>       <C>       <C>
Customer A..................................................      --%        2%       10%
</TABLE>

3. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES

     The changes in the allowance for possible loan and lease losses are as
follows:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                                ----------------------------------
                                                                  1997         1996         1995
                                                                  ----         ----         ----
<S>                                                             <C>          <C>          <C>
Balance at beginning of year................................    $ 412,916    $ 291,605    $169,260
  Provision.................................................      415,052      592,874     175,139
  Charge-offs...............................................     (392,676)    (471,563)    (52,794)
                                                                ---------    ---------    --------
Balance at end of year......................................    $ 435,292    $ 412,916    $291,605
                                                                =========    =========    ========
</TABLE>

     The allowance for loan and lease losses consisted of specific allowances
for leases of $158,477 and $100,000 at December 31, 1997 and 1996, respectively,
and a general unallocated allowance of $276,815, $312,916, and $291,605 at
December 31, 1997, 1996 and 1995, respectively.

     On October 10, 1995, a lessee of the Company, Value-Added Communications
("VAC"), filed a petition under Chapter 11 of the Bankruptcy Act. At the time
VAC's petition for bankruptcy was filed, VAC had several leases with the
Company. At December 31, 1995, VAC's leases had a net investment balance of
$927,731, which represented approximately 6.2% of the Company's total net
investment in leases and financing contracts. As a result of the Company's
collateralized position with respect to its VAC leases and because the leases
had been guaranteed by a strong guarantor, the Company was able to negotiate a
settlement with VAC that resulted in the equipment being re-leased to MCI
Telecommunications Corporation at no loss to the Company.

     On May 6, 1996, a lessee of the Company, United Tele-Systems of Virginia,
Inc. ("UTS") filed a Voluntary Petition for Relief under Chapter 11 of the
Bankruptcy Code. This bankruptcy petition was dismissed on May 22, 1996 and, in
connection therewith, the Company exercised its right to manage the assets
leased to UTS. The net investment in the leases at the time the assets were
repossessed was approximately $432,000. The Company, two affiliated partnerships
for which the Company acts as General Partner, and UTS were named in a lawsuit,
filed by another creditor of UTS. The creditor was claiming $360,000 in
compensatory damages and $350,000 in punitive damages. Based on offers to
purchase the pay telephone equipment and an expected settlement offer related to
the lawsuit, the Company expected to incur a loss upon the sale or re-lease of
this equipment. Management charged $324,000 to the provision for possible loan
and lease losses for the expected loss in 1996 and reclassified its net
investment in the equipment, net of the specific allowance, to equipment under
operating leases pending the equipment's ultimate sale or re-lease. The
equipment was sold during 1997 with no further loss to the Company and the
lawsuit was settled pending the outcome of an audit which is in process.
Management believes any loss as a result of the audit is adequately covered by
the Company's general allowance.

     On October 31, 1996, a lessee of the Company, Soil Recovery Services, Inc.
("SRS"), had an involuntary Petition for Relief under Chapter 7 of the U.S.
Bankruptcy Code filed against it. This was converted to a voluntary Chapter 11
on November 25, 1996. At the time the first petition was filed, SRS had

                                       23
<PAGE>   25
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

various leases with the Company that had a net investment totaling $256,500 and
represented 1.4% of the Company's total net investment in leases and finance
contracts. A specific allowance for losses of $100,000 was established through a
charge to the provision for possible loan and lease losses in 1996 based on
estimates of the fair value of the equipment under lease. The Company has
obtained the right to repossess the equipment and is in the process of selling
the equipment. Management believes the specific allowance is adequate to cover
any loss on sale.

     During the fourth quarter of 1996, management of the Company provided a
specific allowance for a lease with a certain customer for which the Company had
not been receiving lease payments. Management is actively working with such
customer to arrange for a sale of the assets under lease. A charge of $50,000
was recorded to the provision for possible loan and lease losses representing
management's best estimate of the loss on the expected sale of the equipment.
Also, due to the uncertainty as to the timing and amount of future payments from
such customer and as to the sale of the assets under lease, the Company
reclassified its net investment in the lease at December 31, 1996 of $144,972,
net of the specific allowance, to equipment leased under operating leases. The
Company is in the process of selling the equipment and expects no further loss
on sale. The carrying value at December 31, 1997 was $113,978.

     In March, 1997, the Company foreclosed on a lease with a customer. The net
investment in this lease was $545,189. The Company entered into a management
agreement with a pay phone operator to manage the equipment with the intent to
purchase. The equipment was subsequently sold to such entity for approximately
$150,000 less than the carrying value of the lease. The Company attempted to
collect the deficiency balance from the guarantor under the original lease.
However, since no payments have been received, the Company charged $150,000 to
the provision for possible loan and lease losses and wrote off the balance at
December 31, 1997.

     During 1997, a lessee of the Company filed for bankruptcy. Due to the
uncertainty over a possible prior lien on the equipment under lease and the
proceeds which may result from sale of the equipment, the Company charged
$150,000 to the provision for possible loan and lease losses and wrote off the
lease balance of $150,000 at December 31, 1997.

4. INVESTMENTS IN LIMITED PARTNERSHIPS

     The Company is the general partner of Telecommunications Income Fund IX,
L.P. ("TIF IX"). TIF IX is a limited partnership which raised approximately $17
million through a best-efforts public offering of its limited partnership units.
At December 31, 1997 and 1996, the Company's investment in TIF IX consisted of
its allocated general partnership interest, unreimbursed costs incurred by the
Company in connection with the public offering and temporary loans made to the
partnership. Pursuant to the partnership agreement, TIF IX reimbursed the
Company for offering and promotional expenses incurred up to 4% of the capital
raised. The unreimbursed costs are being amortized on a straight-line basis over
a 55-month period which approximates the period of anticipated future revenues
from TIF IX. As of December 31, 1997 and 1996, the unamortized balance of these
unreimbursed costs aggregated $0 and $33,482, respectively.

     The Company is the general partner of Telecommunications Income Fund X,
L.P. ("TIF X"). TIF X is a limited partnership which raised approximately $22.6
million through a best-efforts public offering of its limited partnership units.
At December 31, 1997 and 1996, the Company's investment in TIF X consisted of
its allocated general partnership interest and temporary loans made to the
partnership. Pursuant to the partnership agreement, TIF X reimbursed the Company
for offering and promotional expenses incurred up to 4% of the capital raised.
During the year ended December 31, 1996, the Company received $13,604 for
reimbursement for the remaining unreimbursed amount of such expenses.

                                       24
<PAGE>   26
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

     The Company has also incurred $24,511 of offering related costs related to
Telecommunications Income Fund XI for which a best affords public offering is in
process. The Company will be reimbursed for offering costs incurred up to 4% of
the capital raised.

     Combined summarized financial information for TIF IX and TIF X is as
follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              -------------------------
                                                                 1997          1996
                                                                 ----          ----
<S>                                                           <C>           <C>
ASSETS:
Net investment in direct financing leases and notes
  receivable................................................  $27,564,000   $33,330,000
Other assets................................................    2,876,000     3,573,000
                                                              -----------   -----------
Total assets................................................  $30,440,000   $36,903,000
                                                              ===========   ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Notes payable, guaranteed by the Company (Note 12)..........  $ 5,989,000   $ 5,900,000
Other liabilities...........................................    1,640,000     1,485,000
                                                              -----------   -----------
Total liabilities...........................................    7,629,000     7,385,000
                                                              -----------   -----------
Partners' equity:
General partner.............................................       21,000        22,000
Limited partners............................................   22,837,000    29,559,000
Other.......................................................      (47,000)      (63,000)
                                                              -----------   -----------
Total partners' equity......................................   22,811,000    29,518,000
                                                              -----------   -----------
Total liabilities and partners' equity......................  $30,440,000   $36,903,000
                                                              ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                        ---------------------------------------
                                                           1997          1996          1995
                                                           ----          ----          ----
<S>                                                     <C>           <C>           <C>
Income from direct financing leases...................  $ 4,776,000   $ 6,070,000   $ 6,585,000
Other revenue.........................................      894,000       924,000       200,000
Provision for possible losses.........................   (5,429,000)   (1,671,000)     (923,000)
Impairment loss on equipment..........................     (319,000)     (971,000)           --
Expenses..............................................   (2,040,000)   (3,148,000)   (2,661,000)
                                                        -----------   -----------   -----------
Net income (loss).....................................  $(2,118,000)  $ 1,204,000   $ 3,201,000
                                                        -----------   -----------   -----------
Income (loss) allowable to the Company................  $      (972)  $       680   $     1,657
                                                        ===========   ===========   ===========
Net income (loss) per partnership unit:
  TIF IX..............................................      $ (3.25)       $14.83        $24.26
  TIF X...............................................      $(21.11)       $ 2.17        $17.15
</TABLE>

     The Company receives a management fee equal to 5% of the amount of gross
rental payments received by TIF IX and TIF X. During the years ended December
31, 1997, 1996 and 1995, gross fees aggregated $604,768, $702,266 and $864,838,
respectively. In addition, the Company is reimbursed for certain other costs
under administrative services agreements. Amounts received by the Company
pursuant to these agreements amounted to $168,000, $147,000 and $168,107 for the
years ended December 31, 1997, 1996 and 1995, respectively.

     The Company receives 4% of all leases acquired by TIF IX and TIF X during
the initial funding period, which the Company reports as an acquisition fee.
Amounts reported by the Company as acquisition fees were $123,687 for the year
ended December 31, 1995. The initial funding period ended during 1995.

                                       25
<PAGE>   27
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

5. CREDIT ARRANGEMENTS

     The Company obtains a portion of its financing under a line-of-credit
agreement with a bank. The amount available to borrow under the line-of-credit
is limited to 75% of its qualified accounts, as defined in the agreement
(primarily leases and notes receivable), but, in no case, can exceed $10
million. The line-of-credit bears interest at prime plus 1.76% and 1.7% at
December 31, 1997 and 1996, respectively, and is collateralized by substantially
all of the Company's assets. The line-of-credit agreement is guaranteed by the
Company's parent and a major stockholder of the Company's parent. The agreement
is also cancelable by the lender after giving a 90-day notice. The agreement
expires on April 30, 1998. If the line of credit is renewed with the existing
lender, the agreement requires the Company to refinance approximately $363,000
of existing subordinated debt maturing in 1998. Such debt refinanced would have
to be on the same terms as they presently exist but with new maturity dates of
not less than two years. The Company intends to offer to the subordinated debt
holders the opportunity to renew the debt for an additional two year term at the
same interest rate. The interest rate on amounts outstanding at December 31,
1997 and 1996 under the line-of-credit agreement was 10.26% and 9.95%,
respectively.

     The loan agreement contains various restrictive covenants which, among
others, restrict dividend payments except to Class B shareholders and Series A
preferred shareholders and requires the Company to maintain certain financial
ratios including a total liabilities to tangible net worth ratio of not greater
than 2.5, a minimum stockholders' equity (including redeemable stock) of
$1,702,000 and an interest coverage ratio of 1.2. As of December 31, 1997 the
Company was in violation of its minimum stockholders' equity and interest
coverage ratio. The Company has obtained waivers for such covenants from the
lender for 1997.

     There can be no assurance that the Company will not continue to be in
violation of one or more of these covenants. Continued adverse operating results
could cause continued noncompliance with these covenants, in which event the
bank could immediately accelerate the maturity of the entire outstanding balance
under the line of credit or deny or restrict the Company's access to funds under
the line of credit. Also, certain other debt obligations of the Company contain
standard cross-default provisions. Noncompliance with these covenants could
result in the immediate acceleration of the maturity of such other debt.

     Notes payable consists of the following at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1997         1996
                                                                 ----         ----
<S>                                                           <C>          <C>
Collateral trust bonds issued by Berthel Fisher & Company
  Leasing, Inc., 9% to 12%, due through 1997................  $       --   $   20,017
Installment loan agreements with banks, 7.75% to 11%,
  maturing through 2000 with subjective acceleration
  clauses, collateralized by net investment in certain
  direct financing leases, certain agreements are also
  guaranteed by the Company's parent........................   1,517,398    2,273,632
Capital lease obligations, 5.37%, due through 2000..........      12,532       17,156
                                                              ----------   ----------
Notes payable...............................................  $1,529,930   $2,310,805
                                                              ==========   ==========
</TABLE>

                                       26
<PAGE>   28
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

     Subordinated debt consists of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1997         1996
                                                                 ----         ----
<S>                                                           <C>          <C>
Uncollateralized subordinated debentures, 11% to 12%,
  maturing through 1998.....................................  $  725,000   $  725,000
Uncollateralized subordinated notes payable, 9.5% to 10%,
  maturing in 2001 and 2004, net of discount................   2,996,564    2,995,522
Uncollateralized subordinated debenture payable to parent,
  floating interest rate, maturing in 2005..................   2,000,000    2,000,000
                                                              ----------   ----------
Total subordinated debt.....................................  $5,721,564   $5,720,522
                                                              ==========   ==========
</TABLE>

     Interest expense summarized by category is as follows:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                             --------------------------------------
                                                                1997          1996          1995
                                                                ----          ----          ----
<S>                                                          <C>           <C>           <C>
Line-of-credit agreement.................................    $  794,776    $  953,912    $  392,946
Demand note payable to parent............................         1,410            --            --
Uncollateralized subordinated note payable to parent.....            --        31,802        24,792
Collateral trust bonds issued by Berther Fisher & Company
  Leasing, Inc...........................................           458        11,729        55,032
Collateral trust bonds issued by Security Finance
  Corporation............................................            --            --        32,349
Installment loan agreements with banks...................       167,676       254,731       281,055
Capital lease obligations................................         1,582         1,532           227
Uncollateralized subordinated debentures.................       125,143       125,374       140,735
Uncollateralized subordinated debenture to parent........       227,521       228,277       298,420
Uncollateralized subordinated notes payable..............       404,589       183,016            --
Other....................................................        20,190           747         1,974
                                                             ----------    ----------    ----------
                                                             $1,743,345    $1,791,120    $1,227,530
                                                             ==========    ==========    ==========
</TABLE>

     The collateral trust bonds issued by Berthel Fisher & Company Leasing, Inc.
are collateralized by certain equipment leases and are redeemable by the bond
holder at any time after one year from the date of issuance subject to certain
limitations as defined in the agreements, including a maximum redemption in any
one year of 5% of the total principal balance outstanding.

     The subordinated note payable and debenture to parent bear interest at
prime plus 3% (11.5% at December 31, 1997, 1996 and 1995), adjusted
semi-annually, with a minimum interest rate of 6% and a maximum rate of 12%. In
October 1995, the Company and its parent restructured $2,000,000 of the
subordinated note payable to the Company's parent into a subordinated debenture.
Under the restructured debenture, the maturity date was extended to December 31,
2005; the debenture was contractually subordinated to the subordinated notes
payable and to collateralized debt; and the Company's parent was issued warrants
for the purchase of 118,875 shares of common stock of the Company at $16.82 per
share, exercisable through October 5, 2000. No value was attributed to the
warrant by the Company since the warrant's exercise price was equal to the
estimated fair value of the Company's common stock at date of issuance.

                                       27
<PAGE>   29
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

     The annual maturities of notes payable and subordinated debt at December
31, 1997 are as follows:

<TABLE>
<S>                                                             <C>
Year ending December 31:
       1998.................................................    $1,296,251
       1999.................................................       435,534
       2000.................................................       392,618
       2001.................................................     2,157,565
       2002.................................................        12,962
       Thereafter...........................................     2,956,564
                                                                ----------
       Total................................................    $7,251,494
                                                                ==========
</TABLE>

6. INCOME TAXES

     The results of the Company's operations are included in the consolidated
tax returns of Berthel Fisher & Company. In certain states, the Company files
separate income tax returns. The entities included in the consolidated returns
have adopted the policy of allocating income tax expense or benefit based upon
the pro rata contribution of taxable operating income or losses. Generally, this
allocation results in profitable companies recognizing a tax provision as if the
individual company filed a separate return and loss companies recognizing
benefits to the extent their losses contribute to reduce consolidated taxes.
Deferred income taxes have been established by each member of the consolidated
group based upon the temporary differences within the entity. Based on the
parent's consolidated net deferred tax liability position, management believes
it is more likely than not that the Company's deferred income tax asset will be
recoverable.

     Income tax expense (benefit) consisted of the following:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                             ---------------------------------
                                                               1997        1996        1995
                                                               ----        ----        ----
<S>                                                          <C>         <C>         <C>
Current....................................................  $(425,000)  $   4,151   $  20,000
Deferred...................................................    188,549    (457,871)   (211,200)
                                                             ---------   ---------   ---------
Income taxes...............................................  $(236,451)  $(453,720)  $(191,200)
                                                             =========   =========   =========
</TABLE>

     The effective tax rate on loss before income taxes is different from the
prevailing federal income tax rate as follows:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                             ---------------------------------
                                                               1997        1996        1995
                                                               ----        ----        ----
<S>                                                          <C>         <C>         <C>
Income tax at federal statutory rates (34%)................  $(228,548)  $(438,700)  $(198,900)
Tax effect increase (decrease) of:
  State income taxes, net of federal effect................    (13,900)    (25,800)      2,600
  Other items..............................................      5,997      10,780       5,100
                                                             ---------   ---------   ---------
Income taxes...............................................  $(236,451)  $(453,720)  $(191,200)
                                                             =========   =========   =========
</TABLE>

                                       28
<PAGE>   30
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

     The tax effect of temporary differences giving rise to the Company's net
deferred income tax asset are as follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1997         1996
                                                                 ----         ----
<S>                                                           <C>          <C>
Gross deferred income tax liabilities:
  Direct financing leases...................................  $ (824,000)  $ (500,000)
  Unamortized costs associated with limited partnerships....          --      (25,000)
                                                              ----------   ----------
Total.......................................................    (824,000)    (525,000)
                                                              ----------   ----------
Gross deferred income tax assets:
  Alternative minimum tax carryforward......................      84,000       84,000
  Allowance for possible loan and lease losses..............     169,000      149,000
  Net operating loss carryforward...........................     885,000      800,000
  Other.....................................................      13,362        7,911
  Unrealized loss on available-for-sale security............      61,000           --
                                                              ----------   ----------
Total.......................................................   1,212,362    1,040,911
                                                              ----------   ----------
Net deferred income tax asset...............................  $  388,362   $  515,911
                                                              ==========   ==========
</TABLE>

     At December 31, 1997, the Company's net operating loss carryforward
aggregates $2,300,000 and expires in 2010.

7. REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK

     The Company's Class B nonvoting convertible stock carries a 12%
noncumulative dividend limited to 25% of the Company's income before taxes each
year, up to a maximum of $1.20 per share. The Class B nonvoting convertible
stock is convertible on a one-for-one basis up to a maximum of 20% of the Class
A common stock of the Company after conversion. The stock is redeemable at $10
per share for a 30-day period after the tenth anniversary of the issuance date
(April, 1990 to September, 1991) at the option of the holder. Shares which are
not redeemed during that time are automatically converted to Class A common
stock on a one-for-one basis. The following summarizes the amounts pertaining to
the Class B nonvoting convertible stock:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1997       1996
                                                                ----       ----
<S>                                                           <C>        <C>
Redeemable Class B nonvoting convertible stock (no par
  value-authorized 100,000 shares, issued and outstanding
  75,500 shares), at redemption or liquidation value........  $755,000   $755,000
Unamortized stock issuance costs............................   (24,071)   (32,095)
                                                              --------   --------
Class B nonvoting convertible stock.........................  $730,929   $722,905
                                                              --------   --------
</TABLE>

     During the year ended December 31, 1995, the Company allowed redemptions
aggregating $200,000 outside the standard terms of the stock agreement. The 1995
redemption resulted in a gain of $27,270 which has been recorded directly to
retained earnings.

8. PREFERRED STOCK

     Each share of the Series A preferred stock is entitled to cumulative annual
dividends of 8% payable, if as and when declared by the Board of Directors,
quarterly. Unpaid dividends will accumulate and be payable prior to the payment
of dividends on the Company's Class A common stock. The preferred stock is
redeemable at any time at the option of the Company, on not less than 30 days
written notice to registered

                                       29
<PAGE>   31
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

holders. The redemption price shall be $14.70 per share if redeemed during 1997,
$14.56 per share if redeemed during 1998, $14.42 per share if redeemed during
1999, $14.28 per share if redeemed during 2000, $14.14 per share if redeemed
during 2001, and $14.00 per share if redeemed thereafter, plus, in each case,
accumulated unpaid dividends. Unless previously redeemed by the Company, the
holders of the preferred stock are entitled at any time to convert each share
into .875 shares of Class A common stock. The preferred stock is not entitled to
vote on any matter except where the Iowa Corporation Act requires voting as a
class, in which case each share of stock shall be entitled to one vote per share
on those matters where the preferred stock is voting as a class. The preferred
stock is entitled to a preference on liquidation equal to $14.00 per share, plus
accumulated unpaid dividends.

     The Company issued $424,774 of preferred stock and $60,682 of warrants to
its parent at December 31, 1996 in exchange for the conversion of the
subordinated note payable to parent of $264,980 and the contribution of
restricted stock of a public company with an estimated fair value of $220,476.

9. COMMON STOCK WARRANTS

     The Company's common stock warrant activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                EXPIRATION    EXERCISE      NUMBER
                                                                   DATE        PRICE      OUTSTANDING
                                                                ----------    --------    -----------
<S>                                                             <C>           <C>         <C>
Issued to the parent in 1995 in connection with the
  subordinated note payable restructuring...................      2000         16.82        118,875
Issued in 1996 in connection with the subordinated notes
  payable offering..........................................    2001-2004      16.00         33,011
Issued in 1996 in connection with the preferred
  stock/warrant offering:
  A Warrant.................................................      1998         12.00         30,341
  B Warrant.................................................      1999         14.00         30,341
                                                                                            -------
Balance at December 31, 1996................................                                212,568
Issued in 1997 in connection with the preferred
  stock/warrant offering:
  A Warrant.................................................      1998         12.00         94,659
  B Warrant.................................................      1999         14.00         94,659
                                                                                            -------
Balance at December 31,1997.................................                                401,886
                                                                                            =======
</TABLE>

10. PROFIT SHARING PLAN

     The Company participates in a qualified profit sharing plan under Internal
Revenue Code Section 401(a), including a qualified cash or deferred arrangement
under Section 401(k), sponsored by Berthel Fisher & Company Financial Services,
Inc. Under the terms of the plan, each participant may elect to defer
compensation from 2% to 15%. A matching contribution equal to 50% of the
deferred compensation of all eligible participants will be made by the employer
up to 4% of each participant's total compensation. The employee contributions to
the plan are fully vested and employer contributions vest over five years. The
Company's contribution for the years ended December 31, 1997, 1996 and 1995
aggregated $6,356, $14,927 and $11,217, respectively.

11. MANAGEMENT AND SERVICES AGREEMENTS

     The Company pays, under an unwritten agreement with the Company's parent,
50% of the management fees it receives from TIF IX and TIF X (see Note 4) to the
Company's parent. The Company's parent agreed to suspend indefinitely such
payment beginning March 1, 1997 due to the Company's operating losses. Such

                                       30
<PAGE>   32
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

management fees paid to the Company's parent were $47,146, $351,134 and $432,419
during 1997, 1996 and 1995, respectively.

     In addition, the Company also has an unwritten, month-to-month agreement
with its parent in which the Company's parent provides management services at a
yearly rate of $240,000, $210,000 and $250,000 during 1997, 1996 and 1995,
respectively. In addition, during 1993, the Company paid its parent $50,000 to
provide consulting services relating to TIF X for such items as lease
documentation, lease approvals, debt structuring and portfolio liquidation. This
payment is being amortized to expense over five years, the estimated life of the
operating phase of TIF X.

     The Company, from time to time, will engage the services of Berthel Fisher
& Company Financial Services, Inc., a broker-dealer majority owned by the
Company's parent. In addition, the Company reimburses Berthel Fisher & Company
Financial Services, Inc. for operating expenses incurred on its behalf,
including certain expenses related to the administrative services agreements
discussed in Note 4. The Company also enters into other arrangements with the
parent or its affiliates. Following are the amounts paid or received by the
Company to Berthel Fisher & Company or its affiliates related to these
arrangements:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                -------------------------------
                                                                  1997        1996       1995
                                                                  ----        ----       ----
<S>                                                             <C>         <C>         <C>
Issuance costs paid (and capitalized) in connection with the
  subordinated notes payable offering.......................    $     --    $223,070    $    --
Offering expenses incurred in connection with the Series A
  preferred stock and warrant offering......................     108,621          --         --
Interest income.............................................      16,965          --         --
Commissions paid on various other transactions..............          --          --      3,935
TIF IX and TIF X administrative services expense
  reimbursements............................................          --          --     46,444
Operating expense reimbursements............................      45,300      50,173     77,063
Office rent.................................................      58,368          --     28,240
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

     The Company is contingently liable for all debts of TIF IX and X as the
general partner.

     The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF IX. The line-of-credit agreement allows TIF IX to
borrow the lesser of $2 million, or 32% of its qualified accounts, as defined in
the agreement. The balance outstanding under this line-of-credit was $50,557 and
$1,060,490 at December 31, 1997 and 1996, respectively. The agreement matures on
April 30, 1998, is cancelable by the lender after giving a 90-day notice and is
collateralized by substantially all assets of TIF IX. The note is also
guaranteed by the Company's parent and a principal stockholder of the Company's
parent.

     The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF X. The line-of-credit agreement allows TIF X to
borrow the lesser of $6 million, or 40% of its qualified accounts, as defined in
the agreement. The balance outstanding under this line-of-credit was $5,354,801
at December 31, 1997 and $2,607,911 at December 31, 1996. The agreement matures
on April 30, 1998, is cancelable by the lender after giving a 90-day notice and
is collateralized by substantially all assets of TIF X. The note is also
guaranteed by the Company's parent and a principal stockholder of the Company's
parent.

     The Company also has guaranteed amounts outstanding under installment loan
agreements of TIF IX and TIF X totaling $583,233 and $2,231,510 at December 31,
1997 and 1996, respectively. The agreements are collateralized by certain direct
financing leases and a second interest in all assets of TIF IX and TIF X.

                                       31
<PAGE>   33
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

     In December 1995 the Company entered into a lease agreement for office
space. The lease term began January 1, 1996 and expires December 30, 2000. Rent
is $58,368 per year under the agreement.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value amounts disclosed below are based on estimates prepared by
the Company based on valuation methods appropriate in the circumstances.
Generally accepted accounting principles do not require disclosure for lease
contracts. The carrying amount for financial instruments included among cash and
cash equivalents, due from affiliates, line-of-credit agreement, and other
short-term payables approximates their fair value because of the short maturity
of those instruments or the variable interest rate feature of the instruments.
Also, the Company's available-for-sale security is reported at market value. The
estimated fair value of other significant financial instruments are based
principally on discounted future cash flows at rates commensurate with the
credit, interest rate and prepayment risk involved.

     The estimated fair values of the Company's other significant financial
instruments are as follows:

<TABLE>
<CAPTION>
                                                     DECEMBER 31, 1997           DECEMBER 31, 1996
                                                  ------------------------    ------------------------
                                                   CARRYING        FAIR        CARRYING        FAIR
                                                    AMOUNT        VALUE         AMOUNT        VALUE
                                                   --------       -----        --------       -----
<S>                                               <C>           <C>           <C>           <C>
Notes receivable..............................    $6,986,307    $7,054,104    $6,530,354    $6,489,812
Notes payable.................................     1,529,930     1,523,359     2,310,805     2,284,873
Subordinated debt.............................     5,721,564     5,721,564     5,720,522     5,945,762
</TABLE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

     The Company's executive officers and directors and their ages and position
with the Company are as follows:

<TABLE>
<CAPTION>
           NAME              AGE                 POSITIONS WITH COMPANY
           ----              ---                 ----------------------
<S>                          <C>   <C>
Thomas J. Berthel..........  46    President, Chief Executive Officer, Director
Nancy L. Lowenberg.........  39    Vice President, Chief Operating Officer, Director
Ronald O. Brendengen.......  43    Treasurer, Chief Financial Officer, Director
Leslie D. Smith............  50    Secretary
Emmett J. Scherrman........  65    Director
Von L. Elbert..............  59    Director
James W. Noyce.............  42    Director
</TABLE>

     Thomas J. Berthel, Age 46, Chief Executive Officer (1994-present) of the
Company, served as president from the Company's inception to 1994, and was
elected President in October, 1996. He also serves as Director (inception to
present) of the Company. Mr. Berthel served as President of Berthel Fisher &
Company Financial Services, Inc. from its inception to 1993, and since 1993 has
served as Chief Executive Officer and a Director of Berthel Fisher & Company
Financial Services, Inc. Mr. Berthel also serves as President and Chairman of
the Board of Berthel Fisher & Company, the parent company of both the Company
and Berthel Fisher & Company Financial Services, Inc. Mr. Berthel serves as the
Chairman of the Board and Chief

                                       32
<PAGE>   34
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

Executive Officer of Berthel Fisher & Company Planning, Inc., the trust advisor
of Berthel Growth & Income Trust I, a company required to file reports pursuant
to the Securities Exchange Act of 1934. Mr. Berthel also serves in various
offices and as a Director of various other subsidiaries of Berthel Fisher &
Company. In November, 1995, Mr. Berthel was elected a director of Intellicall,
Inc., a publicly traded company. He also serves as the Chairman of the Board of
Amana Colonies Golf Course, Inc. Mr. Berthel holds a Financial and Operation
Principal license issued by the National Association of Securities Dealers, Inc.
He is also a Certified Life Placement Agent. Mr. Berthel has also served as an
individual general partner of eight private leasing programs. Mr. Berthel holds
a bachelor's degree from St. Ambrose College, Davenport, Iowa (1974). He also
holds a Master's degree in Business Administration from the University of Iowa,
Iowa City, Iowa (1993).

     Nancy L. Lowenberg, age 39, has been elected Vice President and Chief
Operating Officer of the Company beginning January 2, 1997. From September 1986
to December, 1996, Ms. Lowenberg was employed by Firstar Bank Iowa, N.A., in
Cedar Rapids as Vice President Commercial Loans for Iowa. As Vice President
Commercial Loans, she was a relationship manager for 62 accounts with
approximately $70,000,000 of committed credit. She responsibility for annual
review and maintenance of existing accounts and business development. From 1981
to 1986, Ms. Lowenberg was employed by First Bank Systems. Ms. Lowenberg
received her Bachelor of Science Agricultural Business with a minor in Finance
in 1981 from Iowa State University, Ames, Iowa.

     Gregory Pugh, age 40, was appointed Executive Vice President of the Company
in 1995. He has served as Vice President since October, 1990. Mr. Pugh was
elected to serve as a Director of the Company in August, 1995. Prior to joining
the Company, Mr. Pugh was employed by Norwest Mortgage from 1989 to 1990 as
Branch Facilities Specialist in Des Moines, Iowa. Mr. Pugh was employed by the
Principal Financial Group from 1983 to 1988 in various capacities. His last
position with Principal Financial Group was as a Mortgage Loan Officer. Mr. Pugh
was awarded a Bachelor of Science degree in Industrial Administration/Business
Management in 1981 from Iowa State University and a Masters of Business
Administration degree from Drake University in Des Moines, Iowa in 1990. Mr.
Pugh resigned from the Company effective July 11, 1997.

     Ronald O. Brendengen, age 43, is the Treasurer, Chief Financial Officer and
a Director (1988-present) of the Company. He was elected to his current offices
in October, 1996. He has served as Secretary (1994-March, 1995), Treasurer,
(1998-August, 1995), and Chief Financial Officer (1994-August, 1995) of the
Company. He served as Controller (1985-1993), Treasurer (1987-present, Chief
Financial Officer, Secretary and a Director (1987-present), and was also elected
Chief Operating Officer in January 1998, of Berthel Fisher & Company, the parent
company of the Company. Mr. Brendengen also serves as the Treasurer, Chief
Operating Officer, Chief Financial Officer and a Director of Berthel Fisher &
Company Planning, Inc., the trust advisor of Berthel Growth & Income Trust I, a
company required to file reports pursuant to the Securities Exchange Act of
1934. He also serves in various offices and as a Director of each subsidiary of
Berthel Fisher & Company. Mr. Brendengen holds a certified public accounting
certificate and worked in public accounting during 1984 and 1985. From 1979 to
1984, Mr. Brendengen worked in various capacities for Morris Plan and MorAmerica
Financial Corp., Cedar Rapids, Iowa. Mr. Brendengen attended the University of
Iowa before receiving a bachelor's degree in Accounting and Business
Administration with a minor in Economics from Mt. Mercy College, Cedar Rapids,
Iowa, in 1978.

     Leslie D. Smith, age 50, is the Secretary (March, 1995-present) of the
Company. Mr. Smith serves as the Secretary and a Director of Berthel Fisher &
Company Planning, Inc., the trust advisor of Berthel Growth & Income Trust I, a
reporting company. In 1994, Mr. Smith was named General Counsel of Berthel
Fisher & Company, parent company of the Company. Mr. Smith was awarded his B.A.
in Economics in 1976 from Iowa Wesleyan College, Mount Pleasant, Iowa, and his
J.D. in 1980 from the University of Dayton School of Law, Dayton, Ohio. Mr.
Smith was employed as an Associate Attorney and as a Senior Attorney for

                                       33
<PAGE>   35
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

Life Investors, Inc., Cedar Rapids, Iowa, from 1981 through 1985 where he was
responsible for managing mortgage and real estate transactions. From 1985 to
1990, Mr. Smith was General Counsel for LeaseAmerica Corporation, Cedar Rapids,
Iowa. From 1990 to 1992, Mr. Smith was Operations Counsel for General Electric
Capital Corporation, where he was responsible for managing the legal department
of a GATCH division located in Cedar Rapids, Iowa. From 1993 to 1994, Mr. Smith
was employed as Associate General Counsel for Gateway 2000, Inc., in North Sioux
City, South Dakota.

     Steven J. Hogan, age 52, was elected a Director of the Company in August,
1995. In May, 1995, Mr. Hogan was elected Chairman and Chief Executive Office of
Electronic Exchange & Transfer Corporation. In 1991, Mr. Hogan founded LinkUSA
Corporation, a wholesale-only provider of calling card services and other
enhanced services to local and interexchange carriers. He served as President
and CEO of LinkUSA from its inception until 1994. From 1987 to 1991, Mr. Hogan
was Vice President of Communications Research at Telecom*USA Company. From 1985
to 1987, Mr. Hogan was General Manager of the Communication Products Division of
Teleconnect Company. Mr. Hogan is Principal Member of Plans and Concepts, L.P.,
an industry consulting organization offering technical and business planning
with particular expertise in telecommunications and transaction processing. Mr.
Hogan graduated from the Illinois Institute of Technology with a BS degree in
1968. Mr. Hogan resigned his directorship in July 1997.

     Emmett J. Scherrman, age 65, was elected a Director of the Company in
August, 1995. Mr. Scherrman graduated in 1953 from Loras College with a B.A. in
accounting , and attended the U.S. Army Finance School, Ft. Benjamin Harrison,
from 1953 to 1955. Mr. Scherrman served as President (1987 to 1997) and Chairman
of the Board and Chief Executive Officer (1987-1990) of LeaseAmerica
Corporation, Cedar Rapids, Iowa. Since his retirement from LeaseAmerica in 1990,
Mr. Scherrman has served as a consultant to Brenton Bank and Trust Company,
Cedar Rapids, Iowa from 1992 to present. Mr. Scherrman currently serves as a
Director of Brenton Bank and Trust Company; Treasurer and Director of Oak Hill
Engineering, Inc.; Chairman, Board of Trustees, Mount Mercy College; and
Treasurer and Member of the Board of Trustees, Mercy Medical Center.

     Von L. Elbert, age 59, was elected Director of the Company in October,
1996. He has served as a Director of Berthel Fisher & Company, the parent of the
Company, since May, 1991. From 1978 to 1988, Mr. Elbert was the President of
TLS, Co., a data processing company, from 1988 to 1996, he served as the Vice
President, Treasurer and Chief Financial Officer of Galt Sand Company, a
manufacturer of wearing apparel. Mr. Elbert also serves as a director of
Mercantile Bank of Eastern Iowa. Mr. Elbert received his BBA degree from the
University of Iowa in 1962.

     James W. Noyce, age 42, was elected Director of the Company and of General
Partner in September, 1997. Mr. Noyce has been employed by FBL Financial Group,
Inc. since 1985. He presently serves as Chief Financial Officer of FBL Financial
Group, Inc. (and its affiliates, including Farm Bureau Life Insurance Company),
a position he has held since December, 1995. Prior to December, 1995, he served
FBL Financial Group, Inc. is various capacities, including, from 1991 to
December 1995, as Vice President and Controller. Mr. Noyce graduated in 1978
with a Bachelor of Science and Business Administration (BSBA) in Actuarial
Science and Accounting from Drake University College of Business.

                                       34
<PAGE>   36
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

ITEM 10. EXECUTIVE COMPENSATION

     The following table sets forth the compensation paid or accrued by the
Company for services rendered during 1995, 1996 and 1997 with respect to the
Chief Executive Officer and the President of the Company:

                         SUMMARY OF COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                        ANNUAL COMPENSATION
                                                         --------------------------------------------------
                  NAME AND                                                  OTHER ANNUAL       ALL OTHER
             PRINCIPAL POSITION                  YEAR    SALARY    BONUS    COMPENSATION    COMPENSATION(1)
             ------------------                  ----    ------    -----    ------------    ---------------
<S>                                              <C>     <C>       <C>      <C>             <C>
Thomas J. Berthel
  Chief Executive Officer....................    1995     $-0-     $-0-         $-0-          $172,967(2)
                                                 1996     $-0-     $-0-         $-0-          $137,571(2)
                                                 1997     $-0-     $-0-         $-0-          $ 22,060(2)
</TABLE>

-------------------------
(1) Beginning with meetings held after August 1, 1995, directors of the Company
    who are also employees of the Company or affiliates of the Company are paid
    meeting fees of $150 per meeting; directors of the Company who are not also
    employees of the Company or affiliates of the Company are paid meeting fees
    of $250 per meeting.

(2) Includes fees received from the parent of the Company for services provided
    by Mr. Berthel to Telecommunications Income Fund IX, L.P. and
    Telecommunications Income Fund X, L.P., two limited partnerships for which
    the Company serves as general partner.

     The Company pays, under an unwritten agreement with the Company's parent,
50% of the management fees it receives from TIFIX and TIFX (see Note 4) to the
Company's parent. The Company's parent agreed to suspend indefinitely such
payment beginning March 1, 1997 due to the Company's operating losses. Such
management fees paid to the Company's parent were $47,146, $351,134 and $432,419
during 1997, 1996 and 1995, respectively.

     In addition, the Company also has an unwritten, month-to-month agreement
with its parent in which the Company's parent provides management services at a
yearly rate of $240,000, $210,000 and $250,000 during 1997, 1996 and 1995,
respectively.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Substantially all of the common voting stock of the Company is owned by
Berthel Fisher & Company. The following table sets forth, as of December 31,
1997, the number of shares of the common stock of Berthel Fisher & Company (the
parent of the Company) beneficially owned by (i) each director of the Company,
(ii) each executive officer of the Company named in the Summary Compensation
Table, (iii) each person

                                       35
<PAGE>   37
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

known by the Company to beneficially own more than five percent of the
outstanding shares of the common stock of Berthel Fisher & Company, and (iv) all
executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
                             NAME AND ADDRESS                NUMBER OF SHARES                 PERCENT OF
TITLE OF CLASS             OF BENEFICIAL OWNER             BENEFICIALLY OWNED(1)         OUTSTANDING SHARES(2)
--------------             -------------------             ---------------------         ---------------------
<S>              <C>                                       <C>                           <C>
Common           Thomas J. Berthel(3)....................         416,583                       42.81%
                 100 Second Street SE
                 Cedar Rapids. IA 52401
Common           Ronald O. Brendengen....................          27,360                        2.81%
                 100 Second Street SE
                 Cedar Rapids, IA 52401
Common           Fred P. Fisher(4).......................         112,621                       11.57%
                 10875 Benson Drive, Ste. 130
                 Overland Park, KS 66210
Common           Gary L. Rickels.........................          93,808                        9.64%
                 Rural Route #1
                 Center Junction, IA 52212
Common           Von L. Elbert...........................          46,287                        4.76%
                 315 Andover Lane SE
                 Cedar Rapids, IA 52403
Common           All executive officers and directors as          776,900                       79.84%
                 a group (twelve persons)................
</TABLE>

-------------------------
(1) Unless otherwise indicated, each person has sole voting and dispositive
    power over such shares.

(2) Based on 973,022 shares of the common stock of Berthel Fisher & Company
    outstanding at December 31, 1997.

(3) Does not include 500 shares of Class B Nonvoting Convertible Stock of the
    Company owned by Mr. Berthel's wife. The 500 shares are convertible into
    less than one tenth of one percent of the Company's common stock. Does not
    include an option to purchase 15,000 shares of common stock of Berthel
    Fisher & Company.

(4) Includes 104,333 shares owned by Mr. Fisher's individual retirement account.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company serves as the general partner of three publicly held limited
partnerships, Telecommunications Income Fund IX, L.P. ("TIFIX"),
Telecommunications Income Fund X, L.P. ("TIFX") and Telecommunications Income
Fund XI, L.P. ("TIFXI"). The Company receives management fees from TIFIX, TIFX
and TIFXI in its capacity as general partner. The Company had entered into a
consulting contract with Mr. Thomas J. Berthel that provided for twenty percent
of the management fee from TIFIX to be paid to Mr. Berthel for consulting
services provided to the Company in connection with its obligations as the
general partner of TIFIX. The consulting fees paid to Mr. Berthel on account of
services provided to TIFIX were $88,394, $64,532 and $11,219 in 1995, 1996 and
1997, respectively. Mr. Berthel also provides consulting services to the Company
in connection with the Company's obligations as general partner of TIFX. In
connection with these services, Mr. Berthel was paid $84,573, $73,039 and
$10,841 in 1995, 1996 and 1997, respectively. The payment of these fees were
suspended indefinitely beginning March 1, 1997.

     Certain administrative, managerial, consulting and operational services are
provided to the Company by its parent Berthel Fisher & Company ("BFC"). Prior to
October, 1995, these services were provided on a

                                       36
<PAGE>   38
                     BERTHEL FISHER & COMPANY LEASING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

month to month basis pursuant to terms established from time to time by the
Board of Directors of the Company and the Board of Directors of BFC. The amount
of fees were determined on an annual basis by the Boards of Directors of the
Company and BFC. In October, 1995, the Company and BFC entered into a unwritten
agreement whereby BFC would continue to provide these services for the period
ending December 31, 1996, and thereafter on an annual basis subject to the
approval of the Boards of Directors of both companies. The agreement specifies
the services to be provided. The annual charges under this agreement were
$240,000, $210,000 and $250,000 during 1997, 1996 and 1995, respectively.

     T. J. Berthel Enterprises, Inc., a company owned one-half by the Company's
parent and one-half by Thomas J. Berthel, is the general partner of a limited
partnership that owns approximately 7% of the outstanding common stock of
Intellicall, Inc. An individual who owns approximately 4.8% of the Company's
parent also owns approximately 9.5% of this limited partnership. In November,
1995, Mr. Berthel was elected to serve on the Board of Directors of Intellicall,
Inc.

     The Company has a lease with Internet Navigator, Inc. having a net
investment of approximately $146,000 at December 31, 1997. Mr. Von L. Elbert, a
director of the Company, has guaranteed this lease. Mr. Elbert has a 16%
interest in Internet Navigator, Inc. TIFIX has leases with E&S Investments, Inc.
and Future Systems, Inc. having a net investment of approximately $7,300 and
$18,200, respectively, at December 31, 1997. Mr. Elbert is a guarantor of the
E&S Investment, Inc. and Future Systems, Inc. leases. Mr. Elbert has a 33%
ownership interest in Future Systems, Inc. Also see Note 4 to the financial
statements with respect to other related party leases.

     Also see Note 11 to the financial statements with respect to other
miscellaneous transactions with the Company's parent or its affiliates.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

<TABLE>
<S>    <C>
 3.1   Articles of Incorporation of the Company, as amended, filed
       as Exhibit 3.1 to Registration Statement No. 33-98346C are
       hereby incorporated by reference.
 3.2   Bylaws of the Company, as amended, filed as Exhibit 3.2 to
       Registration Statement No. 33-98346C are hereby incorporated
       by reference.
 4.1   Form of Note filed as Exhibit 4.1 to Registration Statement
       No. 33-98346C is hereby incorporated by reference.
 4.2   Form of Indenture by and between the Company and Firstar
       Trust Co., as Trustee filed as Exhibit 4.2 to Registration
       Statement No. 33-98346C is hereby incorporated by reference.
 4.3   Form of Warrant Certificates filed as Exhibit 4.3 to
       Registration Statement No. 33-98346C is hereby incorporated
       by reference.
 4.4   Terms of Warrant filed as Exhibit 4.4 to Registration
       Statement No. 33-98346C is hereby incorporated by reference.
</TABLE>

                                       37
<PAGE>   39
                    BERTHEL FISHER & COMPANY LEASING, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 -- (CONTINUED)

<TABLE>
<CAPTION>
           MATERIAL CONTRACTS
           ------------------
<S>        <C>
    10.1   Revolving Loan and Security Agreement filed as Exhibit 10.1 to Registration Statement No. 33-98346C is
           hereby incorporated by reference.
    10.2   Management Agreement with Berthel Fisher & Company as Exhibit 10.2 to Registration Statement No. 33-98346C
           is hereby incorporated by reference.
    10.3   Incentive Stock Option Plan filed as Exhibit 10.3 to Registration Statement No. 33-98346C is hereby
           incorporated by reference.
    10.4   Incentive Bonus Plan filed as Exhibit 10.4 to Registration Statement No. 33-98346C is hereby incorporated
           by reference.
    10.6   Berthel Fisher & Company Subordinated Debenture and Warrant filed as Exhibit 10.8 to Registration
           Statement No. 33-98346C is hereby incorporated by reference.
    10.7   Lease -- Business Property (office space) filed as Exhibit 10.13 to Registration Statement No. 33-98346C
           is hereby incorporated by reference.
    10.8   Agreement between Southwest Merchant Group and the Company filed as Exhibit 10.14 to Registration
           Statement No. 33-98346C is hereby incorporated by reference.
    10.9   Consulting agreement with Thomas J. Berthel filed as Exhibit 10.16 to Registration Statement No. 33-98346C
           is hereby incorporated by reference.
    10.10  Amendment to Revolving Loan and Security Agreement filed as Exhibit 10.16 to Registration Statement No.
           33-98346C is hereby incorporated by reference.
    10.11  Agreement between Nutmeg Securities Ltd. and the Company filed as Exhibit 10.17 to Registration Statement
           No. 33-98346C is hereby incorporated by reference.
    10.12  Amendment to Revolving Loan and Security Agreement filed as Exhibit 10.16 to Registration Statement No.
           33-98346C is hereby incorporated by reference.
    16     Letter on Change in Certifying Accountant filed as Exhibit 16 to Registration Statement No. 33-98346C is
           hereby incorporated by reference.
    21     Subsidiaries of the Registrant
    27     Financial Data Schedule -- filed electronically
</TABLE>

        (b) Reports on Form 8-K

            none

                                      38
<PAGE>   40

                                   SIGNATURES

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

                                          BERTHEL FISHER & COMPANY LEASING, INC.

<TABLE>
<S>                                                    <C>
       By Berthel Fisher & Company Leasing, Inc.

By:                /s/ THOMAS J. BERTHEL               Date: March 27, 1997
   -------------------------------------------------
                   Thomas J. Berthel
                       President

       By Berthel Fisher & Company Leasing, Inc.

By:              /s/ RONALD O. BRENDENGEN              Date: March 27, 1997
   -------------------------------------------------
                 Ronald O. Brendengen
          Chief Financial Officer, Treasurer
</TABLE>

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

<TABLE>
<S>                                                      <C>
                   /s/ THOMAS J. BERTHEL                 Date: March 27, 1997
----------------------------------------------------
                     Thomas J. Berthel
                  Chief Executive Officer
                    President, Director
          Berthel Fisher & Company Leasing, Inc.,

                  /s/ NANCY L. LOWENBERG                 Date: March 27, 1997
----------------------------------------------------
                    Nancy L. Lowenberg
             Chief Operating Officer, Director
          Berthel Fisher & Company Leasing, Inc.,

                 /s/ RONALD O. BRENDENGEN                Date: March 27, 1997
----------------------------------------------------
                   Ronald O. Brendengen
                    Treasurer, Director
          Berthel Fisher & Company Leasing, Inc.,

                   /s/ DANIEL P. WEGMANN                 Date: March 27, 1997
----------------------------------------------------
                     Daniel P. Wegmann
                        Controller
          Berthel Fisher & Company Leasing, Inc.,
</TABLE>

                                      39