<PAGE>   1


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


                                   FORM 10-QSB

(Mark One)

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

               FOR THE TRANSITION PERIOD FROM      N/A      TO     N/A
                                              -------------    -------------

                        Commission file number 2-93426-D


                         UNISTAR FINANCIAL SERVICE CORP.
        (Exact Name of Small Business Issuer as Specified in Its Charter)


          Delaware                                        87-0419568
-------------------------------                ---------------------------------
(State or Other Jurisdiction of                (IRS Employer Identification No.)
Incorporation or Organization)


                      4635 McEwen Road, Dallas, Texas 75244
           -----------------------------------------------------------
                    (Address of Principal Executive Offices)

                                 (972) 720-7110
           -----------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)


           -----------------------------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

      Check whether the issuer: (1) filed 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[ ]

      State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock, par value $.01
per share -- 24,388,354 shares outstanding as of August 17, 1999.

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





<PAGE>   2





                         UNISTAR FINANCIAL SERVICE CORP.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>


                                                                                                  Page
 Item                                                                                             Number
 ----                                                                                             ------
<S>                                                                                               <C>

                                                      PART I
                                               FINANCIAL INFORMATION

  1.     Financial Statements ...................................................................  1

  2.     Management's Discussion and Analysis of Financial Condition and
         Results of Operations ..................................................................  1

                                                      PART II
                                                 OTHER INFORMATION

  1.     Legal Proceedings ......................................................................  5

  2.     Changes in Securities.................................. ................................  5

  3.     Defaults Upon Senior Securities ........................................................  6

  4.     Submission of Matters to a Vote of Security Holders.....................................  6

  5.     Other Information.......................................................................  6

  6.     Exhibits and Reports on Form 8-K .......................................................  6


Appendix A - Unaudited consolidated financial statements of Unistar Financial
   Service Corp. as of and for the Quarter and Six Months Ended June 30, 1999 ...................  F-1
</TABLE>



<PAGE>   3
                                     PART I
                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

      The financial statements of the Company are annexed to this report as
Appendix A, beginning on page F-1.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

OVERVIEW

     Unistar Financial Service Corp. (the "Company"), through its subsidiaries,
is primarily engaged in the distribution, premium financing, reinsurance, claims
processing and other ancillary areas of personal lines auto insurance business.
As of June 30, 1999, the Company has over 157 company-owned ("captive") retail
auto insurance agency locations and over 463 appointed independent auto
insurance agencies that generate revenue from agency fees, commissions and the
marketing of ancillary financial services. The Company's premium finance
subsidiary, Eagle Premium Finance Company, generates revenue from premium
financing provided to the Company's customers. The Company's several managing
general agencies generate revenue through commissions, policy fee income and
other administrative fees from the marketing and administration of the Company's
insurance products through the Company's auto insurance agency distribution
network. Unistar Insurance Company, the Company's insurance subsidiary,
generates revenues from reinsurance premiums and the investment of its assets.

     The Company completed several significant acquisitions late in 1998. These
transactions represented significant steps in transforming the Company from a
dormant public shell into a vertically integrated insurance and financial
service holding company, specializing in wholesale and retail auto insurance,
premium financing, and insurance claims management. The Company has implemented
a strategy of expanding its insurance product distribution system by acquiring
certain retail auto insurance agencies and other complimentary businesses in the
financial services industry. The Company expects to continue such acquisition
activity for the remainder of 1999, but there can be no assurance of its ability
to do so.

     During the second quarter, the Company contemplated selling its
wholly-owned subsidiary, Unistar Insurance Company ("UIC"), a property and
casualty insurance company domiciled in Texas. Subsequent to the end of the
second quarter, the Company discontinued its efforts to sell UIC. The Company's
present strategy is to continue growing its commission-based and fee-for-service
distribution from which it currently derives most of its earnings, and UIC will
continue with a participation, via reinsurance, of the Company's own personal
lines auto insurance risks.

                                        1

<PAGE>   4
RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999

     The Company acquired its present core business operations during August and
September of 1998, therefore a comparison of second quarter 1999 to second
quarter 1998 or six months ended June 30, 1999 to six months ended June 30, 1998
would not provide meaningful information. The Company believes that the most
appropriate comparison for the second quarter of 1999 is to the first quarter of
1999. The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this report and
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1998.

<TABLE>
<CAPTION>

                                             THREE MONTHS ENDED   THREE MONTHS ENDED
                                                JUNE 30, 1999       MARCH 31, 1999
                                             ------------------   ------------------
                                                 (UNAUDITED)           (UNAUDITED)


<S>                                          <C>                  <C>
GROSS WRITTEN PREMIUMS ...................   $       31,079,000   $       44,209,000
                                             ==================   ==================

Revenue:
 Net commissions and fees earned .........   $       12,138,000   $       14,590,000
 Finance revenue .........................            4,981,000            4,469,000
 Other income, net .......................            2,509,000              501,000
                                             ------------------   ------------------
 Total revenues and other income .........           19,628,000           19,560,000
Expenses:
 Commissions and loss adjustment
     expenses ............................            7,535,000            8,946,000
 Other operating expenses ................            9,067,000            6,560,000
                                             ------------------   ------------------
 Total operating expenses ................           16,602,000           15,506,000
                                             ------------------   ------------------
EBITDA ...................................            3,026,000            4,054,000
 Amortization of customer lists ..........              630,000              551,000
 Depreciation expense ....................              189,000              107,000
 Interest expense ........................            1,851,000            1,129,000
                                             ------------------   ------------------
 Total non-operating expenses ............            2,670,000            1,787,000
                                             ------------------   ------------------
 Income before income taxes ..............              356,000            2,267,000
 Income tax expense ......................              140,000              896,000
                                             ------------------   ------------------
NET INCOME ...............................   $          216,000   $        1,371,000
                                             ==================   ==================
EARNINGS PER SHARE .......................   $             0.01   $             0.06
                                             ==================   ==================
Weighted average shares outstanding ......           24,380,807           24,110,729
                                             ==================   ==================
</TABLE>


     Gross written premiums. The Company's top-line production is measured by
gross written premiums. Gross written premiums of $31.1 million for the second
quarter of 1999 ("Q2") represented a 29.7% decrease from the first quarter of
1999 ("Q1"). This decrease was mainly due to seasonal fluctuations and a rating
increase in the Company's personal lines auto insurance on March 15, 1999.





                                       2
<PAGE>   5
     Net commissions and fees earned. The Company earned net commissions and
fees of $12.1 million during Q2, a 16.8% decrease from Q1. The Company earns
fees and commissions by placing insurance business with third-party insurers.
The decrease in net commissions and fees earned was also due to seasonal
fluctuations and a rating increase in personal lines auto insurance on
March 15, 1999.

     Finance revenue. Finance revenue of $4.9 million during Q2 exceeded Q1 by
11.5%, due to the acquisition of First Grampian Premium Finance Company (a
Florida licensed entity) selling the Company's Florida retail agencies.

     Other income, net. Other income of $2.5 million during Q2 was approximately
five times the amount recognized in Q1. The increase in other income was
primarily attributed to the Company's auto collision appraisal and repair center
divisions which commenced operations in Q2.

     Commissions and loss adjustment expenses. Commissions and loss adjustment
expenses of $7.5 million for Q2 represented a 15.8% decrease from Q1.
Commissions and loss adjustment expenses, the Company's most significant
expense, represent actual commissions paid to retail agents, including expenses
required to settle claims and losses. The Company is reimbursed by reinsurers as
a percentage of earned premium to administer and settle claims. The decrease
corresponded with the decrease in premiums written by the Company during the
second quarter.

     Other operating expenses. Other operating expenses of $9.1 million during
Q2 were 38.2% higher than Q1, due to increased operating expenses by the
company's auto collision appraisal and repair center divisions. The increase
corresponded with the increase in other income generated primarily by the
Company's auto collision appraisal and repair center divisions.

     Interest expense. The 64.0% increase in interest expense, $1.9 million for
Q2 versus $1.1 million during Q1, was the result of a higher balance of the
credit facility that funds the Company's premium finance operations, due to the
greater number of premium finance contracts. The increase was also partially
attributable to the Term Loan (described below) being outstanding for a full
quarter.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's existing capital resources consist of cash, equity securities
available for sale and funds available under credit facilities for premium
financing. The Company's cash and equity securities available for sale increased
to $9.5 million at June 30,1999 from $6.2 million at December 31, 1998.

     In March 1999, the Company entered into a credit facility with Eurostar
Interests, Ltd. that provided a term loan of $10 million, due in March 2003
(the "Term Loan"). The proceeds of the Term Loan have been partially used to
fund acquisitions and otherwise expand operations. The Term Loan bears interest
at 10% per annum and is unsecured.

     Typically the Company maintains cash levels between $4 million and $6
million for general corporate needs, with any excess used to reduce borrowings
under the Company's premium financing facility. In the six months ended June 30,
1999, the Company's operations used $18.4 million of cash compared to $4.7
million in 1998. The primary use of cash was $20.3 million that was used to
finance premium contract receivables. The Company's financing activities for the
six months ended June 30, 1999, provided $25.5







                                       3
<PAGE>   6


million of net cash, compared to $6.6 million in 1998. The increase was
primarily due to the $10 million proceeds from the Term Loan in March 1999. The
Company's investing activities used $3.8 million of net cash in the first
quarter of 1999, compared to $3.2 million provided in 1998, which was mostly
from acquired businesses.

     The Company's cash requirements consist of working capital needs,
obligations under its leases and promissory notes and the funding of potential
acquisitions. Management believes that the Company's cash and funds available
under premium financing facilities are sufficient to meet its anticipated cash
requirements, subject to raising additional capital as necessary for
acquisitions.

     Finance contracts receivable as of June 30, 1999 increased to 56.1 million
from $38.5 million at year end 1998, after deducting an allowance for credit
losses of approximately $1.0 million on each date. The increase reflects
increased business from existing operations and the addition of certain agency
acquisitions and other Florida agency acquisitions. Notes payable increased to
55.9 million as of June 30, 1999 from $38.6 million at year-end 1998, primarily
due to the Term Loan and increased premium finance facility.

     In February, 1999, the Company converted $4 million of debt into equity.

YEAR 2000 MATTERS

     In 1998, the Company began converting its computer systems to be year 2000
compliant. The Company has evaluated its internal systems, both hardware and
software, facilities, and interactions with business partners in relation to
year 2000 issues. The Company believes that it has completed its efforts to
bring the systems in compliance. The total cost incurred to modify these
existing systems, which include both internal and external costs of programming,
coding and testing, was not material. The Company continually evaluates computer
hardware and software upgrades and, therefore, many of the costs to replace
existing items with year 2000 compliant upgrades are not likely to be
incremental costs to the Company. During 1999, the Company will continue to
contact its business partners (including agents, banks, motor vehicle
departments and rating agencies) to determine the status of their compliance and
to assess the impact of noncompliance on the Company. The Company believes that
it is taking the necessary measures to mitigate issues that may arise relating
to the year 2000. To the extent that any additional issues arise, the Company
will evaluate the impact on its business, results of operations and financial
condition and, if material, make the necessary disclosures and take appropriate
remedial action.

RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB

     This Form 10-QSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the Company's business activities and availability of funds.
The forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, regulatory framework, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that







                                       4
<PAGE>   7


the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Form 10-QSB will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.

                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

     The Company is subject to routine legal proceedings in the ordinary course
of business. The Company believes that the ultimate resolution of these lawsuits
will not have a material adverse effect on its business, financial condition or
results of operations. The Company provides for a liability for both the amount
of estimated damages attributable to these lawsuits and the estimated costs of
litigation.

ITEM 2.  CHANGES IN SECURITIES.

     On April 30, 1999, the Company filed a registration statement on Form 8-A
to register its common stock under Section 12(b) and 12(g) of the Securities
Exchange Act of 1934.

     At the Company's Annual Shareholder's Meeting, held June 18, 1999, the
Company's shareholders approved an amendment to the Company's Articles of
Incorporation that increased the authorized shares of the Company from
50,000,000 shares to 200,000,000 shares (See Item 5. below). The Company filed
its Restated Certificate of Incorporation, which is filed as an exhibit to this
Form 10-QSB, with the Delaware Secretary of State on June 30, 1999.

     On June 18, 1999, the Company's Board of Directors amended the Company's
Bylaws (the amended provision had previously allowed the closing of the stock
transfer records) in order to comply with a requirement of the American Stock
Exchange. The Company's Amended and Restated Bylaws are filed as an exhibit to
this Form 10-QSB.

     On July 13, 1999, the Company's Board of Directors announced a 2-for-1
stock split, payable in the form of a stock dividend to the Company's
shareholders of record as of July 31, 1999, and payable on or before August 31,
1999. On July 23, 1999, the Board determined that a stock split would not be in
the best interests of the Company's shareholders, and the Board rescinded the
stock dividend.

     During the second quarter of 1999, the Company issued the following shares
of its common stock without registration under the Securities Act of 1933:

     In April 1999, the Company issued 2,010 shares of common stock in multiple
     stock-for-asset transactions.

     The above issuances were unregistered, as the Company was relying on the
exemption from registration contained in Section 4(2) of the Securities Act on
the basis that such transactions did not involve public offerings.





                                       5
<PAGE>   8

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

     None.

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

     On June 18, 1999, the Annual Meeting of the Company's Shareholders was
held, at which the following three matters were submitted to a vote and approved
as indicated:

     1.  Proposal to elect nine individuals to the Board of Directors pursuant
         to management's nominations: Marc A. Sparks, F. Jeffrey Nelson, James
         G. Leach, Kerry A. Sebree, Morris Belzberg, Brent Brown, Noelle Hill,
         Leonard Feldman and Patrick Rastiello. This proposal was approved with
         15,770,151 shares voting in favor of each nominee, and no shares were
         withheld.

     2.  Proposal to amend the Company's Certificate of Incorporation to
         increase the authorized shares of the Company from 50,000,000 shares to
         200,000,000 shares. This proposal was approved with 13,382,627 shares
         voting in favor, no shares voting against, and 2,387,524 shares
         abstaining.

     3.  Proposal to ratify the appointment of Karlins Arnold & Corbitt, P.C. as
         the Company's independent auditors for 1999. This proposal was approved
         with 15,770,151 shares voting in favor, no shares voting against, and
         no shares abstaining.

ITEM 5.  OTHER INFORMATION.

         On May 17, 1999, the Company's common stock was accepted for listing
and commenced trading on the American Stock Exchange. The Company's common stock
had been quoted on the OTC Bulletin Board from September 1998 to May 1999.

         In mid-July 1999, the Company's common stock experienced extreme price
volatility in its trading on the American Stock Exchange, after which the
Listing Investigations Department of The Nasdaq-Amex Market Group (the "Market
Group") commenced a review of the Company. Pending the results of such review,
the Market Group halted the trading of the Company's common stock on July 21,
1999. Among other things, the Market Group has requested and been supplied with
information about the valuation of certain assets (customer lists and a
reinsurance license) on the Company's balance sheet, and certain transfers and
recipients of the Company's common stock. Some of such transfers were made by
Marc A. Sparks, the Company's chairman and CEO, and F. Jeffrey Nelson, the
Company's President and CFO.

          The Company is cooperating fully with the review process, but at this
time the Company's management cannot determine: (i) the outcome or duration of
the review; (ii) when, or if , the Company's common stock will resume trading on
the American Stock Exchange; or (iii) whether the results of the Market Group's
review will have a material effect on the Company's financial position or
results of operation.

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

         (a)      Exhibits




                                       6
<PAGE>   9

         3.1      Restated Certificate of Incorporation.(2)
         3.2      Amended and Restated Bylaws.(2)
         10.1*    Registrant's 1998 Stock Option Plan.(1)
         27.0     Financial Data Schedule.(2)

*        Denotes management contract or compensatory plan.

(1)      Incorporated by reference to the Registrant's Report on Form 8-K filed
         September 2, 1998.
(2)      Filed herewith.

         (b)      Reports on Form 8-K

None.







                                       7
<PAGE>   10

                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                        UNISTAR FINANCIAL SERVICE CORP.


Dated: August 19, 1999              By   /s/  MARC A. SPARKS
                                      ------------------------------------------
                                                   Marc A. Sparks
                                       Chairman and Chief Executive Officer



Dated: August 19, 1999              By   /s/  F. JEFFREY NELSON
                                      ------------------------------------------
                                                  F. Jeffrey Nelson
                                       President and Chief Financial Officer





<PAGE>   11

                                   APPENDIX A

                        UNAUDITED FINANCIAL STATEMENTS OF
                         UNISTAR FINANCIAL SERVICE CORP.
          AS OF AND FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1999






<PAGE>   12

                         UNISTAR FINANCIAL SERVICE CORP.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                             June 30,          December 31,
                                                                               1999                1998
                                                                         ----------------    ----------------
                                                                           (Unaudited)
<S>                                                                      <C>                 <C>
     ASSETS
Equity securities available for sale, at fair value                      $        419,000    $        347,000
Cash                                                                            9,133,000           5,865,000
Finance contracts receivable, net of allowance for
     credit losses of [$1,008,445] and $996,146, respectively                  56,116,000          38,454,000
Premiums due from agents and policyholders                                      5,896,000           1,685,000
Property and equipment, net                                                     6,773,000           3,535,000
Customer lists, net of accumulated amortization                                85,091,000          86,176,000
Reinsurance Intermediary License(s)                                             5,018,000           5,000,000
Investments                                                                    14,569,000           6,283,000
Other assets                                                                    4,031,000           1,988,000
                                                                         ----------------    ----------------
     TOTAL ASSETS                                                        $    187,046,000    $    149,333,000
                                                                         ================    ================

     LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Reserve for commissions and loss adjustment expenses                     $      6,589,000    $      5,340,000
Unearned commissions and policy fees                                            6,715,000           6,180,000
Amount due reinsurer                                                            6,132,000           1,923,000
Notes payable                                                                  55,958,000          38,571,000
Accounts payable and accrued liabilities                                        4,857,000           9,426,000
Long-term debt                                                                 10,175,000                  --
Income tax payable                                                              3,065,000           2,929,000
                                                                         ----------------    ----------------
     TOTAL LIABILITIES                                                         93,491,000          64,369,000
                                                                         ----------------    ----------------

Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized
     5,000,000 shares; no shares issued or outstanding                                 --                  --
Common stock, $.01 par value, authorized 200,000,000
     shares; 24,404,412 and 24,009,372 issued and
     outstanding, respectively                                                    244,000             240,000
Additional paid-in capital                                                     92,130,000          85,203,000
Accumulated other comprehensive income                                           (785,000)           (858,000)
Retained earnings                                                               2,140,000             553,000
Less treasury stock, at cost (63,333 shares)                                     (174,000)           (174,000)
                                                                         ----------------    ----------------
   TOTAL STOCKHOLDERS' EQUITY                                                  93,555,000          84,964,000
                                                                         ----------------    ----------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $    187,046,000    $    149,333,000
                                                                         ================    ================
</TABLE>


                 See notes to consolidated financial statements.


                                       F-1

<PAGE>   13



                         UNISTAR FINANCIAL SERVICE CORP.
                        CONSOLIDATED STATEMENT OF INCOME
             FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999

<TABLE>
<CAPTION>

                                                                Three              Six
                                                                Months             Months
                                                            ---------------   ---------------
                                                              (Unaudited)       (Unaudited)



<S>                                                         <C>               <C>
GROSS WRITTEN PREMIUMS                                      $    31,079,000   $    75,288,000
                                                            ===============   ===============

REVENUE
Net commissions and fees earned                             $    12,138,000   $    26,728,000
Finance revenue                                                   4,981,000         9,450,000
Other income, net                                                 2,509,000         3,010,000
                                                            ---------------   ---------------
     Total revenues and other income                             19,628,000        39,188,000
                                                            ---------------   ---------------

EXPENSES
     Commissions and loss adjustment expenses                     7,536,000        16,481,000
     Other operating expenses                                     9,067,000        15,627,000
     Amortization of customer lists                                 630,000         1,181,000
     Depreciation expense                                           189,000           296,000
     Interest expense                                             1,850,000         2,980,000
                                                            ---------------   ---------------
           Total expenses                                        19,272,000        36,565,000
                                                            ---------------   ---------------


INCOME BEFORE PROVISION FOR INCOME TAX                              356,000         2,623,000

PROVISION FOR INCOME TAX                                            140,000         1,036,000
                                                            ---------------   ---------------

NET INCOME                                                  $       216,000   $     1,587,000
                                                            ===============   ===============





Basic earnings per share                                    $           .01   $           .07
Diluted earnings per share                                  $           .01   $           .07

Weighted average number of common shares outstanding:
Basic                                                            24,380,807        24,244,547
Diluted                                                          24,380,807        24,244,547
</TABLE>









                 See notes to consolidated financial statements.


                                       F-2

<PAGE>   14





                         UNISTAR FINANCIAL SERVICE CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 1999

<TABLE>
<CAPTION>

                                                                   Six
                                                                  Months
                                                               ------------
                                                                (Unaudited)


<S>                                                            <C>
Cash flows from operating activities:
     Net income                                                $  1,587,000
     Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization                                1,477,000
     Finance contract receivables                               (20,294,000)
     Amount due reinsurers                                        4,556,000
     Reserve for commissions and loss expenses                    1,295,000
     Unearned commissions and policy fees                        (2,314,000)
     Other, net                                                  (4,677,000)
                                                               ------------

     Net cash used in operating activities                      (18,370,000)
                                                               ------------

Cash flows from investing activities:
     Businesses acquired in purchase transactions net of
     cash acquired                                                 (604,000)
     Purchases of property and equipment                         (2,865,000)
     Other                                                         (366,000)
                                                               ------------

     Net cash used in investing activities                       (3,835,000)
                                                               ------------

Cash flows from financing activities:
     Proceeds from notes payable                                 25,473,000
                                                               ------------

     Net cash provided by financing activities                   25,473,000
                                                               ------------

Net increase in cash                                              3,268,000

Cash, beginning of period                                         5,865,000
                                                               ------------

Cash, end of period                                            $  9,133,000
                                                               ============
</TABLE>






                 See notes to consolidated financial statements.


                                       F-3

<PAGE>   15



                         UNISTAR FINANCIAL SERVICE CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unistar Financial Service Corp. ("Unistar" or "the Company") is a vertically
integrated insurance holding company which, through its subsidiaries controls
substantially all aspects of the auto insurance underwriting, distribution and
claims process. Through its insurance subsidiaries (U.S. Fidelity Insurance
Services), Unistar provides non-standard personal lines automobile insurance.
The Company internally processes claims made by its customers through its claims
adjusting company, Eagle Claims Corp, and offers premium financing to its own
insureds through Eagle Premium Finance Company. The Company also provides
reinsurance brokerage services, renter's insurance, collision repair, appraisal
services and other ancillary services pertinent to its operations through other
wholly-owned subsidiaries. Unistar Insurance Company operates as a property and
casualty insurance company domiciled in the State of Texas and reinsures
non-standard automobile insurance produced and underwritten by affiliated
companies in Texas.

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

On August 17, 1998, the stockholders of the Company approved: (i) a Stock
Purchase Agreement, dated as of July 7, 1998 (the "IFHC Acquisition"), whereby
the Company purchased all of the issued and outstanding shares of common stock
of International Fidelity Holding Corporation, a Texas insurance holding
corporation ("IFHC"), in exchange for 19,777,000 shares of common stock, $.01
par value per share ("Common Stock"), of the Company on a post-Reverse Stock
Split basis, as defined below, (ii) an amendment to the Certificate of
Incorporation authorizing a one-for-fifteen reverse stock split of the Company's
outstanding Common Stock (the "Reverse Stock Split") and (iii) an amendment to
the Certificate of Incorporation to change the name of the Company to Unistar
Financial Service Corp. Following the closing of the IFHC Acquisition on August
17, 1998, IFHC became a wholly-owned subsidiary of the Company. The Company,
through its sole ownership of IFHC, controls IFHC's insurance subsidiary,
Unistar Insurance Company, a Texas property and casualty insurance corporation.

The IFHC Acquisition was accounted for as a reverse-takeover, meaning that for
accounting purposes IFHC was the acquirer of the Company. Therefore, the
financial results of IFHC for all of 1998 are included in the Company's
consolidated financial statements contained herein. The USFH Acquisition
(defined below), however, was accounted for as an asset purchase, therefore only
the financial results of USFH subsequent to September 30, 1998 are included in
the Company's consolidated financial statements contained herein.

On September 30, 1998, the Company completed the acquisition (the "USFH
Acquisition") of the assets and operations of U.S. Fidelity Holding Corp. and
its subsidiaries (collectively, "USFH"). USFH participates in the auto insurance
industry by providing multiple non-standard auto insurance products, premium
financing and claims administration and auto collision appraisal and repair
services. The USFH Acquisition was structured as a stock-for-assets exchange,
valued at approximately $75 million, with the Company issuing 3,975,000 shares
of Common Stock in exchange for substantially all of the assets of USFH.

Reclassifications - Certain reclassifications have been made to the prior year
financial statements to conform with the current year presentation.

Securities Available for Sale - Equity securities are classified as
"available-for-sale" as defined by SFAS 115. In accordance with SFAS 115, they
are reported at aggregate fair value with unrealized losses excluded from
earnings and reported as other comprehensive income, net of deferred taxes. The
cost of securities sold was determined by the average cost method.



                                       F-4

<PAGE>   16



                         UNISTAR FINANCIAL SERVICE CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Depreciation of plant and equipment is provided over the estimated useful
lives of the respective assets using the straight-line method, generally from
five to forty years.

Expenditures for additions, major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to earnings as incurred.

When property, plant and equipment are retired or otherwise disposed of, the
cost thereof and the applicable accumulated depreciation are removed from the
respective accounts and the resulting gain or loss is reflected in earnings.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") 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 from those estimates.

Risks - The following is a description of the most significant risks facing the
Company and how it mitigates those risks:

     Legal/regulatory risks - the Company utilizes third party policy-issuing
insurance companies to write premium which the Company produces. These companies
are subject to legal and regulatory risks. The risk that changes in the
regulatory environment in which insurer operates will create additional expenses
not anticipated by the insurer in pricing its products. That is, regulatory
initiatives designed to reduce insurer profits, restrict underwriting practices
and risk classifications, mandate rate reductions and refunds, and new legal
theories or insurance company insolvencies through guaranty fund assessments may
create costs for the insurer beyond those recorded in the financial statements.
The Company attempts to mitigate this risk by monitoring proposed regulatory
legislation and by assessing the impact of new laws.

     Credit risk - the Company is subject to several credit risks, some of which
are the ability of agents to refund unearned commissions in the event that a
policy cancels, the ability of a premium finance customer to adhere to their
installment agreement, and solvency of its reinsurers. The Company is in the
practice of reserving a portion of each agent's commission as a contingency for
the refund of unearned commission, which reduces its exposure. In addition,
agents which do not timely remit unearned commissions lose their authority with
the Company. Premium finance contracts are strictly monitored and, via systems
automation, policies are promptly canceled for non-payment of premium finance
contracts, thereby eliminating exposure to the Company, for uncollectible
balances. The Company attempts to minimize reinsurance risk by maintaining sound
reinsurance agreements with a number of reinsurers, and by providing for any
amounts deemed uncollectible.

     Interest rate risk - the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. To the extent that
liabilities come due more quickly than assets mature, an insurer might have to
sell assets prior to maturity and potentially recognize a gain or a loss. The
Company attempts to mitigate this risk by attempting to match the maturity
schedule of its assets with the expected payouts of its liabilities.

Customer Lists - Customer lists are amortized on a straight-line basis over 40
years. Management reviews, on an annual basis, the carrying value of customer
lists in order to determine whether an impairment has occurred. Impairment is
based on several factors including the Company's projection of future
undiscounted operating cash flows. If an impairment of the carrying value were
to be indicated by this review, the Company would adjust the carrying value of
customer lists to their estimated fair value.

Long-Lived Assets - The Company reviews its long-lived assets and certain
identifiable intangibles to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If such events or changes in circumstances are present, a loss
is recognized to the extent the carrying value



                                       F-5


<PAGE>   17

                         UNISTAR FINANCIAL SERVICE CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



of the asset is in excess of the sum of the undiscounted cash flows expected to
result from the use of the asset and its eventual disposition.

Premium Finance - Premium finance contracts are carried at unpaid balances.
Management, considering current information and events regarding the borrowers'
ability to repay their obligations, considers a loan to be impaired when it is
probable that Unistar will be unable to collect all amounts due according to the
original contractual terms of the note agreement. When a loan, in management's
judgment, becomes impaired, interest income is subsequently recognized only to
the extent of cash payments received.

Management maintains allowances for premium finance contracts at a level which
management believes is adequate to absorb potential losses in the portfolios.
The allowances are based on an evaluation of the notes, past loss experience,
current economic conditions, volume, growth and other relevant factors.

Reserve For Unpaid Commissions And Loss Adjustment Expenses - The reserve for
unpaid commissions and loss expenses is undiscounted and represents cash-basis
estimates of reported losses and estimates based on certain actuarial
assumptions regarding the past experience of unreported losses. Estimated
amounts of salvage and subrogation are deducted from the reserve for unpaid
commissions and loss expenses. Management believes that the reserve for unpaid
commissions and loss expenses is adequate to cover the ultimate liability.
However, such estimate may be more or less than the amount ultimately paid when
the claims are finally settled.

Revenue Recognition - Premium commissions are recognized upon the approval and
payment of the insurance policy. Policy fee income are recognized ratably over
the related policy terms, based upon the estimated ultimate amounts to be paid.

Finance charges are recorded as unearned income at the beginning of installment
finance contracts with customers. Unistar recognizes finance charge income using
the effective interest rate method over the life of each contract that typically
approximates eleven months.

Reinsurance arrangements are short-duration prospective contracts for which
prepaid reinsurance premiums are amortized ratably over the related policy terms
based on the estimated ultimate amounts to be paid. Premiums ceded for contracts
with retrospective adjustment features are calculated based upon the related
estimated incurred losses and loss expenses including a provision for unreported
losses.

Contingent Reinsurance Commission - The Company's reinsurance contracts provide
ceding commissions for premiums written which are subject to adjustment. The
amount of ceding commissions is determined by the loss experience for the
reinsurance agreement term. The reinsurer provides commissions on a sliding
scale with maximum and minimum achievable levels. The reinsurer provides the
Company with the provisional commissions. The Company has recognized the
commissions based on the current loss experience for the policy year premiums.
This results in establishing a contingent liability, included in due from
reinsurers, for the excess of provisional commissions retained compared to
amounts recognized, which is subject to variation until the ultimate loss
experience is determinable.

Fair Value - The fair value of the Company's investments are estimated based on
bid prices published by financial services or quotations received from
securities dealers and is reflective of the interest rate environment that
existed as of the close of business on December 31, 1998. Changes in interest
rates subsequent to December 31, 1998 may affect the fair value of the Company's
investments.

The carrying amounts for the following financial instrument categories
approximate their fair values at December 31, 1998 because of their short-term
nature: cash and cash equivalents, finance contracts receivable, due from
reinsurers, prepaid reinsurance premiums, unearned premiums, finance contracts
payable and notes payable.

Income Taxes - Deferred income tax has been provided for the effects of
temporary differences between financial


                                      F-6

<PAGE>   18

                         UNISTAR FINANCIAL SERVICE CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


reporting and tax based assets and liabilities and has been measured using the
enacted marginal tax rates and laws that are currently in effect.

Cash Equivalents - The Company considers all certificates of deposit, United
States government securities and commercial paper with original maturities of
three months or less to be cash equivalents.

Earnings per Share - Earnings per share is computed in accordance with the
Financial Accounting Standards Board (FASB) Statement No 128 "Earnings per
Share." Basic earnings per share is computed based on the weighted average
number of common shares outstanding, excluding any dilutive effects of options,
awards and convertible securities. Dilutive earnings per share is computed based
on the weighted average number of common shares outstanding plus the dilutive
effects of options, awards and convertible securities.

Other Comprehensive Income - In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income," which requires transactions that are currently reported
directly to stockholders' equity be reported in a financial statement that is
displayed as prominently as other financial statements. SFAS 130, which is
effective for fiscal years beginning after December 15, 1997, impacts disclosure
requirements only. Therefore, SFAS 130 will have no impact on the Company's
financial condition, cash flows or results of operations.

Segment Information - In June 1997, the FASB issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise," and requires
companies to report financial and descriptive information about their reportable
operating segments. The financial information is required to be reported on the
basis that is used internally for evaluating segment performance and deciding
how to allocate resources to segments. SFAS 131 requires disclosure only and
will have no impact on the Company's financial condition, cash flows or results
of operations.

BUSINESS ACQUISITIONS

Effective September 30, 1998, the Company acquired substantially all of the
assets and assumed certain liabilities of U.S. Fidelity Holding Corp. The
purchase price exceed the fair value of net assets by approximately $84.1
million and has been included in customer lists. Effective December 31, 1998,
Unistar acquired the operations of independent insurance agencies in Texas.
These acquisitions were contributed to the Company by Unistar Insurance
Agencies, LLC, owned by significant stockholders of the Company and valued at
approximately $10.6 million based upon cash and note considerations. Included in
this amount is $5 million value assigned to Talon Financial Services, LTD.
("Talon"), a Bermuda-based reinsurance brokerage company.

STATUTORY INSURANCE ACCOUNTING PRINCIPLES

Statutory regulations generally limit the payment of cash dividends in any one
year to an amount equal to the greater of net investment income reported for the
previous calendar year or 10% of surplus as regards policyholders as of the
previous year-end. Surplus in excess of this limitation is not available for
dividends without special approval of the regulatory authorities.

Since August 26, 1997, Unistar Insurance Company ("UIC") has operated under
Regulatory Administrative Oversight by the Texas Department of Insurance (the
"TDI"). The more significant requirements were for UIC to provide certain
financial statements, projections and business plans for approval and review.
The TDI also required UIC to adopt and amend certain policies and procedures.

UIC responded to the Texas Department of Insurance on November 3, 1997 regarding
the aforementioned issues. As of June 30, 1999, management believes they have
adequately addressed all of the significant issues.



                                      F-7


<PAGE>   19


                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>

EXHIBIT
NUMBER              DESCRIPTION
-------             -----------


<S>            <C>
   3.1         Restated Certificate of Incorporation.(2)

   3.2         Amended and Restated Bylaws.(2)

   10.1*       Registrant's 1998 Stock Option Plan.(1)

   27.0        Financial Data Schedule.(2)
</TABLE>