Exhibit 21


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Phoenix Leasing Incorporated:

We have audited the accompanying  consolidated balance sheets of Phoenix Leasing
Incorporated (a California corporation) and Subsidiaries as of June 30, 1998 and
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  balance  sheets are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in the balance  sheets.  An audit also  includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the balance  sheets  referred to above present  fairly,  in all
material respects,  the financial  position of Phoenix Leasing  Incorporated and
Subsidiaries as of June 30, 1998 and 1997, in conformity with generally accepted
accounting principles.




San Francisco, California,                                   ARTHUR ANDERSEN LLP
September 9, 1998

                                  Page 1 of 12
<PAGE>

<TABLE>

                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<CAPTION>

                                                                          June 30,      June 30,
                                                                            1998          1997
                                                                            ----          ----
<S>                                                                     <C>          <C>
Cash and cash equivalents                                               $ 6,530,661  $11,409,747
Investments in marketable securities                                      7,313,855    5,105,289
Trade accounts receivable, net of allowance for doubtful accounts
   of $55,173 and $121,944 at June 30, 1998 and 1997, respectively          131,575      289,284
Receivables from Phoenix Leasing Partnerships, other affiliates and
   trusts                                                                 4,515,180    4,315,315
Notes receivable from related party                                       3,053,037    1,002,060
Equipment subject to lease                                                6,622,323    4,320,755
Notes receivable                                                         11,814,873    5,825,842
Investments in Phoenix Leasing Partnerships                               2,085,922    1,678,239
Property and equipment, net of accumulated depreciation of $11,541,407
   and $10,881,577 at June 30, 1998 and 1997, respectively                5,900,642    6,009,049
Capitalized initial direct costs of originating leases and loans            464,207      150,767
Other assets                                                              2,490,060    2,936,974
                                                                        -----------  -----------

         TOTAL ASSETS                                                   $50,922,335  $43,043,321
                                                                        ===========  ===========

                      LIABILITIES AND SHAREHOLDER'S EQUITY

LIABILITIES:

Warehouse lines of credit                                               $19,139,328  $10,310,568
Payables to affiliates                                                      382,264    2,950,748
Accounts payable and accrued expenses                                     3,806,494    2,374,490
Long-term debt                                                              140,215      147,532
Deficit in investments in Phoenix Leasing Partnerships                      409,131      738,297
                                                                        -----------  -----------

         TOTAL LIABILITIES                                               23,877,432   16,521,635
                                                                        -----------  -----------

Minority Interests in Consolidated Subsidiaries                             122,744      105,901
                                                                        -----------  -----------

Commitments and Contingencies (Note 13)

SHAREHOLDER'S EQUITY:

Common stock, without par value, 30,000,000 shares
   authorized, 5,433,600 issued and outstanding at
   June 30, 1998 and 1997, respectively                                      20,369       20,369
Additional capital                                                       11,466,920   11,466,920
Unrealized gains on investments in securities, available for sale           236,392      243,311
Retained earnings                                                        15,198,478   14,685,185
                                                                        -----------  -----------

         TOTAL SHAREHOLDER'S EQUITY                                      26,922,159   26,415,785
                                                                        -----------  -----------

         TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY                     $50,922,335  $43,043,321
                                                                        ===========  ===========

<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>


                                       2
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998

Note 1. Summary of Significant Accounting Policies:

         a.  Organization - Phoenix Leasing  Incorporated and subsidiaries  (the
Company),  a wholly owned subsidiary of Phoenix American  Incorporated (PAI), is
engaged in the organization  and management of partnerships  which specialize in
the  purchase  and  lease  of  primarily  high-technology  and  data  processing
equipment.  The partnerships  purchase equipment directly from equipment vendors
for lease to financial,  commercial and industrial  businesses and  governmental
agencies.   The  partnerships   also  finance   transactions  in  the  areas  of
microcomputers  and  emerging  growth  companies.  The Company  also  engages in
similar leasing  activities for its own account and pools these loans and leases
for sale to trusts  which  engage in the sale of asset  backed  securities . The
Company also provided ongoing  equipment  maintenance  services for end-users of
high-technology  data processing  equipment and graphic plotters.  This business
operation was sold in May 1997.

         b. Principles of Consolidation - The consolidated  financial statements
include  the  accounts  of  Phoenix  Leasing  Incorporated  and  its  wholly  or
majority-owned  subsidiaries  and  subsidiaries  over which the  Company  exerts
control.  All  significant  intercompany  accounts  and  transactions  have been
eliminated in consolidation.

             Except as otherwise explained below,  minority interests in the net
assets and net income or loss of  majority-owned  subsidiaries  are allocated on
the basis of the proportionate ownership interests of the minority owners.

             Three  of the  consolidated  subsidiaries  are  California  limited
partnerships  (the  Partnerships)  which are  general  partners  of three of the
Phoenix  Leasing  Partnerships.  As of June 30,  1998,  the  Company  held a 50%
general  partner  ownership  interest  in two of the  Partnerships  and a  62.5%
interest  in one.  Under the terms of the  partnership  agreements,  profits and
losses  attributable to acquisition fees paid to the  Partnerships  from Phoenix
Leasing Partnerships are allocated to the limited partner (the minority owner in
the Partnerships) in proportion to the limited partner's ownership interest. All
remaining profits and losses are allocated to the Company.  Distributions to the
partners are made in accordance with the terms of the partnership agreement. The
limited  partner of each of the  Partnerships  is Lease  Management  Associates,
Inc., a Nevada corporation  controlled by an officer of the Company,  who is the
owner of PAI.

         c.  Investments - Investments in Phoenix Leasing  Partnerships  reflect
the Company's equity basis in the Phoenix Leasing Partnerships. Under the equity
method of accounting the original investment is recorded at cost and is adjusted
periodically  to  recognize  the  Company's   share  of  earnings,   losses  and
distributions after the date of acquisition.  The Company has adopted the equity
method of accounting on the basis of its control and significant  influence over
the Phoenix Leasing Partnerships.

         d. Lease Accounting - The Company's leasing  operations consist of both
financing and operating  leases.  The method of  accounting  for finance  leases
recognizes  unearned  income at the  inception  of the lease  calculated  as the
excess of net rentals  receivable and estimated residual value at the end of the
lease term over the cost of the equipment  leased.  Unearned income is amortized
monthly  over  the  term  of the  lease  on a  declining  basis  to  provide  an
approximate  level  rate of return on the  unrecovered  cost of the  investment.
Initial direct costs of  originating  new leases are  capitalized  and amortized
over the initial lease term.

             When  accounting  for  operating  leases,  the leased  equipment is
recorded as an asset, at cost, and is depreciated on a straight-line  basis over
its estimated useful life, ranging up to six years. Rental income represents the
rental payments due during the period under the terms of the lease.


                                       3
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 1. Summary of Significant Accounting Policies (continued):

             The Company is the lessor in leveraged lease agreements under which
computer  equipment  having an  estimated  useful life of 5 years was leased for
periods  from 4-5 years.  The Company is the equity  participant  and  equipment
owner. A portion of the purchase price was furnished by third-party financing in
the form of  long-term  debt that  provides  no  recourse  to the Company and is
secured by a first lien on the financed equipment.

         e. Property and  Equipment - Property and  equipment  which the Company
holds for its own use are recorded at cost and  depreciated  on a  straight-line
basis over estimated useful lives ranging up to 45 years.

         f. Income Taxes - The Company is included in consolidated  and combined
tax returns filed by PAI. See Note 15 for further information.

         g. Investments in Securities - Investments in securities, available for
sale, are stated at fair value or amortized cost which  approximates fair value,
as specified by SFAS 115. Interest is recognized when earned.

         h. 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 from those estimates.

         i.  Reclassification  - Certain 1997 balances have been reclassified to
conform to the 1998 presentation.


Note 2.   Receivables from Phoenix  Leasing Partnerships,  Other Affiliates, and
          Trusts:

         Receivables  from Phoenix Leasing  Partnerships,  other  affiliates and
trusts consist of the following as of June 30:

                                                              1998        1997
                                                              ----        ----

Management fees                                           $  342,154  $  156,688
Acquisition fees                                             308,182     283,133
Other receivables from Phoenix Leasing Partnerships, net     846,578   3,353,327
Servicer advances due from unaffiliated Trusts               468,453     230,478
Receivable from Parent                                     2,511,601        --
Receivables from other corporate affiliates                   38,212     291,689
                                                          ----------  ----------

                                                          $4,515,180  $4,315,315
                                                          ==========  ==========


Note 3. Investments in Phoenix Leasing Partnerships:

         The Company  records its  investments in Phoenix  Leasing  Partnerships
under the equity method of accounting.  The ownership interest percentages vary,
ranging  from .5% up to 25%.  As  general  partner,  the  Company  has  complete
authority in, and responsibility for, the overall management and control of each


                                       4
<PAGE>

                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 3. Investments in Phoenix Leasing Partnerships (continued):

partnership,   which  includes   responsibility   for  supervising   partnership
acquisition,  leasing, remarketing and sale of equipment.  Distributions of cash
from  the  partnerships  are  made at the  discretion  of the  general  partner;
historically,  a  significant  portion of the  partnerships'  earnings  has been
distributed annually.

         The activity in the investments in Phoenix Leasing Partnerships for the
years ended June 30 are as follows:

                                                    1998                1997
                                                    ----                ----

         Balance, beginning of year              $   939,942        $ 1,012,671
         Additional investments                    6,109,431            178,243
         Equity in earnings (losses)                (664,595)         2,933,649
         Cash distributions                       (4,707,987)        (3,184,621)
                                                 -----------        -----------

         Balance, end of year                    $ 1,676,791        $   939,942
                                                 ===========        ===========

         The Company's  total  investments in Phoenix Leasing  Partnerships  are
comprised  of  investments  in  certain   partnerships   which  are  subject  to
fluctuations due to partnerships' performances and timing of cash distributions.
At times the investment in those partnerships will be a deficit.

         In addition, four of the Phoenix Leasing Partnerships ceased operations
as of December  31,  1997.  At closing,  the Company,  as General  Partner,  was
required to make additional  capital  contributions to the extent of differences
between the Partnership's general partner's tax capital account and book capital
account balances.  The capital  contributions  were subsequently  written off to
bring the book capital account balance to $0.

         The aggregate  positive  investment  and aggregate  deficit  investment
balances are presented  separately on the balance sheets as of June 30, 1998 and
1997.

         The partnerships own and lease equipment.  All debt of the partnerships
is secured by the equipment and is without recourse to the general partners. The
unaudited  financial  statements  of  the  partnerships  reflect  the  following
combined,  summarized  financial  information  as of June  30,  1998 and for the
twelve months then ended:

         Assets                                             $85,615,000
         Liabilities                                          7,763,000
         Partners' Capital                                   77,852,000
         Revenue                                             24,962,000
         Net Income                                          12,186,000


Note 4.  Equipment Subject to Lease and Notes Receivable:

         Equipment  subject  to lease  includes  the  Company's  investments  in
leveraged leases,  investments in financing  leases,  operating leases and notes
receivable.

         The Company  purchases  equipment  subject to operating and full payout
leases with the  intention  of selling the  equipment  to one of its  affiliated
limited partnerships or to trusts. Should the equipment be sold to an affiliated


                                       5
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 4.  Equipment Subject to Lease and Notes Receivable (continued):

limited partnership, the sales price will be the original purchase price paid by
the Company,  plus any net  acquisition  and holding costs reduced by any rental
payments  received  by the  Company  during  the  warehousing  period.  When the
equipment is sold to a trust, the Company earns a brokerage commission.

         Equipment subject to lease consists of the following at June 30:

                                                       1998          1997
                                                       ----          ----

         Equipment on lease, net of accumulated
           depreciation of $47,146 and $47,177
           at June 30, 1998 and 1997, respectively  $     8,154  $    83,057
         Leveraged leases                             1,051,728    1,913,392
         Equipment held for resale                      252,133      225,084
         Investment in financing leases               4,954,636    1,863,214
         Lease Residuals                                297,905         --
         Operating leases                                57,766      236,008
                                                    -----------  -----------
           Total equipment subject to lease         $ 6,324,417  $ 4,320,755
                                                    ===========  ===========

         Notes receivable                           $11,814,873  $ 5,825,842

         Leveraged Leases:
         ----------------

         The  Company's net  investment  in leveraged  leases is composed of the
following elements at June 30:
                                                       1998          1997
                                                       ----          ----

         Rental receivable (net of principal and  
           interest on the nonrecourse debt)       $      --     $      --
         Estimated residual value of leased assets   1,740,972     2,602,636
         Less:  Unearned and deferred income          (689,244)     (689,244)
                                                   -----------   -----------

         Net investment in leveraged leases        $ 1,051,728   $ 1,913,392
                                                   ===========   ===========

         Investment in Financing Leases:
         ------------------------------

         The Company has entered into direct lease  arrangements  with companies
engaged in different industries located throughout the United States. Generally,
it is  the  responsibility  of the  lessee  to  provide  maintenance  on  leased
equipment.

         The  Company's  net  investment  in  financing  leases  consists of the
following at June 30:

                                                       1998          1997
                                                       ----          ----

         Minimum lease payments to be received     $ 6,594,860   $ 2,420,101
         Less:  unearned income                     (1,584,490)     (542,155)
                allowance for early termination        (55,734)      (14,732)
                                                   -----------   -----------

         Net investment in financing leases        $ 4,954,636   $ 1,863,214
                                                   ===========   ===========



                                       6
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 4.  Equipment Subject to Lease and Notes Receivable (continued):

         Minimum rentals to be received on  non-cancelable  financing leases for
the years ended June 30, are as follows:

         1999                                              $ 1,554,861
         2000                                                1,560,606
         2001                                                1,532,905
         2002                                                1,294,282
         2003                                                  642,901
         Thereafter                                              9,305
                                                           -----------

           Total                                           $ 6,594,860
                                                           ===========

         Notes Receivable:
         ----------------

         Notes receivable for the years ended June 30, are as follows:

                                                         1998            1997
                                                         ----            ----

           Notes receivable from emerging growth and
         other companies with stated interest ranging
         from 9% to 20.7% per annum receivable in
         installments ranging from 35 to 86 months
         collateralized by the equipment financed    $ 12,195,557   $  5,825,842
         Less:  allowance for losses                     (380,684)          --
                                                     ------------   ------------

         Total                                       $ 11,814,873   $  5,825,842
                                                     ============   ============

        Minimum payments to be received on  non-cancelable  notes receivable for
the years ended June 30, are as follows:

         1999                                             $  3,727,594
         2000                                                3,743,647
         2001                                                3,708,383
         2002                                                2,878,901
         2003                                                1,816,735
         Thereafter                                            937,524
                                                          ------------
           Total minimum payments to be received            16,812,784
         Less: unearned interest                            (4,617,227)
               allowance for losses                           (380,684)
                                                          ------------
           Net investment in notes receivable             $ 11,814,873
                                                          ============


Note 5.  Sale of Leased Assets and Notes Receivable:

         The Company  adopted SFAS 125,  "Accounting for Transfers and Servicing
  of Financial  Assets and  Extinguishments  of  Liabilities",  as it relates to
  transactions  including  revolving  periods  completed  after January 1, 1997.
  Prior to this  date,  such  transactions  were  accounted  for under  SFAS 77,
  "Reporting by Transferors for Transfers of Receivables without Recourse".  The
  change in standards did not have a material effect on the financial statements
  of the Company during the year ended June 30, 1997.



                                       7
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 5.  Sale of Leased Assets and Notes Receivable (continued):

         The   Company   temporarily   funds  and  holds   equipment   financing
transactions  structured as either financing leases or notes  receivable.  These
financing transactions are held by the Company for a short period of time before
they are then  transferred  to a  special  purpose  entity  for the  purpose  of
securitizing the payment streams. To date, the Company has been involved in five
such securitization transactions. The first three transactions were entered into
prior to June 30, 1997, the fourth  transaction was entered into on November 25,
1997,  and  the  fifth  on  May  25,  1998.  Pursuant  to  these  securitization
transactions,  the Company may continue to transfer additional finance leases or
notes  receivable  to these  special  purpose  entities on a monthly basis for a
period of one year from the date of each securitization transaction.  During the
year ended June 30, 1998, the Company  transferred  additional  financing leases
and notes receivable to special purpose entities.


Note 6.  Property and Equipment:

         Major classes of property and equipment at June 30 are as follows:

                                                        1998             1997
                                                        ----             ----

         Land                                       $  1,077,830   $  1,077,830
         Buildings                                     7,452,634      7,420,201
         Office furniture, fixtures and equipment      8,012,736      7,468,072
         Other                                           898,849        924,523
                                                    ------------   ------------

                                                      17,442,049     16,890,626
         Less accumulated depreciation and
           amortization                              (11,541,407)   (10,881,577)
                                                    ------------   ------------

         Net Property and Equipment                 $  5,900,642   $  6,009,049
                                                    ============   ============

         PAI owns its  headquarters  building  in San  Rafael,  California.  The
Company paid  $7,749,476 to purchase the land and  construct  the building.  The
cost of construction  was paid for with a combination of $2,749,476 in cash from
the  Company's  operations  and a $5,000,000  advance  from PAI. The  $5,000,000
advance  is  included  as  a  reduction  in  receivable   from  Phoenix  Leasing
Partnerships  and other  affiliates.  PAI has  pledged  the market  value of the
building as security for a $5,000,000  Industrial Revenue Bond ("IRB") which PAI
has with the City of San Rafael, California. The principal of the IRB is payable
in a lump sum payment on October 1, 2004.

         As of June 30, 1998, a portion of the Company's  headquarters  has been
leased to third parties.  The remaining lease term is for less than one year and
the minimum lease payments receivable is $146,055.


Note 7.  Investments in Securities:

        The  Company  accounts  for its  investments  in  securities  under  the
Financial  Accounting  Standards Board issued Statement of Financial  Accounting
Standards  No.  115 -  Accounting  for  Certain  Investments  in Debt and Equity
Securities  (SFAS  115).  This  pronouncement   prescribes  specific  accounting
treatment   for   investments   based  on   their   classification   as   either
held-to-maturity  securities  (HTM),   available-for-sale  securities  (AFS)  or
trading securities, as defined in the statement.


                                       8
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 7.  Investments in Securities (continued):

        In connection  with the five prior lease and note  securitizations  (see
Note 7) the Company has acquired Class C Equipment Investment Trust Certificates
(Class C Shares)  and notes.  The Class C Shares are  classified  as AFS and are
reported at their  amortized cost of $6,880,457 and  $4,658,771,  as of June 30,
1998 and 1997,  respectively,  which approximates fair value. The Class C Shares
do not have a specified contractual maturity.

         All other  equities  held by the Company are  classified as AFS and are
reported at their fair value of $433,397 and $446,518 at June 30, 1998 and 1997,
respectively.  Gross unrealized gains on such securities as of June 30, 1998 and
1997 were $393,987 and $405,518, respectively.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging  Activities.  The  Statement  establishes  accounting  and reporting
standards requiring every derivative  instruments  (including certain derivative
instruments  embedded in other  contracts)  be recorded in the balance  sheet as
either an asset or liability measured at its fair value. This Statement requires
that changes in the derivative's fair value be recognized  currently in earnings
unless  specific  hedge  accounting  criteria are met.  Special  accounting  for
qualifying  hedges  allows a  derivative's  gains and  losses to offset  related
results on the hedged item in the income statement,  and requires that a company
must formally document,  designate, and assess the effectiveness of transactions
that receive hedge accounting.

         Statement  133 is effective for fiscal years  beginning  after June 15,
1999.  Statement  133 cannot be  applied  retroactively.  Statement  133 must be
applied to (a) derivative  instruments  and (b) certain  derivative  instruments
embedded in hybrid contracts that were issued, acquired,  substantively modified
after December 31, 1997.

         The Company has not yet  quantified  the impacts of adopting  Statement
133 on our financial  statements  and has not determined the timing of or method
of our  adoption  of  Statement  133.  However,  the  Statement  could  increase
volatility in earnings and other comprehensive income.


Note 8.  Fair Value of Financial Instruments:

         Investments in Securities
         -------------------------

         The carrying amounts of investments in securities,  available for sale,
reported in the balance sheets approximate their fair values.

         Notes Receivable and Debt
         -------------------------

         The  fair  values  of the  Company's  notes  receivable  and  debt  are
estimated  based on the market prices of similar  instruments  or on the current
market interest rates for instruments with similar terms, maturities, and risks.
The estimated fair values of the Company's notes receivable and debt approximate
the carrying amounts reported in the balance sheets.



                                       9
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 9.  Short-Term and Warehouse Lines of Credit:

         To provide  interim  financing for equipment and working capital needs,
the Company  executes  lines of credit which  consist of  short-term  notes with
banks with interest  rates equal to the prime rate or the banks' index rate. All
lines of credit are renewable annually at the banks' option.

         As of June 30,  1998,  the  Company,  through  PAI,  had  access to one
short-term  line of credit  totaling $2.5 million,  all of which was  available.
Draw downs under this credit line are secured by the Company's  receivables from
Phoenix Leasing Partnerships and its Class C shares.

         In addition,  the Company has two secured short-term warehouse lines of
credit totaling $47.5 million,  which are used to provide interim  financing for
the acquisition of equipment and the financing of notes  receivable.  As of June
30, 1998 and 1997,  $19.1 and $10.3 million,  respectively,  of these lines have
been drawn  down and are due in one year or less.  The draw  downs  under  these
lines are collateralized by investments in financing leases and notes receivable
included in  equipment  subject to lease and by a second  lien on the  Company's
Class C shares.  The  interest  rate is tied to the Bank's base rate or the IBOR
(Eurodollar)  rate. The  commitment  period for one of the lines of credit which
totals $22.5 million  terminates on December 31, 1999. The second line of credit
which totals $25 million  terminates  on August 31, 1999.  Monthly  payments are
based on the lesser of the  aggregate  payments  received  by the Company on its
leases and notes  receivable  or the  aggregate  principal  and interest  amount
outstanding on the credit line.

         In connection  with the Company's  lines of credit,  various  financial
ratios and other  covenants must be  maintained.  The Company has guaranteed its
right,  title and interest in certain of its assets and the future receipts from
these assets in order to secure payment and performance of these credit lines.


Note 10.  Long-Term Debt:

         Long-term debt consists of the following at June 30:

                                                              1998         1997
                                                              ----         ----

                Mortgage payable at varying interest
           rates with an initial rate of 8.75% secured by 
           a first deed of trust on real property with a
           value of $167,650.  Note is amortized over
           83 months with monthly payments of $559 and
           a final payment of $121,267.                     $140,215    $147,532
                                                            ========    ========

The aggregate  long-term debt maturities for the fiscal years ended June 30, are
as follows:

         1999                                               $  6,706
         2000                                                  6,706
         2001                                                126,803
                                                            --------
         Total                                              $140,215
                                                            ========


Note 11.  Income Taxes:

         The Company's income or loss for tax reporting  purposes is included in
the consolidated and combined tax returns filed by PAI which are prepared on the
accrual  basis  of  accounting.  In  accordance  with  a Tax  Sharing  Agreement


                                       10
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 11.  Income Taxes (continued):

effective  July 1, 1991,  between the  Company and PAI,  PAI has assumed all tax
liabilities and benefits arising from the Company's income or loss.

         The  Company  computes  its tax  benefit or  provision  and the related
liability is transferred to PAI.

         The  provision  for income taxes for the year ended June 30 consists of
the following:

                                                         1998           1997
                                                         ----           ----

         Current tax expense (benefit)                $1,198,968    $ (111,925)
         Deferred tax (benefit) expense                 (913,044)      670,305
                                                      ----------    ----------

                                                      $  285,924    $  782,230
                                                      ==========    ==========

         Cumulative  temporary  differences of $6,554,133 and  $10,097,889 as of
June 30, 1998 and 1997,  respectively,  are primarily  related to differences in
book and tax accounting treatments for leveraged leases.

         The difference between the effective tax rate and statutory tax rate is
due to certain expenses  deductible for financial reporting purposes but not for
tax purposes,  state tax expense net of federal benefit and other  miscellaneous
items.


Note 12.  Transactions with Related Parties:

         The  Company  provided  a line of  credit  totaling  $8,000,000  to its
principal  shareholder  which was  recourse  to the assets  and common  stock of
Phoenix  Precision  Graphics,  Inc.  (PPG) (a  Nevada  corporation  owned by the
principal  shareholder).  At June 30, 1997,  $511,493 of this line of credit was
outstanding and is included in notes receivable from related  parties.  On April
1,  1998,  the  Company's  principal  shareholder  contributed  the  assets  and
liabilities of Phoenix Precision Graphics,  Inc. (PPG) to the Company.  PPG is a
electrostatic  plotter  manufacturing company which is currently in the research
and  development  phase.  At the time of  contribution,  PPG had total assets of
$1,949,436 and liabilities  which the Company  assumed  totaling  $577,016.  The
Company's   financial   statements   include  this  transaction  as  though  the
contribution occurred on July 1, 1996.

         The  Company  provided  an  interest  bearing  line of  credit to PAI's
controlling shareholder,  which was secured by common stock of Phoenix Fiberlink
Inc. (a Nevada  Corporation,  owned by the principal  shareholder).  At June 30,
1997,  $199,105  of this line of credit has been drawn down and is  included  in
notes receivable from related party. This note was paid in full in October 1997.

         The Company  earned a management  fee from an affiliate of $154,622 and
$515,137  for the  years  ended  June 30,  1998  and  1997,  respectively.  This
management fee is included in Portfolio management fees.

         As of January 1,  1997,  the  Company  transferred  certain  assets and
liabilities to a  non-consolidated  affiliate,  ReSource/Phoenix,  Inc.,  wholly
owned by the Company's controlling shareholder.  No gain or loss was recorded as
a result of this transaction.  In addition,  the Company  transferred all of its
third party resource  service  contracts to  ReSource/Phoenix,  Inc. The Company
recorded  fees from these  contacts  of  $657,295  for the  period  July 1, 1996
through  December  31, 1996.  ReSource/Phoenix,  Inc.  will  continue to provide


                                       11
<PAGE>
                  PHOENIX LEASING INCORPORATED AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED BALANCE SHEETS

                                  JUNE 30, 1998


Note 12.  Transactions with Related Parties (continued):

Accounting, Investor Administration,  and Information Technology services to the
Company.

         The  Company   provides  an   interest   bearing   line  of  credit  to
ReSource/Phoenix,  Inc.,  which is secured by common stock of  ReSource/Phoenix,
Inc. (an affiliated Nevada corporation). As of June 30, 1998, $3,053,037 of this
line of credit had been  drawn down and is  included  in notes  receivable  from
related party.


Note 13.  Commitments and Contingencies:

         The Company has entered into agreements which contain specific purchase
commitments.  The Company may satisfy these commitments by purchasing  equipment
for its own  account  or by  assigning  equipment  purchases  to its  affiliated
partnerships. At June 30, 1998 the Company anticipates being able to satisfy its
future obligations under the agreements.

         On October 28, 1997 a Class Action  Complaint was filed against Phoenix
Leasing  Incorporated,  Phoenix  Leasing  Associates  II,  LP,  Phoenix  Leasing
Associates III, LP, Phoenix  Securities Inc. and Phoenix  American  Incorporated
(the  "Companies") in California  Superior Court for the County of Sacramento by
eleven  individuals on behalf of investors in Phoenix Leasing Cash  Distribution
Funds I through V (the  "Partnerships").  The  Companies  were  served  with the
Complaint on December 9, 1997. The Complaint seeks  declaratory and other relief
including  accounting,  receivership,   imposition  of  constructive  trust  and
judicial  dissolution and winding up of the  Partnerships,  and damages based on
fraud,  breach of  fiduciary  duty and breach of  contract by the  Companies  as
general partners of the Partnerships.  Plaintiffs served an amended complaint on
August 17,  1998.  Discovery  has not yet  commenced.  The  Companies  intend to
vigorously defend the Complaint.


Note 14.  Subsequent Events:

         Effective  July 1, 1998, the Company and all its  subsidiaries  adopted
treatment as an Subchapter  "S"  Corporation  pursuant to the Federal Income Tax
Regulations for tax reporting purposes and changed its fiscal year end from June
30 to September 30.

         On July 15, 1998, the Company entered into a term loan agreement with a
Bank to borrow up to $10 million. Draw-downs under this term loan are secured by
equipment  lease or loan  contracts and repayment of the term loan is guaranteed
by the  Company.  The interest  rate is a fixed rate equal to the two-year  U.S.
Treasury  (in  effect  at the time of the  draw-downs)  plus a  margin.  Monthly
payments of principal  and interest are equal to cash  received  pursuant to the
lease and loan  contracts  less a .125%  servicing fee and all expenses paid for
legal and  collection  expenses.  The entire  unpaid  principal is due 48 months
after the draw down has  occurred.  On August 24,  1998,  the  Company  borrowed
$9,999,648 of this term-loan to purchase equipment lease or loan contracts.



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