SELECTED CONSOLIDATED FINANCIAL INFORMATION
     (IN THOUSANDS, EXCEPT PER SHARE, OUTSTANDING SHARES AND OPERATING DATA)

<TABLE>
<CAPTION>

                                                        FISCAL YEARS ENDED SEPTEMBER 30,
                                             ----------------------------------------------------
                                               1994        1995      1996       1997       1998
                                             ----------  ---------  -------   --------   --------
<S>                                          <C>       <C>        <C>          <C>       <C>    

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
  Revenues
     Principal transactions ..............   $ 37,255   $ 54,653   $103,889   $122,817   $105,861
     Commissions .........................     13,398     23,375     34,421     38,707     49,725
     Investment banking ..................     29,234     70,360    154,272     90,471     91,332
     Corporate finance fees ..............     18,561     20,709     37,962     54,237     75,080
     Interest and dividends ..............      2,952      3,974     14,707     22,629     27,236
     Net investment gains ................     10,270     33,852     24,434        229      2,415
     Other ...............................      7,660     13,916     23,017     17,142     21,476
                                              -------    -------    -------    -------    -------
     Total revenues ......................    119,330    220,839    392,702    346,232    373,125
                                              -------    -------    -------    -------    -------
  Expenses
     Compensation and benefits ...........     60,175    105,370    198,613    178,873    187,065
     Brokerage and clearance .............      7,367     10,441     13,629     17,258     23,064
     Occupancy and equipment .............      6,679      7,803     10,677     17,183     21,514
     Communications ......................      6,244      7,394      9,614     14,762     15,353
     Interest ............................        987      2,083      4,314      4,454      3,628
     Other ...............................     11,841     15,849     28,788     36,605     51,957
     Total expenses ......................     93,293    148,940    265,635    269,135    302,581
     
     Income before income tax provision ..     26,037     71,899    127,067     77,097     70,544
Income tax provision .....................     10,119     22,461     38,466     33,923     30,333
                                              -------     -------   --------   --------    ------
Net income ...............................    $15,918    $ 49,438   $ 88,601   $ 43,174  $ 40,211  
                                              =======     =======   ========   ========    ======  
Earnings per share
      Basic ..............................                                    $   1.83   $   1.64
      Diluted ............................                                    $   1.68   $   1.51

Weighted average shares
       Basic .............................                                    23,569,306  24,551,064
       Diluted ...........................                                    25,682,887  26,613,541

PRO FORMA INFORMATION:
  Net income before income 
   tax adjustment .........................                        $   88,601   
  Income tax adjustment(1) ................                           (17,443)
                                                                   -----------
  Pro forma net income.....................                        $   71,158
                                                                   ===========
  Pro forma earnings per share(2)
       Basic ..............................                        $     3.60
       Diluted.............................                        $     3.27
  
  Pro forma weighted average shares
     Basic.................................                        19,752,726
     Diluted...............................                        21,734,143

CONSOLIDATED BALANCE SHEET DATA:
  Total assets .............................. $155,160   $319,630   $537,917   $678,937    $606,668
  Debt obligations ..........................   12,684     13,771      8,365      2,700           0
  Stockholders' equity 
   and partners' capital ....................   63,591    105,462    226,711    297,378     336,756
  Book value per common share
   outstanding(3) ........................... $   4.43   $   6.31   $   9.99   $  12.51    $  14.28

OPERATING DATA:
  Total employees(4) ........................      426        498        685        823         845
  Return on average stockholders' equity
   and partners' capital ....................       28%         5%        60%        16%         13%
  Compensation and benefits expense as
   a percentage of total revenues ...........       50%         4%        51%        52%         50%

  Non-compensation and benefits expense as a
  percentage of total revenues ..............       28%         1%        16%        26%         31%

</TABLE>

----------------------
(1)  Includes  taxes on LP's  earnings as if LP's  earnings  were  subject to an
effective  tax rate of 44 percent.  

(2) Pro forma earnings per common share are determined by dividing pro forma net
income by the weighted  average number of common shares,  including common share
equivalents,  outstanding  during the year.  Pro forma earnings per common share
are not shown prior to 1996 because the amounts would not be meaningful.

(3) Includes  equivalent shares related to LP units outstanding at September 30,
1994 and 1995. Shown at end of period.

(4) Shown at end of period.

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

     THE STATEMENTS IN THIS ANNUAL REPORT THAT RELATE TO FUTURE PLANS, EVENTS OR
PERFORMANCE ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THOSE RELATING TO THE COMPANY'S PRINCIPAL INVESTMENT ACTIVITIES, ITS
PLANS TO ADDRESS THE YEAR 2000 ISSUE,  ITS CURRENT EQUITY CAPITAL LEVELS AND ITS
MARKET  RISKS.  ACTUAL  RESULTS  MIGHT  DIFFER  MATERIALLY  DUE TO A VARIETY  OF
IMPORTANT  FACTORS.  THESE FACTORS INVOLVE RISKS AND UNCERTAINTIES  RELATING TO,
AMONG  OTHER  THINGS,  GENERAL  ECONOMIC  AND  MARKET  CONDITIONS,   COMPETITIVE
CONDITIONS  WITHIN THE SECURITIES  INDUSTRY,  CHANGES IN INTEREST  RATES,  STOCK
MARKET  PRICES  AND  MUTUAL  FUND  CASH  INFLOWS  OR  OUTFLOWS,  CHANGES  IN THE
TECHNOLOGY AND HEALTHCARE  INDUSTRIES AND OTHER  INDUSTRIES IN WHICH THE COMPANY
IS ACTIVE,  CHANGES IN DEMAND  FOR  INVESTMENT  BANKING  AND  SECURITIES  BROKER
SERVICES, THE COMPANY'S ABILITY TO RECRUIT AND RETAIN KEY EMPLOYEES,  CHANGES IN
SECURITIES AND BANKING LAWS AND  REGULATIONS,  TRADING AND PRINCIPAL  INVESTMENT
ACTIVITIES,  LITIGATION AND OTHER FACTORS  DISCUSSED  BELOW IN  "OVERVIEW."  THE
COMPANY'S ANNUAL REPORT ON FORM 10-K (THE "FORM 10-K") FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1998 FILED WITH THE  SECURITIES AND EXCHANGE  COMMISSION  CONTAINS
ADDITIONAL INFORMATION ABOUT THESE AND OTHER RISKS AND UNCERTAINTIES.

OVERVIEW

     Hambrecht & Quist Group ("H&Q" or the  "Company") is a holding  company for
Hambrecht & Quist  California  ("H&Q  California"),  whose  primary  subsidiary,
Hambrecht  & Quist  L.L.C.  ("H&Q  LLC"),  is an  investment  banking  firm  and
securities broker-dealer. H&Q California's other subsidiaries and affiliates are
engaged in  investment  banking,  venture  capital fund  management,  investment
advisory and lease and other asset-based financing activities.
Effects of Market Conditions

     The  Company's  business  depends to a  substantial  extent on the  overall
securities  market  and the  sectors of the  securities  market  represented  by
companies in the technology and healthcare industries.  The securities market is
affected by general economic and market  conditions,  including  fluctuations in
interest rates, the volume of securities trading, price levels of securities and
the flow of investor  funds into and out of equity mutual funds,  and by factors
that apply to particular industries,  such as technological advances and changes
in the  regulatory  environment.  Substantial  fluctuations  can  occur and have
occurred in the Company's  operating results and in the component sources of the
Company's revenues due to these and other factors.  In periods of reduced market
activity,  profitability  has  been  and is  likely  to be  adversely  affected.
Accordingly, net earnings for any period should not be considered representative
of any other period.

     For example,  the Company's  record  results of operations  for fiscal 1996
were achieved during  consistently  favorable economic and market conditions for
equity  offerings by companies  in the  industries  and of the size on which the
Company  focuses.  By  contrast,  during the  Company's  second and third fiscal
quarters of 1997 and the fourth  quarter of fiscal 1998, the economic and market
conditions  were not as favorable for such equity  offerings,  particularly  for
equity offerings of emerging growth  technology  companies.  During fiscal 1996,
1997  and  1998,  the  Company  managed  or  co-managed  134,  94 and 88  public
offerings,  respectively.  The  fourth  fiscal  quarter  of 1998  was one of the
slowest  periods  for public  offerings  this  decade.  During the 1997 and 1998
fourth  fiscal  quarters,  the Company  managed or  co-managed  31 and 13 public
offerings, respectively.

EFFECTS OF COMPETITION

     The  securities  business is intensely  competitive.  Many of the Company's
competitors  have  greater  capital,  financial  and  other  resources  than the
Company.   During  1997  and  1998,  the  securities  business  has  experienced
consolidation, including the acquisition of certain of the Company's competitors
by large commercial banks,  providing  competitors of the Company with increased
financial  and other  resources.  In  addition,  competition  for key  personnel
persists.  The Company has experienced losses of research,  investment  banking,
venture capital and sales and trading  professionals from time to time and there
can be no assurance  that losses of key  personnel due to  competition  or other
factors will not occur in the future.

EFFECTS OF COMPANY FACTORS AND GROWTH STRATEGIES

     Over the past several years, the Company has experienced significant growth
in its business  activities  and the number of its  employees.  The scope of the
Company's business activities has increased to include new business  activities,
increased  emphasis on building existing  operations and a significantly  higher
level of  principal  investment  activities,  as more fully  described  below in
"Overview - Effects of Principal Investment Activities." The number of employees
has increased significantly from both the increased scope of business activities
and the growth of existing  operations.  Average  employee  headcount was 841 in
fiscal 1998 compared to 759 in fiscal 1997.  This employee  growth has increased
fixed expenses  associated with  compensation and benefits costs,  occupancy and
equipment costs and communications  costs. Any failure to effectively manage the
Company's growth through the investment in management  personnel,  financial and
management systems and controls,  and facilities could have an adverse effect on
the Company's operations.

EFFECTS OF INVESTMENT BANKING AND OTHER CORPORATE FINANCE ACTIVITIES

     Two significant components of the Company's revenues are investment banking
fees earned from underwriting  activities and corporate finance fees earned from
merger and  acquisition  and other  advisory  services  provided to companies in
H&Q's areas of industry  focus.  The number of such  available  underwriting  or
advisory transactions is affected by many factors including, but not limited to,
the  conditions  impacting  the  securities  market (see  "Overview - Effects of
Market  Conditions")  and the  Company's  ability to  successfully  compete  for
available  underwriting  and advisory  assignments  (see  "Overview - Effects of
Competition").  The Company's  level of underwriting  and corporate  finance fee
revenues  earned  is  affected  by both  the  number  and  size of  transactions
completed. Substantial fluctuations can occur and have occurred in the amount of
such fees  earned from  quarter to quarter  and from year to year.  Accordingly,
fees earned for any period should not be considered  representative of any other
period.  In periods of reduced  investment  banking and other corporate  finance
activity, profitability has been and is likely to be adversely affected.

EFFECTS OF PRINCIPAL INVESTMENT ACTIVITIES

     The  Company  makes  principal   investments  for  strategic  purposes  and
financial returns. As part of the Company's principal investment activities,  it
purchases  equity and debt  securities  or makes  commitments  to purchase  such
securities  from  public and private  companies.  Such  investments  may involve
substantial  amounts of capital and  significant  exposure to any one company or
business,  as well  as to  market,  credit  and  liquidity  risks.  The  Company
purchased $87.4 million and $65.7 million in principal  investments  during 1997
and  1998,  respectively.  Included  in the 1998  purchases  is a $26.9  million
investment in the common stock of World Access Inc. acquired by the Company in a
private  transaction.  The World Access, Inc. ("WAXS") position at September 30,
1998 was partially hedged through a series of options transactions.  The Company
expects to continue its principal  investment  activities in subsequent quarters
through direct investments in public and private companies, investments in funds
managed by the Company or by investment management entities in which the Company
has an interest, investments in other special situation funds managed by outside
fund  managers  and  investments  in joint  ventures.  However,  there can be no
assurance that the level and quality of potential investment  opportunities made
available to the Company will be sufficient to support such historical levels of
principal investing or that any future or historical  investments will achieve a
level of financial performance consistent with the Company's objectives.

     The Company accounts for its marketable  investments in public companies at
prevailing  market prices,  less discounts for illiquid or restricted  holdings.
The Company accounts for its  nonmarketable  investments in private companies at
estimated fair value as determined by management of the Company. Such marketable
and  nonmarketable  investments are presented in the Company's balance sheets as
long-term  investments.  At  September  30, 1997 and  September  30,  1998,  the
Company's  long-term  investments  totaled  $117.2  million and $129.6  million,
respectively.  Net investment  gains are included in the Company's  statement of
operations  and  include  net  realized  gains and  losses and the net change in
unrealized gains and losses for the period. For 1996, 1997 and 1998, the Company
recorded net  investment  gains of $24.4  million,  $229,000  and $2.4  million,
respectively.

     Principal  investing  activities,  which  have  been  from  time  to time a
significant  contributor  to  the  Company's  revenues  and  earnings,  are  not
predictable  and do not  necessarily  correlate with general market  conditions.
These  results,  which in any  reporting  period may be  influenced by a limited
number of investments  and  transactions,  can vary widely from year to year and
quarter to quarter.

MATTERS RELATED TO THE YEAR 2000

     To the fullest extent  permitted by law, the following year 2000 discussion
is a "Year  2000  Readiness  Disclosure"  within  the  meaning  of the Year 2000
Information and Disclosure Act.

     The Company utilizes  software and related  information  technologies  that
will be affected by the date change in the year 2000. The year 2000 issue exists
because many computer  systems and  applications  currently  use two-digit  date
fields to  designate  a year.  When the  century  date  change  occurs,  certain
date-sensitive  systems may recognize the year 2000 as 1900, or not at all. This
inability to  recognize or properly  treat the year 2000 may result in a systems
failure  or  cause  systems  to  process  critical   financial  and  operational
information   incorrectly.   Additionally,   the   Company   relies  on  certain
noninformation technology systems such as communications and building operations
systems  that could also be  affected by the date  change.  The failure of these
noninformation   technology   systems  could  interrupt  or  shutdown   business
operations for some period of time.

     Based on ongoing  assessments and testing,  the Company has determined that
it will be  required to modify or replace  portions of its  software so that its
computer  systems will  properly  utilize  dates beyond  December 31, 1999.  The
Company has also determined that Lewco, its clearing broker, will be required to
modify  or  replace  significant  portions  of the  software  used by  Lewco  in
connection with processing Company and customer trading activity and maintaining
Company  and  customer  information.  The  Company  anticipates  that  its  most
significant  exposure to the year 2000 issue is through the clearing  activities
performed  for it by Lewco.  While the Company  holds an  ownership  position in
Lewco and will be responsible for a percentage of the costs incurred by Lewco to
address the issue,  the Company does not control the management of the year 2000
problem by Lewco and is dependent on Lewco's  ability to correctly  disclose its
year 2000  compliance  progress  to the Company  and to  adequately  address the
issue.  The  Company  presently  believes  that with  modifications  to existing
software  and  conversions  to new  software  by both it and Lewco,  the adverse
effects of the year 2000 issue can be mitigated.  However, if such modifications
and conversions are not made, or are not completed in a timely manner,  the year
2000  issue  could  have a  material  impact on the  operations,  liquidity  and
financial  condition  of the  Company,  could  lead to  enforcement  actions  by
regulatory agencies and could expose it to third party liability.

     The Company has engaged an independent  consulting firm to assist in impact
analysis, solution design and project planning; however, the Company retains all
responsibility for its year 2000 issues,  plans and compliance efforts. The year
2000  plan  followed  by the  Company  contains  four  phases:  phase one is the
identification  and  prioritization  of all in-house and third party information
technology and noninformation  technology  systems;  phase two is the diagnostic
testing of all critical  information  technology and  noninformation  technology
systems  for  year  2000  compliance;  phase  three  is  the  implementation  of
solutions, including all necessary repair work, modifications,  and replacements
to  system  software  and  hardware;  and  phase  four is the  execution  of the
contingency  plan created  during phases one through three for those areas where
repair work fails.  The Company  substantially  completed  phase one in December
1998.  The Company  expects to  complete  phases two and three by March and June
1999,  respectively,  leaving six months to execute the contingency plan actions
described in phase four.

     The total cost associated with the Company's year 2000 plan is not expected
to be material to the Company's financial position.  For all phases, the Company
has budgeted an incremental $2.0 million for programming  changes and testing of
internally  developed systems and software licensed from third parties.  Most of
the $2.0 million  budgeted will be incurred and expensed in the  Company's  1999
fiscal year beginning  October 1, 1998. None of the Company's other  information
technology projects have been delayed due to the implementation of its year 2000
plan.

     With  respect to Lewco's  efforts,  the  Company  does not expect to devote
material  amounts  of its labor  resources,  but does  expect  to incur  certain
expenses as a result of its ownership  interest in Lewco. To date, the Company's
portion of expenses  incurred  is  approximately  $1.4  million.  The  Company's
remaining  portion of the expenses incurred to address this issue as budgeted by
Lewco is expected to be approximately  $700,000 in fiscal 1999 which amount will
be funded through operating cash flows.

     The estimated  costs of and time frames related to these projects are based
on  estimates  of the  Company's  and  Lewco's  management  and  there can be no
assurance  that  actual  costs  will not  differ  materially  from  the  current
expectations  or that the  proposed  time  frames  can be  maintained.  Specific
factors that might cause such material  differences include, but are not limited
to, the availability and cost of personnel  trained in this area, the ability to
locate  and  correct  all  relevant  computer  code,  timely  responses  to  and
corrections by third parties, the ability to formulate and implement contingency
plans, if required, and similar uncertainties.

     In addition to Lewco,  the Company relies on various third party systems or
services  to  conduct  its  business,  including  Nasdaq,  Inc.,  New York Stock
Exchange,  Inc. and regional  and  national  telecommunications  and market data
services  providers.  The  failure of any of these  entities  to  satisfactorily
address  the year  2000  issue  could  have a  material  adverse  effect  on the
Company's  operations,   liquidity  and  financial  condition.  The  Company  is
presently  monitoring  the  progress  of these  and  other  entities'  year 2000
compliance.

RESTRUCTURING(1)

     H&Q  California  succeeded  in January  1983 to the business of Hambrecht &
Quist, a partnership formed in 1968. Between January 1983 and November 1993, H&Q
California conducted, either directly or through subsidiaries or affiliates, all
of the  Company's  activities.  Hambrecht  & Quist,  L.P.  ("LP")  was formed in
November  1993 for the  purpose of owning and  managing  investments  in certain
operating affiliates.

     On  August  8,  1996,  the  Company  effected  a  series  of  restructuring
transactions (the  "Restructuring"),  pursuant to which, among other things, (i)
LP transferred cash and assets totaling $31.0 million to a liquidating trust for
the benefit of LP's  partners,  (ii)  Hambrecht & Quist  Guaranty  Finance,  LLC
("Guaranty Finance")  distributed assets whose book value was approximately $2.5
million to its equity owners other than LP, (iii) LP and H&Q California  entered
into  separate  merger  transactions,  pursuant  to which LP was merged into the
Company and H&Q California became a wholly owned subsidiary of the Company,  and
(iv) the equity  holders of H&Q California and LP became owners of shares of the
Company's common stock.

--------
(1)  Refer to Note 1 of Notes to the  Consolidated  Financial  Statements  for a
detailed description of the Company's  organizational  structure,  including the
effects of the restructuring transactions completed in August 1996.

<PAGE>

RESULTS OF OPERATIONS

FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997

     REVENUES. Total revenues increased 8% from $346.2 million in 1997 to $373.1
million in 1998.

     Principal  transactions revenue decreased 14% from $122.8 million to $105.9
million due primarily to narrower margins in the OTC business.

     Commissions  increased  28%  from  $38.7  million  to $49.7  million.  This
increase was primarily due to an increase in NYSE listed transactions.

     Investment  banking  revenue  increased  1% from  $90.5  million  to  $91.3
million,  and decreased as a percentage of revenues from 26% to 24%. The Company
managed or co-managed  88 public  offerings  during 1998,  compared to 94 during
1997.

     Corporate  finance fees  increased  38% from $54.2 million to $75.1 million
due  primarily to the  completion  of a higher  level of merger and  acquisition
transactions during 1998.

     Interest and dividend  revenue  increased  20% from $22.6  million to $27.2
million.  The increase  related  primarily to interest  earned on higher average
customer margin loans outstanding.

     Net  investment  gains  increased  955% from $229,000 to $2.4 million.  For
1997, realized gains of $20.5 million were offset by a change in unrealized loss
of $20.3  million.  For 1998,  realized  gains of $18.3 million were offset by a
change in unrealized loss of $15.9 million. Net investment gains in 1997 include
net  investment  losses of $18.1  related to investee  companies  in the airline
industry. The Company recorded a realized loss of $9.9 million on its investment
in Air South  Airlines,  Inc. ("Air South"),  a regional  airline that filed for
bankruptcy in August 1997.  In 1997 and 1998,  the Company  recorded  unrealized
losses of $8.2 million and $2.2  million,  respectively,  on its  investment  in
another regional airline.

     Other  revenues  increased  25% from $17.1  million to $21.5  million.  The
increase  related  primarily  to  increases  in  accrued  profit   participation
distributions, account transaction fees and gains on sales of assets.

     EXPENSES.  Total expenses for the period  increased 12% from $269.1 million
for 1997 to $303.0 million for 1998.

     Compensation  and  benefits  expense  increased  5% from $178.9  million to
$187.1 million. The increase was due primarily to higher incentive  compensation
expenses  accrued on higher  revenues.  Compensation  and benefits  expense as a
percentage of total revenues was 52% and 50%, respectively, for 1997 and 1998.

     Brokerage and clearance  expense  increased 34% from $17.3 million to $23.1
million.  The percentage  increase was primarily  attributable to higher charges
from Lewco,  which  include H&Q's  allocation  of year 2000 systems  programming
changes, and higher floor brokerage charges related to increased commissions.

     Occupancy and equipment  expense  increased 25% from $17.2 million to $21.5
million  as a result of higher  rent  expense  and  depreciation  expense.  Such
increased  expenses  result  from the  increase  in  headcount  and the  related
increased   office   space  and  computer   and   telecommunications   equipment
procurements.  Additionally,  in April  1998,  the  Company  approved  a plan to
replace all of its employees' personal computers and related infrastructure.  It
is anticipated  that the new computer  equipment  will be installed  firmwide by
early 1999.  During the six month period ended  September 30, 1998,  the Company
incurred  additional  depreciation  expense of  approximately  $1.0 million as a
result  of a  change  in  remaining  useful  lives  estimated  for the  existing
computers and related infrastructure.

     Communications  expense  increased 4% from $14.8 million to $15.4  million.
This increase was due to increases in telecommunications expenses and quotes and
information services expenses resulting from the hiring of additional employees.

     Other  expenses  increased  42% from $36.6 million to $52.0  million.  This
increase  was due  primarily  to increased  travel and  entertainment  expenses,
losses in error, bad debts and professional  services fees. In 1997, the Company
recorded a $1.8 million  loss related to letters of credit  issued to two of Air
South's creditors.  In 1998, the Company recorded an additional $8.0 million for
its settlement costs related to the Nasdaq market-makers  antitrust class action
litigation.  Also in 1998, the Company recorded $3.2 million in bad debt expense
related to Guaranty Finance's notes receivable.

     INCOME TAX PROVISION.  The Company's  effective  income tax rate was 44% in
1997 and decreased to 43% in 1998,  primarily due to lower  statutory  state tax
rates.

FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996.

     REVENUES.  Total  revenues  decreased  12% from  $392.7  million in 1996 to
$346.2 million in 1997.

     Principal  transactions revenue increased 18% from $103.9 million to $122.8
million.  This increase was due to an increase in Nasdaq market activity and the
expansion of the Company's equity sales and trading capabilities.

     Commissions  increased  13%  from  $34.4  million  to $38.7  million.  This
increase  was  primarily   due  to  the   expansion  of  the  Company's   listed
institutional equity business.

     Investment banking revenue decreased 41% from $154.3 million $90.5 million,
and decreased as a percentage  of revenues from 39% to 26%. The company  managed
or co-managed 134 public offerings during 1996 compared to 94 during 1997.

     Corporate  finance fees  increased 43% from $38.0 million to $54.2 million.
The increase  results  primarily  from an increased  number and size of advisory
assignments.

     Interest and dividend  revenues  increased  54% from $14.7 million to $22.6
million.  The increase  related  primarily to interest  earned on higher average
customer margin loans outstanding,  higher average notes receivable  outstanding
and  higher  average  investments  in cash  equivalents  outstanding  during the
period.

     Net  investment  gains  decreased 99% from $24.4  million to $229,000.  Net
investment  gains  included  realized  and  unrealized  gains  on the  Company's
investment in The BISYS Group, Inc. ("BISYS") of $15.1 million for 1996 and $1.5
million for 1997. Net investment gains in 1997 included net investment losses of
$18.1 million  related to two investee  companies in the airline  industry.  The
Company recorded a realized loss of $9.9 million on its investment in Air South.
The Company  recorded an  unrealized  loss of $8.2 million on its  investment in
another regional airline.

     Other  revenues  decreased  26% from $23.0  million to $17.1  million.  The
decrease was due primarily to a decrease in profit  participation  distributions
from  venture  funds  managed by the  Company  and the  recognition  by Guaranty
Finance of a $3.3 million gain on the sale of a building in 1996.

     EXPENSES. Total expenses increased 1% from $265.6 million in 1996 to $269.1
million in 1997.

     Compensation  and benefits  expense  decreased  10% from $198.6  million to
$178.9 million.  The decrease was due primarily to lower bonus expenses  accrued
as a result of lower revenues. Compensation and benefits expense as a percentage
of total revenues was 51% in 1996 and 52% in 1997.

     Brokerage and clearance  expense  increased 27% from $13.6 million to $17.3
million.  The percentage  increase  generally  corresponded  with an increase in
principal transactions revenue and agency commissions.

     Occupancy and equipment  expense  increased 61% from $10.7 million to $17.2
million as a result of increases in depreciation expense related to computer and
telecommunications  equipment  upgrades and  procurements  for new employees and
increases in rent expense for additional office space leased.

     Communications  expense  increased 54% from $9.6 million to $14.8  million.
This increase was due to increases in telecommunications expenses and quotes and
information services expenses resulting from the hiring of additional employees.

     Interest  expense  increased  3% from $4.3  million to $4.5  million.  This
increase  related  primarily to higher  average  customer  payables  outstanding
during 1997.

     Other  expenses  increased  27% from $28.8 million to $36.6  million.  This
increase  was  due  to  increases  in   professional   services  fees,   travel,
entertainment and conference expenses and bad debt expense. In the fourth fiscal
quarter,  the Company  recorded a $1.8 million loss related to letters of credit
issued to two of Air South's creditors.

     INCOME TAX PROVISION.  The Company's effective income tax rate was 30.3% in
1996 and increased to 44% in 1997.  The Company's  effective  income tax rate in
1996 was less than the  combined  federal and state  statutory  income tax rates
because  LP was not  subject  to  corporate  federal or state  income  tax.  The
Company's  higher  effective tax rate in 1997  resulted from the  Restructuring.
Subsequent to the Restructuring,  all Company income became subject to corporate
federal and state income tax. The pro forma  income tax  adjustment  in 1996 was
determined  assuming  that all of the  Company's  combined  operations  had been
subject to corporate federal and state income tax.

LIQUIDITY AND CAPITAL RESOURCES

     The  Company has  historically  satisfied  its  funding  needs with its own
capital resources,  consisting almost entirely of internally  generated retained
earnings  and  capital  raised  from the sale of its  common  stock to  employee
stockholders and the public through its initial public offering. As of September
30,  1998,  H&Q LLC had  liquid  assets  consisting  primarily  of cash and cash
equivalents  of $67.0  million  and  amounts  on  deposit  with  Lewco of $110.0
million. Such amounts on deposit with Lewco are a component of the September 30,
1998  payable to Lewco of $11.4  million.  As of September  30,  1998,  Guaranty
Finance had a bank line of credit of $25.0 million with no balance  outstanding.
While the Company has not required  additional  bank  financing  during the past
several years, it has available an additional  $20.0 million line of credit with
a commercial  bank expiring on April 30, 1999.  At September 30, 1998,  H&Q also
had a $26.7 million line of credit with a financial  institution  collateralized
by the Company's  investment  in WAXS.  This line of credit was reduced to $15.9
million in October 1998.

     The Company's  consolidated balance sheet reflects the Company's relatively
unleveraged  financial  position.  The ratio of assets to equity as of September
30, 1998 was approximately  1.8:1. The Company's assets include receivables from
customers  and  Lewco,   securities  held  for  trading   purposes,   short-term
investments and securities held for investment  purposes.  A substantial portion
of the  Company's  receivables  are secured by customer  securities  or security
transactions in the process of settlement.  Securities held for trading purposes
are actively traded and readily marketable. As of September 30, 1998, securities
held for trading purposes include  government  securities  mutual funds totaling
$12.2 million.  Securities  held for  investment  purposes are for the most part
illiquid and are carried at valuations that reflect this lack of liquidity.  The
Company's  stockholders'  equity reflects $21.7 million of treasury  stock.  The
Company  purchased  $25.5  million of treasury  stock  during its fourth  fiscal
quarter.

     H&Q LLC, as a broker-dealer,  is registered with the SEC and is a member of
the NASD and the NYSE,  and is  subject  to the  capital  requirements  of these
regulatory entities.  H&Q LLC's regulatory net capital has historically exceeded
these minimum  requirements.  As of September 30, 1998,  H&Q LLC was required to
maintain  minimum  regulatory  net  capital  in  accordance  with  SEC  rules of
approximately $4.0 million and had total regulatory net capital of approximately
$50.5 million, or approximately $46.5 million in excess of its requirement.

     Hambrecht  &  Quist  Euromarkets,   a  wholly  owned  investment  bank  and
securities  broker  dealer in  France,  was in  compliance  with all  applicable
regulatory capital adequacy requirements at September 30, 1998.

     The Company  believes  that its current level of equity  capital,  combined
with funds anticipated to be generated from operations, will be adequate to fund
its operations for the foreseeable future.

RISK MANAGEMENT

RISK MANAGEMENT CONTROL STRUCTURE

     The  Company  has  established  various  policies  and  procedures  for the
management of its exposure to operating,  principal and credit risks.  Operating
risk arises out of the daily  conduct of the  Company's  business and relates to
the  possibility  that one or more of the Company's  personnel  could commit the
Company to  imprudent  business  activities  or to the  possibility  of improper
processing of transactions.  Principal risk relates to the fact that the Company
owns a variety of  investments  which are  subject to changes in value and could
result in the Company incurring material losses.  Credit risk occurs because the
Company  extends  credit to various of its  customers  in the form of margin and
other types of loans.

     Operating risk is monitored by the Company's Risk Management  Committee and
Commitment Committee. The Risk Management Committee reviews the overall business
activities of the Company and makes recommendations for addressing issues which,
in the judgment of its members,  could result in a material loss to the Company.
When transactions are pending, the Commitment Committee meets weekly to evaluate
and approve potential  investment banking  transactions prior to their execution
by the Company.

     Principal risk is managed  primarily  though the daily  monitoring of funds
committed  to the  various  types  of  securities  owned by the  Company  and by
limiting the exposure to any one investment or type of investment.  The two most
common  categories  of  securities  owned are those related to the daily trading
activities of the  Company's  brokerage and  underwriting  operations  and those
which  arise out of the  Company's  principal  investing  activities.  See "Risk
Management - Market Risk."

     The  Company's  credit risk is  monitored  by its Credit  Committee,  which
includes senior management from its brokerage,  operations,  financial and legal
departments. The committee meets when specific situations arise to review large,
concentrated or high profile accounts and to take  appropriate  actions to limit
the Company's exposure to loss on these accounts. Such actions typically consist
of  setting  higher  margin  requirements  for large or  concentrated  accounts,
requiring a reduction  in the level of margin debt or, in some cases,  requiring
the transfer of the account to another broker-dealer.

MARKET RISK

     Hambrecht & Quist's primary market risk exposure is to equity price changes
and the  resulting  impact on the  Company's  marketable  trading and  long-term
investment  portfolios.  The Company has limited market risk exposure to changes
in interest rates related to its short-term  investment  portfolio.  The Company
does not have material assets and liabilities  denominated in foreign currencies
and therefore, foreign currency risk is not material.

     Equity price risk is inherent in the Company's securities holdings. The two
categories of securities owned are those related to the daily trading activities
of the Company's brokerage and underwriting operations and those which arise out
of the Company's long-term principal investing activities.  Equity price risk is
managed  primarily though the daily monitoring of funds committed to the various
types of securities owned by the Company and by limiting the exposure to any one
investment or type of investment.

     The  Company  attempts to limit its  exposure to market risk on  securities
held as a result of its daily  trading  activities  by limiting its intraday and
overnight  inventory  of  trading  securities  to that  needed  to  provide  the
appropriate level of liquidity in the securities for which it is a market maker.
Security  inventory  positions  are  balanced  and  marked to market  daily.  At
September 30, 1998, the fair value of the Company's trading securities was $31.7
million  in long  positions  and  $18.1  million  in  short  positions.  The net
potential  loss in fair value at September  30, 1998,  using a 10%  hypothetical
decline in prices, is estimated to be approximately $1.4 million.  Occasionally,
the Company  enters  into  exchange-traded  option  contracts  to hedge  against
potential  losses in  inventory  positions,  thus  reducing the  potential  loss
exposure.  Such options are marked to market and are  included in the  Company's
marketable trading securities portfolio.

     The  Company's  primary  method  of  limiting  market  risk  on  securities
positions held in the Company's long-term  investment  portfolio is to liquidate
positions when they become freely tradable.  The Company's long-term  investment
portfolio consists  primarily of marketable and nonmarketable  equity ownerships
in numerous portfolio companies.  Many of the marketable securities owned by the
Company  result  from  the  public  registration  by the  portfolio  company  of
previously private,  nonmarketable shares. In these cases, the Company is nearly
always subject to trading  restrictions  that prevent the Company from disposing
of the security until all such restrictions expire. Additionally,  the extent of
the  Company's  ownership  or the  nature of its  relationship  to the  investee
company may impose additional trading restrictions on the Company's  investment.
Based on  individual  securities  reviews,  the Company may elect to hold freely
tradable  marketable security positions for a period after the restrictions have
lapsed.  In some cases,  such  positions are monitored  daily.  At September 30,
1998, the fair value of the Company's marketable investment securities was $53.9
million.  The net potential loss in fair value, using a 10% hypothetical decline
in prices, is estimated to be approximately $5.4 million.  In the case of larger
holdings of marketable investment  securities,  such as the Company's investment
in WAXS,  the Company may enter into various hedge  contracts such as options to
reduce  the  Company's  potential  loss  exposure.  The  effects  of such  hedge
contracts are included in the Company's valuation of the hedged security.

     The Company has  consistently  applied  the above risk  management  methods
during the past fiscal year and expects to maintain the same  methodologies  and
procedures in future reporting periods.

     The  effects of equity  price risk on the  Company's  long-term  investment
portfolio was evident in the recent  volatile  equity  markets.  General  equity
price declines and declines  specific to industries in which the Company focuses
resulted  in the  Company  recording  net  unrealized  losses  on its  long-term
investment  portfolio  of $8.9  million  in the  Company's  1998  fourth  fiscal
quarter. See "Overview - Effects of Market Conditions."

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and
Stockholders of Hambrecht & Quist Group:

     We have audited the accompanying consolidated balance sheets of Hambrecht &
Quist Group (a Delaware  corporation)  and Subsidiaries as of September 30, 1997
and 1998,  and the related  consolidated  statements of  operations,  changes in
stockholders'  equity and  partners'  capital and cash flows for the years ended
September  30,  1996,  1997  and  1998.  These  financial   statements  are  the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the consolidated  financial  position of Hambrecht &
Quist Group and  Subsidiaries as of September 30, 1997 and 1998, and the results
of their operations and their cash flows for the years ended September 30, 1996,
1997 and 1998, in conformity with generally accepted accounting principles.

     As discussed  in Notes 2 and 7 to the  consolidated  financial  statements,
long-term investments include nonmarketable investments amounting to $65,514,883
and  $75,772,183  (22  and 23  percent  of  total  stockholders'  equity)  as of
September 30, 1997 and 1998, respectively,  which have been valued at fair value
as  determined  by  management.  We have  reviewed  the  procedures  applied  by
management  in  valuing  such  investments  and have  inspected  the  underlying
documentation, and in the circumstances we believe the procedures are reasonable
and the documentation appropriate.  However, because of the inherent uncertainty
of valuation, management's estimate of fair values may differ significantly from
the  values  that  would  have  been  used had a ready  market  existed  for the
securities and the differences could be material.

                                                          ARTHUR ANDERSEN LLP


San Francisco, California,
November 13, 1998

<PAGE>

                             HAMBRECHT & QUIST GROUP
                           CONSOLIDATED BALANCE SHEETS
                        AS OF SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>

                                                                                            1997             1998                  
                                                                                        ------------    -------------
<S>                                                                                  <C>                <C>    

Cash and cash equivalents ..........................................................   $  42,637,732    $  66,959,567
Receivables:
  Customers (net of allowance of $1,050,000 and $1,175,000, respectively) ..........     183,796,833      215,657,363
  Lewco Securities Corp. ...........................................................     157,570,375             --
  Syndicate managers ...............................................................      15,494,668       11,013,798
  Related parties ..................................................................      17,397,164       17,632,094
  Notes (net of allowance of $998,573 and $4,341,348, respectively) ................      17,490,727       13,554,957
  Income taxes .....................................................................         531,955        4,032,103
  Other ............................................................................      14,194,982       20,486,412
Marketable trading securities, at market value .....................................      32,617,567       31,677,092
Long-term investments, at estimated fair value .....................................     117,199,728      129,622,466
Deferred income taxes ..............................................................      56,734,654       75,813,545
Furniture, equipment and leasehold improvements, net of accumulated depreciation and
  amortization .....................................................................      18,782,846       16,962,409
Other assets .......................................................................       4,487,399        3,256,553
                                                                                       -------------    -------------
          Total assets .............................................................   $ 678,936,630    $ 606,668,359
                                                                                       =============    =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
  Customers ........................................................................   $ 186,445,656    $  83,221,535
  Compensation and benefits ........................................................     118,967,915      123,933,699
  Lewco Securities Corp. ...........................................................            --         11,396,221
  Syndicate settlements ............................................................      21,355,653        4,442,449
  Income taxes payable .............................................................       6,563,552             --
  Trade accounts payable ...........................................................       2,829,377        2,897,223
  Accrued expenses and other .......................................................      30,926,355       25,898,187
Securities sold, not yet purchased, at market value ................................      11,770,127       18,122,784
Debt obligations ...................................................................       2,700,000             --
                                                                                       -------------    -------------
          Total liabilities ........................................................     381,558,635      269,912,098
                                                                                       -------------    -------------

Commitments and contingencies

Stockholders' equity:
  Common stock (par value $0.01 and 100,000,000 shares authorized, 23,790,337 and
    24,561,944 issued, respectively) ...............................................         237,903          245,619
  Additional paid-in capital .......................................................     136,271,533      157,217,641
  Stock notes receivable from employees ............................................      (5,620,260)      (3,079,872)
  Retained earnings ................................................................     167,230,812      207,441,350
  Unrealized losses on investments available for sale, net .........................        (303,117)      (3,258,584)
  Cumulative translation loss ......................................................            --           (144,671)
  Treasury stock, at cost (21,615 and 978,802 shares, respectively) ................        (438,876)     (21,665,222)
                                                                                       -------------    -------------
          Total stockholders' equity ...............................................     297,377,995      336,756,261
                                                                                       -------------    -------------

          Total liabilities and stockholders' equity ...............................   $ 678,936,630    $ 606,668,359
                                                                                       =============    =============

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

<PAGE>


                             HAMBRECHT & QUIST GROUP
                      CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997, AND 1998

<TABLE>
<CAPTION>

                                             1996            1997           1998
                                          ------------   ------------   ------------
<S>                                     <C>             <C>             <C>   
REVENUES:
  Principal transactions .............   $103,889,312   $122,816,953   $105,860,709
  Commissions ........................     34,420,431     38,706,851     49,725,475
  Investment banking .................    154,271,774     90,470,621     91,332,041
  Corporate finance fees .............     37,962,437     54,237,209     75,080,234
  Interest and dividends .............     14,707,327     22,629,092     27,235,663
  Net investment gains ...............     24,434,401        228,979      2,414,790
  Other ..............................     23,016,922     17,142,186     21,475,868
                                         ------------   ------------   ------------

    Total revenues ...................    392,702,604    346,231,891    373,124,780
                                         ------------   ------------   ------------

EXPENSES:
  Compensation and benefits ..........    198,613,070    178,872,709    187,065,268
  Brokerage and clearance ............     13,628,832     17,258,305     23,064,046
  Occupancy and equipment ............     10,677,161     17,183,241     21,513,669
  Communications .....................      9,614,368     14,762,047     15,352,793
  Interest ...........................      4,314,085      4,453,983      3,628,473
  Other ..............................     28,787,669     36,604,823     51,956,513
                                         ------------   ------------   ------------

    Total expenses ...................    265,635,185    269,135,108    302,580,762
                                         ------------   ------------   ------------
    Income before income tax provision    127,067,419     77,096,783     70,544,018
INCOME TAX PROVISION .................     38,466,246     33,922,585     30,333,480
                                         ============   ============   ============
    Net income .......................   $ 88,601,173   $ 43,174,198   $ 40,210,538
                                         ============   ============   ============

EARNINGS PER SHARE:
  Basic................................                 $       1.83   $       1.64
  Diluted..............................                 $       1.68   $       1.51

WEIGHTED AVERAGE SHARES:
  Basic................................                   23,569,306     24,551,064
  Diluted..............................                   25,682,887     26,613,541

PRO FORMA INFORMATION (UNAUDITED):
Net income before income tax adjustment..  $  88,601,173
Income tax adjustment....................    (17,443,418)
                                              -----------
  Pro forma net income...................  $  71,157,755
                                              ==========

Pro forma earnings per share:
  Basic..................................  $        3.60
  Diluted................................  $        3.27

Pro forma weighted average shares:
  Basic..................................     19,752,126
  Diluted................................     21,734,143

</TABLE>


        The accompanying notes are an integral part of these statements.


<PAGE>

               HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL

              FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>


                                                                            Hambrecht & Quist Group 
                                              ----------------------------------------------------------------------------------
                                                                                                                                   
                                                    Number                       Additional         Stock                          
                                                  of Common         Common       Paid - in          Notes             Retained     
                                                   Shares           Stock         Capital         Receivable          Earnings     
                                               --------------   -------------   -------------   --------------     ------------ 
<S>                                              <C>             <C>             <C>           <C>                <C>            

BALANCE, SEPTEMBER 30, 1995 ................      14,609,188    $  25,412,585                   $(7,659,714)      $  72,205,112
  Sales of common stock or partners' capital
    additions ..............................       2,080,348       11,994,895                    (7,831,585)              --   
  Reductions of stock and capital notes ....            --               --                       8,981,733               --   
  Repurchases of common stock or partners'
    capital withdrawals ....................        (608,368)      (2,201,212)                          --           (1,409,601)
  Distribution of LP interest to Group Trust            --               --                             --            4,493,971
  Transfer of LP notes receivable to H&Q ...            --               --                       (8,227,753)             --   
  Net income through August 7, 1996 ........            --               --                             --           33,688,550
  Partners' capital distributions payable ..            --               --                             --                --   
  Partners' capital distributions ..........            --               --                             --                --   
  Change in net unrealized gains ...........            --               --                             --                --   
                                                  ----------      -----------      -----------   ------------      ------------  
 Balance, August 7, 1996 ..................      16,081,168       35,206,268                     (14,737,319)       108,978,032
  Distribution of cash and securities to LP      
    Trust ..................................            --               --               --             --               --
  Merger between H&Q and LP. ...............       2,587,762      (35,019,579)      56,366,873           --               --
  Purchase of additional interest in .......       
   Guaranty Finance ........................            --               --               --             --               --
                                                  ----------      -----------      -----------    ------------      -----------  
  Balance, August 8, 1996 ..................      18,668,930          186,689       56,366,873    (14,737,319)      108,978,032
  Sale of common stock in initial public
   offering plus net underwriting revenue of       
   $425,000 ................................       4,025,000           40,250       60,276,750           --               --   
  Reductions of stock notes ................            --               --               --        1,186,816             --
  Net income from August 8 to September 30,            
   1996 ....................................            --               --               --             --          15,078,582
  Change in net unrealized losses ..........            --               --               --             --               --

                                                  ----------      -----------      -----------    ------------      -----------  
BALANCE, SEPTEMBER 30, 1996 ................      22,693,930          226,939      116,643,623    (13,550,503)      124,056,614
  Sales of common stock ....................       1,134,244           11,342       20,083,292       (289,035)            --
  Forfeitures of common stock ..............         (37,837)            (378)        (455,382)          --               --
  Reductions of stock notes ................            --               --               --        8,209,370             --
  Net income ...............................            --               --               --             --          43,174,198
  Change in net unrealized losses ..........            --               --               --             --               --
  Purchases of treasury stock (21,615           
   shares) .................................            --               --               --            9,908             --
                                                  ----------      -----------      -----------    ------------      -----------  
BALANCE, SEPTEMBER 30, 1997 ................      23,790,337          237,903      136,271,533     (5,620,260)      167,230,812
  Sales of common stock ....................         894,316            8,943       25,297,557           --              --
  Forfeitures of common stock ..............        (122,709)          (1,227)      (2,422,351)          --              --
  Reductions of stock notes ................            --               --               --        2,540,388            --
  Net income ...............................            --               --               --             --          40,210,538
  Change in net unrealized losses ..........            --               --               --             --              --
  Change in translation loss ...............            --               --               --             --              --
  Purchases of treasury stock (1,115,000
    shares), net of issuances (157,813            
    shares) ................................            --               --         (1,929,098)          --              --
                                                  ----------      -----------      -----------    -----------     ------------      
BALANCE, SEPTEMBER 30, 1998 .................     24,561,944      $   245,619     $157,217,641    $(3,079,872)     $207,441,350
                                                  ==========      ===========     ============    ===========      ============
<CAPTION>

                                                                   Hambrecht & Quist Group
                                               --------------------------------------------------------------

                                                                  Cumulative                                                      
                                                  Unrealized     Translation      Treasury          Subtotal        
                                                  Losses, Net        Loss       Stock, at cost     H&Q Group       
                                               ---------------  --------------  ---------------   -----------     
<S>                                             <C>              <C>            <C>              <C>              

BALANCE, SEPTEMBER 30, 1995 ................                                                      $89,957,983     
  Sales of common stock or partners' capital
    additions ..............................                                                        4,163,310     
  Reductions of stock and capital notes ....                                                        8,981,733     
  Repurchases of common stock or partners'
   capital withdrawals ....................                                                        (3,610,813)    
  Distribution of LP interest to Group Trust                                                        4,493,971     
  Transfer of LP notes receivable to H&Q ...                                                       (8,227,753)    
  Net income through August 7, 1996 ........                                                       33,688,550     
  Partners' capital distributions payable ..                                                              --      
  Partners' capital distributions ..........                                                              --      
  Change in net unrealized gains ...........                                                              --      
                                               -------------    -------------    -------------    -----------   
  Balance, August 7, 1996 ..................                                                      129,446,981     
  Distribution of cash and securities to LP                                                                     
  Trust ....................................                                                              --
  Merger between H&Q and LP. ...............       (557,280)                                       20,790,014     
  Purchase of additional interest in           
   Guaranty Finance.................. ......       (136,410)                                         (136,410)
                                               -------------    -------------    -------------    -----------   
  Balance, August 8, 1996 ..................       (693,690)                                      150,100,585     
  Sale of common stock in initial public
   offering plus net underwriting revenue of           
   $425,000 ................................            --                                         60,317,000
  Reductions of stock notes ................            --                                          1,186,816     
  Net income from August 8 to September 30,                 
   1996 ....................................            --                                         15,078,582
  Change in net unrealized losses ..........         28,466                                            28,466 
                                               -------------    -------------    -------------    -----------   

BALANCE, SEPTEMBER 30, 1996 ................       (665,224)                                      226,711,449     
  Sales of common stock ....................            --                                         19,805,599 
  Forfeitures of common stock ..............            --                                           (455,760) 
  Reductions of stock notes ................            --                                          8,209,370 
  Net income ...............................            --                                         43,174,198  
  Change in net unrealized losses ..........        362,107                                           362,107
  Purchases of treasury stock (21,615              
   shares) ..................................            --               --          (438,876)      (428,968)
                                               -------------    -------------    -------------    -----------   
BALANCE, SEPTEMBER 30, 1997 ................       (303,117)                          (438,876)   297,377,995   
  Sales of common stock ....................            --                                --       25,306,500   
  Forfeitures of common stock ..............            --                                --       (2,423,578)  
  Reductions of stock notes ................            --                                --        2,540,388   
  Net income ...............................            --                                         40,210,538             
  Change in net unrealized losses ..........     (2,955,467)                              --       (2,955,467)  
  Change in translation loss ...............            --           (144,671)            --         (144,671)   
  Purchases of treasury stock (1,115,000
    shares), net of issuances (157,813             
    shares) ................................            --               --        (21,226,346)   (23,155,444)
                                               -------------    -------------    -------------    -----------   
BALANCE, SEPTEMBER 30, 1998.................     (3,258,584)    $    (144,671)   $ (21,665,222)  $336,756,261
                                               =============    =============    =============    ===========   

<CAPTION>
                                                                         Hambrecht & Quist, LP
                                               ----------------------------------------------------------------------
                                                                 Capital
                                                  Partners'      Notes        Distributions   Unrealized    Subtotal 
                                                  Capital       Receivable       Payable       Gains, Net    H&Q LP        Total
                                                 ----------    ------------    ------------    ---------   ----------  ------------
<S>                                           <C>              <C>             <C>             <C>         <C>         <C>
BALANCE, SEPTEMBER 30, 1995 ................   $ 26,194,002    $(2,232,013)    $(10,445,367)   1,987,478   15,504,100  $105,462,083 
  Sales of common stock or partners' capital        
    additions ..............................      7,595,591     (7,333,171)            --           --        262,420     4,425,730 
  Reductions of stock and capital notes ....           --        1,337,431             --           --      1,337,431    10,319,164
  Repurchases of common stock or partners'       
    capital withdrawals ....................       (420,344)          --               --           --       (420,344)   (4,031,157)
  Distribution of LP interest to Group Trust           --             --               --           --           --       4,493,971
  Transfer of LP notes receivable to H&Q ...           --        8,227,753             --           --      8,227,753          -- 
  Net income through August 7, 1996 ........     39,834,040           --               --           --     39,834,040    73,522,590 
  Partners' capital distributions payable ..          --              --        (14,034,971)        --    (14,034,971)  (14,034,971)
  Partners' capital distributions ..........    (24,480,338)          --         24,480,338         --           --            --
  Change in net unrealized gains ...........          --              --               --       1,101,224   1,101,224     1,101,224 
                                                 ----------    ------------     ------------    ---------   ----------  ------------
  Balance, August 7, 1996 ..................     48,722,951           --               --       3,088,702  51,811,653   181,258,634 
  Distribution of cash and securities to LP        
   Trust ..................................     (27,375,657)                                   (3,645,982)(31,021,639)  (31,021,639)
  Merger between H&Q and LP. ...............    (21,347,294)                                      557,280 (20,790,014)         --   
  Purchase of additional interest in
   Guaranty Finance .......................          --                                              --          --        (136,410)
                                                ----------    ------------     ------------    ---------   ----------  ------------
 
Balance, August 8, 1996 ....................         --               --               --            --          --     150,100,585 
  Sale of common stock in initial public          
   offering plus net underwriting revenue of                                                          
   $425,000 ................................                                                                             60,317,000
  Reductions of stock notes ................                                                                              1,186,816
  Net income from August 8 to September 30,                                                                    
   1996 ....................................                                                                             15,078,582
  Change in net unrealized losses ..........                                                                                 28,466
                                                ----------    ------------     ------------    ---------   ----------  ------------

BALANCE, SEPTEMBER 30, 1996 ................        --               --               --            --          --      226,711,449 
  Sales of common stock ....................                                                                             19,805,599
  Forfeitures of common stock ..............                                                                               (455,760)
  Reductions of stock notes ................                                                                              8,209,370 
  Net income ...............................                                                                             43,174,198 
  Change in net unrealized losses ..........                                                                                362,107
  Purchases of treasury stock (21,615                                                          
   shares) .................................                                                                               (428,968
                                                ----------    ------------     ------------    ---------   ----------  ------------

BALANCE, SEPTEMBER 30, 1997 ................         --               --               --            --          --     297,377,995
  Sales of common stock ....................                                                                             25,306,500 
  Forfeitures of common stock ..............                                                                             (2,423,578)
  Reductions of stock notes ................                                                                              2,540,388
  Net income ...............................                                                                             40,210,538
  Change in net unrealized losses ..........                                                                             (2,955,467)
  Change in translation loss ...............                                                                               (144,671)
  Purchases of treasury stock (1,115,000 
   shares), net of issuances (157,813
   shares) ..................................                                                                           (23,155,444)
                                                ----------    ------------     ------------    ---------   ----------  ------------

BALANCE, SEPTEMBER 30, 1998 ................         --               --               --            --          --    $336,756,261
                                                ==========    ============     ============    =========   ==========  ============ 

</TABLE>

        The accompanying notes are an integral part of these statements.
                                                                               
                                             

<PAGE>


                             HAMBRECHT & QUIST GROUP
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998

<TABLE>
<CAPTION>

                                                                             1996            1997             1998
                                                                        --------------   -------------   --------------
<S>                                                                     <C>              <C>             <C>   

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income .........................................................   $ 88,601,173    $ 43,174,198    $ 40,210,538
                                                                         ------------    ------------    ------------
  Adjustments to reconcile net income to net cash and cash
    equivalents provided by operating activities-
      Depreciation and amortization ..................................      6,724,686       9,524,109      11,150,635
      Net investment gains ...........................................    (24,434,401)       (228,979)      2,414,790
      Net gains on sales of leased assets ............................     (3,394,352)           --        (4,542,528)
      Deferred tax benefit ...........................................    (26,967,633)    (19,139,165)    (16,620,647)
      Minority interest in income of subsidiaries ....................        685,105         388,934         178,927
      Changes in operating assets and liabilities-
        Customers, net ...............................................      2,854,297      28,575,358    (135,084,651)
        Lewco Securities Corp. .......................................    (38,541,879)    (77,038,187)    168,966,596
        Syndicate managers ...........................................     (3,203,996)     (2,751,770)      4,480,870
        Income taxes receivable, net .................................     (4,439,132)      8,509,311      (3,077,361)
        Related parties and other receivables ........................    (14,196,022)    (11,367,316)     (6,902,474)
        Marketable trading securities, net ...........................    (49,676,915)     11,670,441       7,293,132
        Other assets .................................................      6,497,018      (1,438,338)      1,408,818
        Compensation and benefits payable ............................     63,683,797      35,046,851      19,744,660
        Syndicate settlements ........................................     (6,879,034)      2,824,910     (16,913,204)
        Trade accounts payable .......................................      1,538,586         346,016          67,846
        Accrued expenses and other payables ..........................     11,145,247      11,088,519      (4,246,208)
        Other, net ...................................................     (1,244,456)         57,084       6,477,124
                                                                         ------------    ------------    ------------

          Total adjustments ..........................................    (79,849,084)     (3,932,222)     29,966,745
                                                                         ------------    ------------    ------------
          Net cash and cash equivalents provided by
            operating activities .....................................      8,752,089      (1,438,338)     70,177,283
                                                                         ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of long-term investments .................................    (32,727,770)    (87,351,958)    (65,678,756)
  Proceeds from sales/distributions of long-term investments .........     36,222,554      61,778,580      46,919,387
  Purchases of furniture, equipment and leasehold improvements            (11,138,680)    (12,904,169)     (8,497,403)
  Increases in notes receivable ......................................    (10,500,000)    (13,337,311)    (11,963,000)
  Payments of notes receivable .......................................           --         5,348,011      12,555,995
  Purchase of additional 17.5 percent of Guaranty Finance ............     (1,374,922)           --              --
  Other, net .........................................................           --              --         3,525,432
                                                                         ------------    ------------    ------------
          Net cash and cash equivalents used in investing
            activities ...............................................    (19,518,818)    (46,466,847)    (23,138,345)
                                                                         ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from debt obligations .....................................     19,732,057      21,459,227       9,500,000
  Repayments of debt obligations .....................................    (25,137,973)    (27,124,048)    (12,200,000)
  Proceeds from sales of common stock and partners' capital
    contributions ....................................................     68,992,106       5,924,858       5,651,681


<PAGE>


               HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
              FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<CAPTION>

                                                                             1996            1997           1998
                                                                         ------------    ------------    ------------
<S>                                                                       <C>              <C>           <C>    

  Repurchases of common stock and partners' capital withdrawals ......     (4,031,157)           --              --
  Partners' capital distributions ....................................    (33,836,338)           --              --
  Distributions to minority members of Guaranty Finance ..............       (300,000)           --          (187,500)
  Investment by minority members in Transition Capital ...............        625,000            --              --
  Purchases of treasury stock ........................................           --          (428,968)    (25,481,284)
                                                                         ------------    ------------    ------------
          Net cash and cash equivalents provided by (used in)
            financing activities .....................................     26,043,695        (168,931)    (22,717,103)
                                                                         ------------    ------------    ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .....................     15,276,966      (7,393,802)     24,321,835

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .......................     34,754,568      50,031,534      42,637,732
                                                                         ------------    ------------    ------------
                                                                                                           66,959,567
CASH AND CASH EQUIVALENTS AT END OF YEAR .............................   $ 50,031,534    $ 42,637,732    $ 66,959,567
                                                                         ============    ============    ============

SCHEDULE OF SUPPLEMENTAL INFORMATION:
  Taxes paid to taxing authorities ...................................   $ 67,051,664    $ 40,009,539    $ 35,081,320
  Interest paid ......................................................      4,314,084       4,453,983       3,628,473

SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
  H&Q LLC long-term investments, net, were reclassified
    from H&Q LLC marketable securities ...............................           --        18,165,165            --
  H&Q California received marketable long-term investments
    as repayment for profit participations receivable ................           --         2,881,718         708,368
  H&Q common stock sales and LP partners' capital
    contributions were made with stock and capital notes
    receivable from employees ........................................     15,164,756         289,035            --
  H&Q common stock was issued to employees in exchange
    for reductions in compensation and benefits and taxes payable ....      7,256,604      22,090,111      21,765,215
  H&Q common stock was forfeited by employees resulting in
    decreases in compensation and benefits expense ...................           --           455,760       2,423,578
  Net unrealized gains (losses) on subsidiaries' long-term
    investments, net of tax, were recorded as increases (decreases) in
    equity, minority interest (included in other payables) ...........     (3,641,069)        413,867       3,728,854
  H&Q California's limited partnership interest in LP was
    distributed to certain current and former employees in
    exchange for reductions in compensation and benefits payable .....      4,493,971            --              --
  The Restructuring resulted in the following non cash reductions
    to long-term investments and stockholders' equity and
    partners' capital:
     Distribution of securities by LP to the LP Trust ................     21,665,639            --              --
     Distribution of securities by Guaranty Finance to minority
        member .......................................................      2,485,968            --              --

</TABLE>

        The accompanying notes are an integral part of these statements.

<PAGE>



                             HAMBRECHT & QUIST GROUP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



1. ORGANIZATION, NATURE OF OPERATIONS AND RESTRUCTURING:

ORGANIZATION

     The financial statements include the consolidated operations of Hambrecht &
Quist  Group,  a  Delaware  corporation  ("H&Q",  "Hambrecht  &  Quist"  or  the
"Company").  H&Q was formed in fiscal 1996 to be the sole parent of  Hambrecht &
Quist California, a California corporation ("H&Q California") (formerly known as
Hambrecht  & Quist  Group) and to succeed  to the assets of  Hambrecht  & Quist,
L.P., a California limited partnership ("LP"). The 1996 historical  consolidated
financial  statements  include the combined  operations of H&Q California and LP
(see Note 2).

     On August 8, 1996, through separate mergers (collectively,  the "Mergers"),
a newly formed subsidiary of H&Q merged with H&Q California,  and LP merged with
H&Q. All of the  shareholders  of H&Q California  exchanged each of their common
shares for four  shares of H&Q common  stock.  All of the former  partners of LP
exchanged  each of their  partnership  units for 24 shares of H&Q common  stock.
Subsequently,  the assets and  liabilities of LP were  contributed by H&Q to H&Q
California.  The Mergers were accounted for at the respective  stockholders' and
partners'  carrying values,  which represent the entities'  carrying values. The
individuals'  carrying  values were used  because each  individual  party to the
Mergers was a promoter of H&Q and its initial public offering (under  Securities
and Exchange Commission  accounting  guidelines).  No minority interest resulted
from the Mergers.  All  references to historical  number of shares and per-share
amounts have been restated to reflect the effect of the four-for-one exchange of
shares.

     Subsequent  to the Mergers,  on August 9, 1996,  H&Q issued  4,025,000  new
shares in an initial public offering (the  "Offering").  The net proceeds of the
Offering were $60,317,000.

NATURE OF OPERATIONS

     H&Q  consolidates  its wholly owned  subsidiary,  H&Q  California,  and its
subsidiaries.  H&Q  California  owns the  following  wholly owned  subsidiaries.
Hambrecht & Quist L.L.C., a Delaware limited  liability  company ("H&Q LLC"), is
an investment  banking  subsidiary and securities  broker-dealer  that primarily
serves companies and investors involved in the technology,  healthcare, services
and branded consumer industries. Hambrecht & Quist Euromarkets, S.A. ("H&Q EM"),
formerly  Hambrecht & Quist Saint  Dominique,  is a broker-dealer  registered in
France providing investment banking services to European companies.  Hambrecht &
Quist  Capital  Management  Incorporated,  a  California  corporation  ("Capital
Management"),  is a registered  investment  adviser.  Capital  Management is the
investment   adviser  to  two  publicly  traded  closed-end  mutual  funds,  H&Q
Healthcare Investors and H&Q Life Sciences Investors.  Hambrecht & Quist Venture
Partners, a California limited partnership  ("Venture  Partners"),  is a venture
capital fund management partnership.

     H&Q  California  also owns  87.5  percent  of  Hambrecht  & Quist  Guaranty
Finance, LLC ("Guaranty  Finance"),  a California limited liability company. The
remaining 12.5 percent minority  interest is owned by individuals  active in the
management  of Guaranty  Finance and is included in accrued  expenses  and other
payables in the  consolidated  financial  statements.  Guaranty Finance provides
secured,  asset-based financings that include tenant improvement and real estate
leases,  equipment leases,  accounts  receivable and inventory  financing,  loan
guarantees, bridge loans and mezzanine financing for emerging growth technology,
biotechnology and healthcare companies.

     Effective  January  26,  1998,  Hambrecht  & Quist  Transition  Capital LLC
("Transition Capital"), a provider of bridge loans and mezzanine financing,  was
merged into Guaranty Finance.  Previously,  H&Q California owned an 87.5 percent
interest in and was the managing  member of Transition  Capital.  The merger was
accounted for as a reorganization  of entities under common control.  Under such
reorganization accounting, the historical bases of the assets and liabilities of
Transition  Capital and Guaranty  Finance were  combined.  H&Q retained its 87.5
percent interest in Guaranty Finance.

     Effective May 28, 1998, H&Q  discontinued  the operations of RvR Securities
Corp.  ("RVR"),  a  registered   broker-dealer   serving  companies  with  small
capitalizations.  Previously, H&Q California owned 100 percent of RVR. RVR's net
assets were  distributed to its parent,  H&Q California.  Such  distribution was
accounted for at the historical carrying bases of the net assets transferred.

     Other  entities are not  consolidated  and are  accounted  for on an equity
basis,  which  approximates  fair  value.  H&Q  owns a 15  percent  interest  in
Hambrecht & Quist Asia Pacific,  Ltd., a British Virgin  Islands  company ("Asia
Pacific")  (see  Note  4) and has  profit  participation  interests  of 25 to 35
percent in  investment  funds  managed by Asia  Pacific.  Asia Pacific  provides
financial advisory and fund management  services in the Asia Pacific region. H&Q
LLC owns  approximately 20 percent of Lewco Securities  Corporation,  a Delaware
corporation  ("Lewco")  (see  Notes 7 and 11).  Lewco is a  clearing  broker and
depository for H&Q LLC and Schroder & Co., which owns  approximately 80 percent,
with two other  minority  owners.  All expenses,  net of certain  revenues,  are
reimbursed by both owners based on the volume of transactions processed on their
behalf.  These costs are reported as expenses in the consolidated  statements of
operations.  Other less significant  investment and venture capital partnerships
are recorded in long-term  investments  at their  estimated fair value (see Note
2).  

     Effective  July 1, 1998, the Company  established a strategic  relationship
with H&Q Venture  Associates,  L.L.C. , a California  limited  liability company
("Venture  Associates") (see Note 4). Venture Associates is owned and managed by
former  employees of Hambrecht & Quist and provides fund management  services to
the Company (see Note 11) and to outside parties.  H&Q has profit  participation
interests of varying percentages in all of the investment funds and partnerships
managed by Venture Associates.

     Prior  to  its  merger  with  H&Q,  LP  operated  primarily  as  a  holding
partnership  for  certain   current  and  prior  operating   affiliates  of  H&Q
California.  Such  ownership  of  operating  affiliates  included  a 30  percent
ownership  of H&Q LLC and a 70  percent  ownership  of  Guaranty  Finance.  Such
ownership  interests  were  transferred  to H&Q as  part  of  the  Mergers.  H&Q
California  owned the  remaining 70 percent of H&Q LLC. An entity  controlled by
the CEO of the  Company  and a third  party  owned the  remaining  30 percent of
Guaranty Finance.  H&Q California was the one percent general partner of LP, and
the same employee shareholders of H&Q California were the limited partners.

RESTRUCTURING

     Prior to the Mergers,  H&Q  California  and LP  significantly  restructured
their  operations  through  a series  of  transactions  and  distributions  (the
"Restructuring")  designed to simplify the  Company's  structure.  The following
transactions were completed as part of the Restructuring in 1996.

     H&Q  California  distributed  its limited  partnership  interest in LP to a
liquidating  trust (the "Group  Trust")  benefiting  certain  current and former
employees.  The result of the distribution was a charge to compensation  expense
and an addition to  stockholders'  equity of $4,493,971,  which  represented the
value of the limited partnership interest.  Previously, such limited partnership
value was eliminated in consolidation due to intercompany ownership.

     LP distributed  cash and securities  totaling  $31,021,639 to a liquidating
trust (the "LP Trust")  benefiting  the partners of LP. The cash and  securities
distributed  totaled  $9,356,000 and $21,665,639,  respectively.  The securities
distributed  included securities held by LP and securities  distributed to LP by
H&Q LLC and Guaranty  Finance.  H&Q LLC's securities  distribution  included its
remaining  holdings of The BISYS Group,  Inc.  ("BISYS") (see Note 7).  Guaranty
Finance also distributed  $2,485,968 of securities to its minority  member.  All
securities were distributed at their estimated fair value.

     H&Q California  purchased an additional  17.5 percent  interest in Guaranty
Finance for $1,374,922 from the minority  member.  Such purchase  resulted in no
remaining  ownership of Guaranty  Finance by the Company's CEO. The purchase was
accounted  for as a purchase of minority  interest and resulted in the recording
of an immaterial amount of goodwill.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION AND COMBINATION

     All significant intercompany accounts and transactions have been eliminated
in consolidation and combination.  The 1996 historical  financial statements and
footnote  disclosures  represent the combined  financial position and results of
operations and changes in  shareholders'  equity and partners'  capital and cash
flows for H&Q California and LP.

USE OF ESTIMATES

     The preparation of these financial  statements  requires the use of certain
estimates by management in determining the entity's assets, liabilities, revenue
and expenses.  The most  significant  estimates  with regard to these  financial
statements relate to the valuation of long-term investments, as discussed below.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include cash on hand, demand deposits with banks,
money  market  accounts  and  cash  equivalent  short-term   investments.   Cash
equivalent   short-term   investments  include  U.S.  Treasury  bills,   reverse
repurchase  agreements and other U.S. government securities totaling $29,949,090
and $50,667,696 at September 30, 1997 and 1998,  respectively.  Cash equivalents
have original maturities of 90 days or less.

SECURITIES TRANSACTIONS

     Customers' securities transactions are recorded on a settlement-date basis,
with  related  commission  income and expenses  recorded on a trade-date  basis.
Marketable  securities owned and securities sold, not yet purchased are recorded
on  a  trade-date  basis.  Final  underwriting  settlements  are  recorded  when
received.

MARKETABLE TRADING SECURITIES

     Marketable  trading  securities and securities  sold, not yet purchased are
reported at prevailing  market prices.  Realized and unrealized gains and losses
on marketable  trading  securities  and  securities  sold, not yet purchased are
included in principal transactions revenue.

LONG-TERM INVESTMENTS

     Long-term    investments   include   marketable   equity   securities   and
nonmarketable securities (which include restricted securities of publicly traded
companies,  securities of private companies and investment partnership and other
venture capital interests).

     H&Q  California  and  H&Q  LLC  own   marketable   equity   securities  and
nonmarketable   investments.   Marketable  equity  securities  are  reported  at
prevailing  market  prices.   Discounts  are  applied  for  holdings  which  are
restricted in their  disposition.  Nonmarketable  investments are not registered
for public sale or carry restrictions on sale and are reported at estimated fair
value as determined by management.  Factors  considered by management in valuing
nonmarketable  investments  include  the  type  of  investment,  purchase  cost,
marketability,  restrictions on disposition, subsequent purchases of the same or
similar  investments  by other  investors,  and current  financial  position and
operating  results  of the  investee  entities.  Warrants  and  other  rights to
purchase  investments  are valued at cost,  which  approximates  estimated  fair
value.  Realized and unrealized gains and losses on long-term  investments owned
by H&Q and H&Q LLC are included in revenues as net investment gains.

     Also included in long-term  investments are  investments  owned by Guaranty
Finance.  Guaranty Finance  primarily owns marketable equity  securities.  Under
Statement of Financial Accounting  Standards No. 115 (SFAS 115),  Accounting for
Certain  Investments  in Debt and Equity  Securities,  entities such as Guaranty
Finance must carry its  available-for-sale  securities  at fair value and report
unrealized gains and losses in stockholders'  equity.  At September 30, 1997 and
1998,  the  unrealized  loss for Guaranty  Finance was $346,419 and  $6,533,540,
respectively  and H&Q's recorded  portion,  net of the related tax effects,  was
$303,117 and $3,258,584, respectively.

FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Furniture,  equipment  and  leasehold  improvements  are  recorded at cost.
Depreciation  of furniture  and  equipment  is provided  using  accelerated  and
straight-line  methods.  These assets are depreciated  over periods ranging from
three to seven years based on estimated useful lives. Leasehold improvements are
amortized  over the lesser of the useful life of the  improvement or the term of
the lease.  Expenditures for repairs and maintenance  that do not  significantly
increase the life of the asset are charged to expense as incurred.

INCOME TAXES AND PRO FORMA INCOME TAX ADJUSTMENT

     The Company  accounts  for income  taxes in  accordance  with  Statement of
Financial  Accounting  Standards  No. 109,  Accounting  for Income  Taxes ("SFAS
109"). Under this method, the Company recognizes taxes payable or refundable for
the current year and deferred tax liabilities and assets for future consequences
of events that have been recognized in the Company's financial statements or tax
returns.

     No provision  has been made in the  financial  statements  for income taxes
related to the income of LP. Pursuant to applicable federal and state income tax
regulations,  all income or loss of LP is reportable by each partner directly to
the taxing  authority.  As part of the Mergers  (see Note 1), LP merged into the
Company  and  ceased  existence.  For  financial  reporting  purposes,  the 1996
consolidated  statement of operations includes a pro forma income tax adjustment
of  $17,443,418  representing  taxes on LP's  income  as if LP's  earnings  were
subject to income taxes at an effective tax rate of 44 percent.

COMMON STOCK AND PARTNERS' CAPITAL TRANSACTIONS

     Since the Offering in 1996,  common stock issuances have been to employees,
directors and the Savings and Employee Stock Ownership Trust  ("SESOT")(see Note
12). The issuances to the SESOT are more fully  described in Note 12.  Issuances
to employees and directors include awards to new employees,  awards to employees
under  the 1996  Bonus  and  Deferred  Sales  Compensation  Plan  ("Compensation
Plan")(see  Note 12) and  exercises  of stock  options  by  current  and  former
employees  and  directors.   Awards  to  new  employees  and  awards  under  the
Compensation Plan are recorded as compensation and benefits expense.

     Prior to the Offering, all of H&Q's common stock transactions were recorded
pursuant to the terms of the  Hambrecht  & Quist  Shareholders'  Agreement  (the
"Agreement")  which required all stock  issuances and  repurchases and all stock
option  grants to be recorded  using fair market  value,  as  determined  by the
Company's  Board of Directors (the "Board").  The Board approved a formula value
approximating  fair market value,  which resulted in transactions being recorded
at premiums  over the Company's net book value,  as determined  under  generally
accepted accounting  principles.  Under the Agreement,  all selling shareholders
were  required  to first offer their  shares to the  Company  before  seeking an
independent  buyer.  The Company  repurchased all selling  shareholders'  shares
subject to the terms of the Agreement,  which was terminated in connection  with
the Offering.

     All  LP  partnership  unit  sales  and  repurchases  were  recorded  at the
partnership's  fair market  value,  as defined in the  Hambrecht & Quist Limited
Partnership Agreement, using a formula value similar to H&Q's.

TREASURY STOCK TRANSACTIONS

     The  Company's  treasury  stock  purchases  are  comprised  of common stock
purchased on the open market and common stock  repurchased  in  connection  with
unpaid employee stock notes  receivable (see Note 11). Open market  purchases of
common stock are  recorded at the  Company's  cost.  Stock note  repurchases  of
common  stock are recorded at the carrying  value of the unpaid  employee  stock
note. The Company's treasury stock issuances relate to issuances of common stock
pursuant to the  Company's  employee  benefit  plans (See Note 12).  Differences
between the first-in first-out cost of the treasury stock and the grant price of
the shares issued are charged to additional paid in capital.

     During 1997 and 1998,  the Company's  treasury stock  transactions  were as
follows:

                                                       Shares           Cost
                                                   -------------   -------------

Treasury shares at September 30, 1996 ..........           --      $       --
  Open market purchases ........................         20,000         428,968
  Employee stock notes receivable repurchases ..          1,615           9,908
                                                   ------------    ------------
Treasury shares at September 30, 1997 ..........         21,615         438,876
  Open market purchases ........................      1,115,000      25,481,284
  Employee benefit plan issuances ..............       (157,813)     (4,254,938)
                                                   ------------    ------------

Treasury shares at September 30, 1998 ..........        978,802    $ 21,665,222
                                                    ============    ============


     Subsequent to September 30, 1998, the Company  purchased on the open market
294,000 shares for $4,803,386.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     Substantially  all of the Company's  financial  assets and  liabilities are
carried  at market or  estimated  fair  value or are  carried  at  amounts  that
approximate current fair value because of their short-term nature. Estimates are
made at a specific  point in time,  based on  relevant  market  information  and
information about the financial instruments.

EARNINGS PER SHARE

     In March 1997, the FASB issued Statement of Financial  Accounting Standards
No. 128,  Earnings  per Share  ("SFAS  128").  The Company  adopted  SFAS 128 on
October 1, 1997. SFAS 128 replaces  primary and fully diluted earnings per share
with basic and diluted earnings per share calculations. Basic earnings per share
is computed by dividing net income by weighted average shares.  Diluted earnings
per share is  computed  by  dividing  net  income  by  weighted  average  shares
including  the dilutive  effects of stock  options.  Diluted  earnings per share
calculations  result in the same earnings per share  previously  reported by the
Company.  1996 pro forma  earnings per share is  determined  using pro forma net
income (see above). The Company's basic and diluted earnings per share for 1996,
1997 and 1998 are as follows:

                                                        Weighted
                                                         Average      Per Share
                                      Net Income         Shares        Amount
                                     -----------       ----------     --------
1996:
  Basic earnings per share ........  $71,157,755       19,752,126      $ 3.60
  Options outstanding .............        --           1,982,017
                                     -----------       ----------
  Diluted earnings per share ......  $71,157,755       21,734,143      $ 3.27
                                     ===========       ==========     
                                      
1997:
  Basic earnings per share ........  $43,174,198       23,569,306      $ 1.83
  Options outstanding .............        --           2,113,581
                                     -----------       ----------   
  Diluted earnings per share ......  $43,174,198       25,682,887      $ 1.68
                                     ===========       ==========      
                                                      
1998:
  Basic earnings per share ........  $40,210,538       24,551,064      $ 1.64
  Options outstanding .............        --           2,062,477
                                     -----------       ----------    
  Diluted earnings per share ......  $40,210,538       26,613,541      $ 1.51
                                     ===========       ========== 
 

     Subsequent to September 30, 1998, the Company granted shares and options to
employees under various compensation plans (see Note 12).

STOCK OPTION PLANS

     The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting  Principles Board Opinion
No. 25).  Under this method,  compensation  expense is recognized  for awards of
options to purchase shares of common stock to employees under compensatory plans
only if the fair  market  value of the stock at the option  grant date (or other
measurement  date, if later) is greater than the amount the employee must pay to
acquire  the  stock.  Statement  of  Financial  Accounting  Standards  No.  123,
Accounting  for  Stock-Based  Compensation  ("SFAS  123")  permits  companies to
continue using the intrinsic  value method or to adopt a fair value based method
to account  for stock  option  plans.  The fair value  based  method  results in
recognizing as expense over the vesting period the fair value of all stock-based
awards on the date of grant.  The  Company  has  elected to  continue to use the
intrinsic  value method and the pro forma  disclosures  required by SFAS 123 are
included in Note 12.

NEW ACCOUNTING STANDARDS

     In 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
130,  Reporting  Comprehensive  Income  ("SFAS 130") and  Statement of Financial
Accounting  Standards No. 131,  Disclosure  about  Segments of an Enterprise and
Related  Information ("SFAS 131"). The Company is required to and will implement
the  provisions of these new standards  effective  beginning  with the Company's
1999 fiscal year. SFAS 130  establishes  standards for the reporting and display
of comprehensive  income, which includes net income and changes in equity except
those resulting from investments by, or distributions to, stockholders. SFAS 131
establishes  standards for disclosures  related to business operating  segments.
The  adoption  of  these  standards  will not have an  effect  on the  Company's
financial position or results of operations but will impact financial  statement
disclosure.

     In 1998, the FASB issued  Statement of Financial  Accounting  Standards No.
133, Accounting for Derivative  Instruments and Hedging Activities ("SFAS 133").
The  Company  is  required  to and will  implement  the  provisions  of this new
standard  effective with its 2000 fiscal year. SFAS 133  establishes  accounting
and reporting standards  requiring that every derivative  instrument be recorded
in the balance  sheet as either an asset or as a liability  measured at its fair
value  and  that  changes  in the  fair  value be  recognized  currently  in the
statement  of  operations.  The  Company  has not yet  quantified  the impact of
adopting SFAS 133 on its financial  statements but does not believe it will have
a material effect on the Company's financial position or results of operations.

DERIVATIVES

     The   Company's   derivatives   activities   were   limited   primarily  to
exchange-traded  option contracts to reduce market risk on inventories in Nasdaq
and exchange-listed  securities.  The fair value of such options are included in
marketable  trading  securities and securities sold, not yet purchased (see Note
6) and  realized  and  unrealized  gains  thereon are  recognized  in  principal
transactions revenue (see Note 2). Additionally,  from time to time, the Company
may hedge investments held in its long-term  investment  portfolio (see Note 7).
The fair value of such hedges are  included  in  long-term  investments  and the
realized and unrealized  gains thereon are  recognized in net  investment  gains
revenue (see Note 2).

FOREIGN CURRENCY TRANSLATION

     Assets and liabilities  denominated in foreign currencies are translated at
the exchange  rate on the balance  sheet date,  while  revenues and expenses are
translated at average rates of exchange prevailing during the year.  Translation
adjustments are accumulated as a separate component of stockholders' equity.

RECLASSIFICATIONS

     Certain  amounts  in the 1996  and  1997  financial  statements  have  been
reclassified to conform to the 1998 presentation.

3.   RECEIVABLES FROM AND PAYABLES TO CUSTOMERS:

     Receivables  from and payables to customers  include amounts due to or from
customers  as a result  of cash and  margin  transactions.  Securities  owned by
customers are held as collateral for these  receivables.  Such collateral is not
reflected in the consolidated financial statements.

4.   RECEIVABLES FROM RELATED PARTIES:

     At September 30, 1997 and 1998 receivables  from related parties  consisted
of the following:
                                                         1997           1998
                                                     ------------   ------------
Notes receivable from related parties and employees   $ 2,696,455   $ 2,034,354
Asset management fees and profit participations ...     5,989,569     7,240,551
Related party and other advances ..................     8,711,140     8,357,189
                                                      ===========   ===========
                                                      $17,397,164   $17,632,094
                                                      ===========   ===========

     Notes  receivable  from related  parties and  employees as of September 30,
1997 and 1998  include  notes  receivable  from Asia Pacific of  $1,757,670  and
$812,464, respectively.

     Asset management fees and profit  participations  at September 30, 1997 and
1998,  include profit  participations  receivable of $5,527,057 and  $7,240,551,
respectively  from  venture  and  investment  partnerships  managed  by  Venture
Partners.   Included  in  other   revenues  are   management   fees  and  profit
participation   distributions   from  venture   capital  funds  of  $13,685,248,
$8,735,436 and $7,796,183 for the years ended September 30, 1996, 1997 and 1998,
respectively.  Also  included in other  revenues are  management  fees earned by
Capital  Management of $3,669,463,  $3,617,583 and $4,059,010 for 1996, 1997 and
1998, respectively.

     Related party and other advances include temporary advances made to related
parties for operating  expenses and to related parties,  directors and employees
for purchases of investments.  Of the amount  outstanding at September 30, 1998,
$7,307,777  relates to advances to related parties,  directors and employees for
purchases of  investments  made on their behalf.  Also included in related party
and other advances is $819,807 in advances made to Venture Associates (see Notes
1 and 11) under a $2.0 million revolving credit facility.

5.   NOTES RECEIVABLE:

     Notes receivable  include advances made by Guaranty Finance in exchange for
notes  receivable.  The notes bear  interest at rates between 6.75 percent to 14
percent and are secured by certain of the  borrowers'  tangible  and  intangible
assets.  At  September  30,  1998,  principal  payments  are  due on  the  notes
receivable as follows:

     1999 ........................   $ 11,116,029
     2000 ........................      6,599,783
     2001 ........................        180,493
                                     ------------
                                       17,896,305
       Less - allowance for losses     (4,341,348)
                                     ------------
                                     $ 13,554,957
                                     ============


6. MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED:

     At  September  30,  1997  and  1998,   marketable  trading  securities  and
securities sold, not yet purchased, consisted of the following:

                                              1997           1998
                                          ------------   -----------
     Marketable trading securities-
        Equity securities ..............   $10,367,207   $ 8,994,939
        Convertible bonds ..............     2,086,750    10,366,290
        Options ........................        26,840        79,062
        U.S. government securities .....    20,136,770    12,236,801
                                           ===========   ===========
                                           $32,617,567   $31,677,092
                                           ===========   ===========

     Securities sold, not yet purchased-
        Equity securities ..............   $11,359,430   $17,674,404
        Convertible bonds ..............          --         373,852
        Options ........................       410,697        74,528
                                           ===========   ===========
                                           $11,770,127   $18,122,784
                                           ===========   ===========

7.  LONG-TERM INVESTMENTS

     At September 30, 1997 and 1998,  the Company's  long-term  investments,  at
estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
                                                                      1997           1998
                                                                  ------------   ------------
<S>                                                              <C>            <C>    
  Marketable equity securities available for sale by Guaranty
    Finance ...................................................   $ 14,023,208   $  6,512,887
  World Access, Inc. ..........................................     23,778,230
                                                                                 ------------
  Marketable equity securities - other ........................     37,661,637     23,559,166
                                                                  ------------   ------------
            Total marketable investments ......................     51,684,845     53,850,283
                                                                  ------------   ------------
  Nonmarketable securities and investment partnership interests     39,568,602     50,116,787
  Venture Partners and affiliated venture capital funds .......     15,756,670     14,312,839
  Venture capital funds managed by others .....................      8,079,332      9,232,278
  Lewco Securities ............................................      2,110,279      2,110,279
                                                                  ------------   ------------
            Total nonmarketable investments ...................     65,514,883     75,772,183
                                                                  ------------   ------------
            Total long-term investments .......................   $117,199,728   $129,622,466
                                                                  ============   ============
</TABLE>

     In March 1998,  the Company  purchased a large block of World Access,  Inc.
("WAXS") common stock in a private transaction. The Company partially hedged the
position  through  a series  of  options  transactions  that are  recorded  as a
component of the investment.  This position collateralizes a $26,708,402 line of
credit,  also obtained in March 1998 from a financial  institution (see Note 9).
No amounts have been drawn on this line of credit as of September 30, 1998.  The
line of credit was reduced to $15,873,363  subsequent to September 30, 1998 (see
Note 9).

     The cost of the Company's  long-term  investments at September 30, 1997 and
1998, was $119,412,383 and $153,916,280, respectively.

     Following  is an analysis of the net  investment  gains for the years ended
September 30, 1996, 1997 and 1998:

                                     1996           1997            1998
                                 ------------   ------------    ------------

Realized gains ...............   $ 24,045,279   $ 20,527,924    $ 18,308,855
Change in unrealized gains and
  (losses), net ..............        389,122    (20,298,945)    (15,894,065)
                                 ============   ============    ============
Net investment gains .........   $ 24,434,401   $    228,979    $  2,414,790
                                 ============   ============    ============

     Included in net investment  gains are realized and unrealized  gains on the
Company's  investment in BISYS of $15,093,727,  $1,465,206 and $36,451 for 1996,
1997 and 1998, respectively.  As part of the Restructuring in 1996 (see Note 1),
H&Q LLC  distributed  shares of BISYS valued at  $14,267,556  to LP and recorded
realized gains of $6,589,963 on the distribution.

     Included in net investment gains in 1997 and 1998 are net investment losses
of $18,126,682 and $2,179,899,  respectively,  related to two investee companies
in the  airline  industry.  In 1997,  the  Company  recorded a realized  loss of
$9,878,854 on its investment in Air South Airlines, Inc. (Air South), a regional
airline that filed for  bankruptcy in August 1997. In 1997 and 1998, the Company
recorded  unrealized losses of $8,247,828 and $2,179,899,  respectively,  on its
investment in another  regional  airline.  In 1997,  the Company also recorded a
loss,  included in other  expense,  of  $1,802,176  related to letters of credit
issued to two of Air South's creditors.

     The cost and estimated  fair values of Guaranty  Finance's  investments  in
marketable equity  securities  available for sale at September 30, 1997 and 1998
are as follows:
                                 1997            1998
                             ------------    ------------
   Cost ..................   $ 14,369,649    $ 13,046,427
   Gross unrealized gains       1,975,968         641,714
   Gross unrealized losses     (2,322,409)     (7,175,254)
                             ============    ============
   Estimated fair value ..   $ 14,023,208    $  6,512,887
                             ============    ============

     Gross  proceeds,  gross realized gains and gross realized losses from sales
of investments in marketable  equity  securities  available for sale by Guaranty
Finance for the years ended September 30, 1996, 1997 and 1998 are as follows:

                              1996            1997          1998
                           -----------    -----------   -----------
   Gross proceeds ......   $ 4,531,113    $ 2,882,175   $ 7,573,145
   Gross realized gains      2,587,095        446,302     2,537,827
   Gross realized losses      (301,244)          --            --


8.  FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:

     The following summarizes the Company's  furniture, equipment and leasehold
improvements as of September 30, 1997 and 1998:

                                                      1997            1998
                                                  ------------    ------------
Furniture and equipment .......................   $ 31,672,647    $ 37,658,519
Leasehold improvements ........................     12,489,222      14,330,746
Less- Accumulated depreciation and amortization    (25,379,023)    (35,026,856)
                                                  ============    ============
                                                  $ 18,782,846    $ 16,962,409
                                                  ============    ============

     For the years  ended  September  30,  1996,  1997 and 1998,  occupancy  and
equipment expense included  depreciation and amortization  expense on furniture,
equipment and leasehold improvements of $3,873,463, $7,342,719, and $10,024,152,
respectively.

9.  DEBT OBLIGATIONS:

     Debt obligations consist of the following:
<TABLE>
<CAPTION>

                                                                                      1997             1998
                                                                                 --------------  ---------------
<S>                                                                             <C>              <C>    

Lines of credit-
  $15,000,000  bank line of credit  (H&Q  California);  interest  on  individual
      advances at prime plus 0.75 percent  (9.25  percent at September 30, 1997)
      or at LIBOR plus 2.5 percent  (8.25  percent at September  30, 1997) fixed
      for  the  term  of the  advance;  collateralized  in  full  by  marketable
      securities and certain customer  receivables;  average balance outstanding
      in 1997 and 1998 was $5,115,091 and $84,615, respectively; expired March
      30, 1998.................................................................      $1,100,000         --
  $20,000,000 bank line of credit (H&Q California); interest on
      overnight  advances  at  prime  (8.25  percent  at  September  30,  1998);
      unsecured; $10,000,000 drawn for four days in 1997 and
      no amounts drawn in 1998; expires April 30, 1999.........................            --           --
  $26,708,402 bank line of credit (H&Q California); interest at
      Eurodollar  rate plus 0.50 percent  (5.81  percent at September  30, 1998)
      collateralized  in  full  by  WAXS  position  (See  Note  7);  no  balance
      outstanding in 1998; replaced on October 2, 1998
      with a new line of credit (see below)....................................            --           --
  $11,000,000 bank line of credit (Guaranty Finance); interest at
      prime  plus  1.25  percent   (9.75   percent  at  September   30,   1997);
      collateralized in full by Guaranty  Finance's assets,  except for cash and
      marketable  securities;  average balance  outstanding in 1997 and 1998 was
      $785,833 and $1,030,000, respectively;
      expired February 28, 1998.................................................        700,000         --
  $10,000,000 bank line of credit (Transition Capital); interest at
      prime  plus  1.75  percent   (10.25   percent  at  September   30,  1997);
      collateralized in full by Transition Capital's assets, except for cash and
      marketable  securities;  average balance  outstanding in 1997 and 1998 was
      $283,333 and $360,000, respectively;
      expired January 26, 1998..................................................        900,000         --
  $25,000,000 bank line of credit (Guaranty Finance); interest at
      prime  plus  1.00  percent   (9.25   percent  at  September   30,   1998);
      collateralized  in full by Guaranty  Finance  assets,  except for cash and
      marketable securities; average balance outstanding in
      1998 was $214,286; expires February 27, 1999..............................         --             --
                                                                                     ----------    ---------------
                                                                                     $2,700,000    $    --                 
                                                                                     ==========     ==============
</TABLE>

     The average prime rate for 1997 and 1998 was 8.5 percent.  Interest expense
on debt  obligations was  $1,135,501,  $617,563 and $191,556 during fiscal 1996,
1997 and 1998, respectively.

     Subsequent to September 30, 1998,  the line of credit for  $26,708,402  was
revised to $15,873,363. There were no changes to the terms.

10. INCOME TAXES:

     The income tax  provision  consisted of the  following  components  for the
years ended September 30, 1996, 1997 and 1998:

                                          State and
                          Federal           City           Total
                        ------------    ------------    ------------

     1996--
         Current ...   $ 44,972,093    $ 20,461,786    $ 65,433,879
         Deferred ..    (23,048,950)     (3,918,683)    (26,967,633)
                       ------------    ------------    ------------

               Total   $ 21,923,143    $ 16,543,103    $ 38,466,246
                       ============    ============    ============

     1997--
         Current ...   $ 36,907,127    $ 16,154,623    $ 53,061,750
         Deferred ..    (12,885,782)     (6,253,383)    (19,139,165)
                       ------------    ------------    ------------

               Total   $ 24,021,345    $  9,901,240    $ 33,922,585
                       ============    ============    ============

     1998--
         Current ...   $ 36,526,122    $ 10,428,005    $ 46,954,127
         Deferred ..    (12,494,532)     (4,126,115)    (16,620,647)
                       ------------    ------------    ------------

               Total   $ 24,031,590    $  6,301,890    $ 30,333,480
                       ============    ============    ============


     The  deferred  income  tax asset as of  September  30,  1997 and  1998,  is
composed of the following:

                                                       1997           1998
                                                    -----------   -----------

   Compensation and benefits accruals ...........   $36,440,726   $46,093,948
   Net unrealized losses on long-term investments     4,237,582    15,462,917
   Other liability accruals .....................     6,288,318     3,270,884
   Depreciation and amortization ................     3,255,848     4,601,813
   Other ........................................     6,512,180     6,383,983
                                                    -----------   -----------
           Deferred income tax asset ............   $56,734,654   $75,813,545
                                                    ===========   ===========

     There was no valuation  allowance  against deferred tax assets at September
30, 1997 and 1998.

     The following is a  reconciliation  of the income tax expense to the amount
computed by applying  the federal  statutory  rate to income  before  income tax
expense:
<TABLE>
<CAPTION>

                                                     1996                 1997                   1998
                                            --------------------  ---------------------   -------------------
                                               Amount       Rate     Amount       Rate       Amount      Rate
                                            ------------   -----  ------------    -----   ------------   ----  

<S>                                          <C>           <C>    <C>            <C>      <C>            <C>

Tax expense computed at statutory rate .   $ 44,473,597    35.0%  $ 26,983,873    35.0%   $ 24,690,406   35.0%
State and local tax provision, net of
   federal income tax benefit ..........     10,753,017     8.5      6,202,866     8.0       4,822,515    6.9
Nondeductible expenses .................        765,470     0.6        677,372     0.9         798,209    1.1
LP income not subject to tax (Note 2) ..    (17,443,418)  (13.7)          --        --            --       --
Other, net .............................        (82,420)   (0.1)        58,474     0.1          22,350     --
                                            ------------   -----  ------------    -----   ------------   ----  
                                           $ 38,466,246    30.3%  $ 33,922,585    44.0%   $ 30,333,480   43.0%
                                           ============    ====   ============    ====    ============   ==== 
                                                                    
</TABLE>

11. RELATED-PARTY TRANSACTIONS:

INVESTMENT TRANSACTIONS

     The  Company  makes  investments  in private  companies  directly,  through
investment  partnerships  and  through  the  venture  capital  funds it manages.
Venture  Partners  manages the majority of the Company's  venture  capital funds
(see Note 1) and earns  management fees and profit  participation  distributions
(see Note 4).

     Directors,  officers  and  employees  of H&Q or its  subsidiaries  may have
additional  interests  in such  private  companies  directly or through  various
affiliated venture capital or other investment  entities.  Such parties may also
serve on the boards of directors of companies in which the Company has invested.

     Guaranty  Finance  provides lease and other financing to companies in which
H&Q, its subsidiaries and its affiliates have equity investments.

OPERATING AND CREDIT ADVANCES

     H&Q pays operating expenses on behalf of certain related parties, primarily
Asia Pacific and Venture  Associates  (see Notes 1 and 4), and is reimbursed for
those  expenses.  Operating  expenses  that  have  not yet been  reimbursed  are
included in receivables  from related  parties (see Note 4).  Additionally,  H&Q
entered into a $2.0 million credit facility with Venture Associates (see Note 4)
on July 1,  1998.  Under the terms of the  credit  facility,  H&Q agreed to make
advances  to Venture  Associates  for the  short-term  purpose  of  funding  its
investment obligations.  Interest on balances advanced under the credit facility
is at prime plus one percent.

STOCK NOTES RECEIVABLE

     In  connection  with  sales of the  Company's  common  stock,  the  Company
received stock notes receivable from employees, which, at September 30, 1997 and
1998, had principal balances of $5,620,260 and $3,079,872, respectively, and are
treated as a reduction of  stockholders'  equity.  These notes bear  interest at
rates  ranging from 6.0 percent to 7.5 percent and have  maturity  dates ranging
from 1998 through 2000.

     Capital  notes  receivable  from LP  partners  represent  amounts  due from
partners, including H&Q, for their capital contributions to LP. Such amounts are
recorded as a reduction of partners' capital. In 1996, capital notes receivables
from LP  partners of  $8,227,753  were  transferred  to H&Q  California  and are
reflected in the stock notes receivable amounts described above.

LEWCO SECURITIES CORP.

     H&Q LLC is a co-owner  of Lewco (see Note 1), a  securities  clearing  firm
that is a registered  broker-dealer and member of each major stock exchange. H&Q
LLC holds a subordinated note for $300,000 issued by Lewco. The interest on this
note is paid  quarterly  at the  prime  rate,  with the  principal  balance  due
December 31, 1999. The subordinated  note receivable and H&Q LLC's investment in
Lewco are  carried in  long-term  investments  (see Note 7). H&Q LLC uses Lewco,
which renders its services to its owners on a cost-sharing basis, to process its
securities  transactions  and all other related  clearing  services.  Lewco also
maintains the Company's customer and broker accounts.

     Amounts  receivable from Lewco result from customer and H&Q LLC proprietary
transactions.  Interest on the interest-bearing amounts receivable from Lewco is
earned at a  fluctuating  rate (4.80  percent and 3.98 percent at September  30,
1997 and 1998, respectively).

12.  EMPLOYEE BENEFIT PLANS:

SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST

     Under the SESOT (see Note 2), the Company  established  an  Employee  Stock
Ownership  Plan  ("ESOP")  and a  profit-sharing  plan  ("PSP") with an employee
salary deferral (or 401(k)) feature. Collectively, the ESOP and PSP are referred
to as the Hambrecht & Quist Group Savings and Employee Stock Ownership Plan (the
"Plan"  or  "SESOP").  Substantially  all  full-time  employees  of H&Q  and its
subsidiaries and certain affiliates are eligible to participate in the Plan.

     Under the Plan, the Company may match  employees'  401(k)  contributions to
the PSP up to $4,000  per  employee  per year by  making  Company  common  stock
contributions  to the  ESOP.  The  Company  may  also  make  discretionary  cash
contributions  to the  PSP.  For  1996,  1997 and  1998,  the  Company  recorded
compensation expense of $1,590,000, $1,943,760 and $1,092,394,  respectively, to
the ESOP under the matching  provision.  Subsequent to September  30, 1998,  the
Company  issued  approximately  43,000  shares  of  common  stock to the ESOP in
satisfaction  of  its  compensation  and  benefits  payable.   No  discretionary
contributions were made to the PSP in 1996, 1997 or 1998.

     As of September 30, 1998, the ESOP owned approximately 6 percent of the H&Q
common stock outstanding.

BONUS AND DEFERRED SALES COMPENSATION PLAN

     The  Company  may pay  bonuses  to its  executives  and other  professional
employees under the Compensation  Plan (see Note 2). The Compensation  Committee
of the Board (the "Committee"), in its sole discretion, may offer such employees
the ability to elect to receive a percentage (the "Percentage") of such bonus or
commission in H&Q common  stock,  valued at not less than 90 percent of the fair
market value on the date of grant. Unless otherwise determined by the Committee,
the  stock  vests  ratably  over  three  years  following  the  date  of  grant.
Determinations  with respect to executive officers are made by the Board instead
of the Committee.  At the date of the bonus payment,  the employee may choose to
decline any offered common stock, and instead receive cash payments equal to the
Percentage  over  three  years  following  the  date  of  grant.  If  his or her
employment  terminates  within  the three  year  vesting  period,  the  employee
forfeits the unvested  common stock or future cash  payments.  In February 1998,
the 1996 Equity Plan ("1996  Plan") was amended to increase the number of shares
of the Company's common stock reserved for issuance under the Compensation  Plan
and the 1996 Plan by  2,000,000  shares to a total of 5,000,000  shares,  all of
which may be issued as stock  options or stock  awards.  Additionally,  the 1996
Plan was amended to provide for automatic  annual  increases of shares  issuable
under the  Compensation  Plan (See Note 2) and the 1996 Plan as of  January 1 of
each year equal to the lesser of (i) 3.0  percent of the total  number of shares
of common stock of the Company then outstanding and (ii) 750,000 shares.

     The Company  paid bonuses in October  1998.  Under the  Compensation  Plan,
537,808 shares valued at $9,039,468 were issued to executives and  professionals
effective  October 15, 1998. All such amounts were included in compensation  and
benefits payable as of September 30, 1998.

STOCK OPTION PLANS

     The Company has three stock option plans,  the 1985 Stock Option Plan (1985
Plan), 1995 Stock Option Plan (1995 Plan) and the 1996 Plan.  Additionally,  the
Company has granted stock options outside the 1985, 1995 and 1996 plans.

     The  Company's  1985 Plan,  which  provided  for the granting of options to
purchase  4,000,000 shares of the Company's common stock,  expired September 30,
1994,  except as to the options  then  outstanding.  As of  September  30, 1998,
158,000 options remain  outstanding under the 1985 Plan. The Company's 1995 Plan
provided  for the  granting of  incentive  options and  nonqualified  options to
purchase  4,972,000 shares of the Company's common stock to officers,  employees
and  directors  at a price not less than 85 percent of fair market  value at the
date the option was granted,  subject to certain limitations regarding incentive
stock options.  Due to the creation of the 1996 Plan, no further options will be
granted  under the 1995  Plan.  As of  September  30,  1998,  3,264,896  options
remained  outstanding  under  the 1995  Plan.  The 1996  Plan  provides  for the
granting  of  incentive  and  nonqualified  options  to  purchase  shares of the
Company's common stock to Company  employees,  directors and consultants.  As of
September 30, 1998, 885,900 options are outstanding under the 1996 Plan. Outside
the 1985,  1995 and 1996 plans,  1,017,481  options have been granted to certain
officers and  directors.  Such options were granted with an exercise price equal
to fair market value (see Note 2) at the date of grant.

     Options  become  exercisable  as  determined  at the  date of  grant by the
Committee  or the  Board,  in the  case of  executive  officers  and  directors.
Generally,  options become  exercisable over a five year period from the date of
grant and expire seven years after the date of grant.

     Details of stock options are as follows:
                                            Number   
                                          of Shares       Exercise Price
                                         ----------      ----------------
Outstanding at September 30, 1995........ 2,934,428      $ 2.04 -  $ 5.54
  Granted................................ 4,530,320      $ 6.52 -  $13.75
  Exercise...............................(1,609,628)     $ 2.10 -  $ 4.74
  Canceled...............................  (157,600)     $ 2.62 -  $ 5.54
                                         -----------
Outstanding at September 30, 1996........ 5,697,520      $ 2.04 -  $13.75
  Granted................................   301,600      $16.13 -  $31.06
  Exercise...............................  (205,038)     $ 2.04 -  $11.25
  Canceled...............................  (226,926)     $ 5.54 -  $19.88
                                         -----------
Outstanding at September 30, 1997........ 5,567,156      $ 2.10 -  $31.06
  Granted................................   739,000      $13.75 -  $43.25
  Exercised..............................  (565,467)     $ 2.10 -  $22.13
  Canceled...............................  (414,412)     $ 4.60 -  $32.75
                                         ===========
Outstanding at September 30, 1998........ 5,326,277      $ 2.10 -  $43.25
                                         ===========

     Of the  outstanding  options at September  30, 1998,  1,947,586 had vested.
Subsequent to September 30, 1998, the Company issued  1,399,000 stock options at
an exercise  price of $14.75 which was equal to fair market value at the date of
grant.

     In October 1998,  the Company's  Board  authorized a stock option  exchange
program whereby  non-executive officer employees holding stock options under the
1996 Plan were offered the opportunity to exchange two existing  options for one
new option. The new options are exercisable at $14.75 per share, the fair market
value of the Company's common stock as of the effective date of the program, and
vest over a five-year period. Upon conclusion of the program, a total of 417,500
existing  options at a weighted  average exercise price of $32.79 were exchanged
for new options,  resulting in a net decrease of 208,750 shares subject to stock
options.

     The Company  applies the intrinsic value method in accounting for its stock
options plans. In 1996,  625,988 options were granted at an exercise price below
fair market value on the date of grant,  and resulted in a $1,165,903  charge to
compensation  expense.  Other  grants of options did not result in  compensation
expense in 1996,  1997 or 1998. Had the Company used the fair value based method
proscribed  by SFAS 123 (see Note 2), the  Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:

                                 1996          1997         1998
                             -----------   -----------   -----------
Net income
  As reported ............   $71,157,755   $43,174,198   $40,210,538
  Pro forma ..............    66,010,945    41,354,111    32,325,904

Diluted earnings per share
  As reported ............   $      3.27   $      1.68   $      1.51
  Pro forma ..............   $      3.04   $      1.61   $      1.21
                                         
     The fair value of each option  grant in 1997 and 1998 is  estimated  on the
date of grant using the  Black-Scholes  option-pricing  model. The fair value of
each option  grant in 1996 is  estimated  using the minimum  value  method.  The
weighted  average  assumptions  used for options,  respectively  are as follows:
expected  volatility  of  58.0  percent  and  91.0  percent  in 1997  and  1998,
respectively  (not applicable in 1996);  risk-free  interest rates of 6.17, 5.86
and 4.40 percent in 1996, 1997 and 1998, respectively;  and the expected life of
5.95 years for all seven year grants and 2.80 years for all three year grants in
1996 and 1997 and the  expected  life of 4.94 years for all seven year grants in
1998.

STOCK APPRECIATION RIGHTS

     In fiscal 1996 the Company  awarded Stock  Appreciation  Rights ("SARs") to
key employees and  executives.  These SARs have a service period of one year and
result in additional cash  compensation to the individuals based on the increase
in the Company's  book value during the service period to which the SARs relate.
The SARs vest and are paid over three  years,  with  immediate  cancellation  of
vesting upon employment termination.

     Compensation  expense recorded for SARs awards was $9,461,954 for 1996. The
remaining  SARs liability of $1,919,551  will be paid on January 15, 1999.  Such
amount is included in compensation and benefits payable at September 30, 1998.

13.  NET CAPITAL REQUIREMENTS:

     As a registered  broker-dealer,  H&Q LLC is subject to the  Securities  and
Exchange  Commission's  Uniform  Net Capital  Rule  15c3-1 (the  "Rule") and the
capital  rules of the New  York  Stock  Exchange,  Inc.,  of which  H&Q LLC is a
member.  H&Q LLC has elected to compute its net  capital  requirement  under the
"alternative"  method,  which requires  minimum net capital to be the greater of
$1,000,000 or two percent of aggregate  debit balances  arising from  customers'
transactions,  as defined. The Rule also provides that equity capital may not be
withdrawn or cash  distributions paid if the resulting net capital would be less
than  the  amounts  required  under  the  Rule.  Accordingly,   the  payment  of
distributions  and  advances  to H&Q by H&Q LLC is limited to excess net capital
under the most  restrictive  of these  requirements.  At September  30, 1997 and
1998,  H&Q  LLC's   regulatory  net  capital  of  $67,030,028  and  $50,484,565,
respectively,  was 27 percent and 26 percent,  respectively,  of aggregate debit
items and its net capital in excess of the minimum  required was $62,087,429 and
$46,533,220, respectively.

     At  September  30,  1998,  H&Q EM was in  compliance  with  all  applicable
regulatory capital adequacy requirements.

14.  COMMITMENTS AND CONTINGENCIES:

     Aggregate  annual  rentals for office space under  noncancelable  operating
leases are as follows:

            1999...............................    $ 9,596,377
            2000...............................      9,420,762
            2001...............................      9,609,905
            2002...............................      9,655,214
            2003...............................      9,714,879
            Thereafter.........................     27,486,866
                                                  -------------
                                                   $75,484,003
                                                  =============

     Certain of these leases have escalation  clauses.  Rental  expense,  net of
sublease income,  charged to occupancy and equipment expense for the years ended
September 30, 1996,  1997 and 1998, was  $4,716,591,  $6,427,289 and $7,387,323,
respectively.

     Lewco conducts a stock borrow/stock  lending business.  On behalf of Lewco,
the Company has agreed to  guarantee  its  proportional  share of secured  loans
resulting from this business. The Company's contingent liability relating to its
net  unsecured  position  under  this  indemnity  agreement  was  $3,483,890  at
September  30,  1998.   Also,  in  connection  with  H&Q  LLC's  option  trading
activities,  the Company has issued a letter of credit  totaling  $8,000,000  at
September 30, 1998 benefiting the Options Clearing Corporation.

     The  Company  has  other  contingent  liabilities,   including  contractual
commitments  arising in the normal course of business,  the resolution of which,
in  management's  opinion,  will not have an  adverse  effect  on the  Company's
financial position.

     In December 1997,  H&Q and other  broker-dealer  defendants  entered into a
settlement agreement with the plaintiffs in the Nasdaq  market-makers  antitrust
class  action  litigation.  The Company  recorded an  $8,000,000  charge for its
unaccrued  portion of settlement  costs in the quarter ended  December 31, 1997.
This charge is included  in other  expense.  All  settlement  amounts  were paid
before September 30, 1998.

     As is the case with many firms in the securities industry, the Company is a
defendant  or  co-defendant  in a number of  actions.  These  civil  actions and
arbitrations have arisen in the normal course of the Company's  business and are
incidental  to  its  activities  as  a  broker-dealer   in  securities,   as  an
underwriter,  as a  corporate  financial  advisor,  as  an  investor  and  as an
employer. The Company is also involved,  from time to time, in proceedings with,
and investigations by, governmental agencies and self-regulatory  organizations.
Some of the actions have been brought on behalf of various  classes of claimants
and seek damages of material or  indeterminate  amounts.  Most of the  Company's
current  proceedings  relate to public  underwritings of securities in which H&Q
LLC  participated  as a  manager,  co-manager  or  member  of  the  underwriting
syndicate. These cases involve claims under federal and/or state securities laws
and seek compensatory and other monetary damages. It is possible that H&Q and/or
H&Q LLC may be  called  upon as a member of a class of  defendants  or under the
terms of  underwriting,  indemnification  or other  agreements  to contribute to
settlements or judgments  arising out of these cases.  The Company is contesting
the complaints in all cases and believes that there are meritorious  defenses in
each  of  these  lawsuits.  Although  the  ultimate  outcome  of  the  Company's
litigation  cannot  be  ascertained  at  this  time,  it is the  opinion  of the
Company's management,  based on discussions with counsel, that the resolution of
these  actions  and  others  will  not have a  material  adverse  effect  on the
Company's financial statements taken as a whole.

     H&Q has  indemnified  certain of its officers,  directors  and agents,  and
certain of its affiliates,  as permitted under applicable state law. Under these
provisions,  H&Q itself is and will be subject to indemnification  assertions by
officers,  directors,  agents or certain of its affiliates who are or may become
defendants  in  litigation  that may  result in the normal  course of  business.
Although the ultimate outcome of  indemnification  assertions  outstanding as of
September 30, 1998, cannot be ascertained at this time, it is the opinion of the
Company's management,  based on discussions with counsel, that the resolution of
these  assertions  will not have a  material  adverse  effect  on the  Company's
financial statements taken as a whole.

15. FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK:

     In the normal  course of business,  H&Q LLC enters into  various  financial
transactions  with  market  risk in  connection  with  its  proprietary  trading
activities.   These  transactions  primarily  include  purchases  and  sales  of
marketable  trading  securities,  including equity options.  H&Q LLC records its
marketable  trading  securities  at market value (see Note 2). H&Q LLC's options
are primarily  executed to minimize its market risk  exposure of its  underlying
trading  positions as well as to benefit from changing  market  conditions.  All
options transacted by H&Q LLC are  exchange-traded in organized markets and have
terms of less than one year. Additionally,  H&Q LLC, H&Q California and Guaranty
Finance  purchase  long-term  investments with market risk.  Occasionally,  such
purchases are hedged.  All long-term  marketable  investments,  including hedges
thereon,  are recorded at market value (see Note 2). The  Company's  exposure to
market  risk  is  determined  by  a  number  of  factors,  including  the  size,
composition  and  diversification  of  positions  held  and  market  volatility.
Management   actively  monitors  its  market  risk  exposure  by  reviewing  the
effectiveness of hedging strategies and setting market risk limits.

     In the normal course of business, H&Q LLC's customer activities involve the
execution, settlement and financing of various customer securities transactions.
These  activities  may expose H&Q LLC to  off-balance-sheet  credit  risk in the
event that the  customer is unable to fulfill its  contracted  obligations.  H&Q
LLC's customer  securities  activities are transacted on either a cash or margin
basis. In margin transactions,  H&Q LLC extends credit to the customer,  subject
to various regulatory and internal margin  requirements,  collateralized by cash
and  securities  in the  customer's  account.  H&Q LLC monitors  collateral  and
required  margin  levels  daily  and,  pursuant  to  such  guidelines,  requests
customers to deposit additional  collateral or reduce securities  positions when
necessary.  H&Q LLC is also exposed to credit risk when its margin accounts or a
margin account is collateralized by a concentration of a particular security and
when that security decreases in value.

     In  addition,  H&Q LLC  executes  customer  short-sale  transactions.  Such
transactions  may  expose  H&Q LLC to  off-balance-sheet  risk in the event that
margin  requirements are not sufficient to fully cover losses that customers may
incur. In the event that the customer fails to satisfy its obligations,  H&Q LLC
may be required to purchase financial instruments at prevailing market prices in
order to fulfill the customer's obligations.

     In accordance with industry practice, H&Q LLC records customer transactions
on a settlement-date  basis,  which is generally three business days after trade
date. H&Q LLC is therefore exposed to risk of loss on these  transactions in the
event  of the  customers'  or  brokers'  inability  to meet  the  terms of their
contracts,  in  which  case  H&Q LLC  may  have to  purchase  or sell  financial
instruments at prevailing market prices. Settlement of these transactions is not
expected to have a material effect on H&Q LLC's balance sheet.

     As a securities broker-dealer,  H&Q LLC provides services to diverse groups
of  corporations  and  institutional  and  individual  investors.  A substantial
portion  of  H&Q  LLC's   transactions   is  executed  with  and  on  behalf  of
institutional  investors,  including  other  broker-dealers,  commercial  banks,
insurance   companies,   pension  plans,   mutual  funds  and  other   financial
institutions.   H&Q  LLC's   exposure  to  credit  risk   associated   with  the
nonperformance  of these customers in fulfilling their  contractual  obligations
pursuant to securities transactions can be directly impacted by volatile trading
markets.  As of  September  30,  1998,  the  Company  did not  have  significant
concentrations  of credit risk with any single  counterparty  or with collateral
represented by any single security.

16.  INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA:

     The  Company  is  primarily  engaged  in a  single  line of  business  as a
securities  firm, which comprises  several types of services,  such as principal
and agency  transactions,  underwriting  and  investment  banking and  long-term
equity investing. These activities constitute a single business segment.

     The assets and revenues related to the Company's foreign operations are not
significant.

17.  QUARTERLY DATA (UNAUDITED):

     The following  table sets forth selected  highlights for each of the fiscal
quarters  during  the  years  ended  September  30,  1997 and 1998  (dollars  in
thousands, except per share data):

<PAGE>
                                                                       Diluted
                                              Income                   Earnings
                                              Before                     Per
                                Total         Income       Net          Share
                              Revenues        Taxes       Income         (1)
                             ----------     --------     --------     --------
     1997:
     First quarter .......     $ 94,900     $ 28,145     $ 15,761     $   0.62
     Second quarter ......       74,653       13,373        7,489     $   0.29
     Third quarter .......       82,299       18,239       10,214     $   0.40
     Fourth quarter ......       94,380       17,340        9,710     $   0.37
                               --------     --------     --------     
        Total year ........    $346,232     $ 77,097     $ 43,174     $   1.68
                               ========     ========     ========     
 

     1998:
     First quarter .......     $ 91,622     $ 11,666     $  6,650     $   0.25
     Second quarter ......      107,396       28,011       15,966     $   0.60
     Third quarter .......      102,789       24,401       13,913     $   0.52
     Fourth quarter ......       71,318        6,466        3,682     $   0.14
                               --------     --------     --------     
          Total year ........  $373,125     $ 70,544     $ 40,211     $   1.51
                               ========     ========     ========     
    
(1) The sum of the quarters'  diluted earnings per share do not always equal the
total year amounts due to the effect of averaging the number of shares of common
stock and common stock equivalents throughout the year.