SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-KSB

                [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

         For the fiscal year October 31, 1998 Commission file no.1-12938

                                       OR

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

                        For the transition period from to
                             Commission file number

                    INTERSTATE NATIONAL DEALER SERVICES, INC.

             (Exact name of registrant as specified in its charter)

    Delaware                                                  11-3078398
   (State or other jurisdiction of                          (I.R.S. Employer
   incorporation or organization)                           Identification No.)

    333 Earle Ovington Blvd.
    Mitchel Field, New York                                        11553
 (Address of principal executive offices)                        (Zip Code)

                                (516) 228-8600
               (Registrant's telephone number, including area code)

      Securities registered under Section 12 (b) of the Exchange Act:
                                                   Name of Each Exchange
       Title of Each Class                          on Which Registered

  Common Stock, par value $.01 per share                 NASDAQ
  Common Stock Purchase Rights                           NASDAQ  
 
      Securities registered under Section 12 (g) of the Exchange Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes x No

Indicate by check mark if disclosure of delinquent  filers  pursuant to item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of  Registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

The  Registrant's  revenues  for the fiscal  year ended  October  31,  1998 were
$49,283,426.   The   aggregate   market  value  of  the  voting  stock  held  by
non-affiliates  of the  Registrant,  based  upon the  closing  sale price of the
Common  Stock on  January 13, 1999 as reported  on the  NASDAQ  National Market
("NASDAQ"), was approximately $44,767,000.

As of January 13,1999, Registrant had issued and outstanding 4,655,616 shares of
Common Stock.

Transitional Small Business Issuer Disclosure Format (check one): Yes  No  x


<PAGE>
PART I

Item 1.  Business

General

    Interstate  National Dealer Services,  Inc. (the "Company") was incorporated
in Delaware in 1991 and commenced  operations in November 1991 with the purchase
of certain assets and the assumption of certain liabilities of INDS Group, Inc.,
a  California  corporation  which  commenced  operations  in 1981 under the name
Interstate   National  Dealer  Services  Group,  Inc.  The  Company's  principal
executive  offices are located at 333 Earle Ovington Blvd.,  Mitchel Field,  New
York 11553, and its telephone number is (516) 228-8600.

    The  Company  designs,   markets  and  administers   service  contracts  and
warranties for new and used motor vehicles and  recreational  vehicles and, to a
lesser extent,  watercraft,  motorcycles and other vehicles.  A service contract
may be sold by any of the following entities:  (1) either the seller originating
the sale of the vehicle, (2) the financial institution financing the sale of the
vehicle, or (3) other entities,  including the Company,  which sell the contract
to the owner of the  vehicle  after the vehicle  has been  purchased.  A vehicle
service contract is an agreement  between either the seller or the administrator
of the service contract and the vehicle  purchaser under which the seller or the
administrator agrees to replace or repair for a specific term designated vehicle
parts  in  the  event  of a  mechanical  breakdown.  Vehicle  service  contracts
supplement,  or are in lieu of, manufacturers'  warranties and provide a variety
of extended coverage options (typically ranging from three months to seven years
and/or 3,000 miles to 150,000  miles)  generally  offered for sale by sellers to
vehicle  purchasers in a manner  similar to other  options.  

    The  Company  offers a variety  of vehicle  service  contract  and  warranty
programs  through  its  nationwide  sales  force  of  independent  sales  agents
consisting  of  both  companies  and  individuals.  The  Company  enters  into a
non-exclusive  agreement  with each  seller,  under  which the  Company  obtains
insurance coverage to cover such seller's liability for claims under its vehicle
service  contracts  and assists such seller,  and  purchasers,  with the making,
processing and adjustment of claims.

    In April 1995, the Company formed an affiliated insurance company,  National
Service Contract Insurance Company Risk Retention Group, Inc. ("NSC").  Prior to
March 1996,  substantially all of the insurance policies arranged by the Company
as administrator to its sellers had been underwritten by The Travelers Indemnity
Company  ("Travelers")  and National  Warranty  Insurance,  Risk Retention Group
("National Warranty"). Commencing March 1996, the insurance policies arranged by
the Company were underwritten by Travelers and NSC. In January 1998, the Company
entered into an agreement  with a subsidiary  of Orion  Capital to  underwrite a
portion of the insurance policies arranged by the Company.

    Each seller pays a net rate for each service  contract or warranty it sells.
This payment includes (i) an  administrative  fee for the Company from which the
Company pays any commission due the agent, (ii) insurance  premiums and fees for
the  insurance  underwriter,  and  (iii)  a claim  reserve  to be  placed  in an
interest-bearing loss reserve account maintained for the benefit of the contract
purchaser. The net rate for service contracts ranges from $75 to over $3,000 per
contract  with a typical  average  net rate per  contract of $600 for a new car,
$650 for a used car and $725  for a new or used  recreational  vehicle.  In most
cases,  each  seller  is free to  determine  the price at which it will sell the
service  contract to the purchaser.  The amount a seller charges for the service
contract  in excess of the net rate is  additional  income to such  seller.  The
administrative fee for the Company ranges from $30 to $250 (prior to the payment
to the agent of any  commission  which  generally  ranges  from $10 to $125) per
contract,  which fee  varies  based on the type of  service  contract  sold by a
seller.

    The various vehicle  service  contract  programs  offered by the Company are
designed to provide sellers with an additional  source of revenue.  For example,
certain of the Company's  programs  provide that sellers and other  participants
(such as agents) who reach certain sales volumes receive additional revenues if,
and to the extent,  claims  paid on their  service  contracts  are less than the
claims reserves maintained for such contracts. Under certain circumstances,  the
Company may also be entitled to unconsumed  claim reserves,  including  reserves
attributable to sellers who have not achieved specified sales volumes of service
contracts.
<PAGE>

    Initially,  the Company's  business  focused on extended  warranties for new
automobiles and, to a lesser extent, used cars. In the past four years, however,
a higher percentage of sales are from warranties for used cars. In addition, the
Company has expanded into other  markets and has realized an increasing  portion
of revenues from its recreational vehicle programs.

Marketing

    The  Company  markets  its  services  and  products,  using its  network  of
independent  agents,  primarily  to dealers  and,  to a lesser  extent,  leasing
companies,  finance companies and other service contract marketers.  The Company
promotes its services and products to the agents and, to some extent, to dealers
primarily   through  the  participation  of  the  Company  at  trade  shows  and
advertising  in trade  publications.  The Company has also  obtained  agents and
dealers through  recommendations  and referrals from existing agents and dealers
and others, some of which receive a commission from the Company upon the sale of
its services and products. To assure a high level of competence and awareness of
its current  administrative  services and products, the Company provides initial
and on-going training for its agents and dealers.

    The dealers  participating in the Company's programs sell motor vehicles and
recreational  vehicles  manufactured  by all of the  major  manufacturers  whose
products are sold in North America.  Most of the Company's dealers sell products
from more than one  manufacturer.  Accordingly,  the Company  does not focus its
sales and  marketing  efforts on any one  vehicle  manufacturer  or on any small
group of manufacturers.

    The Company  enters into an  independent  agent  agreement  with each of its
agents  which  generally is  terminable  at any time by the Company or the agent
upon giving of 30 days written notice or by the Company  immediately  for cause.
The agreement provides that, among other things, the agents solicit sellers,  on
a non-exclusive  basis, for the Company within designated  territories which may
include one or more states or portions thereof. Most agents are compensated on a
flat rate  commission  basis.  Agents may sell  products  and  services of other
companies,  including competitors of the Company, and have no obligation to sell
the products and services offered by the Company.

    In order to sell service contracts to vehicle owners who had not purchased a
service contract at the time of their vehicle  purchase,  the Company also makes
sales through its own and a third party's call center facilities and through its
own and another  entity's  internet sites. To facilitate such direct sales,  the
Company  offers a  service  contract  financing  program.  Under  the  Company's
financing  program, a purchaser of a service contract is given the option to pay
for such contract on a monthly basis over a period of time, without interest. As
of October 31,  1998,  the  Company's  receivables  from its  financing  program
totaled approximately  $6,849,000.  The Company believes its exposure from these
financed  contracts is limited because the service contract is terminated if the
purchaser fails to make his monthly payments to the Company.

Competition

    The business of marketing  administrative services and related products, and
specifically  services  related to motor vehicle  service  contracts,  is highly
competitive  and  dominated  by the  major  automotive  manufacturers  and other
independent  third-party  administrators.  The  Company is unable to predict the
extent to which automobile manufacturers (by, for example,  extending the period
covered  under  vehicle  warranties)  may  reduce a  dealer's  ability to market
extended vehicle service contracts such as those administered by the Company.

    Although management of the Company believes that it is competitive with most
third-party administrators,  the Company's position in the overall market is not
significant.  In addition,  many of the Company's competitors have significantly
better financial resources and operating resources than those of the Company. In
order to be  competitive  in the  marketplace,  the Company  provides  insurance
coverage at competitive prices, offers a range of products and services believed
not to be available from most of its competitors and supports sales with service
to its dealers and the vehicle purchaser.  The Company provides maintains a
toll-free line to facilitate customer service.

Seasonality

    A sale of a service  contract by the Company is  dependent  upon the sale of
the  primary  product  (such  as  motor  vehicles,   recreational  vehicles  and
watercraft) covered by the service contract. As a result, the Company's revenues
are  reduced in the  winter  months  when sales of new and used motor  vehicles,
recreational  vehicles and  watercraft are lower in some regions than during the
other months of the year.


<PAGE>


Government Regulation

    The service contract programs  developed and marketed by the Company and its
related  operations are regulated by the statutes and regulations of a number of
states.  Generally,  some states require registration of administrators and some
state statutes concern the scope of service contract coverage and the content of
the service contract or warranty document. In the latter instances,  these state
statutes typically require that specific  provisions be included in the contract
expressly  stating  the  purchaser's  rights  in the  event of a claim,  how the
service contract or warranty may be canceled and identification of the insurance
underwriter   indemnifying  the  sellers  or  administrators  against  loss  for
performance under the terms of the contracts. The Company believes that it is in
compliance in all material  respects with the applicable  regulations  governing
vehicle  service  contracts  and  warranties  in the  states  in  which  it does
business,  and in some  cases  relies on its  insurance  underwriters  and their
managing  agents to monitor such  regulations  and respond to any inquiries from
state authorities.

    The  issuance  of  insurance  policies  in respect of service  contracts  is
regulated  under the  insurance  laws and  regulations  of the  various  states.
Although  the  Company  believes  that  its  activities  as a  service  contract
administrator  are not directly  proscribed by such  regulations,  the Company's
ability  to  perform  its  activities  as a service  contract  administrator  is
effected by such  regulations.  The Company does not believe that as a result of
performing such activities it can be  characterized  as an insurance  company or
insurance  agent  under any state  insurance  statute  in the states in which it
currently operates. In the event that any state insurance regulators require the
Company to comply with insurance  statutes or regulations or become an insurance
agent,  the Company  will  evaluate  the cost of such  compliance  to  determine
whether the Company  will  conduct  business in the state.  NSC,  the  Company's
insurance  affiliate,  is  regulated  by federal  statutes  and must comply with
certain state  registration  requirements.  The Company  believes that NSC is in
compliance in all material  respects with the insurance laws and  regulations in
the states in which NSC does business.

    It is possible  that some states in which the Company now conducts  business
may effect  changes in the current laws which may regulate the activities of the
Company,  including the imposition of new financial or other requirements on the
Company.  In  such  event,  the  Company  would  have  to  meet  the  regulatory
requirements or cease to conduct business in such state or states.

    The Company  does  business in 47 states and believes it has complied in all
material  respects with  applicable  regulations in all such states.  Of such 47
states,  the  Company is able to sell only  certain  products  and  services  in
Connecticut,  Wisconsin and Washington because of certain insurance  regulations
in these states.

Employees

    As of December  31, 1998,  the Company had 103  full-time  employees  and 40
part-time  employees.  None of the Company  employees is  represented by a labor
union, and the Company considers its relations with its employees to be good.

Forward Looking Statements

    The statements contained in this annual report that are not historical facts
are  "forward-looking  statements."  The Company cautions readers of this annual
report  that a number of  important  factors  could cause the  Company's  actual
future  results  to  differ   materially   from  those  expressed  in  any  such
forward-looking  statements.  These  important  factors,  and other factors that
could affect the Company,  are described in the Company's Current Report on Form
8-K filed with the  Securities  and  Exchange  Commission  on December 23, 1996.
Readers of this annual report are referred to such filing.

Item 2.  Properties

    The Company currently  occupies  approximately  26,500 square feet of office
space at 333 Earle Ovington Blvd., Mitchel Field, New York 11553. Of such space,
13,000  square feet are occupied  pursuant to a ten-year  lease which  commenced
March 1, 1995,  at an initial  annual rent of  approximately  $300,000,  and the
remaining 13,500 square feet are occupied  pursuant to a six-year sublease which
commenced  October 1996 and was amended in November  1997, at an amended  annual
rent  of  approximately  $237,000.  (See  Note 8 to the  Notes  to  Consolidated
Financial Statements for future lease payments under this lease and sublease.)
<PAGE>

Item 3.  Litigation

    There are no material legal  proceedings  pending  against the Company other
than ordinary routine litigation incidental to the business,  and the Company is
not aware of any threatened  material legal proceedings to which the Company may
be a party.


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

    None.

Item  5.   Market  for   Registrant's   Common   Equity  and   Related
Stockholder Matters

    From July 22, 1994 until January 23, 1997, the Company's  common stock,  par
value $.01 per share (the "Common  Stock") and the Company's  redeemable  common
stock purchase warrants,  exercisable to purchase one share of Common Stock (the
"Warrants"),  traded on the NASDAQ SmallCap Market under the symbols "ISTN," and
"ISTNW," respectively,  and on the Boston Stock Exchange under the symbols "IST"
and "ISTW,"  respectively.  On January 23, 1997, the Company's  common stock and
Warrants were listed for trading on the NASDAQ  National Market System and, as a
result,  were no  longer  traded on the  SmallCap  Market  or the  Boston  Stock
Exchange. On September 29, 1997 the Company exercised its right to redeem all of
its outstanding  Warrants.  The Warrants remained  exercisable until October 29,
1997,  thirty days after the date of the  redemption  notice.  As of October 29,
1997, 1,218,983 of the 1,225,100 then outstanding warrants had been exercised by
the  holders  thereof  for a price of $5.50 per share and the  Company  received
proceeds of approximately $6,704,000 from such exercises. All remaining Warrants
are no longer exercisable.

The  following  table  sets  forth for the  periods  indicated  the high and low
closing  sales  prices of the shares of Common Stock and Warrants as reported by
NASDAQ.  The  quotations  represent  prices  between  dealers and do not include
retail mark-up, mark-down or commission.



                                 Common
                                  Stock            Warrants
                                 -------           ---------          

                             High      Low       High     Low

 
    11/01/96 to 01/31/97     5-3/4    5          2-1/2    1-11/16

    02/01/97 to 04/30/97     7-9/32   5-5/8      2-5/8    1-15/16

    05/01/97 to 07/31/97     7-11/16  6-1/2      3        2     

    08/01/97 to 10/31/97     10-3/4   7-1/16     5        2-5/16
   
    11/01/97 to 01/31/98     10-1/8   7-3/4      N/A      N/A     
    
    02/01/98 to 04/30/98     9-7/16   7-1/2      N/A      N/A 

    05/01/98 to 07/31/98     8-3/8    7          N/A      N/A   

    08/01/98 to 10/31/98     8-1/8    5-3/8      N/A      N/A  

    11/01/98 to 01/13/99     12-1/4   7-1/8      N/A      N/A  

  As of January 13, 1999, there were 56 holders of record of Common Stock.

    The Company  has not paid cash  dividends  on the Common  Stock and does not
contemplate  paying cash  dividends  in the  foreseeable  future.  Instead,  the
Company intends to retain earnings for use in the Company's operations.


<PAGE>


    In  September  1995,  the  Board  of  Directors  of the  Company  adopted  a
Shareholders  Rights Plan (the  "Rights  Plan") to help  protect  the  Company's
stockholders   against  certain  coercive  takeover  tactics  commonly  used  by
corporate  raiders  to  deprive  stockholders  of the  long-term  value of their
investment  through  transactions  that do not treat all  stockholders  equally.
Under the terms of the Rights Plan,  the Board of Directors  declared a dividend
of one common stock  purchase  right (a "Right") for each  outstanding  share of
Common Stock of the Company held by  stockholders of record on November 10, 1995
(the "Record Date"). Each Right entitles the holder to purchase from the Company
one share of Common  Stock at a price of $25 per share,  subject to  adjustment.
The  description  and terms of the  Rights  are set forth in a Rights  Agreement
dated as of October 24, 1995 between the Company and Continental  Stock Transfer
& Trust Company, as Rights Agent.

    Until the earlier to occur of (i) 10 days  following  a public  announcement
that a person  or group of  affiliated  or  associated  persons  (an  "Acquiring
Person") has  acquired  beneficial  ownership of 15% or more of the  outstanding
shares of Common  Stock or (ii) 10  business  days (or such later date as may be
determined by action of the Board of Directors  prior to such time as any person
becomes an Acquiring  Person)  following the commencement of, or an announcement
of an intention to make, a tender offer or exchange  offer the  consummation  of
which would  result in the  beneficial  ownership by a person or group of 15% or
more of such  outstanding  shares (the  earlier of such dates  being  called the
"Distribution  Date"),  the Rights will be evidenced  with respect to any of the
Common Stock  certificates  outstanding  as of the Record  Date,  by such Common
Stock certificate with a copy of the Summary of Rights to Purchase Common Shares
attached thereto.  The Rights are not exercisable  until the Distribution  Date.
The Rights  will expire on November  10,  2005 (the  "Final  Expiration  Date"),
unless the Final  Expiration  Date is  extended or unless the Rights are earlier
redeemed by the Company, in each case, as described below.

    In the event that, after the Distribution Date, the Company is acquired in a
merger  or  other  business  combination  transaction  or  50%  or  more  of its
consolidated  assets or earning power are sold, proper provision will be made so
that each  holder of a Right will  thereafter  have the right to  receive,  upon
exercise thereof at the then current exercise price of the Right, that number of
shares  of  common  stock  of the  acquiring  company  which at the time of such
transaction  will have a market  value of two times  the  exercise  price of the
Right.  In the  event  that any  person  becomes  an  Acquiring  Person,  proper
provision  shall be made so that  each  holder  of a Right,  other  than  Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter  have the right to receive  upon  exercise  that  number of shares of
Common Stock having a market value of two times the exercise price of the Right.

    At any time  after the  acquisition  by an  Acquiring  Person of  beneficial
ownership  of 15% or more of the  outstanding  Common  Stock  and  prior  to the
acquisition by such Acquiring  Person of 50% or more of the  outstanding  Common
Stock, the Board of Directors of the Company may exchange the Rights (other than
Rights owned by such  Acquiring  Person which have become void),  in whole or in
part,  at an exchange  ratio of one share of Common Stock per Right  (subject to
adjustment).

    At any time prior to the  acquisition  by an Acquiring  Person of beneficial
ownership of 15% or more of the outstanding Common Stock, the Board of Directors
of the  Company may redeem the Rights in whole,  but not in part,  at a price of
$.01 per Right (the  "Redemption  Price").  The  redemption of the Rights may be
made effective at such time, on such basis and with such conditions as the Board
of  Directors  in its  sole  discretion  may  establish.  Immediately  upon  any
redemption  of the Rights,  the right to exercise the Rights will  terminate and
the only right of the holders of Rights will be to receive the Redemption Price.

    The terms of the  Rights may be  amended  by the Board of  Directors  of the
Company  without the consent of the holders of the Rights,  except that from and
after such time as any person becomes an Acquiring  Person no such amendment may
adversely  affect the  interests  of the  holders of the Rights  (other than the
Acquiring Person).

    Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company,  including,  without  limitation,  the right to
vote or to receive dividends.

    There is no  separate  public  trading  market  for the  Rights.  Until  the
Distribution  Date, the Rights may be transferred  with and only with the shares
of Common Stock.



<PAGE>


Item 6.  Management's Discussion and Analysis of Financial Condition
and Results of Operations

Results of Operations

    For the Year ended  October 31,  1998  compared to the Year ended
October 31, 1997

    Revenues  increased  approximately  $11,354,000,  or 30%,  to  approximately
$49,283,000  for the year ended  October 31,  1998 as compared to  approximately
$37,929,000 for the year ended October 31, 1997. This increase was primarily due
to: (i) a significant  increase in the recognition of deferred  contract revenue
as a result of an increase in the total  number of unexpired  service  contracts
under  administration;  and (ii) a significant  increase in  administrative  and
insurance  fees  resulting  from an increase in the number of service  contracts
accepted for  administration  by the Company in fiscal 1998. The increase in the
number of service contracts accepted for  administration  during fiscal 1998 was
primarily due to the aggressive  efforts by the Company in enrolling  additional
producers  to sell the  Company's  products and to a more  diversified  array of
products offered by the Company.

    Costs  of  services   provided,   which  consist  primarily  of  claims  and
cancellation  costs,   increased  by  approximately   $7,129,000,   or  42%,  to
approximately  $23,975,000  for the year ended  October 31, 1998, as compared to
approximately  $16,846,000  for the year ended October 31, 1997. As a percentage
of  revenues,  cost of  services  provided  increased  to 49% for the year ended
October  31,  1998 as  compared  to 44% in the same  period in 1997.  Claims and
cancellation  costs  are  directly  affected  by the total  number of  unexpired
contracts under administration, which has increased on a yearly basis.

    Gross margin increased by approximately $4,226,000, or 20%, to approximately
$25,308,000  for the year ended October 31, 1998,  as compared to  approximately
$21,082,000  for the year ended  October 31,  1997.  This  increase is primarily
attributable  to the increase in revenues as described  above.  Gross margin for
the year ended  October  31,  1998 was 51% as compared to 56% for the year ended
October 30, 1997. This decrease is primarily  attributable to an increase in the
relative percentage of revenue  represented by deferred contract revenue,  which
has a low gross margin, as compared to  administrative  fees which have a higher
gross margin.

    Selling,  general and  administrative  expenses  increased by  approximately
$3,544,000,  or 19%, to approximately $21,835,000 for the year ended October 31,
1998,  up from  approximately  $18,291,000  for the year ended October 31, 1997.
This  increase  was in  large  part due to (i)  increases  in  selling  expenses
primarily  due to  increased  commissions  paid as a result of  increased  sales
volume;  and (ii)  increases  in  general  and  administrative  expenses  due to
increased  personnel and postage costs resulting from increased sales volume and
to  the  development  of new  service  contract  products.  As a  percentage  of
revenues,  selling, general and administrative expenses decreased to 44% for the
year ended October 31, 1998 as compared to 48% in the same period in 1997.

    Other  income,  net  increased  by  approximately  $1,224,000  or  165%,  to
approximately  $1,968,000  for the year ended  October 31, 1998,  as compared to
approximately  $744,000 for the year ended  October 31, 1997.  This  increase is
partially  attributable  to other income of $500,000  received by the Company in
settlement of a dispute with an unaffiliated party in the first quarter of 1998.
The  balance of the  increase was the result of an  increase  in  investment
income generated by funds provided by the exercise of the Company's  outstanding
warrants in October 1997 and by funds provided by operating activities.

    For the year ended  October 31, 1998,  the Company had income  before income
taxes of  approximately  $5,442,000 and recorded a provision for income taxes of
approximately   $2,138,000,  as  compared  to  income  before  income  taxes  of
approximately  $3,535,000  and a  provision  for income  taxes of  approximately
$1,398,000  in the same  period  in 1997.  Net  income  increased  approximately
$1,167,000,  or 55%, to approximately  $3,304,000 for the year ended October 31,
1998 as  compared to  approximately  $2,137,000  for the year ended  October 31,
1997.

Liquidity and Capital Resources

    Cash and cash  equivalents  and United States  Treasury Bills, at cost, were
approximately  $37,331,000  at October 31,  1998,  as compared to  approximately
$26,857,000 at October 31, 1997. The increase of  approximately  $10,474,000 was
primarily the result of cash provided by the Company's operating activities less
cash used for the purchase of furniture, fixtures and equipment.
<PAGE>

    During the fiscal year ended  October 31, 1997,  the Company  entered into a
$3,000,000  revolving  credit facility with the Chase Manhattan Bank.  Under the
terms of the  facility,  advances bear interest at 1/2% above the prime rate and
the  Company is  obligated  to pay an annual  facility  fee of 1/2% of the total
available amount. Outstanding amounts under the credit facility are secured by a
pledge of all accounts  receivable  of the Company.  As at October 31, 1998,  no
amounts had been borrowed under the credit facility.

    The Company believes that its current available cash and anticipated  levels
of  internally  generated  funds  will  be  sufficient  to  fund  its  financial
requirements at least for the next fiscal year at the Company's present level of
revenues and business activity.

Capital Expenditures

    The Company intends to spend  approximately  $350,000 in fiscal 1999 for the
purchase of computer  hardware and software,  telephone  equipment and leasehold
improvements  to enable the Company to  administer  the  contracts  generated by
increased sales volume.

Impact of Inflation

    The Company  does not believe  that  inflation  has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.

Year 2000

    The Year 2000 issue exists  because many computer  systems and  applications
currently  use  two-digit  date fields to designate a year.  As the century date
change occurs,  date-sensitive  systems will recognize the year 2000 as 1900, or
not at all.  This  inability to  recognize  or properly  treat the Year 2000 may
cause  systems  to  process  critical  financial  and  operational   information
incorrectly.  The  Company's  computer  systems  use  four-digit  date fields to
designate a year and, as a result,  the Company  believes  that its systems will
properly  recognize  the Year 2000.  The  Company  has  contacted  its  critical
suppliers of services to determine  that the services that they provide are Year
2000  compliant.  The Company  believes,  based upon its internal  reviews,  the
configuration of the Company's systems, inquiries made of its critical customers
and suppliers, and other factors, that the future external and internal costs to
be incurred  relating to the modification of internal-use  software for the Year
2000 will not be material to the  Company's  results of  operations or financial
position.

Item 7.  Financial Statements

       Annexed hereto starting on page F-1.


<PAGE>
           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES

               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                 Page

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                          F-2

FINANCIAL STATEMENTS:

  Consolidated Balance Sheets as of October 31, 1998 and 1997     F-3

  Consolidated Statements of Operations for the years ended
  October 31, 1998 and 1997                                       F-4

  Consolidated Statements of Stockholders' Equity for the years
  ended October 31, 1998 and 1997                                 F-5

  Consolidated Statements of Cash Flows for the years ended
  October 31, 1998 and 1997                                       F-6

  Notes to Consolidated Financial Statements                      F-7
























                                  F-1


<PAGE>






                REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Interstate National Dealer Services, Inc.:


We have  audited the  accompanying  consolidated  balance  sheets of  Interstate
National Dealer Services,  Inc. (a Delaware  corporation) and subsidiaries as of
October  31,  1998  and  1997,  and  the  related  consolidated   statements  of
operations,  stockholders' equity and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Interstate  National  Dealer
Services, Inc. and subsidiaries as of October 31, 1998 and 1997, and the results
of their  operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.



                                          ARTHUR ANDERSEN LLP





Melville, New York
January 6, 1999


                                  F-2




<PAGE>


           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                         AS OF OCTOBER 31, 1998 AND 1997

                  ASSETS                                  1998          1997
                  ------                               --------         -----

CURRENT ASSETS:
  Cash and cash equivalents                       $ 20,885,903     $20,846,524
  United States Treasury Bills, at cost             16,445,339       6,010,337
  Accounts receivable, net                           8,163,882       8,891,963
  Prepaid expenses                                     653,281         367,932
                                                    -----------     -----------
           Total current assets                     46,148,405      36,116,756

RESTRICTED CASH                                      1,951,856       1,633,068

FURNITURE, FIXTURES AND EQUIPMENT,  at cost,
 less accumulated  depreciation and amortization
 of $897,478 and $530,281, respectively              1,551,572       1,179,293

INTANGIBLE ASSETS, less accumulated amortization
 of $151,667 and $127,401, respectively                 73,333          97,599

DEFERRED INCOME TAXES                                2,127,843       1,491,771

NOTE FROM RELATED PARTY                                 90,000         110,000

OTHER ASSETS                                         1,463,732         654,074
                                                  -------------     -----------
                                                   $53,406,741     $41,282,561
     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                 $ 3,402,417     $ 2,929,476
  Accrued expenses                                     737,660       1,040,721
  Accrued commissions                                1,001,178       1,080,178
  Reserve for claims                                 1,622,361       1,120,527
  Other liabilities                                    311,135         241,598
                                                     -----------    -----------
           Total current liabilities                 7,074,751       6,412,500

DEFERRED CONTRACT REVENUE                           26,264,571      18,478,155

CONTINGENCY PAYABLE                                  1,951,856       1,633,068
                                                    -----------    ------------
           Total liabilities                        35,291,178      26,523,723
                                                    -----------    ------------

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY:
  Preferred stock, par value $.01 per share;
   authorized 1,000,000 shares; no issued shares        -               -
  Common stock, par value $.01 per share;
   authorized 10,000,000 shares; issued and
   outstanding 4,650,916 and 4,623,016 shares,
   respectively                                         46,509          46,231
  Additional paid-in capital                        11,104,699      11,052,054
  Retained earnings                                  6,964,355       3,660,553
                                                   ------------    ------------

           Total stockholders' equity               18,115,563      14,758,838
                                                   ------------    ------------
                                                  $ 53,406,741    $ 41,282,561


      The accompanying notes to financial statements are an integral
               part of these consolidated balance sheets.

                                  F-3


<PAGE>


           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997


                                                     1998           1997

REVENUES                                         $ 49,283,426   $ 37,928,719

OPERATING COSTS AND EXPENSES:
  Costs of services provided                       23,974,988     16,846,370
  Selling, general and administrative expenses     21,835,259     18,290,862
  
                                                   ----------      ---------  
     Operating income                               3,473,179      2,791,487

OTHER INCOME (EXPENSE):
  Interest income                                   1,483,296        771,702
  Interest expense                                    (15,000)       (27,968)
  Other income                                        500,000           -
                                                 -------------    -----------
     Income before provision for income taxes       5,441,475      3,535,221

PROVISION FOR INCOME TAXES                          2,137,673      1,398,548
                                                 -------------    -----------

     Net income                                  $  3,303,802    $ 2,136,673
                                                 =============   ============


NET INCOME PER SHARE:
  
  Basic                                          $        .71     $      .62 
                                                 ============     ==========   
  Weighted average shares outstanding               4,635,301      3,434,008
                                                 ============     ==========


  Diluted                                        $        .67     $      .54 
                                                 ============     ==========   
  Weighted average shares outstanding               4,960,939      3,949,744
                                                 ============     ==========






      The accompanying notes to financial statements are an integral
                part of these consolidated statements.











                                  F-4


<PAGE>



           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997



                               Common Stock                Additional
                             Number of          Paid-in     Retained
                               Shares   Amount  Capital     Earnings    Total



BALANCE AT OCTOBER 31, 1996 3,384,233 $33,843  $4,347,592 $1,523,880  $5,905,315

Shares issued pursuant to
 exercise of warrants       1,218,983  12,190   6,692,216       -      6,704,406

Shares issued pursuant to 
 exercise of stock options     19,800     198      12,246       -         12,444

Net income for the year ended
 October 31, 1997                -        -         -      2,136,673   2,136,673
                            --------- -------  ---------  ----------   ---------


BALANCE AT OCTOBER 31, 1997 4,623,016  46,231  11,052,054  3,660,553  14,758,838


Shares issued pursuant to
 exercise of stock options     27,900     278      52,645       -         52,923

Net income for the year ended
 October 31, 1998                -        -         -      3,303,802   3,303,802
                            --------- -------  ----------  ---------  ----------
 


BALANCE AT OCTOBER 31, 1998 4,650,916 $46,509 $11,104,699 $6,964,355 $18,115,563
                            ========= ======= =========== ========== ===========


















       The accompanying notes to financial statements are an integral 
                part of these consolidated statements.











                                       F-5


<PAGE>


           INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997


                                                       1998        1997

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                       $3,303,802  $2,136,673
  Adjustments to reconcile net income to net
    cash provided by operating activities:
   Depreciation and amortization                      427,173     339,891
   Deferred income taxes                             (636,072)   (638,791)
   Increase (decrease) in cash resulting from
    changes in operating assets and liabilities:
    Accounts receivable                               728,081  (4,753,912)
    Prepaid expenses                                 (285,349)   (117,763)
    Restricted cash                                  (318,788)    342,437 
    Other assets                                     (845,368)     (2,839)
    Accounts payable                                  472,941   1,359,579
    Accrued expenses                                 (303,061)    528,606
    Accrued commissions                               (79,000)    531,706 
    Reserve for claims                                501,834     466,680
    Other liabilities                                  69,537      85,846
    Deferred contract revenue                       7,786,416   7,799,889
    Contingency payable                               318,788    (342,437)
                                                   ----------   ----------

       Net cash provided by operating activities   11,140,934   7,735,565
                                                   ----------   ----------  

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net purchases of United States
   Treasury Bills                                 (10,435,002) (6,010,337)
  Purchase of furniture, fixtures and equipment      (739,476)   (555,757)
  Note from related party                              20,000    (110,000)
                                                     ---------   --------- 
       Net cash used in investing
         activities                               (11,154,478) (6,676,094)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of warrants                     -      6,704,406
  Payment of long-term debt to related party             -       (160,000)
  Proceeds from exercise of stock options              52,923      12,444
                                                     ---------  ---------- 
       Net cash provided by financing 
        activities                                     52,923   6,556,850 
                                                   -----------   ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS              39,379   7,616,321

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR       20,846,524  13,230,203
                                                   ----------  ----------
CASH AND CASH EQUIVALENTS, END OF YEAR           $ 20,885,903 $20,846,524
                                                 ============ ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Income taxes                                 $ 2,915,254  $ 2,083,791
                                                 ============ ===========
    Interest                                     $    15,000  $    27,968
                                                 ============ ===========


      The accompanying notes to financial statements are an integral
              part of these consolidated statements.

                                       F-6


<PAGE>
         INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            OCTOBER 31, 1998 AND 1997

1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business

Interstate  National  Dealer  Services,  Inc. and  subsidiaries  (the "Company")
designs,  markets and administers  service  contracts and warranties for new and
used  motor  vehicles  and  recreational  vehicles  and,  to  a  lesser  extent,
watercraft,  motorcycles and other vehicles.  A service  contract may be sold by
any of the following entities: (1) either the seller originating the sale of the
vehicle, (2) the financial institution financing the sale of the vehicle, or (3)
other entities,  including the Company,  which sell the contract to the owner of
the vehicle after the vehicle has been purchased.  A vehicle service contract is
an  agreement  between  either the seller or the  administrator  of the  service
contract and the vehicle  purchaser under which the seller or the  administrator
agrees to replace or repair for a specific term designated  vehicle parts in the
event of a mechanical breakdown. Vehicle service contracts supplement, or are in
lieu of,  manufacturers'  warranties and provide a variety of extended  coverage
options  (typically  ranging from three months to seven years and/or 3,000 miles
to 150,000 miles) generally offered for sale by sellers to vehicle purchasers in
a manner  similar to other  options.  The Company  enters  into a  non-exclusive
agreement with each seller,  under which the Company obtains insurance  coverage
to cover such seller's  liability for claims under its vehicle service contracts
and  assists  such  seller,  and  purchasers,  with the making,  processing  and
adjustment of claims. In April 1995, the Company formed an affiliated  insurance
company,  National Service Contract Insurance Company Risk Retention Group, Inc.
("NSC").  Commencing March 1996, the insurance  policies arranged by the Company
as  administrator  to  its  dealers  were  underwritten  by  NSC  and  a  single
non-affiliated  insurance company.  In January 1998, the Company entered into an
agreement with a second non-affiliated insurance company to underwrite a portion
of its service contracts.

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its subsidiaries,  all of which are wholly-owned.  All significant  intercompany
transactions and balances have been eliminated in consolidation. As required for
insurance companies, NSC has a December 31 year end.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

Furniture, Fixtures and Equipment

Furniture,  fixtures  and  equipment  are stated at cost.  Depreciation  for all
assets  acquired prior to fiscal 1995 is calculated  using  accelerated  methods
over the  estimated  useful  lives of the  assets.  Depreciation  for all assets
acquired  thereafter  is  calculated  using the  straight  line  method over the
estimated useful lives of the assets. The asset lives are as follows:


                                       F-7


<PAGE>


      Furniture and fixtures          7 years
      Office equipment                5 to 10 years
      Leasehold improvements          The  remaining  lease term or useful life
                                       of asset, whichever is shorter.

Restricted Cash

Pursuant  to  an  agreement  among  the  Company,   one  of  the  non-affiliated
underwriters  of the  insurance  policies  administered  by the  Company and its
managing  agent,  a specified  amount is required to be deposited into an escrow
account for each contract sold by the Company and  underwritten by such insurer.
These  funds  held in escrow by an  independent  third  party are to be used for
paying the costs of administering service contracts should the Company be unable
to do so for any reason. Under the agreement, the Company is entitled to receive
on a quarterly  basis, any funds in excess of a specified amount for each active
service  contract.  For the years ended  October 31, 1998 and 1997,  the Company
received approximately $195,000 and $136,000, respectively, of such funds, which
are  reflected  in  revenues  in the  accompanying  consolidated  statements  of
operations.  The balance in this escrow account totaled  approximately  $802,000
and $753,000 at October 31, 1998 and 1997,  respectively.  The same amounts have
been reflected as contingency payable in the accompanying  consolidated  balance
sheets.

Certain of the service contract programs offered by the Company provide that the
claim reserves generated by each dealer be placed in  interest-bearing  accounts
maintained by PNC Bank, New England.  To the extent such reserves are unconsumed
on expired contracts, then (a) with respect to dealers who reach specified sales
volumes of service contracts,  such unconsumed  reserves and any interest earned
thereon are  distributed  (subject  to the  underwriter's  consent  based on its
satisfaction  that  a  dealer's  reserves  are  in an  amount  in  excess  of an
actuarially  acceptable  level) to the dealer and (b) with respect to each other
dealer, such unconsumed reserves and any interest earned thereon are distributed
to the Company (subject to the  underwriter's  consent based on its satisfaction
that a dealer's reserves are in an amount in excess of an actuarially acceptable
level).  The  Company  received  approximately  $122,000  and  $254,000  of such
unconsumed reserves for the years ended October 31, 1998 and 1997, respectively,
which are reflected in revenues in the accompanying  consolidated  statements of
operations. The balance in these interest-bearing accounts totaled approximately
$1,150,000  and  $880,000 at October 31, 1998 and 1997,  respectively.  The same
amounts  have  been  reflected  as  contingency   payable  in  the  accompanying
consolidated balance sheets.

Reserve for Claims

Reserve  for claims  represents  claims  that were  approved  for  payment as of
October 31, 1998 and 1997, but not paid as of those respective dates.

Revenues

Revenues relating to administrative  and insurance fees from the sale of vehicle
service  contracts are recognized when the service contract sold is approved and
accepted by the Company.  Revenues are deferred on vehicle service  contracts in
those instances where the Company directly receives cash for that portion of the
total service contract that is allocated to estimated claims reserves.  Deferred
contract  revenue is recorded as earned over the life of the service contract in
proportion to expected claims.



                                       F-8


<PAGE>


Income Taxes

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting  Standards  ("SFAS") No. 109,  "Accounting  for Income  Taxes".  This
pronouncement  establishes  financial accounting and reporting standards for the
effects of income  taxes that result from the  Company's  activities  during the
current and  preceding  years and requires an asset and  liability  approach for
financial  accounting  and reporting for income taxes.  The provision for income
taxes is based upon income after  adjustment for those permanent items which are
not considered in the  determination  of taxable  income.  Deferred taxes result
when the  Company  records  deductions  or  recognizes  revenue  for  income tax
purposes in a different year than for financial reporting purposes.

Net Income Per Share

The Company reports earnings per share in accordance with the provisions of SFAS
No. 128,  "Earnings  Per  Share".  Basic net income per share  ("Basic  EPS") is
computed by dividing net income by the weighted  average number of common shares
outstanding.  Diluted  net  income  per share  ("Diluted  EPS") is  computed  by
dividing net income by the weighted average number of common shares and dilutive
common  share   equivalents  then   outstanding.   SFAS  No.  128  requires  the
presentation  of both Basic EPS and Diluted EPS on the face of the statements of
operations.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported  amounts of certain assets and liabilities and disclosure of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Stock Based Compensation

The Company  accounts for  stock-based  compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation". This pronouncement establishes a
fair  value  based  method  of  accounting   and   reporting   for   stock-based
compensation.  Under SFAS No.  123,  companies  may elect to follow the new fair
value based method or to continue to report under  Accounting  Principles  Board
Opinion No. 25 ("APB  25"),  "Accounting  for Stock  Issued to  Employees".  The
Company has elected to follow the  accounting  guidance of APB 25 with pro forma
disclosure of the fair value method specified in SFAS No. 123.

2.  FURNITURE, FIXTURES AND EQUIPMENT:

Furniture, fixtures and equipment consists of the following :

                                         October 31,
                                        1998        1997
    Furniture and fixtures        $   624,366  $  424,096
    Office equipment                1,616,828   1,225,667
    Leasehold improvements            207,856      59,811
                                    ----------  ----------  
                                    2,449,050   1,709,574
    Less:  Accumulated depreciation
             and amortization         897,478     530,281
                                   -----------  ----------
                                   $1,551,572  $1,179,293

                                       F-9


<PAGE>


3.  INCOME TAXES:

The provision for income taxes consists of the following :
                                          October 31,
                                        1998        1997
                                     ---------    --------
Federal :
         Current                   $2,182,830  $1,564,233
         Deferred                    (480,872)   (463,523)
    State :
         Current                      590,915     473,106
         Deferred                    (155,200)   (175,268)
                                   ----------- -----------
                                   $2,137,673  $1,398,548

The differences between the provision for income taxes and income taxes computed
using the U.S. Federal statutory income tax rate were as follows :
                                          October 31,
                                        1998     1997

    U.S. Federal statutory rate         34%       34%
    State income taxes, net of
       Federal benefit                   5         6
                                       ----       ---
    Effective tax rate                  39%       40%
                                        ===       ===

The deferred income taxes of approximately  $2,128,000,  which have been paid as
of October 31, 1998,  result from  temporary  differences  between the financial
accounting and income tax treatment of deferred contract revenue.

4. LINE OF CREDIT:

During the fiscal  year ended  October 31,  1997,  the  Company  entered  into a
$3,000,000  revolving  credit facility with the Chase Manhattan Bank.  Under the
terms of the  facility,  advances bear interest at 1/2% above the prime rate and
the  Company is  obligated  to pay an annual  facility  fee of 1/2% of the total
available amount. Outstanding amounts under the credit facility are secured by a
pledge of all accounts  receivable  of the  Company.  As at October 31, 1998 and
1997, no amounts had been borrowed under the credit facility.

5.  STOCKHOLDERS' EQUITY:

a)  Warrants

In  connection  with a July 1994 public  offering of Common  Stock,  the Company
issued  warrants for the  purchase of 1,225,100  shares of its Common Stock at a
price per share of $5.50. On September 29, 1997 the Company  exercised its right
to redeem all of its outstanding  warrants.  The warrants  remained  exercisable
until October 29, 1997, thirty days after the date of the redemption  notice. As
of October 29, 1997,  1,218,983 of the 1,225,100 then  outstanding  warrants had
been  exercised  by the  holders  thereof for a price of $5.50 per share and the
Company received proceeds of $6,704,406 in connection  therewith.  All remaining
warrants are no longer excercisable.

b)  1993 Stock Option Plan

On November 1, 1992, the Company granted  certain   officers  and  employees
non-qualified stock

                                       F-10


<PAGE>


options for the  purchase of up to 184,000  shares of common stock and on May 5,
1993, such non- qualified stock options were formally  included in the Company's
1993 Stock Option Plan (the "Plan") adopted as of such date.  Under the Plan, as
amended,  344,000  shares of common stock have been  reserved for issuance  upon
exercise of incentive stock options or non-qualified stock options to be granted
to officers and  employees who are  instrumental  to the success of the Company.
The majority of options are  exercisable  in increments of 20% of the underlying
option shares per annum  following the first  anniversary  of the issuance date.
However,  no option shall be exercisable  after the expiration of ten years from
the date the option was granted.

The following  options to purchase the Company's  common shares were outstanding
under the Plan at October 31, 1998:
                                                   Weighted
                                                   Average
                                     Number        Exercise
                                    of Shares       Price
    October 31, 1996                276,834        $2.10
      Exercised                     (19,800)         .63
      Canceled                       (3,400)        1.41
                                  ----------
    October 31, 1997                253,634        $2.23
      Exercised                     (16,300)         .53
                                  ----------
    October 31, 1998                237,334        $2.35

As of October 31, 1998,  options to purchase 192,934 shares were exercisable and
11,500 shares were available for future grant.

c)  1996 Incentive Plan

On December  18, 1995 the Board of  Directors  of the Company  approved the 1996
Incentive  Plan (the  "Incentive  Plan").  The  Incentive  Plan  authorizes  the
granting of incentive  awards through  grants of share options,  grants of share
appreciation  rights,  grants of share purchase  awards and grants of restricted
share awards to those individual directors and/or employees who are instrumental
to the  success of the  Company.  The  aggregate  number of shares  which may be
issued pursuant to the Incentive Plan shall not exceed 300,000.  The majority of
options issued under the Incentive Plan are  exercisable in increments of 20% of
the underlying  option shares per annum  following the first  anniversary of the
issuance date.  However,  no option shall be exercisable after the expiration of
ten years from the date the option was granted.

The following  options to purchase the Company's  common shares were outstanding
under the Incentive Plan at October 31, 1998:
                                                   Weighted
                                                   Average
                                     Number        Exercise
                                    of Shares       Price
    October 31, 1996                105,000        $4.36
      Granted                        37,500         6.73
                                  ---------
    October 31, 1997                142,500        $4.98
      Granted                        93,000         5.375
      Exercised                      (9,800)        4.24
                                  ----------
    October 31, 1998                225,700        $5.18


                                       F-11


<PAGE>


As of October 31, 1998,  options to purchase 99,700 shares were  exercisable and
64,500 shares were available for future grant.

d)  Other Options

On June 12, 1996,  the Company  granted  certain  officers  non-qualified  stock
options for the purchase of 180,000 shares of common stock at a weighted average
exercise  price of $4.63 per share.  Similarly,  on January 7, 1998, the Company
granted a certain officer  non-qualified stock options for the purchase of 6,000
shares of common  stock at an  exercise  price of $9.313 per share. The exercise
prices  exceeded the market  value per share on the dates of grant.  The options
were immediately exercisable and expire ten years from the dates of grant.

e)  SFAS No. 123

The  Company  has  adopted  the  disclosure-only  provisions  of SFAS  No.  123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been  recognized  for the stock  option  plans.  Had  compensation  cost for the
Company's  stock  option  plans been  determined  based on the fair value at the
grant date for  options  granted  in fiscal  1998 and 1997 as  described  by the
provisions  of SFAS No. 123, the Company's net income and diluted net income per
share would have been decreased as indicated below:
                                      1998       1997

Net income - as reported         $3,303,802   $2,136,673
Net income - pro forma            3,230,760    2,098,580
Diluted net income per share -
 as reported                        .67          .54
Diluted net income per share -
 pro forma                          .65          .53

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes  option-pricing model. The following weighted-average  assumptions
were used for grants in 1998:  dividend yield of 0%; expected volatility of 50%;
risk-free  interest  rate of 4.6%;  expected life of 5 years and a fair value of
$2.74. The following weighted-average  assumptions were used for grants in 1997:
dividend yield of 0%;  expected  volatility of 50%;  risk-free  interest rate of
6.5%; expected life of 5 years and a fair value of $3.48.

f)  Shareholders Rights Plan

In September  1995, the Board of Directors of the Company adopted a Shareholders
Rights  Plan (the  "Rights  Plan") to help  protect the  Company's  stockholders
against certain coercive  takeover tactics commonly used by corporate raiders to
deprive  stockholders  of  the  long-term  value  of  their  investment  through
transactions that do not treat all stockholders equally.  Under the terms of the
Rights  Plan,  the Board of  Directors  declared a dividend of one common  stock
purchase  right (a "Right")  for each  outstanding  share of Common Stock of the
Company held by stockholders of record on November 10, 1995. Each Right entitles
the holder to purchase  from the Company one share of Common Stock at a price of
$25 per share, subject to adjustment.

6.  RELATED PARTY TRANSACTIONS:

In April 1997,  the Company  made a loan to one of its officers in the amount of
$110,000. The loan bears interest at 7 percent per annum, payable quarterly, and
is due in full in April 2002.  Interest income of $6,595 and $3,375 was recorded
for the years  ended  October  31,  1998 and  1997,  respectively.  The  balance
outstanding at October 31, 1998 was $90,000.
                                       F-12


<PAGE>


In January  1998,  the Company  entered into an agreement  with a subsidiary  of
Orion  Capital  ("Orion")  to  underwrite  a portion of the  insurance  coverage
arranged by the Company for its service contract customers.  Concurrently, Orion
entered into a reinsurance  agreement  with Target  Insurance  Ltd.  ("Target"),
which  is  owned  by  certain  shareholders  of  the  Company,   which  provided
reinsurance  for losses to Orion under its  agreement  with the Company.  During
fiscal  1998,  Target  received  approximately  $2,100  in  premiums  under  its
agreement  with  Orion.  In  addition,  in  January  1998,  NSC  entered  into a
reinsurance  agreement with a subsidiary of Orion which provides reinsurance for
losses to NSC under certain  circumstances.  Concurrently,  the Company  entered
into  agreements to indemnify Orion and Target for any losses incurred under the
aforementioned agreements. There were no such losses, and there were no payments
made by the Company  under the  indemnification  agreements  in fiscal 1998.  In
fiscal 1997 the Company and NSC had similar reinsurance agreements with Reliance
National Indemnity Company, which agreements were terminated in December 1997.

7.  EMPLOYEE BENEFIT PLAN:

The Company  maintains a 401(k) Profit Sharing Plan covering  substantially  all
full-time  employees,  and provides for employee  contributions  of up to 15% of
their  salary.  The Company does not match  employee  contributions.  The profit
sharing portion of the plan is discretionary and non-contributory. Approximately
$82,000 and $64,000 was  contributed  by the Company for the years ended October
31, 1998 and 1997, respectively.

8.  COMMITMENTS AND CONTINGENCIES:

Letters of Credit

Concurrent with the Orion agreements explained in Note 6, the Company issued two
letters of credit  through its principal  lending  institution  in the amount of
$1,750,000  and  $250,0000.  These  letters of credit are  irrevocable  and have
one-year renewable terms.

Leases

In December 1994, the Company  entered into a 10 year lease agreement for office
space in Mitchel Field,  New York which enabled the Company to  consolidate  its
Great Neck, New York and Novato,  California  operations.  The term of the lease
commenced on March 1, 1995 and shall  terminate  on February  28,  2005.  In May
1996, the Company entered into a 6 year sublease for additional  office space at
its Mitchel Field location. In November 1997, the sublease was amended to expand
the  additional  office  space  available  to the Company at its  Mitchel  Field
location.  The term of the  sublease  commenced  on  October  1,  1996 and shall
terminate on November 30, 2002.  Future  minimum lease  payments under the lease
and sublease are as follows:

           Fiscal year                       Amount
           -----------                       ------
              1999                       $  636,000
              2000                          650,000
              2001                          666,000
              2002                          465,000
              2003                          462,000
           Thereafter                       616,000
                                           ---------
                                         $3,495,000

Rent  expense  totaled  approximately  $578,000 and $479,000 for the years ended
October 31, 1998 and 1997, respectively.
                                       F-13


<PAGE>


Employment Agreements

On November 1, 1998, the Company entered into an Amended and Restated Employment
Agreement  with Chester J. Luby  providing for his employment as Chairman of the
Board of Directors  and Chief  Executive  Officer of the Company.  The agreement
terminates on December 31, 2008,  but is  automatically  extended for additional
one-year  periods  unless either party  provides  written notice that no further
extensions  shall be  granted.  The  employment  agreement  provides  for  total
compensation  as  the  sum  of  his  annual  salary,  annual  bonus  and  annual
performance  bonus (if any) for that fiscal year.  The annual salary of $250,000
may be  increased  annually at the  discretion  of the Board of  Directors.  The
annual bonus is calculated  based on the earnings of the Company and is equal to
the greater of $150,000 or 4 1/2% of the Company's  earnings before interest and
taxes for the fiscal year. The annual performance bonus may be granted each year
at the discretion of the Board of Directors. In the event of Mr. Luby's death or
the termination of his employment  agreement the amount the Company paid for his
split-dollar life insurance policies which are recorded as non-interest  bearing
loans and totaled approximately $249,000 and $186,000 as of October 31, 1998 and
1997, respectively, will be reimbursed to the Company.

On November 1, 1998, the Company entered into an Amended and Restated Employment
Agreement with Cindy H. Luby providing for her employment as President and Chief
Operating Officer of the Company. The agreement terminates on December 31, 2008,
but is  automatically  extended for  additional  one-year  periods unless either
party provides written notice that no further  extensions shall be granted.  The
employment  agreement  provides for total  compensation as the sum of her annual
salary, annual bonus and annual performance bonus (if any) for that fiscal year.
The annual salary of $175,000 may be increased annually at the discretion of the
Board of Directors.  The annual bonus is calculated based on the earnings of the
Company  and is equal to the  greater  of  $100,000  or 3 1/2% of the  Company's
earnings before  interest and taxes for the fiscal year. The annual  performance
bonus may be granted each year at the discretion of the Board of Directors.

As of  December  1,  1993,  the  Company  entered  into a  five-year  employment
agreement  with its vice  president,  marketing,  which  provides  for an annual
salary of  approximately  $69,000.  He also receives  monthly  commissions in an
amount  equal to 2% of (a) all  administrative  fees paid to the Company  during
such month minus (b) the  aggregate  selling  expenses  incurred  for such month
minus (c)  $150,000.  Such  employment  agreement,  as  amended,  terminates  on
December  31,  2002.  During  the term of such  agreement,  the vice  president,
marketing, is entitled to receive an annual bonus at the discretion of the Board
of Directors.

The future aggregate minimum annual compensation required under these agreements
is approximately $744,000.

Litigation

In the normal  course of  business,  the  Company  is a party to various  claims
and/or  litigation.  Management  believes that the settlement of all such claims
and/or litigation, considered in the aggregate, will not have a material adverse
effect on the Company's financial position and results of operations.

9.  DISPUTE SETTLEMENT:

Included in Other Income is a $500,000  payment  received in December  1997,  in
connection with the settlement of a dispute with an unaffiliated party.


                                       F-14


<PAGE>

Item 8. Changes In and  Disagreements  with  Accountant  on Accounting
and Financial Disclosure

    None.




PART III

Item  9.  Directors,   Executive   Officers,   Promoters  and  Control
Persons: Compliance with Section 16 (a) of the Exchange Act

    The table below sets forth certain  information  as of January 13, 1999 with
respect to the  executive  officers and  directors  of the  Company.  Other than
Chester J. Luby and Cindy H. Luby,  who are  father  and  daughter,  none of the
executive officers or directors of the Company is related.



    Name                            Age              Position

Chester J. Luby. . . . . . . .       67   Chairman, Chief Executive Officer and
                                           Director*

Cindy H. Luby. . . . . . . . .       44   President, Chief Operating Officer
                                           and Director**

Lawrence J. Altman . . . . . .       51   Senior Vice President, Marketing

Zvi D. Sprung . . . . . . . ..       49   Chief Financial Officer, Treasurer
                                           and Secretary

William H. Brown . . . . . . .       68   Director**

Donald Kirsch. . . . . . . . . .     67   Director*

Harvey Granat . . . . . . . . .      61   Director*** 


    * Term expires 2000     
                              
  **  Term expires 2001

 ***  Term expires 1999


    The Board of Directors of the Company is divided into three classes  serving
staggered three year terms. The Company's Certificate of Incorporation  provides
that  directors may be removed with or without  cause only upon the  affirmative
vote of holders of at least 66-2/3% of the voting power of the then  outstanding
shares of any class or series of capital  stock of the Company  entitled to vote
generally in the election of directors, voting as a class.

    Chester J. Luby has been the Chairman,  Chief Executive  Officer, a director
and a principal stockholder of the Company since its inception in 1991. For more
than five years, Mr. Luby has been the president and a principal  stockholder of
Target Agency,  Inc.  ("Agency"),  Target  Insurance Ltd., a Bermuda joint stock
company  ("Target"),  and Dealers  Extended  Services,  Inc.  ("DESI"),  private
companies involved in various aspects of the insurance  business.  Mr. Luby is a
graduate  of the  University  of Chicago and Yale Law School and a member of the
New York and Florida bars.

    Cindy H. Luby was  elected  President  and Chief  Operating  Officer  of the
Company  in  December  1995 and has been a  director  of the  Company  since its
inception. Ms. Luby was Vice President,  Chief Financial Officer,  Treasurer and
Secretary of the Company from its  inception in 1991 until  December  1995.  For
more than five years,  Ms. Luby has been a vice president of Agency,  Target and
DESI. Ms. Luby is a licensed life and property and casualty  insurance agent and
is a graduate of Wellesley  College and General  Motors School of  Merchandising
and Management.

    Lawrence J.  Altman was elected  Senior  Vice  President,  Marketing  of the
Company in April 1997. Mr. Altman was Vice President,  Marketing, of the Company
since its  inception  in 1991  until  April  1997.  For more than five years Mr.
Altman has been a vice  president of Agency and DESI.  From 1973 to the present,
Mr. Altman has been in the vehicle service  contract  industry as an employee of
companies selling or designing,  marketing and  administering  such contracts as
well as an independent agent marketing such contracts.

<PAGE>

     Zvi D.  Sprung  joined the  Company in August  1995 and was  elected  Chief
Financial  Officer,  Treasurer and Secretary in December 1995.  Prior to joining
the Company, Mr. Sprung was Controller of Advanced Media, Inc. (1994-95),  Chief
Financial  Officer of Pharmhouse  Corp.  (1992-94)  and  Controller of Long Lake
Energy Corporation (1987-92). Mr. Sprung is a Certified Public Accountant in the
state of New York.

    William H. Brown has been  President  of Leroy  Holdings,  Inc., a privately
held vehicle leasing  company,  for more than the last five years. He has been a
director of the Company since September 1994.

    Donald Kirsch is Chairman and  President of The Wall Street Group,  Inc. and
President  and  Chief  Executive  Officer  of  Wall  Street  Consultants,  Inc.,
financial consulting and financial public relations firms, positions he has held
for more than five years.  He has been a director of the Company since  December
1996.

    Harvey  Granat  has  been the  President  and  Chief  Executive  Officer  of
Sterling/Carl Marks Capital,  Inc., a Small Business  Investment Company,  since
1988.  Prior to  joining  Sterling,  Mr.  Granat  was the  President  and  Chief
Executive Officer of Sussex Leasing Corp., an equipment leasing company.  He was
elected a director by the Board of Directors in January 1999.

    During the fiscal year ended  October 31,  1998,  Robert E.  Schulman  was a
member of the Board of Directors. On November 30, 1998 Mr.
Schulman resigned from the Board.

    Based  solely on its review of copies  received by the Company of reports of
ownership of and changes in ownership of  securities  filed with the  Securities
and Exchange  Commission by the Company's  officers,  directors and greater than
10% shareholders, or written representations from certain reporting persons that
no Forms 5 were required for those persons,  the Company  believes that,  during
the fiscal year ended October 31, 1998,  all filing  requirements  applicable to
its officers,  directors and greater than 10% shareholders were complied with as
required  by Section  16 (a) of the  Securities  and  Exchange  Act of 1934,  as
amended.

Item 10.  Executive Compensation

    The  following  table  summarizes  the  compensation  paid or accrued by the
Company for services  rendered during the years indicated to the Company's Chief
Executive  Officer and to its  executive  officers  whose  salaries  and bonuses
exceeded  $100,000  during the fiscal  year ended  October  31, 1998 (the "Named
Executives").  The Company did not grant any  restricted  stock  awards or stock
appreciation  rights or make any  long-term  incentive  plan payouts  during the
years indicated.
                          Summary Compensation Table


                                                    Long-Term
                                                   Compensation
                    Fiscal Year        Annual       Securities
  Name and            Ended          Compensation   Underlying     All Other
Principal Position  October 31,    Salary    Bonus   Options    Compensation (4)

Chester J.Luby (1)    1998       $200,000  $181,500     25,000      $62,865
 Chairman and Chief   1997        154,167   137,829       -          62,919
 Executive Officer    1996        153,975    72,815    170,000       62,920
        

Cindy H. Luby (2)     1998        125,000   141,100     31,000          -
 President and Chief  1997        100,961    98,450       -             -
 Operating Officer    1996        106,184    48,543    146,434          -

Lawrence J. Altman(3) 1998        217,464       -        6,000          -
 Senior Vice          1997        164,890       -         -             -
 President,           1996        134,702     5,000     26,500          -
 Marketing

(1) Annual compensation paid to Mr. Luby was pursuant to an Employment Agreement
    effective  as of December 1, 1993  between  the  Company  and Mr.  Luby,  as
    amended.

<PAGE>

(2) Annual compensation paid to Ms. Luby was pursuant to an Employment Agreement
    effective  as of December 1, 1993  between  the  Company  and Ms.  Luby,  as
    amended.  In April  1997,  the  Company  provided a loan to Ms.  Luby in the
    amount of $110,000 to assist her in the purchase of a new residence in close
    proximity  to the  Company's  offices.  The  loan  bears  interest,  payable
    quarterly in arrears, at 7% per annum, is unsecured,  and is due and payable
    in full April 2002.  The loan may be prepaid by Ms. Luby in whole or in part
    at any time. In January 1998, Ms. Luby prepaid $20,000 of the loan.
    Similarly, in January 1999, Ms. Luby prepaid an additional $20,000 of the 
    loan.

(3) Annual  compensation  paid  to Mr.  Altman  was  pursuant  to an  Employment
    Agreement  effective  as of  December  1, 1993  between  the Company and Mr.
    Altman, as amended.

(4) Amount  represents split dollar life insurance  premiums paid by the Company
    for the benefit of Mr. Luby.  Amount does not include certain other personal
    benefits,  the total  value of which was less than the  lesser of $50,000 or
    ten percent of the total salary and bonus paid or accrued by the Company for
    services rendered by such officer during the fiscal year indicated.


    In  fiscal  1998  the  Directors  of the  Company  who  were  not  otherwise
affiliated  with the Company,  received a fee of $1,000 plus travel expenses for
attendance at Board or Committee  meetings,  while Directors that were employees
of the Company did not receive any compensation for their attendance at Board or
Committee  meetings.  In  addition,  Mr.  Granat was awarded  15,000  options to
purchase  Common Stock under the Company's  1996  Incentive Plan in January 1999
upon his election to the Board of Directors.  These  options,  none of which are
currently exercisable, become exercisable at the rate of 3,000 options per year.


    The  following  table  sets forth  certain  information  concerning  options
granted  during the fiscal year ended October 31, 1998 to the Named  Executives.
The Company did not grant any stock  appreciation  rights during the fiscal year
ended October 31, 1998.

                        Option Grants in Last Fiscal Year


                Number of    Percentage of Total
                Securities      Option Shares
                Underlying     Granted Employees   Exercise Price   Expiration
 Name         Options Granted   in Fiscal 1998        Per Share        Date

Chester J.Luby (1) 25,000         25.25%              $5.375        10/08/2008
               

Cindy H. Luby  (1) 25,000         25.25%              $5.375        10/08/2008
               (2)  6,000          6.06%               9.313        01/07/2008
              
Lawrence J.    (3)  6,000          6.06%              $5.375        10/08/2008
 Altman        

(1) Grants became  exercisable in October 1998.
(2) Grants became exercisable in January 1998.
(3) Grant becomes exercisable  in October 1999, at an annual rate of 20% of the
    underlying shares of Common Stock.


    The following table sets forth information  concerning the exercise of stock
options by the Named  Executives  during the fiscal year ended  October 31, 1998
and the value of  unexercised  options as of October  31, 1998 held by the Named
Executives.


<PAGE>



               Aggregated Option Exercises in Last Fiscal Year
                                       and
                          Fiscal Year End Option Values


              Shares              Number of Securities   Value of Unexercised
             Acquired     Value   Underlying Unexercised  In-the-Money Options
            on Exercise Realized   Options at October    at October 31, 1998(1)
                                       31,1998
                                  Exercis-  Unexercis-   Exercis-    Unexercis-
                                    able        able       able          able
Chester Luby     -      $    -     207,000     18,000    $593,649     $ 95,420
Cindy Luby     3,000      21,300   185,834     14,000     521,392       74,456
Lawrence
 Altman        7,200      57,420    20,400     23,900      89,803       63,799


(1) Based on the  closing  price of the Common  Stock on NASDAQ on  October  31,
1998.

Stock Option Plan

    The  Company's  Amended and Restated 1993 Stock Option Plan, as amended (the
"Option  Plan"),  is designed to attract,  retain and motivate key  employees by
granting them options to purchase Common Stock. The Option Plan provides for the
grant of a maximum of 344,000 shares of Common Stock and permits the granting of
stock options to employees which are either  "incentive stock options"  ("ISOs")
meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or "nonqualified stock options" ("NSOs").  The Option Plan
is  administered  by a Stock Option and  Compensation  Committee of the Board of
Directors  established  for such  purpose and  consisting  of Donald  Kirsch and
William Brown, independent directors of the Company. Subject to the terms of the
Option Plan, such Committee  determines the recipients of options and the number
of options to be granted  under the Option Plan.  The Option Plan also  provides
for the Stock Option and  Compensation  Committee to establish an exercise price
for ISOs and NSOs that is not less than the fair  market  value per share at the
date of grant.  As of October 31, 1998,  options to purchase  237,334  shares of
Common  Stock  were  outstanding  under the  Option  Plan,  209,734 of which are
exercisable  at  January  13,  1999.  Under the Option  Plan,  a total of 11,500
additional options may be granted.

Incentive Plan

    The Company's  1996 Incentive Plan (the  "Incentive  Plan"),  is designed to
assist the Company in attracting and retaining selected  individuals to serve as
directors, officers, consultants, advisors and employees of the Company who will
contribute to the Company's long-term success. The Incentive Plan authorizes the
granting of incentive awards through grants of options to purchase Common Stock,
grants of Common Stock  appreciation  rights,  grants of Common  Stock  purchase
awards and grants of restricted  Common Stock.  The Incentive  Plan provides for
the grant of a  maximum  of  300,000  shares of  Common  Stock and  permits  the
granting of stock  options  which are either ISOs  meeting the  requirements  of
Section  422 of the Code,  or NSOs.  The  Incentive  Plan is  administered  by a
Committee of the Board of Directors  established for such purpose and consisting
of Donald  Kirsch and  William  Brown,  independent  directors  of the  Company.
Subject  to the terms of the  Incentive  Plan,  such  Committee  determines  the
recipients  of awards and the number of awards to be granted under the Incentive
Plan.  The  Incentive  Plan also  provides  for the  Committee  to  establish an
exercise price for ISOs and NSOs that is, in the case of ISOs, not less than the
fair market value per share at the date of grant.

    In  addition  to grants of  discretionary  awards  by the Stock  Option  and
Compensation  Committee,  the Incentive  Plan  provides for automatic  grants of
options to purchase  15,000 shares to all  independent  directors (as defined in
the Incentive  Plan) at an exercise  price equal to the fair market value of the
Common Stock,  upon the  appointment of an independent  director to the Board of
Directors.  As of October 31, 1998, options to purchase 225,700 shares of Common
Stock  were  outstanding  under  the  Incentive  Plan,   104,700  of  which  are
exercisable at January 13, 1999.


<PAGE>


Employment Agreements

    On  November  1, 1998,  the Company  entered  into an Amended  and  Restated
Employment  Agreement  with  Chester J. Luby  providing  for his  employment  as
Chairman of the Board of Directors and Chief  Executive  Officer of the Company.
This agreement  terminates on December 31, 2008.  However,  it is  automatically
extended for additional  one-year  periods unless either the Company or Mr. Luby
provides written notice that no further extensions shall be granted.

    Mr. Luby is to be paid an annual salary of $250,000,  which may be increased
annually in the discretion of the Board of Directors.  Mr. Luby is also entitled
to an annual  bonus on  account  of each  fiscal  year  equal to the  greater of
$150,000 or 4-1/2% of the Company's  earnings  before interest and taxes for the
fiscal year.  In addition to his annual  salary and bonus,  Mr. Luby may also be
paid an annual  performance  bonus in the  discretion of the Board of Directors.
However,  the amount, if any, of this bonus is determined at the sole discretion
of the members of the Board. Mr. Luby's "Total  Compensation" (as defined in the
employment  agreement)  for any fiscal  year is defined as the sum of his annual
salary, annual bonus and annual performance bonus (if any) for that fiscal year.

    Under the terms of his employment agreement, Mr. Luby is entitled to the use
of a  leased  car and  reimbursement  for all  operating  expenses  for the car,
reimbursement for travel expenses incurred in attending conferences and meetings
of certain trade  associations and certain other business and employment related
expenses,  and premium payments for split dollar life insurance policies for the
benefit  of Mr.  Luby and his  family.  With  respect to the  split-dollar  life
insurance  policies,  the premium  payments  made by the Company are recorded as
non-interest  bearing loans and total  approximately  $249,000 as of October 31,
1998.  This amount will be  reimbursed to the Company in the event of Mr. Luby's
death  or  the   termination   of  his   employment   agreement   under  certain
circumstances.

    If Mr. Luby dies during the term of his  employment  agreement,  the Company
will pay to his  estate a death  benefit  in an amount  equal to five  times Mr.
Luby's annual salary for the most recent  fiscal year  immediately  prior to his
death. If Mr. Luby's employment is terminated  because he becomes disabled,  the
Company will pay him  disability  benefits  equal to fifty  percent (50%) of his
average  Total  Compensation  during the three most recent fiscal years prior to
his  disability.  This annual  disability  benefit is payable  until Mr.  Luby's
death.  If Mr. Luby  terminates his employment by the Company for "good reason,"
as defined in the agreement,  or if the Company  terminates his employment other
than for "good cause" (as defined in the  agreement) or  disability,  then he is
entitled to be paid the amount of his Total  Compensation for the Company's most
recent fiscal year immediately  prior to his termination  multiplied by a factor
equal to the  greater  of two (2) or the number of years  (including  fractions)
remaining in the term of his  agreement.  If Mr. Luby retires during the term of
his agreement, he is to be paid retirement benefits equal to fifty percent (50%)
of his Total Compensation for the Company's most recent fiscal year prior to his
retirement. This annual retirement benefit is payable until Mr. Luby's death. If
Mr.  Luby is an  employee  of the  Company  immediately  prior to a  "Change  in
Control" of the Company, as defined in the agreement,  all stock options he owns
immediately vest and become exercisable. In addition, the Company is required to
pay Mr. Luby an amount equal to the number of shares of Common Stock  underlying
his  options  multiplied  by the  amount,  if any,  that the  lesser  of (i) the
exercise  price of Mr. Luby's options or (ii) the closing price of the Company's
shares on the date of the Change in Control,  exceeds the average  closing price
of the Company's shares during the period beginning 180 days and ending 150 days
prior to the date of the Change in Control.  Upon  receipt of this  payment from
the Company,  Mr. Luby may then retain or exercise  his options.  Alternatively,
Mr. Luby may forfeit his options to the Company in exchange for payment equal to
the difference  between the closing price of the Company's shares on the date of
the Change in Control and the exercise price of his options.

    Mr. Luby's  employment  agreement  also contains a three year  "non-compete"
clause.  This clause does not apply in the event that Mr.  Luby  terminates  his
employment  with the Company for good  reason or if the Company  terminates  Mr.
Luby's  employment  for  reasons  other than  disability  or "proper  cause," as
defined in the agreement.

    On  November  1, 1998,  the Company  entered  into an Amended  and  Restated
Employment  Agreement  with  Cindy  H.  Luby  providing  for her  employment  as
President and Chief Operating Officer of the Company.  This agreement terminates
on December 31,  2008.  However,  it is  automatically  extended for  additional
one-year  periods unless either the Company or Ms. Luby provides  written notice
that no further extensions shall be granted.

    Ms. Luby is to be paid an annual salary of $175,000,  which may be increased
annually in the discretion of the Board of Directors.  Ms. Luby is also entitled
to an annual  bonus on  account  of each  fiscal  year  equal to the  greater of
$100,000 or 3-1/2% of the Company's  earnings  before interest and taxes for the
fiscal year.  In addition to her annual  salary and bonus,  Ms. Luby may also be
paid an annual  performance  bonus in the  discretion of the Board of Directors.
<PAGE>

However,  the amount, if any, of this bonus is determined at the sole discretion
of the members of the Board.  Ms. Luby's Total  Compensation for any fiscal year
is defined as the sum of her annual salary,  annual bonus and annual performance
bonus (if any) for that fiscal year.

    Under the terms of her employment agreement, Ms. Luby is entitled to the use
of a leased car and  reimbursement  for all  operating  expenses for the car and
reimbursement for business expenses and employment  related expenses,  including
travel expenses incurred in attending  conferences and meetings of certain trade
associations and dues of certain associations.

    If Ms. Luby dies during the term of her  employment  agreement,  the Company
will pay to her  estate a death  benefit  in an amount  equal to five  times Ms.
Luby's annual salary for the most recent  fiscal year  immediately  prior to her
death. If Ms. Luby's employment is terminated because she becomes disabled,  the
Company will pay her  disability  benefits  equal to fifty  percent (50%) of her
average  Total  Compensation  during the three most recent fiscal years prior to
her disability.  This annual disability benefit is payable for the longer of two
(2) years or the balance of the term of her  employment  agreement.  If Ms. Luby
terminates her  employment by the Company for good reason,  or if her employment
is terminated by the Company for reasons other than "good cause" or  disability,
then she is  entitled  to be paid the amount of her Total  Compensation  for the
Company's  most  recent  fiscal  year  immediately   prior  to  the  termination
multiplied  by a factor  equal to the  greater of two (2) or the number of years
(including fractions) remaining in the term of her agreement.  If Ms. Luby is an
employee of the Company immediately prior to a Change in Control of the Company,
all stock options she owns immediately vest and become exercisable. In addition,
the Company is required to pay Ms. Luby an amount  equal to the number of shares
of Common Stock  underlying her options  multiplied by the amount,  if any, that
the lesser of (i) the exercise  price of Ms. Luby's  options or (ii) the closing
price of the Company's shares on the date of the Change in Control,  exceeds the
average  closing price of the Company's  shares during the period  beginning 180
days and  ending  150 days  prior to the date of the  Change  in  Control.  Upon
receipt of this payment  from the Company,  Ms. Luby may then retain or exercise
her options.  Alternatively,  Ms. Luby may forfeit her options to the Company in
exchange for payment  equal to the  difference  between the closing price of the
Company's  shares on the date of the Change in Control and the exercise price of
her options.

    Ms. Luby's  employment  agreement  also contains a three year  "non-compete"
clause.  This clause does not apply in the event that Ms.  Luby  terminates  her
employment  with the Company for good  reason or if the Company  terminates  Ms.
Luby's employment for reasons other than disability or proper cause.

    As of December  1, 1993,  the Company  entered  into a five-year  employment
agreement  with  Lawrence  J.  Altman  providing  for  his  employment  as  Vice
President,  Marketing  of the Company at an annual  salary of $69,150  including
reimbursement  of expenses  incurred in connection  with the use of his car. Mr.
Altman also  receives  monthly  commissions  in an amount equal to 2% of (a) all
administrative  fees  paid  to the  Company  during  such  month  minus  (b) the
aggregate  selling  expenses  incurred for such month minus (c)  $150,000.  Such
employment agreement,  as amended,  terminates on December 31,2002.  Pursuant to
his  employment agreement, Mr. Altman is entitled to receive during the term of
such  agreement,  an annual bonus at the  discretion of the  Company's  Board of
Directors.  Under the terms of such agreement,  if Mr. Altman's  employment with
the  Company  is  terminated  other than for cause,  he is  entitled  to receive
compensation  in an amount equal to the aggregate  salary paid or payable by the
Company to him for the most recent two fiscal years prior to his  termination of
employment.


Item 11.  Security Ownership of Certain Beneficial Owners and
Management

    The  following  table  sets  forth  information   regarding  the  beneficial
ownership of shares of Common Stock,  as of January 13, 1999, by each person who
beneficially owns more than five percent of such shares, by each director of the
Company,  by each  executive  officer of the  Company and by all  directors  and
executive officers of the Company as a group. Each person named in the table has
sole  voting and  investment  power with  respect to all shares of Common  Stock
shown as  beneficially  owned by him or it, except as otherwise set forth in the
notes to the table.


<PAGE>


                                              Shares        Percent of Shares
Name and Address of                         Beneficially       Beneficially
  Beneficial Owner                            Owned              Owned (1)

Chester J. Luby                              705,800(2)           14.5%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Joan S. Luby                                 492,500(3)           10.6%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Cindy H. Luby                                215,894(4)            4.5%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Lawrence J. Altman                            64,300(5)            1.4%
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553

Zvi D. Sprung                                 24,500(6)             -
  333 Earle Ovington Blvd.
  Mitchel Field, New York 11553


William H. Brown                              18,000(7)             -

Donald Kirsch                                 15,000(8)             -

Harvey Granat                                 15,000(9)             -

First Wilshire Securities Management, Inc.   476,300(10)          10.2%

All directors and executive officers 
 as a group (seven persons)                1,058,494              20.4%

(1) Excludes (i) 110,000  shares of Common Stock  issuable  upon the exercise of
    the Unit  Purchase  Options  issued  to the  underwriters  in the  Company's
    initial  public  offering and (ii) 110,000  shares of Common Stock  issuable
    upon  exercise of the Warrants  issued as part of the Units  comprising  the
    Unit Purchase Options.  Amount and Percent of Shares  Beneficially Owned was
    computed  based on 4,655,616  shares of Common Stock  outstanding on January
    13, 1999 and, in each  person's  case,  the number of shares of Common Stock
    issuable upon the exercise of options and/or  Independent  Director Warrants
    (defined  below) held by such person,  or in the case of all  directors  and
    executive officers as a group, the number of shares of Common Stock issuable
    upon the exercise of options and/or  Independent  Director  Warrants held by
    all such members of such group, but does not include the number of shares of
    Common Stock  issuable  upon the exercise of any other  outstanding  options
    and/or Independent Director Warrants.

(2) Includes 225,000 shares issuable upon the exercise of stock options, 214,000
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 12,000 options per year.

(3) Includes 15,000 shares  issuable upon the exercise of stock options,  all of
    which are currently exercisable.

(4) Includes 199,834 shares issuable upon the exercise of stock options, 190,834
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 11,800 options per year. Also includes 960 shares
    owned by Ms.  Luby's  husband,  as to which Ms.  Luby  disclaims  beneficial
    ownership.

(5) Includes 44,300 shares  issuable upon the exercise of stock options,  21,900
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 14,300 options per year.

<PAGE>

(6) All of these shares are issuable upon the exercise of stock  options,  7,300
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 4,900 options per year.

(7) Includes (a) 10,000  shares  issuable  upon the  exercise of stock  options,
    5,000 of which are  currently  exercisable  and the balance of which  become
    exercisable  in April 1999 and (b) 1,200 shares  issuable  upon  exercise of
    warrants to purchase Common Stock (the "Independent Director Warrants"), 600
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable at the rate of 600 Independent Director Warrants per year.

(8) All of these shares are issuable upon the exercise of stock options,  10,000
    of  which  are  currently  exercisable  and  the  balance  of  which  become
    exercisable in December 1999.

(9) All of these shares are issuable upon the exercise of stock options, none of
    which are currently  exercisable and which become exercisable at the rate of
    3,000 options per year beginning in January 2000.

(10)Based on  information  provided in Schedule  13G  supplied to the Company in
    February 1998.  First  Wilshire  Securities  Management,  Inc., a broker and
    investment advisor, has sole voting power over 96,000 of the 476,300 shares.


Item 12.  Certain Relationships and Related Transactions

    In January 1998, the Company  entered into an agreement with a subsidiary of
Orion  Capital  ("Orion")  to  underwrite  a portion of the  insurance  coverage
arranged by the Company for its service contract customers.  Concurrently, Orion
entered into a reinsurance  agreement with Target which provided reinsurance for
losses to Orion under its agreement with the Company. During fiscal 1998, Target
received  approximately  $2,100 in premiums under its agreement  with Orion.  In
addition,  in January  1998,  NSC entered into a  reinsurance  agreement  with a
subsidiary of Orion which provides  reinsurance  for losses to NSC under certain
circumstances.  Concurrently,  the Company  entered into agreements to indemnify
Orion and Target for any losses  incurred under the  aforementioned  agreements.
There were no such losses,  and there were no payments made by the Company under
the indemnification agreements in fiscal 1998.



<PAGE>

Item 13.  Exhibits, List and Reports on Form 8-K

  A) Exhibits

  Exhibit
  No.                          Description

  2.1  Certificate of Merger of INDS Holdings,  Inc. ("Holdings") into
        the Company.(1)
  3.1 Restated Certificate of Incorporation of the Company.(1)
  3.2 Bylaws of the Company, as amended.(1)
  3.3 Amended and Restated Certificate of Incorporation of the Company.(1)
  3.4  Amended and Restated Bylaws of the Company.(1)
  4.1  Form of Common Stock Certificate.(1)
  4.2  Form of Warrant Agreement and Form of Warrant Certificates.(1)
  4.3  Form  of  Unit  Purchase  Option  Agreement  and  Form  of Unit
        Purchase Option Certificate.(1)
  4.4 Rights  Agreement  dated as of October  24,  1995  between the Company and
       Continental Stock Transfer & Trust Company, which includes as exhibits 
       the Form of Right  Certificate as Exhibit A and the Summary of Rights to 
       Purchase  Common Shares as Exhibit B.(2)
 10.1  Amended  and  Restated  Employment  Agreement  between  the Company and
        Chester J. Luby, dated as of November 1, 1998.
 10.2  Amended  and  Restated  Employment Agreement between the Company and
        Cindy H. Luby, dated as of November 1, 1998.
 10.3  Employment  Agreement between the Company and Lawrence J.Altman, dated
        as of December 1, 1993.(1)
 10.4  Amended and Restated 1993 Stock Option Plan.(1)
 10.5  Restated Contingent Claim Reserve and Administration Escrow Contract,
        dated August 7, 1991,  among  Seller (as predecessor-in-interest to the
        Company), The  Travelers Indemnity Company ("Travelers"), Brokerage
        Professionals, Inc. ("BPI") and The Massachusetts Company, Inc. (the
        "Escrow Agent").(1)
 10.6  Replacement  Administrator Agreement, dated October  1, 1991, among 
        INDS Group Inc. (The "Seller")(as  predecessor-in-interest to the
        Company), Travelers, BPI and Automotive Professionals, Inc. ("API").(1)
 10.7  INDS/BPI-Program  Agreement, dated October 1, 1991, among Seller (as
        predecessor-in-interest to the Company), Travelers and BPI.(1)
 10.8  Escrow Account Agreement for Automobile Vehicle Service Contract Primary
        Loss Primary  Loss  Reserve  Funds,  dated  August 22,  1991,  among
        Seller (as predecessor-in-interest to the Company), BPI and the Escrow
        Agent.(1)
 10.9  Assumption of  Contracts, Rights and Actions, dated November 1, 1991,
        among the Company, Seller and Travelers.(1)
 10.10 Assumption of  Contracts, Rights and Actions, dated November 1, 1991,
        among the Company, Seller and BPI.(1)
 10.11 Assumption of  Contracts, Rights and Actions, dated November 1, 1991,
        among the Company, Seller and the Escrow Agent.(1)
 10.12 Assumption of  Contracts, Rights and Actions, dated November 1, 1991,
        among the Company, Seller and the API.(1)
 10.13 Form of Independent Agent Agreement.(1)
 10.14 Form of Administrator  Agreement.(1)
 10.15 Form of Dealer Administrator Agreement.(1)
 10.16 Form of Service Contract Financing Program Agreement.(1)
 10.17 Amendment to Amended and Restated 1993 Stock Option Plan.(1)
 10.18 Lease,  dated December 2, 1994, between The Omni Partners,a Limited
        Partnership, as lessor, and the Company, as lessee.(3)


<PAGE>


Exhibit
  No.                          Description


 10.19 Amendment to Employment Agreement between the Company and Lawrence J.
        Altman, dated as of May 1, 1996.(4)
 10.20 1996 Incentive Plan. (5)
 21.1  List of Subsidiaries.
 27    Financial Data Schedule. (6)


 (1)  Incorporated  by  reference  to  Registration  Statement on Form
       SB-2, File No. 33-74222-NY.
 (2)  Incorporated  by  reference  to  Registration  Statement on Form
       8-A dated October 26, 1995.
 (3)  Incorporated  by reference  to Annual  Report on Form 10-KSB for
       the fiscal year ended October 31, 1994.
 (4)  Incorporated  by reference  to Annual  Report on Form 10-KSB for
       the fiscal year ended October 31, 1996.
 (5)  Incorporated  by  reference  to  Registration  Statement on Form
       S-8, File No. 333-09571.
 (6)  This Exhibit is filed for EDGAR filing purposes only.



  B) Reports on Form 8-K.

    No  reports on Form 8-K were  filed  during  the last  quarter of the period
 covered by this report.



<PAGE>


                                   SIGNATURES


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

                            INTERSTATE   NATIONAL  DEALER  SERVICES, INC.

  January 19, 1999

                            By             /s/Cindy H. Luby
                                          Cindy H. Luby
                              President and Chief Operating Officer


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

           Signature                             Title


        /s/Chester J. Luby           Chairman of the Board
         Chester J. Luby               (Chief Executive Officer)


        /s/Cindy H. Luby             President and Director
         Cindy H. Luby                 (Chief Operating Officer)


        /s/Zvi D. Sprung             Chief Financial Officer
         Zvi D. Sprung                 (Chief Accounting Officer)


        /s/William H. Brown          Director
         William H. Brown


       /s/Donald Kirsch             Director
         Donald Kirsch


        /s/Harvey Granat             Director
         Harvey Granat