<PAGE>


===============================================================================


                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                FORM 10-QSB

         /X/   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934
                                       
               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                        COMMISSION FILE NUMBER 0-23928

                           PDS FINANCIAL CORPORATION
            (Exact name of Registrant as specified in its charter)



     MINNESOTA                                       41-1605970
(State or other jurisdiction of                   (I.R.S. Employer
 incorporation or organization)                   Identification Number)

                  6171 MCLEOD DRIVE, LAS VEGAS, NEVADA  89120
                   (Address of principal executive offices)

                                (702) 736-0700
                          (Issuer's telephone number)


     Check whether the registrant (1) filed all reports required to be filed 
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 
12 months (or for such shorter period that the Registrant was required to 
file such reports), and (2) has been subject to such filing requirements for 
the past 90 days.  Yes __X__   No ____
     
     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date:

<TABLE>
<CAPTION>
          Class                         Outstanding as of October 31, 1998
          -----                         ----------------------------------
<S>                                    <C>
Common Stock, $.01 par value                     3,648,211 shares

</TABLE>

===============================================================================

<PAGE>

                           PDS FINANCIAL CORPORATION

                                     INDEX

                        PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
Item 1.  Financial Statements                                             Page(s)
                                                                          -------
<S>     <C>                                                               <C>
         Condensed Consolidated Statement of Income (Unaudited)
              For the Three Months and Nine Months Ended September 30,
              1998 and 1997                                                   2

         Condensed Consolidated Balance Sheet
              As of September 30, 1998 (Unaudited) and December 31, 1997      3

         Condensed Consolidated Statement of Cash Flows (Unaudited)
              For the Nine Months Ended September 30, 1998 and 1997           4

         Notes to Condensed Consolidated Financial Statements (Unaudited)   5-6

         Report of Independent Accountants                                   7

Item 2.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations                           8-15



                          PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K                                     16
</TABLE>


                                      1

<PAGE>

PART I-  FINANCIAL INFORMATION
ITEM  1. FINANCIAL STATEMENTS

                     PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED STATEMENT OF INCOME
                                (UNAUDITED)
<TABLE>
<CAPTION>
                                                       Three months ended September 30,     Nine months ended September 30,
                                                       --------------------------------     ------------------------------
                                                               1998           1997                 1998          1997
                                                           ----------    -----------          -----------    -----------
<S>                                                        <C>           <C>                 <C>             <C>
REVENUES                                                                                
     Equipment sales                                       $2,517,298                         $18,867,933
     Revenue from sales-type leases                         2,068,034    $13,048,913            3,334,672    $13,048,913
     Rental revenue on operating leases                     1,349,337      3,277,882            4,974,020      9,090,165
     Fee income (loss)                                       (128,914)       819,919            1,238,939      2,328,457
     Finance income                                           948,660        424,834            2,065,724      1,262,024
     Other income, net                                            337         (5,076)               1,061          3,152
                                                           ----------    -----------          -----------    -----------
                                                                                        
          Total revenues                                    6,754,752     17,566,472           30,482,349     25,732,711
                                                           ----------    -----------          -----------    -----------
COSTS AND EXPENSES                                                                      
     Equipment sales                                        1,323,190                          15,538,415
     Sales-type leases                                      1,845,347     12,457,651            2,872,590     12,457,651
     Depreciation on operating leases                         880,814      2,506,687            3,729,402      6,797,827
     Selling, general and administrative                    1,201,884        900,595            3,551,195      2,206,183
     Interest                                               1,434,486      1,246,520            3,528,593      3,312,440
                                                           ----------    -----------          -----------    -----------
                                                                                        
          Total costs and expenses                          6,685,721     17,111,453           29,220,195     24,774,101
                                                           ----------    -----------          -----------    -----------
                                                                                        
Income before income taxes                                     69,031        455,019            1,262,154        958,610
                                                                                        
Provision for income taxes                                     27,000        175,000              480,000        366,000
                                                           ----------    -----------          -----------    -----------
                                                                                        
          Net income                                       $   42,031    $   280,019          $   782,154     $  592,610
                                                           ----------    -----------          -----------    -----------
                                                           ----------    -----------          -----------    -----------
                                                                                        
Earnings per share:                                                                     
     Basic                                                     $  .01         $  .09               $  .22         $  .19
     Diluted                                                   $  .01         $  .08               $  .21         $  .18
                                                                                        
Number of shares used to compute per share amounts:                                     
     Basic                                                  3,644,008      3,134,441            3,599,177      3,124,691
     Diluted                                                3,797,806      3,299,189            3,815,037      3,211,414
</TABLE>

     See accompanying notes to condensed consolidated financial statements


                                      2

<PAGE>


                     PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                        CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                               September 30,         December 31,
                                                                   1998                  1997
                                                                   ----                  ----
ASSETS                                                          (Unaudited)       
<S>                                                            <C>                  <C>
Cash and cash equivalents                                       $    403,042         $  1,865,468
Restricted cash                                                    2,552,359      
Accounts receivable                                                1,832,287            1,715,154
Notes receivable, net                                             22,671,068            3,140,964
Net investment in leasing operations:                                             
     Equipment under operating leases, net                        15,078,653           18,327,490
     Direct finance leases                                         8,716,781            5,976,368
     Equipment held for sale or lease                             10,180,249            6,289,900
Deferred income taxes                                                851,000              824,000
Other assets                                                       3,385,632            1,824,488
                                                                ------------         ------------
                                                                                  
          Total assets                                          $ 65,671,071         $ 39,963,832
                                                                ------------         ------------
                                                                ------------         ------------
                                                                                  
LIABILITIES AND STOCKHOLDERS' EQUITY                                              
Accounts payable and accrued expenses                           $  3,199,373         $  2,094,178
Deferred funds for pending transactions                            1,406,798              775,159
Discounted lease rentals                                           3,334,997            5,919,579
Notes payable                                                     32,595,502           21,527,311
Subordinated debt                                                 13,124,911               89,117
Other liabilities                                                  1,425,138              929,142
                                                                ------------         ------------
                                                                                  
          Total liabilities                                       55,086,719           31,334,486
                                                                ------------         ------------
Stockholders' equity:                                                             
    Common stock, $.01 par value, 20,000,000 shares                               
        authorized, 3,648,211 and 3,523,972 issued                                
        and outstanding in 1998 and 1997, respectively                36,482               35,240
    Additional paid-in capital                                    10,866,665            9,695,056
    Retained earnings (accumulated deficit)                         (318,795)          (1,100,950)
                                                                ------------         ------------
                                                                                  
          Total stockholders' equity                              10,584,352            8,629,346
                                                                ------------         ------------
                                                                                  
          Total liabilities and stockholders' equity            $ 65,671,071           39,963,832
                                                                ------------         ------------
                                                                ------------         ------------
</TABLE>

     See accompanying notes to condensed consolidated financial statements


                                      3

<PAGE>

                     PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                    (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                 Nine months ended September 30,
                                                                                 -------------------------------
                                                                                       1998          1997
                                                                                       ----          ----
<S>                                                                              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                                 $    782,154    $    592,610
     Adjustments to reconcile net income to net cash
             provided by (used in) operating activities:
        Depreciation on operating leases                                           3,729,402       6,797,827
        Gain on sale of financial assets                                          (2,205,285)     (1,977,130)
        Purchases/originations of notes receivable
             and direct finance leases                                           (25,833,343)    (16,462,743)
        Proceeds from:
             Sale of notes receivable and direct finance leases                    4,743,462      18,578,609
             Collection of notes receivable and direct finance leases              3,321,175       4,641,580
        Increase in equipment held for sale or lease                             (3,890,349)      (2,827,781)
        Changes in other operating assets and liabilities, net                     1,939,491         216,570
                                                                                ------------    ------------

                Net cash provided by (used in) operating activities              (17,413,293)      9,559,542
                                                                                ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of equipment for leasing                                           (6,294,884)    (10,642,672)
     Proceeds from sale of leased equipment                                        3,702,576         145,064
     Other, net                                                                     (186,871)       (181,445)
                                                                                ------------    ------------

                Net cash used in investing activities                             (2,779,179)    (10,679,053)
                                                                                ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from subordinated debt and warrants                                 13,800,000
     Payment of debt issuance costs                                              (1,560,272)
     Proceeds from notes payable                                                  22,550,348       5,430,193
     Proceeds from discounted lease rentals                                          692,428       4,686,088
     Payments on notes payable                                                   (13,957,495)     (3,495,486)
     Payments on discounted lease rentals                                         (3,047,611)     (6,523,519)
     Payments on subordinated debentures                                             (38,886)       (724,285)
     Proceeds from exercise of stock options                                         291,534               -
                                                                                ------------    ------------

                Net cash provided by (used in) financing activities               18,730,046        (627,009)
                                                                                ------------    ------------

Net decrease in cash and cash equivalents                                         (1,462,426)     (1,746,520)

Cash and cash equivalents at beginning of period                                   1,865,468       2,760,200
                                                                                ------------    ------------

Cash and cash equivalents at end of period                                      $    403,042    $  1,013,680
                                                                                ------------    ------------
                                                                                ------------    ------------
</TABLE>


     See accompanying notes to condensed consolidated financial statements


                                      4

<PAGE>

                  PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.   BASIS OF PRESENTATION

     The condensed consolidated financial statements as of September 30, 1998
and for the three and nine months ended September 30, 1998 and 1997 included in
this Form 10-QSB have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed
or omitted pursuant to such rules and regulations.  The condensed consolidated
balance sheet at December 31, 1997 has been derived from the audited financial
statements as of that date and condensed.  These condensed consolidated
financial statements should be read in conjunction with the financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997.  PricewaterhouseCoopers LLP,
the Company's independent accountants, has performed limited reviews of the
interim financial statements included herein.  Their report on such reviews
accompanies this filing.

     The condensed consolidated financial statements presented herein as of
September 30, 1998 and for the three and nine months ended September 30, 1998
and 1997 are unaudited, but in the opinion of management, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for
the periods presented.  The results of operations for any interim period are
not necessarily indicative of results for the full year.

2.   BORROWINGS

     In May 1998, the Company renewed its agreement with a bank to provide a
$1.0 million working capital line of credit through May 31, 1999. Terms of the
renewed agreement are consistent with the prior agreement.

     In May 1998, the Company completed a $13.8 million public debt offering.
The Company sold 13,800 investment units (the "Units"), each consisting of a
10% Senior Subordinated Note, due July 1, 2004, in the principal amount of
$1,000 (the "Notes") and fifty detachable warrants (the "Warrants") to purchase
fifty shares of the Company's common stock.  Interest on the Notes is payable
quarterly, beginning October 1, 1998.  Each year beginning July 1, 2000, Notes
having an aggregate balance of $2.1 million will be selected at random for
mandatory redemption.  The Warrants have a five year term and an exercise price
of $12.25 per share of common stock.  The Units and the Notes will not be
listed on any securities exchange or on the Nasdaq System.  The Warrants are
listed on The Nasdaq National Market under the trading symbol "PDSFW." Net
proceeds to the Company of $12.2 million, including proceeds from the over-
allotment, will be used to purchase gaming machines, to expand the Company's
leasing activities and for general corporate purposes.

     Also in May 1998, the Company entered into an agreement with a financial
institution to provide the Company a $5.0 million loan.  The net proceeds to
the Company of $4.8 million were deposited in a restricted escrow account.
Advances under the loan are collateralized by certain leases, notes and related
equipment, and bear interest at 10.25%.


                                      5

<PAGE>

                  PDS FINANCIAL CORPORATION AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

     In August 1998, the Company renewed its working capital line of credit
with a bank and increased the amount of the line to $4.0 million.  Terms of the
renewed agreement are consistent with the prior agreement

     At September 30, 1998, the Company's revolving credit and working capital
borrowing capability was $40.0 million and advances under these agreements
aggregated $14.9 million.
     

3.   EARNINGS PER SHARE

     The Company calculated basic and diluted earnings per share as follows:

<TABLE>
<CAPTION>
                                                 Three months ended September 30,    Nine months ended September 30,
                                                 --------------------------------    -------------------------------
                                                          1998           1997                 1998          1997
                                                          ----           ----                 ----          ----
<S>                                                 <C>            <C>                  <C>           <C>
Net income, basic                                    $  42,031      $ 280,019            $ 782,154     $ 592,610
Interest expense on convertible
   Subordinated debentures, net of tax                     182          --                   1,531         --
                                                     ---------      ---------            ---------     ---------
Net income, diluted                                  $  42,213      $ 280,019            $ 783,685     $ 592,610
                                                     ---------      ---------            ---------     ---------
                                                     ---------      ---------            ---------     ---------

Weighted average shares outstanding:
   Basic (actual shares outstanding)                 3,644,008      3,134,441            3,599,177     3,124,691
   Effect of dilutive options                          144,480        164,748              183,607        86,723
   Effect of dilutive warrants                           3,470         22,044
   Effect of convertible subordinated
      Debentures                                         5,848          --                  10,209         --
                                                     ---------      ---------            ---------     ---------
  Diluted                                            3,797,806      3,299,189            3,815,037     3,211,414
                                                     ---------      ---------            ---------     ---------
                                                     ---------      ---------            ---------     ---------

Per share amounts:
   Basic                                             $     .01      $     .09            $     .22     $     .19
                                                     ---------      ---------            ---------     ---------
                                                     ---------      ---------            ---------     ---------
   Diluted                                           $     .01      $     .08            $     .21     $     .18
                                                     ---------      ---------            ---------     ---------
                                                     ---------      ---------            ---------     ---------
</TABLE>

4.   COMPREHENSIVE INCOME

     As of January 1, 1998, the Company adopted Statement of Financial 
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). 
SFAS 130 establishes new rules for the reporting of comprehensive income and 
its components; however, the adoption of SFAS 130 had no impact on the 
Company's net income or stockholders' equity.  SFAS 130 requires unrealized 
gains or losses on the Company's investments in equity securities to be 
included as a component of other comprehensive income.

     During the three months ended September 30, 1998 and 1997, total 
comprehensive income amounted to $29,129 and $279,928 respectively.  During 
the nine months ended September 30, 1998 and 1997, total comprehensive income 
amounted to $781,435 and $635,595 respectively.  Accumulated other 
comprehensive loss at September 30, 1998 and December 31, 1997 was $38,210 
and $37,491, respectively.

                                      6

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and
Stockholders of PDS Financial Corporation:

     We have reviewed the accompanying condensed consolidated balance sheet 
of PDS Financial Corporation and subsidiaries as of September 30, 1998, and 
the related condensed consolidated statements of income for the three and 
nine months ended September 30, 1998 and 1997, and the condensed consolidated 
statements of cash flows for the nine months ended September 30, 1998 and 
1997. These financial statements are the responsibility of the Company's 
management.

     We conducted our reviews in accordance with standards established by the 
American Institute of Certified Public Accountants.  A review of interim 
financial information consists principally of applying analytical procedures 
to financial data and making inquiries of persons responsible for financial 
and accounting matters.  It is substantially less in scope than an audit 
conducted in accordance with generally accepted auditing standards, the 
objective of which is the expression of an opinion regarding the financial 
statements taken as a whole.  Accordingly, we do not express such an opinion.

     Based on our reviews, we are not aware of any material modifications 
that should be made to the accompanying condensed consolidated financial 
statements for them to be in conformity with generally accepted accounting 
principles.

     We have audited, in accordance with generally accepted auditing 
standards, the consolidated balance sheet of PDS Financial Corporation and 
subsidiaries as of December 31, 1997, and the related consolidated statements 
of income, stockholders' equity and cash flows for the year then ended (not 
presented herein); and in our report dated March 20, 1998, we expressed an 
unqualified opinion on those consolidated financial statements.  In our 
opinion, the information set forth in the accompanying condensed consolidated 
financial statements is fairly stated, in all material respects, in relation 
to the consolidated financial statement from which it has been derived.



PricewaterhouseCoopers LLP
Minneapolis, Minnesota
October 28, 1998




                                      7

<PAGE>

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

GENERAL

     The Company is engaged in the business of financing and leasing gaming 
equipment and supplying reconditioned gaming devices to casino operators.  
The gaming equipment financed by the Company consists mainly of slot 
machines, video gaming machines and other gaming devices.  In addition, the 
Company finances furniture, fixtures and other gaming related equipment, 
including gaming tables and chairs, restaurant and hotel furniture, vehicles, 
security and surveillance equipment, computers and other office equipment. 
SlotLease is the Company's specialized operating lease program for slot 
machines and other electronic gaming devices.  The Company believes it is 
currently the only independent leasing company licensed in the states of 
Nevada, New Jersey, Colorado, Indiana, Iowa and Minnesota to provide this 
financing alternative. In 1997, the Company established PDS Slot Source, a 
reconditioned gaming device sales and distribution division, to complement 
its leasing and financing activities and to generate equipment sales to 
casino operators.

     The Company's strategy is to increase its portfolio of assets under 
lease and reconditioned gaming device sales, and thereby increase revenues 
and cash flows.  In addition to its leasing activities, the Company also 
originates note transactions, which it generally sells to institutional 
investors.  In some of its transactions, the Company holds the leases or 
notes for a period of time after origination, or retains a partial ownership 
interest in the leases or notes. The Company believes its ability to 
recondition and distribute used gaming devices enhances the gaming devices' 
values at the end of an operating lease and facilitates additional financing 
transactions.

     The Company's quarterly operating results, including net income, have 
historically fluctuated due to the timing of completion of large financing 
transactions, as well as the timing of recognition of the resulting fee 
income upon subsequent sale. These transactions can be in the negotiation and 
documentation stage for several months, and recognition of the resulting fee 
income by the Company may fluctuate greatly from quarter to quarter. Thus, 
the results of any quarter are not necessarily indicative of the results 
which may be expected for any other period.  The Company believes that the 
development of its lease portfolio and reconditioned gaming device division 
will lead to increased recurring revenues, which will tend to lessen the 
fluctuations of its operating results.


ACCOUNTING FOR COMPANY ACTIVITIES

     The accounting treatment for the Company's financing activities varies 
depending upon the underlying structure of the transaction. The majority of 
the Company's equipment financing transactions are structured as either notes 
receivable or direct finance leases in which substantially all benefits and 
risks of ownership are borne by the borrower or lessee.  Direct finance 
leases are afforded accounting treatment similar to that for notes 
receivable. The Company structures some of its gaming equipment financings as 
operating leases, under which the Company retains substantially 

                                      8

<PAGE>

all of the benefits and risks of ownership. In the third quarter of 1997, the 
Company began structuring certain of its gaming equipment transactions as 
sales-type leases.
     
     The Company's revenue generating activities can be categorized as 
follows: (i) equipment sales; (ii) rental revenue on operating leases; 
(iii) revenue from sales-type leases; (iv) fee income, resulting principally 
from the sale of lease or note receivable transactions; and (v) finance 
income, resulting from financing transactions in which the direct finance 
lease or note receivable is retained by the Company.

     The types of income are further described below:

     EQUIPMENT  SALES.  In mid-1997, the Company established a reconditioned 
gaming device sales and distribution division, PDS Slot Source.  Used gaming 
devices are obtained by the Company either from its customers at the end of 
an applicable lease term, or in the marketplace.  The cost of this equipment 
is recorded in the consolidated balance sheet as equipment held for sale or 
lease. At the time of sale, the Company records revenue equal to the selling 
price of the related asset.  Upon selling reconditioned gaming devices, the 
Company removes the underlying asset from its consolidated balance sheet and 
records the cost, including reconditioning cost, as cost of revenues.  
Equipment sales also includes the sale of equipment which may occur during 
the term of an operating lease.

     RENTAL REVENUE ON OPERATING LEASES.  Operating leases are defined as 
those leases in which substantially all the benefits and risks of ownership 
of the leased asset are retained by the Company.  Revenue from operating 
leases consists of monthly rentals and is reflected in the consolidated 
income statement evenly over the life of the lease as rental revenue on 
operating leases.  The cost of the related equipment is depreciated on a 
straight-line basis over the lease term to the Company's estimate of residual 
value.  This depreciation is reflected on the consolidated income statement 
as depreciation on operating leases.  For operating leases, the cost of 
equipment, less accumulated depreciation, is recorded in the consolidated 
balance sheet as equipment under operating leases, net.

     REVENUE FROM SALES-TYPE LEASES.  Beginning in the third quarter of 1997, 
the Company structured certain of its gaming equipment transactions as 
sales-type leases.  Sales-type leases, like direct finance leases, transfer 
substantially all the benefits and risks of ownership of the leased asset to 
the lessee. Unlike direct finance leases, sales-type leases also include 
dealer profit resulting from the Company leasing equipment which was 
purchased at a discount that is not available to the lessee.  This dealer 
profit is recognized at the inception of the lease as the difference between 
revenue from sales-type leases and sales-type lease cost.  Revenue from 
sales-type leases is the present value of the future minimum lease payments.  
Sales-type lease cost is the Company's equipment cost, net of any discounts, 
less the present value of its unguaranteed residual value.  Upon selling a 
sales-type lease to a third party, the Company removes the underlying asset 
from its consolidated balance sheet.

     FEE INCOME.  The Company funds much of the direct finance lease and note 
transactions it originates through a sale of such transactions (i.e., the 
sale of all of the Company's right, title and interest in the future payment 
stream from the related leases or notes).  A sale may occur simultaneously 
with the origination or several months thereafter.  At the time of sale, the 
Company records fee income equal to the difference between the selling price 
and the carrying value of the related financial asset.  The calculation of 
fee income reflects many factors, including the credit 

                                      9

<PAGE>

quality of the borrowers or lessees, the type of underlying equipment, credit 
enhancements, if any and ultimately, the terms under which the transaction 
was both originated and sold. Fee income also includes commissions earned for 
arranging financing in which the Company is not a party to the transaction.  
Upon the sale of a lease or note, the Company removes the underlying asset 
from its consolidated balance sheet.

     FINANCE INCOME.  For the period during which the Company holds a note 
receivable or direct finance lease, finance income is recognized over the 
term of the underlying lease or note in a manner which produces a constant 
percentage rate of return on the asset carrying cost.  For those direct 
finance leases held by the Company, the present value of the future minimum 
lease payments are recorded in the consolidated balance sheet as direct 
finance leases.


RESULTS OF OPERATIONS

Three Months Ended September 30, 1998 and 1997

     Revenues for the third quarter of 1998 totaled $6.8 million, a decrease 
of $10.8 million from $17.6 million in the third quarter last year.  The 
decrease in revenues is primarily attributable to a decrease in transactions 
classified as sales-type leases.  Gross originations of financing 
transactions for the three months ended September 30, 1998 decreased to 
$11.5 million compared to $18.7 million for the same period in 1997.  The 
originations in the third quarter of 1997 included $13.0 million of 
sales-type leases involving third party equipment (not equipment supplied by 
PDS Slot Source).

     Equipment sales totaled $2.5 million in the third quarter of 1998.  The 
Company did not sell equipment in the third quarter of 1997.  The Company has 
obtained its gaming equipment distributor licenses in Nevada, New Jersey, 
Colorado, Indiana, Iowa and Minnesota and in mid-1997 established its 
reconditioned gaming device sales and distribution division, PDS Slot Source. 
The 1998 equipment sales include both equipment which had been under 
operating leases, and used gaming devices which the Company purchased in the 
marketplace and reconditioned prior to sale.  The cost of equipment sold was 
$1.3 million

     Revenue from sales-type leases was $2.1 million during the third quarter 
of 1998 compared with $13.0 million in the third quarter of 1997.  The higher 
revenue in the 1997 quarter results primarily from the delivery of equipment 
to a new casino, which was opening at that time.  PDS Slot Source marketed 
the equipment leased in the third quarter of 1998; while an unrelated gaming 
equipment manufacturer supplied the equipment leased in the third quarter of 
1997.  The related cost of these sales-type leases was $1.8 million and 
$12.5 million in 1998 and 1997, respectively.
     
     The Company's average operating lease portfolio was $14.6 million during 
the third quarter of 1998 as compared to $32.5 million one year earlier.  The 
decrease in the average portfolio resulted from the sale (primarily in the 
fourth quarter of 1997) of certain of the equipment which had been under 
operating leases. Rental revenue on operating leases decreased to 
$1.3 million from $3.3 million.  Related depreciation also decreased to 
$.9 million from $2.5 million. These leases are expected to generate revenues 
throughout their lease terms, which range from 24 to 48 months and are 
typically 36 months.

                                      10

<PAGE>

     Fee income was a loss of $129,000 resulting from a prepayment premium, 
which the Company incurred and paid during the third quarter of 1998.  The 
Company's strategy is to increase its portfolio of income-producing assets, 
rather than earning fees by selling transactions.  Nonetheless, market 
conditions delayed the Company from selling certain transactions during the 
third quarter of 1998.  The Company generated fee income of $820,000 related 
to the sale of transactions with a basis of $25.6 million in the three months 
ended September 30, 1997.

     Finance income increased $524,000 to $949,000 for the three months ended 
September 30, 1998, compared to $425,000 during the three months ended 
September 30, 1997.  Consistent with the Company's strategy, the increase 
primarily reflects a larger portfolio of notes receivable and direct finance 
leases held by the Company during the third quarter of 1998 as compared to 
the third quarter of 1997.

     Selling, general and administrative expenses increased to $1.2 million 
for the three months ended September 30, 1998, compared to $.9 million in the 
same period of 1997.  The increase in the 1998 period is primarily 
attributable to higher payroll and occupancy costs associated with the 
expansion of sales activities and the formation of the reconditioned gaming 
device division in Las Vegas, Nevada.
     
     Interest expense increased $188,000 primarily because of the higher 
levels of borrowings related to the larger portfolio of notes receivable, 
direct finance leases and inventory held by the Company during the third 
quarter of 1998 as compared to the third quarter of 1997.

     Income before income taxes decreased to $69,000 in the third quarter of 
1998, compared with $455,000 in the same period last year.  The lower third 
quarter 1998 income before income taxes primarily reflects the lower profit 
contribution from fee income, as described above.

     The effective income tax rate was 39.1% in the three months ended 
September 30, 1998, compared with 38.5% in the three months ended September 30,
1997.  In both periods, the effective rate was higher than the federal 
statutory tax rate of 34%, due primarily to state income taxes.


Nine Months Ended September 30, 1998 and 1997

     Revenues for the nine months ended September 30, 1998 totaled 
$30.5 million, an increase of $4.8 million from $25.7 million in the first 
nine months of last year. The increase in revenues is primarily attributable 
to higher equipment sales, partially offset by lower rental revenues. Gross 
originations of financing transactions for the nine months ended September 
30, 1998 were $43.7 million compared to $72.6 million for the same period in 
1997.

     Equipment sales totaled $18.9 million in the first nine months of 1998. 
The Company did not sell equipment in the first nine months of 1997. The 1998 
equipment sales include both equipment which had been under operating leases, 
and used gaming devices which the Company purchased in the marketplace and 
reconditioned prior to sale. The cost of equipment sold was $15.5 million

     Revenue from sales-type leases was $3.3 million during the first nine 
months of 1998 compared with $13.0 million in the first nine months of 1997. 
The higher revenue in the 1997 

                                      11

<PAGE>

period results primarily from the delivery of equipment to a new casino, 
which was opening at that time. PDS Slot Source marketed the equipment leased 
in the 1998 period; while an unrelated gaming equipment manufacturer supplied 
the equipment leased in the 1997 period.  The related cost of these 
sales-type leases was $2.9 million and $12.5 million in 1998 and 1997, 
respectively.

     The Company's average operating lease portfolio was $15.4 million during 
the first nine months of 1998 as compared to $30.4 million one year earlier. 
The decrease in the average portfolio resulted from the sale (primarily in 
the fourth quarter of 1997) of certain of the equipment which had been under 
operating leases. Rental revenue on operating leases decreased to $5.0 million
from $9.1 million. Related depreciation also decreased to $3.7 million
from $6.8 million. These leases are expected to generate revenues throughout 
their lease terms, which range from 24 to 48 months and are typically 36 
months.
     
     Fee income decreased $1.1 million to $1.2 million related to the sale of 
transactions with a basis of $17.6 million in the nine months ended 
September 30, 1998, compared to fee income of $2.3 million on the sale of 
transactions with a basis of $61.1 million in the nine months ended 
September 30, 1997.  The lower level of fee income is primarily attributable 
to the Company's strategy to retain income-producing assets, coupled with 
market conditions in the 1998 period, as discussed above.

     Finance income increased $800,000 to $2.1 million for the nine months 
ended September 30, 1998 when compared to $1.3 million during the nine months 
ended September 30, 1997.  Consistent with the Company's strategy, the 
increase primarily reflects a larger portfolio of notes receivable and direct 
finance leases held by the Company during the first nine months of 1998 as 
compared to the first nine months of 1997.

     Selling, general and administrative expenses increased to $3.6 million 
for the nine months ended September 30, 1998, compared to $2.2 million in the 
same period of 1997. The increase in the 1998 period is primarily 
attributable to higher payroll and occupancy costs associated with the 
expansion of the sales activities and the formation of the reconditioned 
gaming device division in Las Vegas, Nevada.

     Interest expense increased $216,000 primarily because of the higher 
levels of borrowings related to the larger portfolio of notes receivable, 
direct finance leases and inventory held by the Company during the first nine 
months of 1998 as compared to the first nine months of 1997.

     Income before income taxes increased $303,000 to $1,262,000 in the first 
nine months of 1998, compared with $959,000 in the same period last year. The 
improvement in 1998 primarily reflects the profit contributions from 
equipment sales and higher level of finance income, partially offset by lower 
fee income and higher related costs and expenses, as described above.
     
     The effective income tax rate was approximately 38% in the nine months 
ended September 30, 1998 and 1997.  In both periods, the effective rate was 
higher than the federal statutory tax rate of 34%, due primarily to state 
income taxes.

                                      12

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The funds necessary to support the Company's activities have been 
provided by cash flow generated primarily from the operating activities 
described above, and various forms of recourse and nonrecourse borrowings. 
The Company's strategy to increase its leasing activities and reconditioned 
gaming device sales involves a higher level of investment in equipment under 
operating leases and equipment held for sale or lease, financed through 
discounted lease rentals and notes payable. The Company expects its lease 
portfolio to generate recurring cash flow from operations throughout the 
lease term.
     
     The Company's cash and cash equivalents were $403,000 at September 30, 
1998, a decrease of $1.5 million from December 31, 1997. During the first 
nine months of 1998, cash used in operating activities totaled $17.4 million, 
compared with cash provided by operations of $9.6 million in the first nine 
months of 1997. The higher level of cash used in the 1998 period primarily 
reflects the Company's higher level of investment in notes receivable and 
equipment held for sale or lease related to the Company's reconditioned 
gaming device division.  As discussed above, market conditions delayed the 
Company from selling certain transactions during the third quarter of 1998.  
The cash used in investing activities primarily reflects the investment in 
equipment for leasing. The lower level of investment in equipment for leasing 
in the 1998 period results from the Company's decision to deploy certain of 
its resources in the reconditioned gaming device division during 1998.  The 
$18.7 million of net cash provided by financing activities in the first nine 
months of 1998 was driven by the subordinated debt transaction, as discussed 
in the Notes to Condensed Consolidated Financial Statements, and other 
borrowings.

     At September 30, 1998 total borrowings were $49.1 million, up from
$27.5 million at December 31, 1997. The majority of the proceeds from the 
borrowings were invested in notes receivable, equipment under operating lease 
and equipment held for sale or lease. The Company's recourse debt to equity 
ratio was 4.0:1 at September 30, 1998 compared with 2.0:1 at December 31, 
1997. The increase at September 30, 1998 was primarily the result of the 
$13.8 million subordinated debt transaction completed in May 1998. The 
following summarizes the significant borrowing activities of the Company in 
addition to the subordinated debt transaction, which is discussed in the 
Notes to Condensed Consolidated Financial Statements.

     DISCOUNTED LEASE RENTALS. Subsequent to origination of certain leases, 
the Company discounts the remaining lease payments with various financial 
institutions in return for a cash payment based on the present value of such 
payments. Proceeds from discounting are recorded in the Company's condensed 
consolidated balance sheet as discounted lease rentals. The discounted lease 
rentals are generally nonrecourse to the Company. As lessees make payments, 
rental revenue on operating leases is recorded by the Company with an 
offsetting charge to interest expense and a reduction in the discounted lease 
rentals utilizing the interest method. Total discounted lease rentals 
decreased from $5.9 million as of December 31, 1997 to $3.3 million as of 
September 30, 1998. The net decrease of $2.6 million is primarily the result 
of cash proceeds from discounting of $.7 million, more than offset by 
principal payments of $3.0 million.

     NOTES PAYABLE. Total notes payable increased from $21.5 million as of 
December 31, 1997 to $32.6 million as of September 30, 1998. The net increase 
of $11.1 million is primarily the result of additional cash proceeds of 
$22.6 million, net noncash borrowings of $2.5 million, partially offset by 
payments of $14.0 million.

                                      13

<PAGE>

CAPITAL RESOURCES

     At September 30, 1998, the Company's revolving credit and working 
capital borrowing capability is $40.0 million.  Advances under these 
agreements aggregated $14.9 million at September 30, 1998.
     
     The Company's current financial resources, including the proceeds from 
its May 1998 subordinated debt offering, estimated cash flows from operations 
and the revolving credit facilities are expected to be sufficient to fund the 
Company's anticipated working capital needs.  In addition to the borrowing 
activities summarized above, the Company has developed a network of financial 
institutions to which it sells transactions on a regular basis.  The Company 
is, from time to time, dependent upon the need to liquidate or externally 
finance transactions originated and held in its investment portfolio.

     Inflation has not been a significant factor in the Company's operations.

YEAR 2000 ISSUE

     The Company is currently evaluating the potential impact of the situation
referred to as the "Year 2000 Issue."  The Year 2000 Issue concerns the
inability of computer software programs to properly recognize and process date
sensitive information relating to the Year 2000.  The Company has begun
evaluating its major automated systems to determine if they are Year 2000
compliant and has contacted the suppliers of certain of those systems to inquire
about Year 2000 compliance.  The Company believes that its major automated
systems are Year 2000 compliant.

     The Company has also made inquiries of and is contacting certain suppliers
with respect to Year 2000 issues.  Even assuming that all material third parties
confirm that they are or expect to be Year 2000 compliant by December 31, 1999,
it is not possible to state with certainty that such parties will be so
compliant.  It is impossible to fully assess the potential consequences in the
event service interruptions from suppliers occur or in the event that there are
disruptions in such infrastructure areas as utilities, communications,
transportation, banking and government.

     To date, the Company has not incurred material costs associated with the 
Year 2000 Issue.  The Company believes that any future costs associated with, 
and the potential impact of, the Year 2000 Issue will not be material.  Based 
upon its assessments to date, the Company believes it will not experience any 
material disruption in its operations as a result of Year 2000 problems in 
internal financial systems, reconditioning activities and other process 
control systems, or in its interface with major customers and suppliers.  
However, if major suppliers, including those providing inventory, banking, 
electricity and communications services, experience difficulties resulting in 
disruption of critical supplies or services to the Company, a shutdown of the 
Company's operations could occur for the duration of the disruption.  The 
Company has not yet developed a contingency plan to provide for continuity of 
normal business operations in the event problem scenarios, such as those 
described above, arise. The Company will assess the need to develop such a 
plan based upon the results of feedback from its major suppliers.  Assuming 
no major disruption in service from critical third party providers, the 
Company believes that it will be able to manage the Year 2000 transition 
without any material effect on the Company's results of operations or 
financial position.  There can be no assurance, however, that unexpected 
difficulties will not arise and, if so, that the Company will be able to 
timely develop and implement a contingency plan.

FORWARD-LOOKING STATEMENTS

     Certain statements contained herein, which are not historical facts, are 
forward-looking statements within the meaning of the Private Securities 
Litigation Reform Act of 1995.  Such forward-looking statements may be 
identified by the use of terminology such as, "believe," "may," "will," 
"expect," "anticipate," "intend," "designed," "estimate," "should," or 
"continue" or the negatives thereof or other variations thereon or comparable 
terminology.  Such forward-looking statements involve known and unknown 
risks, uncertainties and other factors which may cause the actual results, 
performance or achievements of the Company to be materially different from 
any future results, performance or achievements expressed or implied by such 
forward-looking statements.  Such factors include, without limitation strict 
regulation by gaming authorities, competition the Company faces or may face 
in the future, uncertainty of market acceptance of the 

                                      14

<PAGE>

SlotLease program and PDS Slot Source, the ability of the Company to continue 
to obtain adequate financing, the ability of the Company to recover its 
investment in gaming equipment leased under operating leases as well as its 
investment in used gaming machines purchased for refurbishment and resale to 
customers, the risk of default with respect to the Company's financing 
transactions, the Company's dependence on key employees, potential 
fluctuations in the Company's quarterly results, general economic and 
business conditions, and other risk factors detailed from time to time in the 
Company's reports filed with the Securities and Exchange Commission.

                                      15

<PAGE>

PART II- OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     a)   The following exhibits are included with this quarterly report on
          Form 10-QSB as required by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
          Exhibit
          Number    Description
          ------    -----------
         <S>       <C>
          10.1      Loan Agreement, dated August 5, 1998 
                    between U.S. Bank, as Lender and 
                    the Registrant as Borrower

          15        Letter Regarding Unaudited Interim
                    Financial Information

          27        Financial Data Schedule

</TABLE>

     b)   Reports on Form 8-K - There were no reports on Form 8-K filed during
          the quarter ended September 30, 1998 or during the period from
          September 30, 1998 to the date of this Quarterly Report on 
          Form 10-QSB.

SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                             PDS FINANCIAL CORPORATION

Dated:   November 13, 1998                   By:/s/   Peter D. Cleary
                                             Chief Financial Officer
                                             (a duly authorized officer)




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