<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, 1996

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

For the transition period from ________ to _________

COMMISSION FILE NUMBER 0-23928


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


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

              6442 CITY WEST PARKWAY, SUITE 300, EDEN PRAIRIE, MN  55344
                       (Address of principal executive offices)

                                    (612) 941-9500
                             (Issuer's telephone number)

     Indicate by check mark 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 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date:

          CLASS                           OUTSTANDING AS OF NOVEMBER 8, 1996
          -----                           ----------------------------------
Common Stock, $.01 par value                   3,119,816 shares


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

<PAGE>

                              PDS FINANCIAL CORPORATION

                                        INDEX
                                           

                            PART I - FINANCIAL INFORMATION
                                           

Item 1.  Financial Statements                                         Page No
                                                                      -------
     Condensed Consolidated Statement of Operations (Unaudited)
       For the Three Months and Nine Months Ended September 30,
       1996 and 1995                                                       2

     Condensed Consolidated Balance Sheet (Unaudited)
       As of September 30, 1996 and December 31, 1995                      3

     Condensed Consolidated Statement of Cash Flows (Unaudited)
       For the Nine Months Ended September 30, 1996 and 1995               4

     Notes to Condensed Consolidated Financial Statements (Unaudited)      5

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                         7

                             PART II - OTHER INFORMATION
                                           
Item 6.  Exhibits and Reports on Form 8-K                                 15

                                  1

<PAGE>


                            PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                             PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                              (Unaudited)

<TABLE>

<CAPTION>

                                            THREE MONTHS ENDED       NINE MONTHS ENDED
                                               SEPTEMBER 30,           SEPTEMBER 30,
                                            ------------------        ----------------
                                            1996         1995         1996         1995
                                            ----         ----         ----         ----
<S>                                         <C>          <C>          <C>          <C>

Revenues:
  Fee income                               $  788,836  $     2,582    $1,846,921  $   662,052
  Finance income                              207,122      368,404       565,026    1,489,923
  Rental revenue on operating leases          634,436      401,684     1,296,808    1,247,214
  Gain on sale of assets                        5,309          468        23,583       49,652
  Other income, net                                --           --       110,804           --
                                           ----------  -----------    ----------  ------------
                                                                           
    Total revenues                          1,635,703      773,138     3,843,142    3,448,841
                                           ----------  -----------    ----------  ------------
Costs and expenses:                                                            
  Depreciation on operating leases            486,269      296,399       982,850      918,108
  Provision for uncollectible receivables          --    7,000,000            --    7,000,000
  Selling, general and administrative         690,602      568,035     1,827,967    2,008,011
  Interest                                    262,483      285,210       678,051      971,613
                                           ----------  -----------    ----------  ------------
                                                                          
    Total costs and expenses                1,439,354    8,149,644     3,488,868   10,897,732
                                           ----------  -----------    ----------  ------------

Income (loss) before income taxes             196,349   (7,376,506)      354,274   (7,448,891)
                                                             
Provision (benefit) for income taxes           72,000   (2,654,000)      131,000   (2,681,000)
                                           ----------  ------------   ---------- -------------
                                                                           
    Net income (loss)                      $  124,349  $(4,722,506)   $  223,274 $ (4,767,891)
                                           ==========  ============   ========== =============

Earnings (loss) per share:                                                     

  Primary                                        $.04       $(1.51)         $.07        $(1.55)
  Fully diluted                                  $.04       $(1.51)         $.07        $(1.55)
                                                                           
Number of shares used to compute
  per share amounts:
    Primary                                 3,125,176    3,119,816     3,127,641     3,083,896
    Fully diluted                           3,126,457    3,119,816     3,127,974     3,083,896

</TABLE>
                                                                        


          See accompanying notes to condensed consolidated financial statements


                                  2

<PAGE>

                      PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                         CONDENSED CONSOLIDATED BALANCE SHEET

                                        ASSETS


                                              September 30,       December 31,
                                                  1996                1995
                                              ------------        ------------
                                               (Unaudited)

Cash and cash equivalents                     $ 2,426,815         $  870,109
Restricted cash                                 3,776,414            354,992
Accounts receivable                               725,321            341,348
Notes receivable, net                           3,915,867          6,636,649
Net investment in leasing operations:
  Equipment under operating leases, net        17,385,672          2,913,226
  Direct finance and sales-type leases          1,536,836            672,602
  Investment in residuals                       1,898,359          1,945,904
Income taxes receivable                                --          1,041,000
Deferred income taxes                           1,097,000          1,268,000
Other assets                                      637,130            345,424
                                              -----------         ----------

    Total assets                              $33,399,414         $16,389,254
                                              ===========         ===========


                             LIABILITIES AND STOCKHOLDERS' EQUITY


Accounts payable and accrued expenses         $16,115,861         $ 1,434,354
Discounted lease rentals:
  Nonrecourse                                   5,711,444           1,770,292
  Recourse                                        182,248             441,721
Notes payable:                                                        
  Nonrecourse                                      53,245              53,245
  Recourse                                      3,056,304           4,205,660
Convertible subordinated debentures             2,099,654           2,772,128
Other liabilities                                 518,648              76,619
                                              -----------         -----------

    Total liabilities                          27,737,404          10,754,019
                                              -----------         -----------

Stockholders' equity:                                                 
  Common stock, $.01 par value, 20,000,000 
    shares authorized, 3,119,816 issued and 
    outstanding in 1996 and 1995                   31,198              31,198
  Additional paid-in capital                    7,952,161           7,952,161
  Retained earnings (accumulated deficit)      (2,321,349)         (2,348,124)
                                              ------------         -----------
    Total stockholders' equity                  5,662,010           5,635,235
                                              ------------         -----------
                                        
    Total liabilities and stockholders'
      equity                                  $33,399,414          $16,389,254
                                              ===========          ===========


        See accompanying notes to condensed consolidated financial statements


                                  3

<PAGE>

                             PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                               (Unaudited)
                                       Increase (Decrease) in Cash


                                                             NINE MONTHS ENDED
                                                                SEPTEMBER 30,
                                                             ------------------
                                                             1996          1995
                                                             ----          ----
Cash flows from operating activities:
  Net income (loss)                                   $   223,274   $(4,767,891)
  Adjustments to reconcile net income (loss) 
      to net cash provided by operating activities:                           
    Depreciation on operating leases                      982,850       918,108
    Provision for uncollectable receivables                           7,000,000
    Gain on sale of notes receivable, leases, leased
      equipment and residuals                            (722,995)     (250,309)
    Purchases of notes receivable                      (8,755,119)  (16,330,189)
    Proceeds from:
      Sales of notes receivable                        15,168,883    12,706,871
      Collections on notes receivable                   1,456,836     3,654,275
      Collections of principal on direct
        finance leases                                    764,240       962,163
    Changes in operating assets and liabilities:                     
      Restricted cash                                  (3,421,422)      516,007
      Income taxes receivable                           1,041,000    (2,530,786)
      Accounts payable and accrued expenses              (291,327)   (1,033,776)
    Other, net                                           (267,711)      100,264
                                                      ------------   ----------
      Net cash provided by operating activities         6,178,509       944,737
                                                      ------------   ----------
                                        
Cash flows from investing activities:                                 
  Purchase:  Furniture and fixtures                       (48,548)      (26,298)
             Equipment for leasing                     (5,711,630)
             Investment in residuals                     (311,348)
  Proceeds from sale of leases, leased equipment
    and residuals                                         983,018     1,369,415
                                                      -----------   -----------
      Net cash (used in) provided by investing
        activities                                     (5,088,508)    1,343,117
                                                      -----------   -----------
Cash flows from financing activities:                                 
  Proceeds from notes payable                             470,000     4,268,125
  Proceeds from discounted lease rentals                4,917,321     1,894,210
  Principal payments on notes payable                  (3,012,499)   (6,904,826)
  Principal payments on subordinated debentures          (672,474)
  Principal payments on discounted lease rentals       (1,235,643)   (2,144,137)
  Proceeds from exercise of employee stock options                      305,463
                                                      ------------  -----------
      Net cash provided by (used in) financing
        activities                                        466,705    (2,581,165)
                                                      ------------  -----------

Net increase (decrease) in cash and cash equivalents    1,556,706      (293,311)
                                        
Cash and cash equivalents at beginning of period          870,109       445,905
                                                      ------------  -----------
Cash and cash equivalents at end of period            $ 2,426,815   $   152,594
                                                      ===========   ===========

      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,
1996 and for the three and nine months ended September 30, 1996 and 1995 
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.  These 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, 1995.

     The condensed consolidated financial statements presented herein as
of September 30, 1996 and for the three and nine months ended September 30, 
1996 and 1995 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.

     Certain reclassifications have been made in the 1995 condensed
consolidated statement of cash flows to conform to the classifications used 
in 1996.  These reclassifications had no effect on the 1995 net decrease in 
cash and cash equivalents as previously reported.

2.   EAGLES NEST

     In November 1994, the Company entered into an agreement to finance the 
development of a tribal gaming facility, Eagles Nest Gaming Palace ("Eagles 
Nest"), in New Brunswick, Canada.  As of September 1995, the Company had made 
loans related to this project aggregating $6.3 million, net of unamortized 
loan origination fees to the Company of $312,000.  In addition, the Company 
guaranteed a project-related lease which requires the tribal owner of the 
gaming facility to make monthly payments of $24,128 through August 1997.  The 
amounts advanced under the loans were contractually scheduled to be repaid 
over 60 months beginning in September 1995 and bear interest at 15%.

     On September 22, 1995, after a comprehensive review, the Company 
concluded that the Eagles Nest loans were impaired.  As a result the Company 
established an impairment allowance for the full amount of its loans related 
to this project ($6.3 million) and accrued a liability reflecting the net 
present value of its full obligation under the lease guaranty, as well as an 
estimate of associated expenses, which together totaled $447,000.  The 
facility was closed in October 1995.

                                     5

<PAGE>

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     In March 1996, the Company signed an agreement to sell its interest in 
the loans related to the Eagles Nest facility to Dion Entertainment Corp. 
("Dion"), a publicly-traded Canadian gaming management company.  Upon signing 
the agreement, the Company received 371,000 shares of Dion common stock.  As 
of September 30, 1996, the sale of the Company's interest in the loans has 
not been consumated and the parties are attempting to renegotiate the 
agreement.

3.   WORKING CAPITAL, MANUFACTURER'S AND REVOLVING WAREHOUSING LOANS

     In April 1996, the Company renewed its agreement with a bank to provide 
a $1 million working capital line of credit for the Company through April 30, 
1997.  Advances under the agreement, of which there were none at September 
30, 1996, are collateralized by certain of the Company's notes receivable or 
leases having a value of 120% of the amount of the borrowings, are guaranteed 
by the Company's principal shareholder, and bear interest at 1 percent over 
the bank's reference rate.   The bank's reference rate (prime rate) was 8.25% 
at September 30, 1996.   The agreement contains covenants which require, 
among other things, the Company to maintain a leverage ratio, as defined, of 
less than 5:1.  The Company is in compliance with all covenants as of 
September 30, 1996.

     In June 1996, the Company entered into an agreement with a major 
equipment manufacturer to provide up to $20 million to finance the Company's 
purchases of such manufacturer's equipment.  Advances under the agreement 
were $1.4 million at September 30, 1996, are collateralized by a security 
interest in the related equipment and bear interest at 1 percent over the 
prime rate.

     In July 1996, the Company entered into an agreement with another bank to 
provide a $5 million revolving warehousing loan for the Company through July 
1997.  Advances on the loan, of which there were none at September 30, 1996, 
are collateralized by a security interest in the related notes, leases or 
equipment, as applicable, are guaranteed by the Company's principal 
shareholder, and bear interest at 1.5 percent over the bank's reference rate. 
The loan contains covenants which require the Company to maintain certain 
debt to net worth and cash flow ratios, as defined.

4.   STOCKHOLDERS ACTION

     On May 1, 1996, the stockholders of the Company approved an amendment to 
the Company's 1993 Stock Option Plan to increase the number of shares of 
Common Stock available for issuance thereunder from 1,000,000 shares to 
1,100,000 shares.



                                     6

<PAGE>


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

GENERAL

     The Company is principally engaged in the business of providing 
financing to the gaming industry.  These financings, typically in the form of 
a lease or note, are generally related to, and collateralized by, gaming 
equipment and other furniture, fixtures and equipment used in casino 
operations.  The Company also has financed riverboats and related casino 
amenities.  In 1996, the Company introduced SlotLease, a specialized leasing 
program for slot machines and other electronic gaming devices.

     The Company generally sells some or all of its interest in the leases 
and notes it originates to institutional investors.  In some of its 
transactions, the Company holds the leases or notes for a period of time 
after origination, or will retain an ownership interest in the leases or 
notes.

     The Company's quarterly operating results, including net income (loss) 
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.


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 transactions are structured as either notes 
receivable or direct finance leases in which substantially all benefits and 
risks of ownership are transferred to the lessee. In accordance with the 
Statement of Financial Accounting Standards No. 13 ("FAS No. 13"), direct 
finance leases are afforded accounting treatment similar to that for notes 
receivable.  The balance of the equipment financings are structured as 
operating leases, under which the Company retains some or all of the benefits 
and risks of ownership.  Consistent with the Company's strategy to increase 
its leasing activities, the 1996 originations involve a greater mix of 
operating leases, which generate revenues throughout the lease term, as 
opposed to notes which generate revenues primarily upon sale.  The Company 
retains in its portfolio a small amount of vehicle leases (originated in 1994 
and earlier), for which the sales-type or operating lease accounting method 
is utilized.

     The Company's revenue generating activities can be categorized as 
follows:  (i) fee income, resulting principally from the sale of lease or 
note receivable transactions which it originates; (ii) finance income, 
resulting from financing transactions in which the direct finance lease or 
note receivable is retained by the Company; (iii) rental income from 
operating lease activity; (iv) gain on sale of assets; and (v) other.

     The majority of the Company's gross originations are recorded, upon 
sale, in the Company's condensed consolidated statement of operations as fee 
income reflecting the net transaction contribution (gross sale price less 
carrying value of the related asset), with no offsetting direct expense.  
Generally accepted accounting principles require the Company to


                                     7

<PAGE>


reflect gross revenues, rather than the net transaction contribution, for 
certain other categories of financing activities.  These other categories 
generally relate to the Company's direct finance and operating leases held by 
the Company and account for a smaller percentage of the Company's gross 
financing originations, although such transactions represent a relatively 
large percentage of total revenues before the deduction of corresponding 
expenses. Therefore, a comparison of the "transaction contribution" of each 
of the categories of activities as shown in the following table provides a 
more meaningful analysis of the Company's operations than a comparison of 
relative gross revenues.

     The following table sets forth the Company's operations and origination 
data for the three and nine months ended September 30, 1996 and 1995, 
calculating the transaction contribution derived from each of the types of 
financing activities by matching the revenues with the corresponding 
component of the Company's direct costs and expenses:

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                   SEPTEMBER 30,                         SEPTEMBER 30,
                                               ---------------------                --------------------
                                               1996             1995                1996            1995
                                              -----             ----                ----            ----
<S>                                          <C>              <C>               <C>             <C>
FEE INCOME                                   $  788,836      $     2,582         $ 1,846,921       $  662,052
                                               --------       ----------          ----------       ----------
FINANCE INCOME, NET
  Finance income                                207,122          368,404             565,026        1,489,923
  Less:   Interest expense                       97,481          182,266             304,164          617,673
                                               --------       ----------         -----------       ----------
          Finance income, net                   109,641          186,138             260,862          872,250
                                               --------       ----------         -----------       ----------

OPERATING LEASE REVENUE, NET
  Rental revenue on operating leases            634,436          401,684           1,296,808        1,247,214
  Less: Depreciation on operating leases        486,269          296,399             982,850          918,108
           Interest expense                     105,192           49,490             198,660          195,083
                                               --------       ----------          ----------       ----------
             Operating lease revenue, net        42,975           55,795             115,298          134,023
                                               --------       ----------          ----------       ----------

GAIN ON SALE OF ASSETS                            5,309              468              23,583           49,652
                                               --------       ----------          ----------       ----------
OTHER INCOME, NET                                   ---              ---             110,804              ---
                                               --------       ----------          ----------       ----------
TOTAL TRANSACTION CONTRIBUTION                  946,761          244,983           2,357,468        1,717,977
                                               --------       ----------          ----------       ----------

Provision for uncollectible receivables             ---        7,000,000                 ---        7,000,000
Selling, general and administrative expenses    690,602          568,035           1,827,967        2,008,011
Interest expense attributable to residuals       59,810           53,454             175,227          158,857
                                               --------       ----------          ----------       ----------
INCOME (LOSS) BEFORE INCOME TAXES               196,349       (7,376,506)            354,274       (7,448,891)

Provision (benefit) for income taxes             72,000       (2,654,000)            131,000       (2,681,000)
                                             ----------      -----------          ----------      -----------
NET INCOME (LOSS)                            $  124,349      $(4,722,506)        $   223,274     $ (4,767,891)
                                             ==========      ===========         ===========      ===========

DATA REGARDING GROSS ORIGINATIONS:
      Total gross gaming originations       $37,374,667      $ 2,539,738         $61,510,935     $ 29,457,443
                                            ===========      ===========         ===========     ============
</TABLE>
                                     8

<PAGE>


     The four types of revenues generated by the Company's financing 
activities are further described below:

     FEE INCOME.  The Company generally funds the equipment financing 
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 underlying 
equipment and 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 
asset (including unamortized initial direct costs).  The calculation of fee 
income reflects any cash discounts received by the Company from equipment 
manufacturers.  Fee income also includes commissions earned for arranging 
financing in which the Company is not a party to the transaction.

     Unlike the revenues from the other types of financing activities, fee 
income in connection with these transactions is presented on a net 
transaction contributions basis in the condensed consolidated statement of 
operations.  Therefore, in the preceding table, the revenues from the other 
types of activities have been set forth on a net basis, matching the related 
costs and expenses with the appropriate revenues, in order to provide a more 
meaningful comparison with the Company's fee income.

     Upon the sale of a lease or note held for a period of time, the Company 
removes the underlying asset from its condensed consolidated balance sheet.

     FINANCE INCOME, NET.  For the period during which the Company holds a 
direct finance lease, sales-type lease or note receivable, 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.  
Over the same period, the Company generally incurs interest expense as a 
result of any corresponding external financing.  In calculating the net 
amount of finance income in the preceding table, the component of interest 
expense allocated to carrying direct finance leases, sales-type leases and 
notes receivable has been subtracted from finance income. The 
allocation of interest expense is based first upon any borrowings 
specifically identified with a related asset, and, secondarily, all remaining 
interest is allocated to direct finance leases, operating leases, notes 
receivable and interest in residuals on a pro-rata basis.

     For those direct finance leases and sales-type leases held by the 
Company, the present value of both the future minimum lease payments and 
estimated residual asset values are recorded in the condensed consolidated 
balance sheet as net investment in leasing operations--direct finance and 
sales-type leases.  Note financing activity retained by the Company is 
classified as notes receivable in the condensed consolidated balance sheet.  
All related external financing is recorded in discounted lease rentals, notes 
payable or convertible subordinated debentures.

     OPERATING LEASE REVENUE, NET.  All leases not qualifying as direct 
finance or sales-type leases are classified by the Company as operating 
leases.  In connection with operating leases, the Company retains 
substantially all the benefits and risks of ownership of the asset.  Revenue 
from operating leases consists of monthly rentals and is reflected in the 
condensed consolidated statement of operations evenly over the life of the 
lease as rental revenue on operating leases. The related equipment or 
vehicle cost is depreciated on a straight-line basis over the lease term 
to the Company's estimate of residual value.


                                     9


<PAGE>


     This depreciation is reflected in the condensed consolidated statement of 
operations as depreciation on operating leases.  The Company also incurs 
interest expense as a result of its external financing of these leases.  In 
calculating the operating lease revenue, net, in the preceding table, 
depreciation on operating leases and interest expense allocated to operating 
leases have been subtracted from rental revenue from operating leases. 
Depreciation is allocated on a specific identification basis, while interest 
expense is allocated as described above.

     For operating leases, the cost of equipment, less accumulated 
depreciation, is recorded in the condensed consolidated balance sheet as net 
investment in leasing operations -- equipment under operating leases, net.  
All related external financing is included in discounted lease rentals, notes 
payable or convertible subordinated debentures.

     GAIN ON SALE OF ASSETS.  In situations where the Company sells assets, 
generally when a lessee elects to purchase the Company's equipment 
(previously under operating leases), the Company removes the underlying asset 
from its condensed consolidated balance sheet, and records a gain or loss in 
an amount equal to the difference between the sale price and the underlying 
carrying cost of the asset.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

     Revenues for the third quarter of 1996 totaled $1,636,000, an increase 
of 112% from $773,000 in the third quarter last year.  Gross originations of 
financing transactions for the three months ended September 30, 1996 totaled 
$37.4 million compared to $2.5 million for the same period in 1995.  The 1996 
originations included a larger percentage of operating leases, which generate 
revenues throughout the lease term, as opposed to notes, which generate 
revenues primarily upon sale.  The Company generated fee income of $789,000 
related to the sale of transactions with a basis of $26.1 million in the 
three months ended September 30, 1996, compared to fee income of $3,000 on 
the sale of transactions with a basis of $1.0 million in the three months 
ended September 30, 1995.

     New jurisdictions have generally adopted a more controlled casino 
licensing process, creating increased competition for fewer licenses, and 
favoring larger, established casino operators which generally have lower cost 
of capital.  To counter these market conditions, the Company has introduced 
new financing products, expanded its presence within the existing gaming 
markets and obtained alternative funding sources for its financing products.  
Specifically, in the first quarter of 1996, the Company introduced its 
"SlotLease" operating lease program, and, during the second quarter, opened a 
sales office in Las Vegas, Nevada.  In addition, recently signed revolving 
agreements have increased the Company's funding capability by $25 million 
(see Note 3).   In order to further its strategy of increasing its leasing 
activities, the Company is pursuing licenses that would permit it to own or 
possess gaming equipment in various jurisdictions.  In October 1996, the 
Company received its license to distribute gambling devices and/or associated 
gaming equipment for use in Iowa.  The Company is also licensed as a gaming 
equipment distributor in Minnesota, and has gaming license applications 
pending in other jurisdictions.


                                     10

<PAGE>

     Although the development of new gaming establishments in emerging 
markets has slowed since 1994, management believes that smaller financings 
with existing operators for equipment replacement, expansion and upgrades 
will continue to provide additional financing opportunities.  The Company 
continues to devote considerable resources to develop expanded warehousing 
lines and a network of funding sources focused on smaller transactions. The 
successful development of this program, involving a higher volume of 
transaction originations to a broader base of casino operators, would reduce 
the Company's fee income fluctuations inherent in large emerging market 
transactions. In addition, management continues to explore additional funding 
sources and investment opportunities in the gaming industry.

     Finance income, net, decreased approximately $76,000 for the three 
months ended September 30, 1996 when compared to the three months ended 
September 30, 1995.  The decrease primarily reflects the effect of the 
impairment of the Eagles Nest loans, recognized in the third quarter of 1995.

     The transaction contribution from operating lease revenue, net, for the 
three months ended September 30, 1996 decreased approximately $13,000 when 
compared to the same period in 1995, primarily attributable to higher 
depreciation and interest in 1996.  The Company's operating lease portfolio 
on a weighted basis is in the early stage of the lease term, when 
depreciation and interest reduce the income contribution to the Company.   
These leases are expected to generate revenues throughout their lease term, 
which is generally 36 months, and make a positive income contribution in the 
latter stage of the lease term.

     Gain on sale of assets increased $5,000 in the three months ended 
September 30, 1996 when compared with the same period in 1995.  These gains 
relate to the Company's vehicle portfolio. The Company has not engaged in 
vehicle originations since 1994.

     Selling, general and administrative expenses increased approximately 
$123,000, or 22%,  for the three months ended September 30, 1996 when 
compared to the same period in 1995.  The increase is primarily attributable 
to higher payroll costs related to the higher level of originations, gaming 
licensing costs, and costs associated with increasing the Company's funding 
capabilities.

     Income before income taxes was $196,000 in the third quarter of 1996, 
compared with a loss before income taxes of $7,377,000 in the same period 
last year.  The improvement in 1996 reflects the $702,000 increase in total 
transaction contribution and the provision for uncollectible receivables in 
1995 described in Note 2.


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<PAGE>


NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

     Revenues for the nine months ended September 30, 1996 totaled 
$3,843,000, an increase of 11% from $3,449,000 in the same period last year.  
Gross originations of financing transactions for the nine months ended 
September 30, 1996, more than doubled to $61.5 million compared to $29.5 
million for the same period in 1995.  The Company generated fee income of 
$1,847,000 related to the sale of transactions with a basis of $46.5 million 
in the nine months ended September 30, 1996, compared to fee income of 
$662,000 on the sale of transactions with a basis of $20.6 million in the 
nine months ended September 30, 1995.

     Finance income, net, decreased approximately $611,000 for the nine 
months ended September 30, 1996 when compared to the nine months ended 
September 30, 1995.  The decrease primarily reflects the effect of the 
impairment of the Eagles Nest loans, recognized in the third quarter of 1995.

     Operating lease revenue, net, decreased approximately $19,000 for the 
nine months ended September 30, 1996 compared with the same period in 1995, 
primarily attributable to higher depreciation in 1996.  The Company's 
operating lease portfolio on a weighted basis is in the early stage of the 
lease term, when depreciation and interest reduce the income contribution to 
the Company.   These leases are expected to generate revenues throughout 
their lease term, which is generally 36 months, and make a positive income 
contribution in the latter stage of the lease term.

     Gain on sale of assets decreased approximately $26,000 in the nine 
months ended September 30, 1996 when compared with the same period in 1995, 
due primarily to the smaller vehicle portfolio to which it relates.  The 
Company has not engaged in vehicle originations since 1994.

     Other income, net, in the nine months ended September 30, 1996 primarily 
reflects the recognition of $200,000 of income relating to the receipt of 
371,000 shares of Dion common stock, as discussed in Note 2.  This was 
partially offset by a loss on the sale in the second quarter of certain notes 
receivable, which had been held in the Company's portfolio.  While these 
notes were performing, the yield was below the Company's target.  The sale of 
these notes improved liquidity and enabled the Company to pursue other 
opportunities.

     Selling, general and administrative expenses decreased approximately 
$180,000, or 9%,  for the nine months ended September 30, 1996 when compared 
to the same period in 1995.  The decrease is primarily attributable to costs 
related to uncompleted debt offerings in 1995.

     Income before income taxes was $354,000 in the first nine months of 
1996, compared with a loss before income taxes of $7,449,000 in the same 
period last year.  The improvement in 1996 primarily reflects the 37% 
increase in total transaction contribution in 1996 and the provision for 
uncollectible receivables in 1995 described in Note 2.



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<PAGE>


INCOME TAXES

     The effective income tax rate in 1996 was approximately 37%, which is 
higher than the federal statutory tax rate of 34%, due primarily to state 
income taxes.

     The Company recognized a $2,590,000 income tax benefit in 1995 relating 
to the pre-tax loss of $7.2 million (a 36.0% effective rate).  The effective 
income tax rate in 1995 was lower than in 1996 because the Company may not 
realize the tax benefit of its net operating loss in all states in which it 
does business.  In July 1996, the Company realized approximately $1.0 million 
of this benefit via receipt of a refund of federal income taxes paid related 
to 1994. The remaining net operating loss carryforward will be an available 
deduction from future taxable income through 2008.  Realization of the 
deferred tax asset is dependent on generating sufficient taxable income prior 
to expiration of the loss carryforward.  Although realization is not assured, 
management believes it is more likely than not that all of the deferred tax 
asset will be realized.  The amount of the deferred tax asset considered 
realizable, however, could be reduced if estimates of future taxable income 
during the carryforward period are reduced.


LIQUIDITY AND CAPITAL RESOURCES

     The funds necessary to support the Company's activities have been 
provided by cash flows generated primarily from the operating and financing 
activities described above, and various forms of borrowings (both recourse 
and non-recourse).  The higher level of net cash provided by operating 
activities in the nine months ended September 30, 1996, when compared with 
the same period in 1995, primarily reflects the $2.7 million of net cash 
provided by the sale of notes receivable, the $1.0 million income tax refund, 
both discussed above, as well as lower purchases of notes receivable in the 
1996 period.  The higher level of cash used in investing activities in the 
nine months ended September 30, 1996 primarily reflects the $5.7 million 
investment in equipment for operating leases.  The Company's strategy to 
increase its leasing activities involves a higher level of investment in 
equipment under operating leases, financed primarily through discounted lease 
rentals.  The higher level of net cash used in financing activities in the 
nine months ended September 30, 1995 is primarily the result of  greater 
principal payment on notes payable and discounted lease rentals in the 
ordinary course of business during the 1995 period.

     The following summarizes the significant funding sources and
activities of the Company.

DEBT FINANCING

     DISCOUNTED LEASE RENTALS.   Subsequent to origination of selected 
leases, the Company discounts the remaining lease payments, including 
residuals, 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 non-recourse to 
the Company as to the monthly lease payments and recourse as to the residual 
values.  As lessees make payments directly to the respective financial 
institution, interest income on sales-type leases or 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 in the 
condensed consolidated balance sheet.  The net increase of


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<PAGE>

 $3,682,000 from December 31, 1995 to September 30, 1996 primarily reflects 
additional borrowings to finance the Company's investment in equipment for 
operating leases.

     NOTES PAYABLE.  Total notes payable decreased $1,149,000 from $4,259,000 
as of December 31, 1995 to $3,110,000 as of September 30, 1996.  The net 
decrease is the result of additional borrowings of $1.9 million ($1.4 million 
of which was a noncash investment in equipment under operating leases), 
offset by payments of $3.0 million. Included in the nine months ended 
September 30, 1996 is the payment in full of the $741,000 balance of a bridge 
note advanced to the Company in 1995, which was due and made in January 1996.

     In June 1996, the Company entered into an agreement with a major 
equipment manufacturer to provide up to $20 million in financing for the 
Company.  In July 1996, the Company entered into an agreement with a bank to 
provide a $5 million revolving warehousing loan for the Company for a one 
year term.

     CONVERTIBLE SUBORDINATED DEBENTURES.  As of September 30, 1996, the 
Company has outstanding $2,100,000 of unsecured Convertible Subordinated 
Debentures (the "Debentures"), which are subordinated to other borrowings of 
the Company.  The Debentures require payments of principal and interest in 8 
remaining equal quarterly installments of $297,534 through September 30, 
1998.  Interest on the Debentures accrues at an annual rate of 11.5%.  At the 
option of the holders, the Debentures are convertible into shares of the 
Company's common stock at a price of $4.25 per share.  The Company may prepay 
any unconverted Debentures.


CAPITAL RESOURCES

     The Company's current financial resources, including estimated cash 
flows from operations, the bank working capital line of credit and revolving 
warehousing loans, and the manufacturer's credit facility are expected to be 
sufficient to fund the Company's anticipated working capital needs.  The 
Company is, from time to time, dependent upon the need to liquidate or 
externally finance transactions originated and held in its investment 
portfolio.  The Company is continuing to explore other possible sources of 
capital, primarily debt, in order to continue to focus on its strategy of 
increasing its leasing activities.  There is no assurance that additional 
equity or debt financing, if required, can be obtained or will be available 
on terms acceptable to the Company.

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



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<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.

            EXHIBIT                                            PAGE
            NUMBER                DESCRIPTION                  NUMBER
            -------               -----------                  ------
            11         Calculation of earnings per share         16
            27         Financial data schedule                   17

        b)  Reports on Form 8-K - There were no reports on Form 8-K filed during
            the quarter ended September 30, 1996.




                                  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 8, 1996              By: /s/   PETER D. CLEARY
                                          ----------------------
                                          Chief Financial Officer
                                          (a duly authorized officer)










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