<PAGE>

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                  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 MARCH 31, 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)

     

     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 April 30, 1998
          -----                         --------------------------------
Common Stock, $.01 par value                    3,593,830 shares


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<PAGE>

                          PDS FINANCIAL CORPORATION
                                          
                                    INDEX
                                        
                        PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                                                       Page(s)
                                                                       -------
<S>                                                                    <C>
Item 1.  Financial Statements 

       Condensed Consolidated Statement of Income (Unaudited)
          For the Three Months Ended March 31, 1998 and 1997                 2 

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

       Condensed Consolidated Statement of Cash Flows (Unaudited)
          For the Three Months Ended March 31, 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                             8-12



                            PART II - OTHER INFORMATION
                                          
Item 6.  Exhibits and Reports on Form 8-K                                13-14

</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 March 31,
                                                    ----------------------------
                                                        1998            1997
                                                    ------------    ------------
<S>                                                <C>             <C>
REVENUES
     Equipment sales                                $  6,124,156
     Rental revenue on operating leases                1,981,096    $  2,477,042
     Fee income                                        1,024,529         670,376
     Finance income                                      319,712         409,786
     Other                                                   552           3,394
                                                    ------------    ------------

          Total revenues                               9,450,045       3,560,598
                                                    ------------    ------------

COSTS AND EXPENSES
     Equipment sales                                   5,249,465
     Depreciation on operating leases                  1,558,266       1,819,581
     Selling, general and administrative               1,091,369         622,750
     Interest                                            827,176         869,026       
                                                    ------------    ------------

          Total costs and expenses                     8,726,276       3,311,357      
                                                    ------------    ------------

Income before income taxes                               723,769         249,241

Provision for income taxes                               275,000          95,000
                                                    ------------    ------------

          NET INCOME                                $    448,769    $    154,241
                                                    ------------    ------------
                                                    ------------    ------------

Earnings per share:
     Basic                                                 $ .13           $ .05
     Diluted                                               $ .12           $ .05

Number of shares used to compute per share amounts:
     Basic                                             3,548,849       3,119,816
     Diluted                                           3,761,673       3,132,948

</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                       2
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                     March 31,    December 31,
                                                       1998           1997
                                                   -----------    ------------
<S>                                               <C>            <C>
                                                   (Unaudited)
ASSETS
Cash and cash equivalents                          $   878,837    $ 1,865,468
Accounts receivable                                 14,469,910      1,715,154
Notes receivable, net                                8,393,143      3,140,964
Net investment in leasing operations:
     Equipment under operating leases, net          15,907,874     18,327,490
     Direct finance leases                           3,907,858      5,976,368
     Equipment held for sale or lease                7,084,565      6,289,900
Deferred income taxes                                  683,000        824,000
Other assets                                         1,925,776      1,824,488
                                                   -----------    ------------

          Total assets                             $53,250,963    $39,963,832
                                                   -----------    ------------
                                                   -----------    ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses              $ 2,539,693    $ 2,094,178
Deferred funds for pending transactions              4,484,300        775,159
Discounted lease rentals                             5,836,596      5,919,579
Notes payable                                       28,650,000     21,527,311
Convertible subordinated debentures                     34,407         89,117
Other liabilities                                    2,365,455        929,142
                                                   -----------    ------------

          Total liabilities                         43,910,451     31,334,486
                                                   -----------    ------------

Stockholders' equity:
    Common stock, $.01 par value, 20,000,000 
      shares authorized, 3,571,474 and 3,523,972 
      issued and outstanding in 1998 and 1997, 
      respectively                                      35,715         35,240
    Additional paid-in capital                       9,956,978      9,695,056
    Retained earnings (accumulated deficit)           (652,181)    (1,100,950)
                                                   -----------    ------------

          Total stockholders' equity                 9,340,512      8,629,346
                                                   -----------    ------------
          Total liabilities and stockholders' 
            equity                                 $53,250,963    $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>
                                                                           Three months ended March 31,
                                                                           ----------------------------
                                                                                1998           1997
                                                                            -----------    -----------
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                                   
     Net income                                                             $   448,769    $   154,241
     Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
          Depreciation on operating leases                                    1,558,266      1,819,581
          Gain on sale of financial assets                                   (1,498,771)      (657,360)
          Purchases/originations of notes receivable                                   
            and direct finance leases                                        (9,912,919)    (5,673,862)
          Proceeds from:
               Sale of notes receivable and direct finance leases             4,556,770      5,148,333
               Collection of notes receivable and direct finance leases         660,825        840,866
          Increase in accounts receivable                                    (2,462,490)      (309,059)
          Changes in other operating assets and liabilities, net                348,788         11,148
                                                                            -----------    -----------

                    Net cash provided by (used in) operating activities      (6,300,762)     1,333,888
                                                                            -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of equipment for leasing                                      (1,538,410)    (3,369,810)
     Proceeds from sale of leased equipment                                       4,000         63,368
     Other, net                                                                 (26,420)       (57,112)
                                                                            -----------    -----------

                    Net cash used in investing activities                    (1,560,830)    (3,363,554)
                                                                            -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from notes payable                                              9,019,197      1,500,000
     Proceeds from discounted lease rentals                                     692,428      1,691,914
     Payments on notes payable                                               (2,240,602)      (363,902)
     Payments on discounted lease rentals                                      (775,411)    (1,505,696)
     Payments on subordinated debentures                                        (16,500)      (243,987)
     Proceeds from exercise of stock options                                    195,849              -
                                                                            -----------    -----------

                    Net cash provided by financing activities                 6,874,961      1,078,329
                                                                            -----------    -----------     

Net decrease in cash and cash equivalents                                      (986,631)      (951,337)
     
Cash and cash equivalents at beginning of period                              1,865,468      2,760,200
                                                                            -----------    -----------

Cash and cash equivalents at end of period                                  $   878,837    $ 1,808,863
                                                                            -----------    -----------
                                                                            -----------    -----------
</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 March 31, 1998 and 
for the three months ended March 31, 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.  Coopers & 
Lybrand L.L.P., the Company's independent accountants, have 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 
March 31, 1998 and for the three months ended March 31, 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 April 1998, the Company extended its agreement with a bank to provide 
a $1.0 million working capital line of credit through May 31, 1998.  The 
Company expects to renew the agreement for a one year period on terms which 
are consistent with the prior agreement.  As of May 13, 1998, there were no 
borrowings outstanding under this agreement.

     In May 1998, the Company completed a $12.0 million public debt offering. 
The Company sold 12,000 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.  On May 11, 1998, the 
underwriter exercised its over-allotment option to sell an additional 1,800 
Units, which is expected to close on May 14, 1998.  Interest on the Notes is 
payable quarterly, beginning October 1, 1998.  Each year beginning July 1, 
2000, Notes having an aggregate balance of $1.8 million ($2.1 million upon 
closing of the over-allotment) 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 $12.4 million, including proceeds from the over-allotment, 
will be used to expand the Company's leasing activities and for general 
corporate purposes.


                                       5
<PAGE>

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


3.   EARNINGS PER SHARE

     The Company calculated basic and diluted earnings per share as follows 
for the three months ended March 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                   Three months ended March 31,
                                                   ----------------------------
                                                      1998             1997
                                                   ----------       ----------
<S>                                               <C>              <C>
Net income, basic                                  $  448,769       $  154,241
Interest expense on convertible                                               
   subordinated debentures, net of tax                    907                -
                                                   ----------       ----------
Net income, diluted                                $  449 676       $  154,241
                                                   ----------       ----------
                                                   ----------       ----------

Weighted average shares outstanding:
   Basic (actual shares outstanding)                3,548,849        3,119,816
   Effect of dilutive options                         174,635           13,132
   Effect of dilutive warrants                         20,208
   Effect of convertible subordinated debentures       17,981                -
                                                   ----------       ----------
  Diluted                                           3,761,673        3,132,948
                                                   ----------       ----------
                                                   ----------       ----------

Per share amounts:
   Basic                                                $ .13            $ .05
                                                   ----------       ----------
                                                   ----------       ----------
   Diluted                                              $ .12            $ .05
                                                   ----------       ----------
                                                   ----------       ----------
</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 first quarters of 1998 and 1997, total comprehensive income 
amounted to $467,610 and $136,209, respectively.  Accumulated other 
comprehensive income (loss) at March 31, 1998 and December 31, 1997 was 
($18,650) 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 March 31, 1998, and the 
related condensed consolidated statements of income and cash flows for the 
three-month periods ended March 31, 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.



Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
April 22, 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.  
In 1996, the Company introduced SlotLease, a 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, 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.  In 1996, the Company began 


                                       8
<PAGE>

structuring some of its gaming equipment financings as operating leases, 
under which the Company retains substantially 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. Consistent 
with the Company's strategy to increase its leasing activities, the 1996 and 
1997 originations involve a greater mix of operating leases, which generate 
revenues throughout the lease term, as opposed to notes or direct finance 
leases, which generate revenues primarily upon sale.
      
     The Company's revenue generating activities can be categorized as 
follows: (i) equipment sales; (ii) rental revenue on operating leases; 
(iii) fee income, resulting principally from the sale of lease or note 
receivable transactions; and (iv) 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. 

     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 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.


                                       9
<PAGE>

     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 net 
investment in leasing operations--direct finance leases. 


RESULTS OF OPERATIONS

Three Months Ended March 31, 1998 and 1997

     Revenues for the first quarter of 1998 totaled $9.5 million, an increase 
of $5.9 million from $3.6 million in the first quarter last year.  The 
increase in revenues is primarily attributable to equipment sales.  Gross 
originations of financing transactions for the three months ended March 31, 
1998 decreased to $11.6 million compared to $35.7 million for the same period 
in 1997.

     Equipment sales totaled $6.1 million in the first quarter of 1998.  The 
Company did not sell equipment in the first quarter of 1997.  The Company has 
obtained its gaming equipment distributor licenses in Nevada, New Jersey, 
Colorado, 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 $5.2 million

     The Company's average operating lease portfolio was $17.6 million during 
the first quarter of 1998 as compared to $25.8 million one year earlier.  The 
decrease in the average portfolio results from the sale of certain of the 
equipment which had been under operating leases. Rental revenue on operating 
leases decreased to $2.0 million from $2.5 million.  Related depreciation 
also decreased to $1.6 million from $1.8 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 increased $300,000 to $1.0 million related to the sale of
transactions with a basis of $12.6 million in the three months ended March 31,
1998, compared to fee income of $.7 million on the sale of transactions with a
basis of $22.1 million in the three months ended March 31, 1997.  The higher
level of fee income is primarily attributable to more favorable pricing on the
sale of certain of the leases and notes receivable, which the Company had held
in its portfolio.

     Finance income decreased $90,000 to $320,000 for the three months ended
March 31, 1998 when compared to $410,000 during the three months ended March 31,
1997.  The decrease primarily reflects a smaller portfolio of notes receivable
held by the Company during the first quarter of 1998 as compared to the first
quarter of 1997.

     Selling, general and administrative expenses increased to $1.1 million 
for the three months ended March 31, 1998, compared to $.6 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 


                                       10
<PAGE>

expansion of the sales activities and the formation of the reconditioned 
gaming device division in Las Vegas, Nevada.
     
     Interest expense decreased $42,000 primarily because of the lower levels 
of borrowings related to the smaller portfolio of notes receivable held by 
the Company during the first quarter of 1998 as compared to the first quarter 
of 1997.
     
     Income before income taxes increased $475,000 to $724,000 in the first 
quarter of 1998, compared with $249,000 in the same period last year.  The 
improvement in 1998 primarily reflects the profit contributions from 
equipment sales and higher level of fee income, partially offset by higher 
related costs and expenses, as described above.

     The effective income tax rate was 38% in the three months ended March 31, 
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.
     

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 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 totaled $.9 million at March 31, 
1998, a decrease of $1.0 million from December 31, 1997.  During the first 
quarter of 1998, cash used in operating activities totaled $6.3 million, an 
increase of $7.6 million from the first quarter of 1997.  The higher level of 
cash used in the 1998 quarter primarily reflects the Company's higher level 
of note receivable originations and an increase in accounts receivable 
related to the Company's reconditioned gaming device division. The cash used 
in investing activities in the 1998 quarter primarily reflects $1.5 million 
of investment in equipment for leasing.  The $6.9 million of net cash 
provided by financing activities in the first quarter of 1998 was primarily 
utilized to originate the note receivable transactions discussed above.

     At March 31, 1998 total borrowings were $34.5 million, up from $27.5 
million at December 31, 1997.  The majority of the proceeds from the 
borrowings were invested in equipment in the Company's leasing operations.  
The Company's recourse debt to equity ratio was 2.6:1 at March 31, 1998 
compared with 2.0:1 at December 31, 1997.  The following summarizes the 
significant borrowing activities of the Company.

     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 


                                       11
<PAGE>

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 $5.8 as of March 31, 
1998.  The net decrease of $.1 million is the result of cash proceeds from 
discounting of $.7 million, more than offset by principal payments of $.8 
million.

     NOTES PAYABLE.  Total notes payable increased from $21.5 million as of 
December 31, 1997 to $28.6 million as of March 31, 1998.  The net increase of 
$7.1 million is primarily the result of additional cash proceeds of $9.0 
million, noncash borrowings of $.3 million, partially offset by payments of 
$2.2 million.
     
     
     CAPITAL RESOURCES

     At March 31, 1998, the Company's revolving credit and working capital 
borrowing capability is $34.0 million.  Advances under these agreements 
aggregated $11.4 million at March 31, 1998.  In addition, in May 1998, the 
Company completed a $12.0 million public debt offering, as discussed in Note 2.
to Condensed Consolidated Financial Statements.  The net proceeds to the 
Company of $12.4 million will be used to expand the Company's leasing 
activities and for general corporate purposes.

     The Company's current financial resources, including the proceeds from its
May 1998 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.


FORWARD-LOOKING STATEMENTS

     Certain statements contained herein which are not historical facts are
forward-looking statements with respect to events, the occurrence of which
involves risks and uncertainties, including without limitation strict regulation
by gaming authorities, competition the Company faces or may face in the future,
uncertainty of market acceptance of the 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.


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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.
<TABLE>
<CAPTION>
          Exhibit                                                Page
          Number             Description                        Number
          -------            -----------                        ------
         <S>      <C>                                    <C>
          15       Letter Regarding Unaudited Interim
                   Financial Information                          14

          27       Financial Data Schedule                (EDGAR filing only) 
</TABLE>


     b)   Reports on Form 8-K - There were no reports on Form 8-K filed during
          the quarter ended March 31, 1998 or during the period from March 31,
          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:  May 13, 1998                   By: /s/  Peter D. Cleary    
                                       Chief Financial Officer
                                       (a duly authorized officer)




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