<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 JUNE 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)



          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:

<TABLE>
<CAPTION>
               Class                              Outstanding as of July 31, 1998
               -----                              -------------------------------
<S>                                               <C>
Common Stock, $.01 par value                          3,641,641 shares
</TABLE>



--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>


                             PDS FINANCIAL CORPORATION

                                       INDEX

                           PART I - Financial Information


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

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

       Condensed Consolidated Statement of Cash Flows (Unaudited)
          For the Six Months Ended June 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                              8-14



                            PART II - OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds                         15

Item 4.  Submission of Matters to a Vote of Security Holders               16

Item 6.  Exhibits and Reports on Form 8-K                                  17
</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  June 30,   Six months ended  June 30,
                                                    ----------------------------   --------------------------
                                                           1998           1997           1998           1997
                                                           ----           ----           ----           ----
<S>                                                  <C>            <C>            <C>            <C>
REVENUES
     Equipment sales                                 $ 10,226,479                  $ 16,350,635
     Rental revenue on operating leases                 1,643,587   $  3,335,241      3,624,683   $  5,812,283
     Revenue from sales-type leases                     1,266,638                     1,266,638
     Fee income                                           343,324        838,162      1,367,853      1,508,538
     Finance income                                       797,352        427,404      1,117,064        837,190
     Other                                                    172          4,834            724          8,228
                                                      -----------    -----------    -----------    -----------

          Total revenues                               14,277,552      4,605,641     23,727,597      8,166,239
                                                      -----------    -----------    -----------    -----------

COSTS AND EXPENSES
     Equipment sales                                    8,965,760                    14,215,225
     Depreciation on operating leases                   1,290,322      2,471,559      2,848,588      4,291,140
     Sales-type leases                                  1,027,243                     1,027,243
     Selling, general and administrative                1,257,942        682,838      2,349,311      1,305,588
     Interest                                           1,266,931      1,196,894      2,094,107      2,065,920
                                                      -----------    -----------    -----------    -----------

          Total costs and expenses                     13,808,198      4,351,291     22,534,474      7,662,648
                                                      -----------    -----------    -----------    -----------

Income before income taxes                                469,354        254,350      1,193,123        503,591

Provision for income taxes                                178,000         96,000        453,000        191,000
                                                      -----------    -----------    -----------    -----------

          NET INCOME                                  $   291,354    $   158,350    $   740,123    $   312,591
                                                      -----------    -----------    -----------    -----------
                                                      -----------    -----------    -----------    -----------
Earnings per share:
     Basic                                                   $.08           $.05           $.21           $.10
     Diluted                                                 $.08           $.05           $.19           $.10

Number of shares used to compute per share amounts:
     Basic                                              3,604,673      3,119,816      3,576,761      3,119,816
     Diluted                                            3,862,962      3,193,895      3,819,978      3,152,205
</TABLE>
 

See accompanying notes to condensed consolidated financial statements.

                                         2
<PAGE>

                     PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                        CONDENSED CONSOLIDATED BALANCE SHEET
 


<TABLE>
<CAPTION>
                                                              June 30,    December 31,
                                                               1998           1997
                                                               ----           ----
<S>                                                       <C>            <C>
ASSETS                                                     (Unaudited)
Cash and cash equivalents                                 $  1,386,632   $  1,865,468
Restricted cash                                              4,825,150
Accounts receivable                                          5,261,735      1,715,154
Notes receivable, net                                       16,789,686      3,140,964
Net investment in leasing operations:
     Equipment under operating leases, net                  13,786,102     18,327,490
     Direct finance leases                                   6,929,138      5,976,368
     Equipment held for sale or lease                       10,231,110      6,289,900
Deferred income taxes                                          848,000        824,000
Other assets                                                 3,254,865      1,824,488
                                                          ------------   ------------

          Total assets                                    $ 63,312,418   $ 39,963,832
                                                          ------------   ------------
                                                          ------------   ------------


LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses                     $  5,415,925   $  2,094,178
Deferred funds for pending transactions                      1,525,430        775,159
Discounted lease rentals                                     4,023,360      5,919,579
Notes payable                                               27,369,192     21,527,311
Subordinated debt                                           13,072,601         89,117
Other liabilities                                            1,381,609        929,142
                                                          ------------   ------------

          Total liabilities                                 52,788,117     31,334,486
                                                          ------------   ------------

Stockholders' equity:
    Common stock, $.01 par value, 20,000,000 shares
        authorized, 3,641,641 and 3,523,972 issued
        and outstanding in 1998 and 1997, respectively          36,416         35,240
    Additional paid-in capital                              10,848,712      9,695,056
    Retained earnings (accumulated deficit)                   (360,827)    (1,100,950)
                                                          ------------   ------------

          Total stockholders' equity                        10,524,301      8,629,346
                                                          ------------   ------------

          Total liabilities and stockholders' equity      $ 63,312,418   $ 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>
                                                                                Six months ended June 30,
                                                                                -------------------------
                                                                                   1998           1997
                                                                                   ----           ----
<S>                                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                               $    740,123   $    312,591
     Adjustments to reconcile net income to net cash
               provided by (used in) operating activities:
          Depreciation on operating leases                                       2,848,588      4,291,140
          Gain on sale of financial assets                                      (2,205,285)    (1,428,743)
          Purchases/originations of notes receivable
               and direct finance leases                                       (12,114,078)   (16,138,640)
          Proceeds from:
               Sale of notes receivable and direct finance leases                4,743,462     18,626,948
               Collection of notes receivable and direct finance leases          1,805,655      2,232,900
          Increase in equipment held for sale or lease                          (9,371,754)      (559,485)
          Changes in other operating assets and liabilities, net                   636,678        255,634
                                                                              ------------   ------------

                    Net cash provided by (used in) operating activities        (12,916,611)     7,592,345
                                                                              ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of equipment for leasing                                         (3,173,589)    (6,936,982)
     Proceeds from sale of leased equipment                                      3,697,076        128,263
     Other, net                                                                    (64,898)       (70,555)
                                                                              ------------   ------------

                    Net cash provided by (used in) investing activities            458,589     (6,879,274)
                                                                              ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from subordinated debt and warrants                               13,800,000
     Payment of debt issuance costs                                             (1,550,134)
     Proceeds from notes payable                                                11,699,574      1,309,385
     Proceeds from discounted lease rentals                                        692,428      4,242,140
     Payments on notes payable                                                 (10,537,762)    (1,247,926)
     Payments on discounted lease rentals                                       (2,359,248)    (4,661,127)
     Payments on subordinated debentures                                           (28,706)      (494,990)
     Proceeds from exercise of stock options                                       263,034            -
                                                                              ------------   ------------

                    Net cash provided by (used in) financing activities         11,979,186       (852,518)
                                                                              ------------   ------------

Net decrease in cash and cash equivalents                                         (478,836)      (139,447)

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

Cash and cash equivalents at end of period                                    $  1,386,632   $  2,620,753
                                                                              ------------   ------------
                                                                              ------------   ------------
</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 June 30, 1998 and for
the three and six months ended June 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 June
30, 1998 and for the three and six months ended June 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 will be 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)

3.   EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                             Three months ended June 30,  Six months ended June 30,
                                             --------------------------   -------------------------
                                                 1998           1997           1998           1997
                                                 ----           ----           ----           ----
<S>                                             <C>            <C>            <C>            <C>
Net income, basic                            $  291,354     $  158,350     $  740,123     $  312,591
Interest expense on convertible
   subordinated debentures, net of tax              443            -            1,350            -
                                             ----------     ----------     ----------     ----------
Net income, diluted                          $  291,797     $  158,350     $  741,473     $  312,591
                                             ----------     ----------     ----------     ----------
                                             ----------     ----------     ----------     ----------

Weighted average shares outstanding:
   Basic (actual shares outstanding)          3,604,673      3,119,816      3,576,761      3,119,816
   Effect of dilutive options                   210,315         74,079        194,945         32,389
   Effect of dilutive warrants                   41,177         35,883
   Effect of convertible subordinated
      debentures                                  6,797            -           12,389            -
                                             ----------     ----------     ----------     ----------
  Diluted                                     3,862,962      3,193,895      3,819,978      3,152,205
                                             ----------     ----------     ----------     ----------
                                             ----------     ----------     ----------     ----------

Per share amounts:
   Basic                                           $.08           $.05           $.21           $.10
                                                   ----           ----           ----           ----
                                                   ----           ----           ----           ----
   Diluted                                         $.08           $.05           $.19           $.10
                                                   ----           ----           ----           ----
                                                   ----           ----           ----           ----
</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 June 30, 1998 and 1997, total comprehensive
income amounted to $284,696 and $219,458, respectively.  During the six months
ended Jun 30, 1998 and 1997, total comprehensive income amounted to $752,306 and
$355,667 respectively.  Accumulated other comprehensive income (loss) at June
30, 1998 and December 31, 1997 was ($25,308) 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 June 30, 1998, and the related
condensed consolidated statements of income for the three and six month periods
ended June 30, 1998 and 1997, and the condensed consolidated statements of cash
flows for the six month periods ended June 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
July 23, 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 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.


                                          8
<PAGE>

     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 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


                                          9
<PAGE>

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 June 30, 1998 and 1997

     Revenues for the second quarter of 1998 totaled $14.3 million, an 
increase of $9.7 million from $4.6 million in the second quarter last year.  
The increase in revenues is primarily attributable to equipment sales.  Gross 
originations of financing transactions for the three months ended June 30, 
1998 increased to $20.6 million compared to $18.1 million for the same period 
in 1997.

     Equipment sales totaled $10.2 million in the second quarter of 1998.  The
Company did not sell equipment in the second 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 $9.0 million.

     The Company's average operating lease portfolio was $14.0 million during
the second quarter of 1998 as compared to $33.0 million one year earlier.  The
decrease in the average portfolio resulted from the sale of certain of the
equipment which had been under operating leases. Rental revenue on operating
leases decreased to $1.6 million from $3.3 million.  Related depreciation also
decreased to $1.3 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.

     Revenue from sales-type leases was $1.3 million during the second quarter
of 1998.  The Company did not originate sales-type leases during the second
quarter of 1997.  The related cost of these sales-type leases was $1.0 million.
Consistent with the growth of the distribution business described above, the
Company intends to continue to offer this type of lease.

     Fee income decreased $495,000 to $343,000 related to the sale of
transactions with a basis of $5.0 million in the three months ended June 30,
1998, compared to fee income of $838,000 on the sale of transactions with a
basis of $13.4 million in the three months ended June 30, 1997.

     Finance income increased $370,000 to $797,000 for the three months ended
June 30, 1998 when compared to $427,000 during the three months ended June 30,
1997.  The increase primarily reflects a larger portfolio of notes receivable
and direct finance leases held by the Company during the second quarter of 1998
as compared to the second quarter of 1997.


                                          10
<PAGE>

     Selling, general and administrative expenses increased to $1.3 million for
the three months ended June 30, 1998, compared to $.7 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 $70,000 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 second quarter of
1998 as compared to the second quarter of 1997.

     Income before income taxes increased $215,000 to $469,000 in the second
quarter of 1998, compared with $254,000 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 38% in the three months ended June 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.


Six Months Ended June 30, 1998 and 1997

     Revenues for the six months ended June 30, 1998 totaled $23.7 million, an
increase of $15.5 million from $8.2 million in the first half of last year. The
increase in revenues is primarily attributable to equipment sales. Gross
originations of financing transactions for the six months ended June 30, 1998
were $32.2 million compared to $53.8 million for the same period in 1997.

     Equipment sales totaled $16.4 million in the first half of 1998. The
Company did not sell equipment in the first half 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 $14.2 million.

     The Company's average operating lease portfolio was $15.8 million during
the first half of 1998 as compared to $29.4 million one year earlier. The
decrease in the average portfolio resulted from the sale of certain of the
equipment which had been under operating leases. Rental revenue on operating
leases decreased to $3.6 million from $5.8 million. Related depreciation also
decreased to $2.8 million from $4.3 million. These leases are expected to
generate revenues throughout their lease terms, which range from 24 to 48 months
and are typically 36 months.

     Revenue from sales-type leases was $1.3 million during the first half of
1998. The Company did not originate sales-type leases during the first half of
1997. The related cost of these sales-type leases was $1.0 million. Consistent
with the growth of the distribution business described above, the Company
intends to continue to offer this type of lease.

     Fee income decreased $100,000 to $1.4 million related to the sale of
transactions with a basis of $17.6 million in the six months ended June 30,
1998, compared to fee income of $1.5 million on the sale of transactions with a
basis of $35.5 million in the six months ended June 30,


                                          11
<PAGE>

1997.

     Finance income increased $300,000 to $1.1 million for the six months ended
June 30, 1998 when compared to $800,000 during the six months ended June 30,
1997. The increase primarily reflects a larger portfolio of notes receivable and
direct finance leases held by the Company during the first half of 1998 as
compared to the first half of 1997.

     Selling, general and administrative expenses increased to $2.3 million for
the six months ended June 30, 1998, compared to $1.3 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 $30,000 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 half of 1998
as compared to the first half of 1997.

     Income before income taxes increased $689,000 to $1,193,000 in the first
half of 1998, compared with $504,000 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 38% in the three months ended June 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.


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 totaled $1.4 million at June 30,
1998, a decrease of $.5 million from December 31, 1997. During the first half of
1998, cash used in operating activities totaled $12.9 million, compared with
cash provided by operations of $7.6 million in the first half 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. The cash
provided by investing activities in the 1998 period primarily reflects the
excess of the proceeds from the sale of leased equipment over the investment in
equipment for leasing. The $12.0 million of net cash provided by financing
activities in the first half of 1998 was driven by the subordinated debt
transaction, as discussed in the Notes to Condensed Consolidated Financial
Statements.

     At June 30, 1998 total borrowings were $44.5 million, up from $27.5 million
at December


                                          12
<PAGE>

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 3.5:1 at June 30, 1998
compared with 2.0:1 at December 31, 1997. The increase at June 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 $4.0 as of June 30, 1998. The net
decrease of $1.9 million is primarily the result of cash proceeds from
discounting of $.7 million, more than offset by principal payments of $2.4
million.

     NOTES PAYABLE. Total notes payable increased from $21.5 million as of
December 31, 1997 to $27.4 million as of June 30, 1998. The net increase of $5.9
million is primarily the result of additional cash proceeds of $11.7 million,
net noncash borrowings of $4.7 million, partially offset by payments of $ 10.5
million.

     CAPITAL RESOURCES

     At June 30, 1998, the Company's revolving credit and working capital
borrowing capability is $34.0 million.  Advances under these agreements
aggregated $5.2 million at June 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 also has electronic interfaces with certain of its suppliers. 
The Company has made inquiries and received assurances from such suppliers with
respect to Year 2000 issues.

     The Company believes that any costs associated with, and the potential
impact of, the Year 2000 Issue will not be material.  However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted n a timely manner, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's systems
would not have a material adverse effect on the Company.

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 SlotLease program and 
PDS Slot

                                          13
<PAGE>

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.


                                          14
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company held its annual meeting of shareholders on May 14, 1998 for the
purposes of (1) electing members of the Board of Directors of the Company, (2)
amending the Company's 1993 Stock Option Plan to increase the number of shares
of Common Stock available for issuance thereunder from 1,100,000 to 1,350,000
and (3) ratifying the appointment of Coopers & Lybrand L.L.P. as the independent
accountants of the Company for the fiscal year ending December 31, 1998.

     There were 3,571,474 shares of Common Stock entitled to vote at the meeting
and a total of 3,288,330 shares (92.1%) were represented at the meeting. The
shareholder voting was as follows:

1.        Election of Directors:
<TABLE>
<CAPTION>
                                                              Withhold
                                         For                 Authority
                                         ---                 ---------
     <S>                                 <C>                <C>
     Johan P. Finley                     3,286,630           1,700
     Peter D. Cleary                     3,287,030           1,300
     Charles R. Patterson                3,287,030           1,300
     Joel M. Koonce                      3,287,030           1,300
     James L. Morrell                    3,287,030           1,300
     Lona M.B. Finley                    3,280,530           7,800
</TABLE>

2.   To amend the 1993 Stock Option Plan to increase the number of shares of
     Common Stock available for issuance thereunder from 1,100,000 to 1,350,000:

<TABLE>
<CAPTION>
          For            Against        Abstain        Broker Non-vote
          ---            -------        -------        ---------------
       <S>               <C>            <C>            <C>
       1,957,324         180,786        9,400          1,140,820
</TABLE>

3.   To ratify the appointment of Coopers & Lybrand L.L.P. as the independent
     accountants of the Company for the fiscal year ending December 31, 1998:

<TABLE>
<CAPTION>
               For            Against        Abstain
               ---            -------        -------
          <S>                 <C>            <C>
           3,282,130          900            5,300
</TABLE>


                                          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>
           4.1      Form of Indenture between the Registrant and First Trust 
                    National Association, dated as of May 4, 1998(1)

           4.2      Form of Note (included as Article Two to Exhibit No. 4.1)

           4.3      Form of Warrant Agreement between the Registrant and 
                    Norwest Bank Minnesota, N.A., dated May 4, 1998(1)

           4.4      Form of Warrant (included as Appendix A to Exhibit No. 
                    4.3)

           4.5      Warrant Agreement between the Registrant and Miller & 
                    Schroeder Financial, Inc., dated May 4, 1998(1)

          10.1      Master Loan Agreement by and among the Registrant, PDS 
                    Financial Corporation-Nevada and Miller & Schroeder 
                    Investments Corporation, dated May 26, 1998

          15        Letter Regarding Unaudited Interim
                    Financial Information

          27        Financial Data Schedule
</TABLE>

          (1)  Incorporated by reference to Registrant's previously filed 
Registration Statement on Form SB-2 (File No. 333-49199)

     b)   Reports on Form 8-K - There were no reports on Form 8-K filed during
          the quarter ended June 30, 1998 or during the period from June 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:   August 14, 1998           By:/s/   Peter D. Cleary
                                   ---------------------------
                                   Chief Financial Officer
                                   (a duly authorized officer)


                                          16