U. S. Securities and Exchange Commission
                             Washington, D.C. 20549
                                   FORM 10-KSB
(Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934
     For the fiscal year ended March 31, 1999.

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1943 (NO FEE  REQUIRED)
     For the transition period from _______________ to ______________.

                         COMMISSION FILE NUMBER 0-20924

                           RECONDITIONED SYSTEMS, INC.
                 (Name of small business issuer in its charter)

          ARIZONA                                         86-0576290
(State or other jurisdiction of             (IRS Employer Identification Number)
incorporation or organization)

                     444 WEST FAIRMONT, TEMPE, ARIZONA 85282
          (Address of principal executive offices, including zip code)

                                  602-968-1772
                (Issuer's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:   None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

   Title of Each Class
   -------------------

Common stock, no par value

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

The issuer's revenues for the fiscal year ended March 31, 1999 were $11,042,451.

As of June 25, 1999,  the  aggregate  market value of the Common Stock (based on
the closing price as quoted on the Nasdaq Small Cap Market on that date) held by
non-affiliates of the Registrant was approximately $2,117,511.

As of June 25, 1999, the number of outstanding shares of the Registrant's Common
Stock was 1,401,816.

Portions of the Registrant's definitive Proxy Statement, dated July 7, 1999, for
the  1999  Annual  Meeting  of  Stockholders  to be held  August  6,  1999,  are
incorporated herein by reference into Part III of this Report.

Transitional Small Business Disclosure Format
         Yes [ ] No [X]


<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

Reconditioned  Systems,  Inc. ("RSI" or the "Company"),  an Arizona  corporation
formed in March,  1987,  reconditions  and markets  modular office  workstations
consisting of panels, work surfaces,  file drawers,  book and binder storage and
integrated  electrical components  ("workstations").  The Company specializes in
reconditioning and marketing  workstations  originally  manufactured by Haworth,
Inc. ("Haworth").  RSI purchases used workstations from manufacturers,  dealers,
brokers,  and end-users throughout the United States through competitive bids or
directly  negotiated  transactions.  After  purchasing  used  workstations,  the
Company transports them to its manufacturing facility in Tempe, Arizona where it
disassembles and inventories the  workstations by component  parts,  stores and,
upon receipt of purchase orders,  reconditions and reassembles the workstations.
The Company sells the reconditioned workstations throughout the United States to
dealers and end-users.

There are more than 50  manufacturers  of new workstations in the United States.
Steelcase,  Inc.  ("Steelcase"),  Herman Miller,  Inc.  ("Herman  Miller"),  and
Haworth  constitute  the dominant  manufacturers,  controlling a majority of the
market for new  workstations.  Steelcase,  Herman Miller,  and Haworth have each
created a unique system for connecting  panels and power and  telecommunications
raceways,  resulting in virtually no interchangability  between their respective
products.  Due to the lack of  interchangability  of parts for  workstations  of
these  dominant   manufacturers,   the  Company  has  generally  specialized  in
reconditioning and marketing workstations originally manufactured by just one of
the dominant manufacturers.  The Company elected to specialize in reconditioning
and marketing workstations originally manufactured by Haworth as a result of the
extensive experience of the Company's founders with Haworth workstations.

The Company's executive offices are located at 444 West Fairmont, Tempe, Arizona
85282 and its telephone number is 602-968-1772.

PRINCIPAL LINE OF BUSINESS

The Company's  principal line of business is the sale of  reconditioned  Haworth
workstations.  Historically,  these sales have accounted for  approximately 70 -
80% of the Company's revenues.

The Company  purchases used Haworth  workstations from  manufacturers,  dealers,
brokers,  and end-users and  transports  them to its  manufacturing  facility in
Tempe,  Arizona  where it  disassembles  and  inventories  the  workstations  by
component parts, stores, and, upon receipt of purchase orders,  reconditions and
reassembles the  workstations.  The  reconditioning  process  includes  sanding,
painting,  laminating,  and  reupholstering.  Certain  parts of the used Haworth
workstations  the  Company  purchases  are  damaged  beyond  repair  and must be
replaced with new parts  purchased  from Haworth,  clone parts which the Company
purchases  from various  vendors,  and new parts which the Company  manufactures
from raw materials. The Company markets these reconditioned Haworth workstations
throughout the United States.  Orders  received by the Company range from as few
as one workstation to as many as several hundred workstations.  However,  orders
for more than fifty  workstations  are rare  because  the  manufacturers  of new
workstations  offer deeper discounts on orders of this size, which makes it more
difficult  for the Company to offer its  reconditioned  workstations  at a lower
price than the new workstations.

The Company  believes that  workstations  offer  advantages over the traditional
desk,  free standing file, and permanent dry wall dividers  common to historical
office layouts since  workstations  enable  businesses to house more people in a
given space than traditional  structures and are easier to move and reconfigure.
In addition,  the Company believes its reconditioned  Haworth workstations offer
an advantage over much of its  competition  because they are higher quality than
new workstations available in the same price range.

                                       2
<PAGE>

OTHER LINES OF BUSINESS

The Company derives certain  revenues outside of its principal line of business.
Other lines of business in which the Company engages include:  brokering "as is"
used workstations,  selling new office furniture produced by other manufacturers
(primarily   desks,   files,   and   chairs),   installing   workstations,   and
reconditioning  product  already owned by customers.  Historically,  these other
lines of business  have  accounted for  approximately  20 - 30% of the Company's
revenues.

INVENTORY AND SOURCES OF SUPPLY

The Company  purchases  used Haworth  workstations  throughout the United States
through   competitive  bids  or  private   negotiations   with  new  workstation
manufacturers and dealers, used workstation brokers, and end-users.  The Company
then transports the used Haworth  workstations to its facility in Tempe, Arizona
where it  disassembles,  inventories  by  component  part,  and  stores the used
Haworth workstation  components until purchase orders are received which require
the various  component  parts.  The Company also  maintains  inventories  of new
workstation components purchased from Haworth, clone workstation components, and
raw materials used in the  reconditioning  process.  These raw materials include
items such as fabric, particle board, laminate, and paint.

The  Company  carries a limited  amount of work in process  and  finished  goods
inventory  because it generally  does not initiate  the  reconditioning  process
until a purchase order has been received and because the reconditioning  process
rarely takes more than a couple of days due to the relatively small size of most
orders.   However,   a   significant   portion  of  the  labor  related  to  the
reconditioning  process is completed  at the time the used Haworth  workstations
are originally  received and  disassembled,  and as a result,  the value of this
labor is capitalized and added to the value of the Company's inventory.

The  Company  currently  has  sufficient   amounts  of  inventory  to  meet  its
anticipated demand.  However,  because there is not a principal supplier of used
Haworth  workstations and the supply is based upon end-user decisions  regarding
disposal of or enhancement to existing furniture, there can be no assurance that
the Company will be able to purchase  adequate levels of inventory in the future
at competitive  prices.  Because the Company's principal line of business is the
sale of  reconditioned  Haworth  workstations,  any  unavailability  of adequate
levels of inventory at competitive  prices would have a material  adverse effect
on the Company's business, operating results, and financial condition.

RECONDITIONING PROCESS

The  Company's  reconditioning  process for used Haworth  workstations  includes
sanding, painting,  laminating,  and reupholstering.  The reconditioning process
also includes  replacing certain  components with new components  purchased from
Haworth,  clone  components  purchased from various  vendors,  or new components
manufactured by the Company from raw materials. The Company's facility in Tempe,
Arizona  includes all of the  equipment  required to  recondition  workstations,
including closed and open paint booths, a paint drying booth, sanding equipment,
saws, and laminating equipment.

The reconditioned  Haworth workstations that the Company sells generally consist
of panels, worksurfaces, pedestals, overhead storage units, lateral file storage
units, task lights,  and electrical  raceways.  The Company  reconditions all of
these items.  Components that are often damaged and need to be replaced with new
or clone  components  include  panel top caps,  shelf ends for overhead  storage
units, worksurfaces, electrical base and top feeds, and electrical raceways. The
Company  markets  certain  auxiliary  items such as chairs,  file cabinets,  and
desks, but it usually purchases these items new from other manufacturers  rather
than purchasing them used and reconditioning them.

                                       3
<PAGE>

The Company's  facility has been designed to facilitate the natural flow of used
Haworth  workstation  components  and raw materials in order to  streamline  the
reconditioning  process  through  disassembly,   storage,  reconditioning,   and
shipping.  Storage capacity is maximized by utilizing narrow aisle storage.  The
Company  believes that its current  facility will be able to handle any increase
in volume as a result of its plan to increase its distribution channels.

COMPETITION

In  purchasing  used  Haworth  workstations,  the  Company  competes  with  used
workstation  brokers and other entities that recondition  Haworth  workstations.
Even though the Company may not be the  highest  bidder for an  end-user's  used
Haworth  workstations,  it may still have the  opportunity to purchase them at a
slightly higher cost if the highest bidder was a used workstation  broker who is
simply trying to make a small profit without  actually taking  possession of the
used  Haworth  workstations.  The Company  attempts to procure the used  Haworth
workstations  directly  from  end-users  so  as to  avoid  the  middleman  (used
workstation brokers) and to obtain these used Haworth workstations at the lowest
possible cost.

The market for workstations is highly competitive. The Company competes with new
workstation  manufacturers,  their dealers, and other reconditioners in the sale
of its reconditioned  Haworth  workstations.  New workstation  manufacturers and
their dealers have certain  competitive  advantages  over the Company  including
established distribution channels and marketing programs,  substantial financial
strength, long-term customers, ready access to all component parts, and the fact
that if everything is equal (price,  lead-time,  etc.), most people would choose
new  workstations  over  reconditioned  workstations.  The  Company  has certain
competitive advantages over new workstation  manufacturers and their dealers. On
orders  of  50   workstations   or  less,  the  Company's   pricing  is  usually
significantly  less than  pricing  on new  "Grade  A"  workstations  ("Grade  A"
workstations  are considered to be those  workstations  manufactured by Haworth,
Herman Miller,  and  Steelcase)  and the quality of the Company's  reconditioned
Haworth  workstations  exceeds that of new "Grade B" workstations.  In addition,
the Company can produce and install  fully  reconditioned  Haworth  workstations
within two to three weeks as compared to standard  lead-times  of  approximately
six to eight weeks for the new workstation  manufacturers.  The Company believes
that  its  reconditioning  services  are  more  comprehensive  than  most  other
reconditioners.  This results in a competitive advantage for the Company because
it has the ability to produce more reconditioned workstations and higher quality
reconditioned workstations than most other reconditioners. The Company is facing
increased competition from "bargain" newly manufactured product lines. There are
no  significant  barriers to entry into the markets  served by the  Company.  An
increase  in  competition  from  existing   competitors  or  the  entry  of  new
competitors  could have a material  adverse  effect on the  Company's  business,
operating  results and financial  condition.  There can be no assurance that the
Company will be able to compete  successfully in the future with existing or new
competitors.

DISTRIBUTION

The  Company  markets  its  products  on a  wholesale  basis to new  workstation
dealerships,  design firms,  and  installation  companies  throughout the United
States.  The Company also  markets on a retail  basis to end-users  primarily in
Arizona.  The Company's sales ratio historically had been  approximately  50-60%
wholesale and 40-50% retail sales. As a result of increased marketing efforts in
the  wholesale  division,  the  Company's  sales ratio for the fiscal year ended
March 31, 1999 approximated 65% wholesale and 35% retail.  The Company maintains
a broad  customer  base and is not  dependent on any one  customer.  The Company
employs  three  full-time  salespeople  who  concentrate  on  telemarketing  and
servicing its wholesale sales, and five full-time salespeople who concentrate on
retail sales in the greater Phoenix, Arizona area.

                                       4
<PAGE>

PERSONNEL

The Company  currently has  approximately 64 full-time  employees of whom 37 are
production personnel directly involved in the reconditioning process, six are in
the installation department, 12 are in the sales and design department, and nine
are  management  and  administrative  personnel.  The Company  believes that its
ability to grow and  attain  its  desired  profitability  levels  depends on its
ability  to attract  and  retain  highly  qualified  personnel.  There can be no
assurance  that the Company will be successful in attracting  and retaining such
personnel.  The Company  has  employment  agreements,  which  include  severance
benefits,  with  certain  of its  executive  officers.  See Item 10 -  Executive
Compensation.  None of the  Company's  personnel  are  covered  by a  collective
bargaining  agreement,  and the Company has never suffered a work stoppage.  The
Company considers its relations with its employees to be excellent.

ENVIRONMENTAL REGULATIONS

The Company's  operations are subject to a variety of federal,  state, and local
environmental laws and regulations, including those governing air quality, water
quality, and hazardous materials. The Company's principal environmental concerns
relate to the handling and disposal of paints,  solvents,  and related materials
in  connection  with product  finishes and  composite  fabrication.  The Company
contracts with various  independent waste disposal  companies for services.  The
Company may be exposed to certain environmental liabilities which may or may not
be covered by the insurance of the independent contractors naming the Company as
additional insured or by the Company's own insurance.

The Company believes that it has been operating in substantial compliance in all
material  respects with existing  environmental  laws and  regulations  and that
costs and  effects of such  compliance  are not  material.  The  Company  cannot
predict the nature,  scope or effect of legislation  or regulatory  requirements
that could be imposed or how  existing  or future  laws or  regulations  will be
administered or interpreted with respect to products or activities to which they
have not  previously  been  applied.  Compliance  with  more  stringent  laws or
regulations, or more vigorous enforcement policies or regulatory agencies, could
require  substantial  expenditures by the Company and could adversely affect its
business, financial condition and results of operations.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company  presently  leases a 58,500 square foot  facility in Tempe,  Arizona
that  houses its  corporate  offices,  its  reconditioning  operations,  and its
warehouse space.  The current lease on the Tempe facility  expires March,  2001.
The Company  believes its existing  facilities  are adequate for its current and
projected sales volumes.  In addition,  the Company believes suitable additional
space will be available as needed.

The  Company  owns  substantially  all of its  equipment,  including  its office
equipment and its  reconditioning  equipment.  The Company's  equipment has been
assigned as  collateral  for amounts  borrowed  under loan  agreements  with M&I
Thunderbird Bank.

The  Company  has no  investments  or  interests  in real  estate,  real  estate
mortgages or securities of persons primarily engaged in real estate activities.

ITEM 3.  LEGAL PROCEEDINGS

The Company is not party to any pending  legal  proceedings  other than  routine
litigation incidental to the business.

                                       5
<PAGE>

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

The  Company  held a special  meeting  on  February  5,  1999 at which  time the
shareholders voted on the proposed Merger Agreement between the Company and Cort
Investment Group, Inc. The following table provides the voting results:


             SHARES                  VOTED                  BROKER
PROPOSAL    ELIGIBLE    VOTED FOR   AGAINST   ABSTENTIONS   NON-VOTES   UNVOTED
--------   ----------   ---------   -------   -----------   ---------   -------

Proposed
Merger      1,473,816    941,539     7,783       1,500          0       522,994


Although the  proposed  Merger was approved by the  Company's  shareholders,  on
February  16, 1999,  RSI received  formal  notice of  termination  of the Merger
Agreement from Cort Investment  Group,  Inc. based upon the Company's  allegedly
being in breach  of  certain  representations  and  warranties  set forth in the
Merger  Agreement.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Proposed Merger."


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the high and low closing sales price, as reported
by the Nasdaq  Small Cap  Market,  in dollars  per share for the  quarters  then
ended:

                             COMMON STOCK
DATE                       LOW         HIGH
--------------------    ----------  ----------
June, 1997                1 1/8       2 1/4
September, 1997           1 5/8       4 1/2
December, 1997            2 1/2       3 7/8
March, 1998               2 1/2       4 1/16
June, 1998                3 5/16      3 11/16
September, 1998           3 1/2       4 7/8
December, 1998            3 1/4       4 9/16
March, 1999               2 3/8       4 3/4

The total number of shares of Common Stock of the Company outstanding as of June
25, 1999 was 1,401,816. As a result of the Company's March 1, 1999 press release
announcing the Board's  approval of a common stock  repurchase plan, the Company
was  approached  by a  brokerage  firm who held a large  block of the  Company's
common  stock.  The  Company  purchased  72,000  of  those  shares  in a  market
transaction on April 13, 1999. As of the close of business on June 11, 1999, the
number of record holders of the Company's  Common Stock was 47 and the number of
holders of the Company's  Common Stock  including  beneficial  holders of shares
held in street name was estimated to be 522.

There were no unregistered sales of the Company's Common Stock during the period
covered by this Report.

The Company has not paid any cash  dividends on its Common Stock during the past
two  fiscal  years and does not intend to pay any cash  dividends  on its Common
Stock in the foreseeable  future.  Future earnings,  if any, will be retained to
fund the  development  and growth of the Company's  business.  In addition,  the
Company's  line of  credit  security  agreement  prohibits  the  payment  of any
dividends on the Company's Common Stock. Further, state corporate law may, under
certain circumstances, restrict the Company's ability to pay dividends.

                                       6
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

The  statements  contained  in this  report  that are not  historical  facts may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities  Exchange Act of 1933, as amended,  and Section 21E of the Securities
Exchange Act of 1934,  as amended,  and are subject to the safe harbors  created
thereby.  These  forward-looking  statements  involve  risks and  uncertainties.
Important  factors that could cause actual results to differ materially from the
forward-looking  statements  include,  but are not limited to, the risk that the
Company  may  not be  able  to  geographically  diversify  its  operations  on a
profitable  basis,  continue to  increase  sales,  attract and employ  qualified
personnel,  and  bring  its  computer  hardware  and  software  into  Year  2000
compliance.  In addition,  the  Company's  business,  operations  and  financial
condition  are  subject to  substantial  other risks that are  described  in the
Company's reports and statements filed from time to time with the Securities and
Exchange Commission, including this Report.

RESULTS OF OPERATIONS

The Company  had sales for the fiscal year ended March 31, 1999 (the  "reporting
period") of  $11,042,451.  This compares to $9,583,441 for the fiscal year ended
March 31, 1998 (hereinafter the "comparable  period"),  resulting in an increase
of $1,459,010 or 15%.  This  increase was  primarily  attributable  to increased
wholesale sales.  Approximately  64% of the total sales for the reporting period
were generated from wholesale sales and 36% from retail sales.  Sales during the
comparable period were approximately 60% wholesale and 40% retail.

Wholesale  sales totaled  $7,030,523  for the reporting  period,  an increase of
1,368,900 or 24% over the comparable  period.  This is primarily a result of the
continued success of the Company's  wholesale  marketing plan implemented during
fiscal 1998,  designed to generate increased  wholesale revenues by pursuing new
dealer/broker relationships throughout the western portion of the United States.
In addition to the expanded customer-base,  the wholesale department was awarded
an exclusive  sales  contract near the end of the  comparable  period to provide
workstations in excess of $1 million over a period of 18-24 months.  Sales under
this contract totaled approximately $857,000 during the reporting period.

Retail  sales in the Phoenix  market  totaled  $4,011,928  during the  reporting
period, an increase of $90,110 or 2% over the comparable  period.  This increase
was achieved despite attrition within the retail sales  department.  Due in part
to a restrictive  covenant in the Company's now terminated Merger Agreement with
Cort Investment  Group,  Inc., the Company's  retail sales manager  position has
been vacant since October,  1998. In addition,  the number of retail salespeople
decreased from seven in the comparable period to five as of March 31, 1999.

The Company's gross profit margin for the reporting period was 24.0% as compared
to 25.2% for the comparable  period.  While retail gross profit margins remained
relatively consistent, wholesale gross profit margins declined from 25.3% in the
comparable  period to 23.6% in the reporting  period.  The  Company's  wholesale
department has faced increased  competition  with "bargain"  newly  manufactured
product-lines.  This  competition has driven  wholesale  profit margins down. In
addition,  the profit margins on the large sales contract  mentioned  above have
averaged 19.6%.

The Company's selling and administrative  expenses,  including terminated merger
costs, decreased as a percentage of sales from 16.3% in the comparable period to
15.0% in the reporting period. This decrease was achieved as a result of a lower
overall  percentage  of fixed  expenses to sales and an increased  percentage of
wholesale to retail  sales.  The  Company's  selling  costs on  wholesale  sales
generally are lower than those on retail sales.

With the elimination of the Company's note payable and capital lease obligations
and the  investment  of surplus  cash,  the  Company was able to  eliminate  its
interest expense and generate interest income.  During the comparable period the
Company  reported  $10,727 in other  expense,  primarily  composed  of  interest
expense.  This  compares  to  $55,488 in other  income,  primarily  composed  of
interest income,  earned during the reporting  period.

                                       7
<PAGE>

INCOME TAXES

As  of  March  31,  1999,  the  Company  had  federal  loss   carryforwards   of
approximately  $994,000 and state loss carryforwards of approximately  $794,000.
The federal loss carryforwards  expire through March 31, 2011 and the state loss
carryforwards  expire  through March 31, 2001. The Company will benefit from the
loss carryforwards at statutory rates to the extent it is profitable before they
expire.  Due to  significant  losses  incurred  during the years ended March 31,
1994,  1995  and  1996  and  the  uncertainty  of the  utilization  of the  loss
carryforwards  in future  periods,  the Company  established,  and  continues to
maintain,  a  valuation  allowance  equal to the full  amount  of the  Company's
deferred tax assets.

PROPOSED MERGER

On  November  16,  1998,  the  Company  announced  that it had  entered  into an
Agreement  and Plan of Merger  (the  "Merger  Agreement")  with Cort  Investment
Group,  Inc.,  a Texas  corporation  d/b/a  Contract  Network  ("CNI"),  and RSI
Acquisition  Corp., an Arizona  corporation and  wholly-owned  subsidiary of CNI
("Merger Corp.").

On February 4, 1999,  CNI informed the Company that CNI believed the Company was
in breach of  certain of the  representations  and  warranties  set forth in the
Merger Agreement,  specifically Sections 3.11 ("Tax Returns,  Taxes"), 3.7 ("RSI
SEC Reports"), 3.8 ("Financial Statements and Records of RSI"), 3.9 ("Absence of
Certain Changes") and 3.10 ("No Material Undisclosed Liabilities"). CNI asserted
that the  Company  had not  included  certain  elections  in its 1995 income tax
returns  and  therefore  had  not  properly  preserved  its net  operating  loss
carryforwards.

On February 15, 1999, the Company  received  formal notice of termination of the
Merger  Agreement  from CNI pursuant to the  provisions of Section 8.1(b) of the
Merger  Agreement  based  upon the  Company  allegedly  being in  breach  of the
representations and warranties noted above.

The Company  engaged  experts who filed with the Internal  Revenue Service (IRS)
for a private  letter  ruling to allow the  Company to amend its 1995 income tax
returns to include the omitted elections.  On June 25, 1999 the IRS approved the
Company's private letter ruling.

As of March 31, 1999,  the Company had incurred  $50,588 in expenses  related to
the terminated merger.

FINANCIAL CONDITION AND LIQUIDITY

CASH FLOWS FROM  OPERATING  ACTIVITIES.  Net cash  provided  by  operations  was
$507,844  for the year ended March 31, 1999 as  compared to  $1,252,483  for the
year ended March 31, 1998. This decrease was primarily due to increased accounts
receivables due to increased sales volume and the timing of certain  significant
customer  payments.  Accounts  receivables  as of March 31,  1999 were  $730,760
higher  than those  reported  as of March 31,  1998.  There were  several  large
customer accounts outstanding at March 31, 1999 which were subsequently received
during April 1999. As of April 30, 1999, accounts receivables were $1,163,808, a
reduction of $528,074.

CASH FLOWS FROM INVESTING AND FINANCING  ACTIVITIES.  Net cash used by investing
and financing activities was $137,550 for the reporting period. These funds were
primarily  used for  purchases  related to the  Company's  Year 2000  compliance
program  (see Year 2000 Issues  below),  the purchase of a delivery van and debt
reduction.

EXPECTED  FUTURE CASH FLOWS.  Cash  provided  by  operations  in the near future
should closely  follow  operating  income,  net of  expenditures  related to the
Company's Year 2000 compliance program and funds used for potential acquisitions
or regional sales office development.  Management believes current cash reserves
and cash flows from  operations  will be adequate to fund all of these  programs
without the need for outside financing.  In addition, the Company has $1,000,000
in available  borrowings  on its line of credit with M&I  Thunderbird  Bank (see
Note 6 of the Audited Financial Statements).

                                       8
<PAGE>

FORWARD LOOKING STATEMENTS

The Company believes the key to increasing retail sales in the Phoenix-market is
to employ an adequate number of qualified sales personnel. The Company has added
an additional  retail  salesperson since March 31, 1999, and intends to continue
adding to the retail sales staff as qualified  applicants become  available.  In
addition,  management  intends to hire a sales  manager to further  develop  and
assist its existing sales staff and train newly hired salespeople. The wholesale
sales  department  plans to  continue  its  emphasis  on  developing  new dealer
relationships and strengthening existing accounts.

The Company  reported  sales growth of 15% for the reporting  period and 35% for
the comparable  period.  Management  does not believe  increased sales personnel
within the Phoenix retail market and continuance of the wholesale marketing plan
will  sustain a level of growth at or above the 15% growth  achieved  during the
reporting period.  As a result,  the Board is currently  investigating  possible
acquisition candidates and potential regional sales office locations.  While the
Company intends to actively pursue growth, the Board remains conservative in its
approach. There can be no assurance that the Company will be able to identify or
acquire  acquisition  candidates  on  favorable  terms or that the  Company  can
sustain the level of sales growth achieved during the reporting period.

YEAR 2000 COMPLIANCE

The "Year 2000 problem" arose because many existing  computer  programs use only
the last two digits to refer to a year.  Therefore,  these computer  programs do
not  properly  recognize a year that begins  with "20"  instead of the  familiar
"19."  If not  corrected,  many  computer  applications  could  fail  or  create
erroneous results when the year 2000 begins.

The Company  implemented  a program to access and  monitor  the  progress of its
material  customers,  suppliers and other significant third parties in resolving
Year 2000 compliance  issues.  Questionnaires  have been sent to all significant
third  parties to  evaluate  their Year 2000  readiness.  In  addition,  all new
suppliers and  customers  will be required to complete the  questionnaires.  The
initial evaluation is complete;  however, new third parties will be evaluated as
needed.  All  material  third  parties  with  potential   unresolved  Year  2000
compliance  issues which become evident through this assessment  program will be
monitored  on  an  individual   basis  depending  on  the  significance  of  the
relationship to the Company and the severity of the unresolved issues.  Based on
the  evaluations  completed to date,  there are no material  third  parties with
significant unresolved issues at this time.

The Company has evaluated its existing systems, including information technology
and non-information technology systems, for Year 2000 compliance. Following this
evaluation,  the Company believes all of its non-information  technology systems
are in compliance at this time.

The  Company's  computer  hardware  and  accounting  software  are not Year 2000
compliant. The Company has begun implementing a plan to bring these systems into
compliance prior to the Year 2000. The details of the plan are as follows:

The Company has begun to replace its existing  computer  hardware  with new Year
2000  compliant   equipment.   The  total   replacement  cost  is  estimated  at
approximately  $40,000 and is scheduled  for  completion  by June 30,  1999.  In
addition,  the existing  accounting software program will be replaced with a new
accounting/manufacturing  software program.  The estimated cost of this program,
including implementation and training, is approximately $70,000.  Implementation
is scheduled to begin May 13, 1999 with an estimated  completion  date of August
31, 1999. The cost of the hardware and software  replacement will be funded from
current  cash  reserves  and is not  expected  to have a material  effect on the
Company's operating results.  These capital  expenditures will bring the Company
into Year 2000 compliance and are expected to improve administrative efficiency.
As of March 31, 1999,  the total capital  expenditures  related to the Year 2000
project were approximately $53,000.

                                       9
<PAGE>

If there are  difficulties  implementing  the plan described  above, the Company
intends to upgrade its  current  hardware  and  software to bring them into Year
2000  compliance.  The estimated cost of the software  upgrade is  approximately
$500.  The Company  would also contract with a third party vendor to analyze the
existing  computer  hardware  for Year  2000  compliance  and will  upgrade  all
necessary hardware.  The cost of the analysis and hardware upgrades is estimated
to be between  $3,000 and $5,000.  The cost of both the  software  and  hardware
upgrades  would be funded from  current cash  reserves.  This is not expected to
have a material  effect on the  Company's  operations  and the  additions  could
easily  be  completed  within  30 to 60 days.  These  upgrades  would  bring the
Company's computer systems into Year 2000 compliance.

The most likely worse case scenario regarding the Company's Year 2000 compliance
would be the Company's  inability to implement the new  accounting/manufacturing
package before December 31, 1999 or that the cost of implementation  will exceed
the  estimated  costs.  If for any  reason  the  conversion  process  cannot  be
completed  before January,  2000, the Company will resort to its backup plan. If
the cost of the conversion exceeds the estimated costs, the Company believes any
additional expense can be funded from cash reserves without a material effect on
operations.

The Company's  reconditioning  and sale of  workstations  is not dependent  upon
computer operations. Accordingly, management does not believe there is a risk of
interruption  in its supply of  workstations  to its  customers or lost revenues
with any potential Year 2000  compliance  issues.  Further,  management does not
believe that the Company  faces any  potential  liability  to third  parties for
breach of contract or other harm if its systems are not Year 2000 compliant.

                                       10
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS




                          INDEPENDENT AUDITORS' REPORT


To The Stockholders and Board of Directors of
Reconditioned Systems, Inc.


We have audited the accompanying balance sheets of Reconditioned  Systems,  Inc.
as of March  31,  1999 and  1998,  and the  related  statements  of  operations,
stockholders'  equity,  and cash flows for the years then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Reconditioned Systems, Inc. as
of March 31,  1999 and 1998,  and the results of its  operations,  stockholders'
equity,  and its cash  flows  for the  years  then  ended,  in  conformity  with
generally accepted accounting principles.


Semple & Cooper, LLP

Phoenix, Arizona
May 4, 1999



                                       11
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                                 BALANCE SHEETS
                             MARCH 31, 1999 AND 1998

                                                          1999          1998
                                                       ----------    ----------
                                     ASSETS
CURRENT ASSETS:
   Cash and cash equivalents (Notes 1, 2 and 3)        $1,103,325    $  733,031
   Accounts receivable (Notes 1, 6 and 7)               1,691,882       962,122
   Inventory (Notes 1, 6 and 7)                           909,622       925,258
   Prepaid expenses and other current assets               51,002        58,885
                                                       ----------    ----------

         TOTAL CURRENT ASSETS                           3,755,831     2,679,296
                                                       ----------    ----------

PROPERTY AND EQUIPMENT: (NOTES 1, 5, 6 AND 7)             189,173       134,728
                                                       ----------    ----------

OTHER ASSETS:
   Notes receivable - officers (Notes 3 and 4)            150,000       150,000
   Refundable deposits                                     13,036        13,930
   Other                                                   24,703         4,204
                                                       ----------    ----------

                                                          187,739       168,134
                                                       ----------    ----------

                                                       $4,132,743    $2,982,158
                                                       ==========    ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Current maturities of long-term debt (Note 7)       $        0    $   33,786
   Accounts payable                                       557,662       444,900
   Customer deposits                                       22,635        44,530
   Accrued expenses and other current liabilities         286,076       243,388
                                                       ----------    ----------

         TOTAL CURRENT LIABILITIES                        866,373       766,604
                                                       ----------    ----------

COMMITMENTS (NOTE 8)                                            0             0
                                                       ----------    ----------

STOCKHOLDERS' EQUITY: (NOTES 10 AND 12)
   Common stock, no par value; 20,000,000 shares
      shares authorized                                $4,586,982    $4,586,982
   Accumulated deficit                                 (1,320,612)   (2,367,674)
                                                       ----------    ----------

                                                        3,266,370     2,219,308
   Less: treasury stock, 134 shares, at cost                    0        (3,754)
                                                       ----------    ----------

                                                        3,266,370     2,215,554
                                                       ----------    ----------

                                                       $4,132,743    $2,982,158
                                                       ==========    ==========


                   The Accompanying Notes are an Integral Part
                           of the Financial Statements



                                       12
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                            STATEMENTS OF OPERATIONS
                   FOR THE YEARS ENDED MARCH 31, 1999 AND 1998


                                                          1999          1998
                                                       -----------   ----------
Sales                                                  $11,042,451   $9,583,441

Cost of sales                                            8,396,278    7,168,365
                                                       -----------   ----------

Gross profit                                             2,646,173    2,415,076

Selling & administrative expenses                        1,600,257    1,564,819
Terminated merger costs (Note 12)                           50,588            0
                                                       -----------   ----------

Income from operations                                     995,328      850,257

Other income (expense):
   Interest income                                          49,083        9,771
   Interest expense                                         (1,276)     (20,173)
   Other                                                     7,681         (325)
                                                       -----------   ----------

                                                            55,488      (10,727)
                                                       -----------   ----------

Income before income taxes                               1,050,816      839,530

Provision for income taxes (Note 9)                              0            0
                                                       -----------   ----------

Net income                                             $ 1,050,816   $  839,530
                                                       ===========   ==========

Basic earnings per share (Notes 1 and 11)              $      0.71   $     0.57
                                                       ===========   ==========

Basic weighted average number
   of shares outstanding                                 1,473,880    1,473,950
                                                       ===========   ==========

Diluted earnings per common
   and common equivalent share (Notes 1 and 11)        $      0.62   $     0.51
                                                       ===========   ==========

Diluted weighted average number
         of shares outstanding                           1,697,352    1,655,762
                                                       ===========   ==========


                   The Accompanying Notes are an Integral Part
                           of the Financial Statements

                                       13
<PAGE>

<TABLE>
<CAPTION>
                           RECONDITIONED SYSTEMS, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                   FOR THE YEARS ENDED MARCH 31, 1999 AND 1998

                            |      Common        Common        Retained
                            |       Stock         Stock        Earnings     Treasury
                            |      Shares        Amount       (Deficit)        Stock          Total
----------------------------|----------------------------------------------------------------------
<S>                             <C>          <C>           <C>              <C>          <C>
Balance at March 31, 1997   |   1,473,950    $4,586,982    $(3,207,204)     $(3,754)     $1,376,024
                            |
Net Income                  |      -             -             839,530         -            839,530
                            |----------------------------------------------------------------------
                            |
Balance at March 31, 1998   |
                            |   1,473,950    $4,586,982    $(2,367,674)    $(3,754)      $2,215,554
                            |
Retirement of Treasury      |
   Shares                   |        (134)       -              (3,754)      3,754           -
                            |
Net Income                  |       -            -           1,050,816         -          1,050,816
                            |----------------------------------------------------------------------
                            |
Balance at March 31, 1999   |   1,473,816    $4,586,982    $(1,320,612)    $   -         $3,266,370
                            |======================================================================
</TABLE>
























                   The Accompanying Notes are an Integral Part
                           of the Financial Statements


                                       14
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                            STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED MARCH 31, 1999 AND 1998

                                                          1999          1998
                                                       -----------   ----------
Cash Flows from Operating Activities:

   Cash received from customers                        $10,319,727   $9,620,081
   Cash paid to suppliers and employees                 (9,859,690)  (8,353,071)
   Interest received                                        49,083        5,646
   Interest paid                                            (1,276)     (20,173)
                                                       -----------   ----------

         Net cash provided by operating
         activities                                        507,844    1,252,483
                                                       -----------   ----------

Cash Flows from Investing Activities:

   Loans to officers                                             0     (150,000)
   Purchase of property and equipment                     (103,590)     (17,712)
   Other                                                      (174)           0
                                                       -----------   ----------

         Net cash used by investing
         activities                                       (103,764)    (167,712)
                                                       -----------   ----------

Cash Flows from Financing Activities:

   Proceeds from credit line and long-term
      borrowings                                                 0    2,643,000
   Principal payments on credit line, long-
      term borrowings and obligations
      under capital leases                                 (33,786)  (3,136,864)
                                                       -----------   ----------

         Net cash used by financing
                          activities                       (33,786)    (493,864)
                                                       -----------   ----------

Increase in cash and cash equivalents                      370,294      590,907

Cash and cash equivalents at beginning of year             733,031      142,124
                                                       -----------   ----------

Cash and cash equivalents at end of year               $ 1,103,325   $  733,031
                                                       ===========   ==========



                   The Accompanying Notes are an Integral Part
                           of the Financial Statements


                                       15
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                   FOR THE YEARS ENDED MARCH 31, 1999 AND 1998


                                                          1999          1998
                                                       ----------    ----------

Reconciliation of Net Income to Net Cash
   Provided by Operating Activities:

Net income                                             $1,050,816    $  839,530

Adjustments to reconcile net income to net
cash provided by operating activities:

   Depreciation and amortization                           48,790        68,256
   Provision for doubtful accounts                          1,000        (1,198)
   Loss on disposal of fixed assets                           355         2,704

Changes in assets and liabilities:

   Accounts receivable                                   (730,760)       38,163
   Inventory                                               15,636       272,582
   Prepaid expenses and other assets                      (11,548)      (32,837)
   Accounts payable and accrued expenses                  133,555        65,283
                                                       ----------    ----------
      Net cash provided by operating
      activities                                         $507,844    $1,252,483
                                                       ==========    ==========



Non-Cash Investing and Financing Activities:

During the years  ended  March 31,  1999 and 1998,  the Company did not have any
non-cash investing or financing activities.












                   The Accompanying Notes are an Integral Part
                           of the Financial Statements


                                       16
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                     NOTE 1.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS,
                              AND USE OF ESTIMATES
--------------------------------------------------------------------------------

NATURE OF BUSINESS:
     Reconditioned  Systems,  Inc.  ("RSI" or the  "Company"),  is a corporation
     which  was  incorporated  in the  State of  Arizona  in  March,  1987.  The
     principal business purpose of the Company is the reconditioning and sale of
     office  workstations  comprised  of  panel  systems  to  customers  located
     throughout the country.

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

REVENUE RECOGNITION:
     The Company  recognizes  a sale when its earnings  process is complete.  In
     connection  with  projects  that are to be  installed by the customer or an
     agent of the customer,  the sale is recognized  when the product is shipped
     to or  possession is taken by the  customer.  In  connection  with projects
     installed by the Company,  the sale is  recognized  upon  completion of the
     installation.

CASH AND CASH EQUIVALENTS:
     The Company  considers all highly liquid debt  instruments and money market
     funds purchased with an initial  maturity of three (3) months or less to be
     cash equivalents.

ACCOUNTS RECEIVABLE - TRADE:
     The Company provides for potentially  uncollectible  accounts receivable by
     use of the allowance method.  The allowance is provided based upon a review
     of the individual accounts outstanding,  and the Company's prior history of
     uncollectible accounts receivable.  At March 31, 1999 and 1998, the Company
     has established an allowance for doubtful accounts in the amount of $31,000
     and $30,000, respectively.

INVENTORY:
     Inventory,   composed  of  used  office   workstations  and  reconditioning
     supplies,  is  stated  at the lower of cost  (weighted-average  method)  or
     market.  The Company reviews its inventory monthly and makes provisions for
     damaged and obsolete items.  The Company  contemplates its ability to alter
     the size of panels and other workstation components and designs projects so
     that the workstations  are comprised of products  currently in inventory in
     establishing  its  obsolescence  reserve.  At March 31, 1999 and 1998,  the
     Company had established a reserve for damaged and obsolete inventory in the
     amount of $100,000 and $25,000, respectively.

                                       17
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                                     NOTE 1.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS,
                        AND USE OF ESTIMATES (CONTINUED)
--------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT:
     Property  and  equipment  are recorded at cost.  Depreciation  is generally
     provided for on the straight-line basis over the following estimated useful
     lives of the assets:
                                                         Years
                                                         -----
          Machinery and equipment                        5 - 7
          Office furniture and equipment                 5 - 7
          Leasehold improvements                         Lease term
          Vehicles                                       4 - 5

DEFERRED INCOME TAXES:
     Deferred  income  taxes  are  provided  on an asset and  liability  method,
     whereby  deferred  tax  assets  are  recognized  for  deductible  temporary
     differences  and operating loss and tax credit  carryforwards  and deferred
     tax liabilities are recognized for taxable temporary differences. Temporary
     differences are the differences  between the reported amounts of assets and
     liabilities  and their tax basis.  Deferred  tax  assets  are  reduced by a
     valuation   allowance  when,  in  the  opinion  of  management,   there  is
     uncertainty of the  utilization of the operating  losses in future periods.
     Deferred tax assets and liabilities are adjusted for the effects of changes
     in tax laws and rates on the date of enactment.

STOCK-BASED COMPENSATION:
     The Company has elected to follow  Accounting  Principles Board Opinion No.
     25  Accounting  for Stock  Issued  to  Employees  (APB 25) and the  related
     interpretations in accounting for its employee stock options. Under APB 25,
     because the  exercise  price of employee  stock  options  equals the market
     price of the underlying stock on the date of grant, no compensation expense
     is  recorded.  The Company has adopted the  disclosure-only  provisions  of
     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
     Stock-Based Compensation" (Statement No. 123).

EARNINGS PER SHARE:
     Basic  earnings per share  include no dilution and are computed by dividing
     income  available to common  stockholders by the weighted average number of
     shares outstanding for the period.

     Diluted  earnings  per share  amounts are  computed  based on the  weighted
     average number of shares actually outstanding plus the shares that would be
     outstanding  assuming the exercise of dilutive stock options,  all of which
     are  considered to be common stock  equivalents.  The number of shares that
     would be issued from the exercise of stock  options has been reduced by the
     number of shares that could have been  purchased  from the  proceeds at the
     average  market  price  of  the  Company's  stock.  In  addition,   certain
     outstanding  warrants  which  expired June 30, 1997 are not included in the
     computation  of diluted  earnings per share  because  their effect would be
     antidilutive.

                                       18
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                                     NOTE 2.
                                 CONCENTRATIONS
--------------------------------------------------------------------------------

The Company maintains cash balances at various financial institutions.  Deposits
not to exceed $100,000 at the financial  institutions are insured by the Federal
Deposit  Insurance   Corporation.   As  of  March  31,  1999,  the  Company  had
approximately $903,325 of uninsured cash.

In addition,  the Company  specializes in reconditioning one particular original
equipment  manufacturer's  (OEM) line of office  workstations.  The  business is
dependent upon a readily  available supply of new parts from the OEM, as well as
used product.

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

                                     NOTE 3.
                       FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------

Estimated fair values of the Company's  financial  instruments (all of which are
held for non-trading purposes), are as follows:

                                  March 31, 1999              March 31, 1998
                             ------------------------    -----------------------
                              Carrying                   Carrying
                               Amount      Fair Value     Amount      Fair Value
                             ----------    ----------    --------     ----------
Cash and cash equivalents    $1,103,325    $1,103,325    $733,031      $733,031

The carrying amount approximates fair value of cash and short-term  instruments.
The fair value of Notes  receivable - officers  cannot be determined  due to its
related party nature.

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

                                     NOTE 4.
                           NOTES RECEIVABLE - OFFICERS
--------------------------------------------------------------------------------

On December 19, 1997,  the Company  loaned  $150,000 to officers of the Company.
These funds  enabled the officers to purchase  100,000  shares of the  Company's
Common Stock from a former  shareholder in a privately  negotiated  transaction.
The notes are payable in one payment on or before  December  19,  2002,  and are
collateralized  by the purchased  shares of Common Stock.  Interest on the notes
accrue at a rate equal to that of the  Company's  lender's  base rate plus 2.5%,
payable annually beginning December 19, 1998.


                                       19
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                                     NOTE 5.
                             PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------

Property and equipment by major classifications are as follows:

                                                              MARCH 31,
                                                         1999          1998
                                                       --------      --------
     Office furniture and equipment                    $258,840      $194,914
     Machinery and equipment                            233,996       227,953
     Leasehold improvements                              42,304        36,682
     Vehicles                                            36,054        13,632
                                                       --------      --------
                                                        571,194       473,181
     Accumulated depreciation                          (382,021)     (338,453)
                                                       --------      --------

                                                       $189,173      $134,728
                                                       ========      ========

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

                                     NOTE 6.
                        PLEDGED ASSETS AND LINE OF CREDIT
--------------------------------------------------------------------------------

As of March 31, 1999, the Company had a $1,000,000 line of credit agreement with
M&I Thunderbird  Bank.  Under this agreement,  interest is payable at the bank's
base rate.  Borrowings on the line of credit may not exceed seventy-five percent
(75%) of  eligible  accounts  receivable  and thirty  percent  (30%) of eligible
inventory  up to  $300,000.  The line of credit is  collateralized  by  accounts
receivable,  inventory,  property and equipment, and intangibles.  The agreement
contains various covenants by the Company,  including covenants that the Company
will maintain  certain net worth  thresholds and ratios,  will meet certain debt
service coverage  ratios,  and will not enter into or engage in various types of
agreements or business activities without approval from M&I Thunderbird Bank.

As of March 31, 1999 the Company had no  outstanding  borrowings  on the line of
credit and was in compliance with all of the covenants of the agreement.

                                       20
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                                     NOTE 7.
                                 LONG-TERM DEBT
--------------------------------------------------------------------------------

Long-term debt consists of the following:                                 1998
                                                                          ----
8.25%  note  payable  to  M&I Thunderbird  Bank, due in
monthly installments of $3,440, including principal and
interest,   until  paid  in  full;   collateralized  by
accounts receivable, inventory, property and equipment,
and   intangibles.   In   connection   with  this  loan
agreement,  the Company has agreed to maintain  certain
financial  ratios and various  other  covenants.  As of
March 31,  1998,  the  Company was in  compliance  with
these financial ratios and other covenants                              $32,854

Capital lease obligations                                                   932
                                                                        -------
                                                                         33,786
Less:  current portion                                                  (33,786)
                                                                        -------
Long-term portion                                                       $     0
                                                                        =======

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

                                     NOTE 8.
                           OPERATING LEASE COMMITMENTS
--------------------------------------------------------------------------------

The Company  leases  warehouse  and office space in Tempe,  Arizona,  as well as
certain equipment under  non-cancelable  operating lease agreements  expiring at
various times through March,  2001.  Certain of the lease agreements require the
Company to pay property taxes, insurance and maintenance costs. The lease on the
Tempe, Arizona facility expires March, 2001.

The total minimum rental commitment due is as follows:

                         March 31,                     Amount
                         ---------                     ------

                           2000                       $332,709
                           2001                        333,058
                           2002                         27,801
                                                      --------

                                                      $693,568
                                                      ========

Rent expense under operating lease agreements for the years ended March 31, 1999
and 1998 was approximately $285,500 and $268,750, respectively.

                                       21
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                                     NOTE 9.
                                  INCOME TAXES
--------------------------------------------------------------------------------

Deferred tax assets consist of the following components:

                                           March 31, 1999        March 31, 1998
                                           --------------        --------------
      Deferred tax assets:
         State loss carryforwards           $    72,000           $   175,000
         Federal loss carryforwards             338,000               725,000
                                            -----------           -----------

                                                410,000               900,000
         Less:  valuation allowance            (410,000)             (900,000)
                                            -----------           -----------
                                            $      -              $      -
                                            ===========           ===========

The Company's  approximate net operating loss carryforwards and their respective
expiration dates, are as follows:

                                       Amount             Expiration
                                      --------            ----------
            Federal                   $994,000               2011
            Arizona                   $794,000               2001


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

                                    NOTE 10.
                              COMMON STOCK OPTIONS
--------------------------------------------------------------------------------

As of March 31, 1999 and 1998,  100,000  common  stock  options with an exercise
price  of $1.00  per  share  were  held by the  Company's  President  and  Chief
Executive  Officer,   Chief  Financial  Officer,  and  Chairman  of  the  Board,
respectively.  All of these stock options are presently exercisable.  The option
exercise  price equals the fair market value of the  underlying  common stock on
the issue date of August 19, 1996.

The Company  granted a total of 8,400  Incentive  Stock Options with an exercise
price of $3.00 to certain of the  Company's  non-officer  employees on March 31,
1999.  The options will be fully vested on March 31, 2002,  subject to continued
employment,  and they will expire on March 31, 2005.  The option  exercise price
exceeds the fair market value of the  underlying  common stock on the  effective
date of grant.

The Company  has agreed to register  the shares  issuable  upon  exercise of the
above options by filing a registration statement on Form S-8 with the Securities
and Exchange Commission.

                                       22
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                                    NOTE 11.
                               EARNINGS PER SHARE
--------------------------------------------------------------------------------

For the years ended March 31, 1999 and 1998,  the  following  data shows amounts
used in  computing  earnings per share and the effect on income and the weighted
average number of shares of dilutive potential common stock.

                                                             MARCH 31,
                                                     1999               1998
                                                  ----------         ----------

BASIC EPS

Net income                                        $1,050,816         $  839,530
                                                  ==========         ==========

Weighted average number of shares
   outstanding                                     1,473,880          1,473,950
                                                  ==========         ==========

Basic earnings per share                          $     0.71         $     0.57
                                                  ==========         ==========

DILUTED EPS

Net income                                        $1,050,816         $  839,530
                                                  ==========         ==========

Weighted average number of shares
   outstanding                                     1,473,880          1,473,950

Effect of dilutive securities:
   Stock options                                     223,472            181,812
                                                  ----------         ----------

Common stock including assumed
   conversions                                     1,697,352          1,655,762
                                                  ==========         ==========

Diluted earnings per share                        $     0.62         $     0.51
                                                  ==========         ==========


                                       23
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------

                                    NOTE 12.
                             TERMINATED MERGER COSTS
--------------------------------------------------------------------------------

On  November  16,  1998,  the  Company  announced  that it had  entered  into an
Agreement  and Plan of Merger  (the  "Merger  Agreement")  with Cort  Investment
Group,  Inc.,  a Texas  corporation  d/b/a  Contract  Network  ("CNI"),  and RSI
Acquisition  Corp., an Arizona  corporation and  wholly-owned  subsidiary of CNI
("Merger Corp.").

On February 4, 1999,  CNI informed the Company that CNI believed the Company was
in breach of  certain of the  representations  and  warranties  set forth in the
Merger Agreement,  specifically Sections 3.11 ("Tax Returns,  Taxes"), 3.7 ("RSI
SEC Reports"), 3.8 ("Financial Statements and Records of RSI"), 3.9 ("Absence of
Certain Changes") and 3.10 ("No Material Undisclosed Liabilities"). CNI asserted
that the  Company  had not  included  certain  elections  in its 1995 income tax
returns  and  therefore  had  not  properly  preserved  its net  operating  loss
carryforwards.

On February 15, 1999, the Company  received  formal notice of termination of the
Merger  Agreement  from CNI pursuant to the  provisions of Section 8.1(b) of the
Merger  Agreement  based  upon the  Company  allegedly  being in  breach  of the
representations and warranties noted above.

The Company  engaged  experts who filed with the Internal  Revenue Service (IRS)
for a private  letter  ruling to allow the  Company to amend its 1995 income tax
returns to include the omitted elections. On June 25, 1999, the IRS approved the
Company's private letter ruling.

As of March 31, 1999,  the Company had incurred  $50,588 in expenses  related to
the terminated merger.

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

                                    NOTE 13.
                                SUBSEQUENT EVENTS
--------------------------------------------------------------------------------

On April 13, 1999, the Company  purchased  72,000 shares of the Company's Common
Stock on the open market for $2.375 per share.  The Company  intends to hold the
shares in treasury.

                                       24
<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

Not applicable.


                                    PART III

The  information  required by Items 9-11 of Part III is omitted from this Report
by virtue  of the fact  that the  Company  will  file  with the  Securities  and
Exchange  Commission  (the "SEC"),  pursuant to Regulation  14A, within 120 days
after the end of the fiscal year  covered by this  Report,  a  definitive  proxy
statement (the "Proxy Statement") relating to the Company's Annual Stockholders'
Meeting to be held August 6, 1999. Such  information to be included in the Proxy
Statement  is  incorporated   herein  by  reference.   The  Company  expects  to
disseminate the Proxy Statement to stockholders on or about July 7, 1998.

         MATERIAL  INCORPORATED  HEREIN  BY  REFERENCE  AND  LOCATION  IN  PROXY
         STATEMENT FOR 1999 ANNUAL MEETING:

Item No.  Item Description                  Proxy Statement
--------  ----------------                  ---------------

9         Directors, Executive Officers,    Proposal One - Election of Directors
          Promoters, and Control Persons;
          Compliance with Section 16(a)
          of the Exchange Act
10        Executive Compensation            Proposal One - Election of Directors
11        Security Ownership of Certain     General Information - Security
          Beneficial Owners and Management  Ownership of Certain Principal
                                            Stockholders and Management


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  Company  holds a $75,000  note  receivable  from  Wayne R.  Collignon,  the
Company's  President and Chief  Executive  Officer and a $75,000 note receivable
from Dirk D. Anderson, the Company's Chief Financial Officer. The funds provided
by these  notes were used by the  officers  to  purchase  100,000  shares of the
Company's  Common  Stock from a former  shareholder  in a  privately  negotiated
transaction.  The notes are  payable in one  payment on or before  December  19,
2002, and are  collateralized by the purchased shares of Common Stock.  Interest
on the notes accrued at a rate equal to that of the Company's lender's base rate
plus 2.5%, payable annually beginning December 19, 1998.


                                       25
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(A)(1)  EXHIBITS
The following exhibits are filed herewith pursuant to Regulation S-B:

No.      Description                                                   Reference
---      -----------                                                   ---------
2.1      Definitive merger agreement between Cort Investment
         Group, Inc. and Reconditioned Systems, Inc.                       9
3.1      Articles of Incorporation of the Registrant, as
         amended and restated                                              3
3.2      Bylaws of Registrant, as amended and restated                     3
4.1      Form of Common Stock Certificate                                  1
4.5      Registration Rights Agreements                                    2
*4.9     Options issued to Wayne R. Collignon                              4
*4.10    Options issued to Dirk D. Anderson                                4
*4.11    Amendment to Options issued to Wayne Collignon                    5
*4.12    Amendment to Options issued to Dirk D. Anderson                   5
*4.13    Options issued to Wayne R. Collignon                              5
*4.14    Options issued to Dirk D. Anderson                                5
*4.15    Options issued to Scott W. Ryan                                   5
*4.16    Options issued to Scott W. Ryan                                   5
10.1     Lease Agreement, dated April 12, 1990 between Boston
         Safe Deposit and Trust Company, as Lessor, and Registrant
         as Lessee                                                         1
*10.21   Employment Agreement between the Registrant and Wayne R.
         Collignon                                                         3
*10.22   Employment Agreement between the Registrant and Dirk D.
         Anderson                                                          3
10.23    Third amendment to the Lease between the Registrant, as
         Lessee, and Newhew Associates, as Lessor                          3
10.24    Loan documents between the Registrant and Norwest Business
         Credit, Inc.                                                      3
*10.25   Amendment to Employment Agreement between Registrant and
         Wayne Collignon                                                   4
*10.26   Amendment to Employment Agreement between Registrant and
         Dirk Anderson                                                     4
10.27    Amendments to Loan document between Norwest Business Credit
         and Registrant                                                    4
10.28    Amendment to Loan document between Norwest Business Credit
         and Registrant                                                    5
10.29    Loan document between Registrant and M&I Thunderbird Bank         6
*10.30   Loan document between Registrant and Wayne R. Collignon           7
*10.31   Loan document between Registrant and Dirk D. Anderson             7
10.32    Loan document between M&I Thunderbird Bank and the Registrant     8
27       Financial Data Schedule                                          10

         (1)   Filed with Registration  Statement on Form S-18, No. 33-51980-LA,
               under  the  Securities  Act of 1933,  as  declared  effective  on
               December 17, 1992
         (2)   Filed with Form 10-KSB on July 13, 1995
         (3)   Filed with Form 10-KSB on July 2, 1996
         (4)   Filed with Form 10-QSB on November 14, 1996
         (5)   Filed with 10-KSB on June 26, 1997
         (6)   Filed with 10-QSB on November 14, 1997
         (7)   Filed with 10-QSB on February 10, 1998
         (8)   Filed with 10-QSB on August 14, 1998
         (9)   Filed with 10-QSB on November 13, 1998
         (10)  Filed herewith
         (*)   Indicates a compensatory plan or arrangement

                                       26
<PAGE>
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)

(B)  REPORT ON FORM 8-K

On February 18, 1999,  the Company filed a report on Form 8-K dated February 16,
1999  announcing  the  termination  of the Company's  proposed  merger with Cort
Investment Group, Inc. d/b/a Contract Network.

                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

RECONDITIONED SYSTEMS, INC.

BY:      /S/  Wayne R. Collignon
         -----------------------
         Wayne R. Collignon, President and Chief Executive Officer

DATE:    June 29, 1999


In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Registrant  and in the  capacities  and the
dates indicated.

RECONDITIONED SYSTEMS, INC.

BY:      /S/  Wayne R. Collignon
         -----------------------
         Wayne R. Collignon, President and Chief Executive Officer
         (Principal Executive Officer) and Director

DATE:    June 29, 1999

BY:      /S/  Dirk D. Anderson
         -----------------------
         Dirk D. Anderson, Chief Financial Officer (Principal Financial
         Officer and Principal Accounting Officer) and Director

DATE:    June 29, 1999

BY:      /S/  Scott W. Ryan
         -----------------------
         Scott W. Ryan, Chairman of the Board of Directors

DATE:    June 29, 1999

BY:      /S/ Warren Palitz
         -----------------------
         Warren Palitz, Member of the Board of Directors

DATE:    June 29, 1999

                                       27