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, 1998.

[ ]  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, 1998 were $9,583,441.

As of June 19, 1998,  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 $4,421,850.

As of June 19, 1998, the number of outstanding shares of the Registrant's Common
Stock was 1,473,950.

Portions of the Registrant's  definitive  Proxy Statement,  dated June 19, 1998,
for the 1998 Annual  Meeting of  Stockholders  to be held August 14,  1998,  are
incorporated herein by reference into Part III of this Report.
<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,  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 75 -
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 - 25% 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. Typically, the Company reconditions
all of these items with the  exception of  worksurfaces,  which it  manufactures
because the labor charges to repair used worksurfaces are typically greater than
the cost to manufacture them using raw materials such as particle board, backer,
laminate,  and  t-molding.  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, and task lights.  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.   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 in Arizona and
throughout  the  country.  The  Company's  sales  ratio  historically  had  been
approximately 50% retail sales within Arizona and 50% wholesale and retail sales
in other parts of the United States. As a result of increased  marketing efforts
in the  wholesale  division,  the  Company's  sales ratio for the  current  year
approximated  60%  wholesale  and 40%  retail.  The  Company  maintains  a broad
customer base and is not dependent on any one customer.  The Company employs two
full-time  salespeople  who  concentrate  on  telemarketing  and  servicing  its
wholesale  sales,  seven  full-time  salespeople who concentrate on local retail
sales in the greater Phoenix,  Arizona area, and one full-time sales manager who
directs and assists the local retail sales effort.

                                        4
<PAGE>

PERSONNEL

The Company  currently has  approximately 64 full-time  employees of whom 37 are
production personnel directly involved in the reconditioning  process,  five are
in the installation department,  13 are in the sales and design department,  and
nine are 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.  PROPERTIES

The Company  presently  leases a 50,000 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 volume. 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.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the stockholders  during the fourth quarter
of the fiscal year ended March 31, 1998.

                                     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, 1996                 3/8           3/4
September, 1996            3/8         2 3/4
December, 1996           1 3/8             3
March, 1997              1 1/4             2
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

The total number of shares of Common Stock of the Company outstanding as of June
19, 1998 was 1,473,950. As of the close of business on June 19, 1998, the number
of record holders of the Company's  Common Stock is 55 and the number of holders
of the Company's  Common Stock  including  beneficial  holders of shares held in
street name is estimated to be 350.

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.

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,
including,  but not  limited  to, the risk that the  Company  may not be able to
geographically diversify its operations on a profitable basis, the risk that the
Company may not be able to continue to increase  sales,  maximize its production
capacity,  maintain  adequate  inventory levels at an acceptable cost and employ
qualified  personnel in response to rising  sales.  In addition,  the  Company's
business,  operations and financial  condition are subject to substantial  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.

                                        6
<PAGE>

RESULTS OF OPERATIONS

Reconditioned  Systems,  Inc. (the "Company") reported sales for the fiscal year
ended  March 31, 1998 (the  "reporting  period")  of  $9,583,441  as compared to
$7,121,637 for the fiscal year ended March 31, 1997 (hereinafter the "comparable
period"),  resulting  in an increase of  $2,461,804  or 35%.  This  increase was
primarily  attributable to increased  wholesale sales.  Approximately 60% of the
total sales for the reporting  period were  wholesale  sales and 40% were retail
sales.  Sales during the comparable period were  approximately 50% wholesale and
50% retail.

Wholesale sales totaled  $5,661,623 for the reporting period, an increase of 50%
over the  comparable  period.  This was a result of expansion  of the  wholesale
division,  implementation  of a new  marketing  plan  aimed  at  increasing  the
Company's wholesale  customer-base,  and extended industry lead times during the
third quarter of the reporting  period.  The Company began  targeting the larger
metropolitan  areas  throughout the western United States and has had success in
developing new  dealership/broker  relationships  in these areas.  The Company's
wholesale   division  has  been  very  successful  in  the  California   market.
Approximately  53% of  wholesale  sales  during  the  reporting  period  were to
customers located in California.  The remaining 47% was divided among many other
states with no individual state attributable for more than 8%.

Retail sales in the Phoenix and Tucson  markets  totaled  $3,921,818  during the
reporting period, an increase of 17% over the comparable  period.  This increase
was  primarily  a result  of  additional  sales  personnel  and  support  staff,
development of an extensive  formal training program for the sales personnel and
increased  advertising.  During the comparable period, the Company employed five
to six retail  salespeople and two sales support staff members.  The Company now
employs seven to eight  salespeople  and three sales support staff members.  The
complexity and demand for accuracy  within the Company's  industry  require that
the sales staff have proper  training  and  product  knowledge.  The Company has
developed a formal training  program  designed to equip new salespeople with the
skills necessary to succeed.  In addition,  the Company invested nearly $100,000
in  advertising  and  promotion  during the  reporting  period,  an  increase of
approximately $15,000 over the comparable period.

The Company also benefited  from a temporary  competitive  advantage  during the
third  quarter of the  reporting  period due to  extended  industry  lead times.
Industry  lead times during the third  quarter  averaged  between ten and eleven
weeks,  as compared  to typical  lead times of five to six weeks.  Although  the
Company normally is less  competitive on larger projects,  a number of end-users
were  required  to find  alternative  modular  office  furniture  sources due to
scheduling demands. The Company was able to provide those end-users  refurbished
product within their time constraints.  Industry lead times have now returned to
normal levels.

The Company's gross profit margin for the reporting  period was 25%, as compared
to a gross  profit  margin  of 23%  for  the  comparable  period.  Although  the
Company's  increase in the  percentage of wholesale  sales to retail sales would
normally  indicate a lower gross  profit  margin,  the  increased  sales  volume
allowed the Company to capitalize  on gains in economies of scale.  In addition,
the Company's  improved  financial  position provided the necessary cash to fund
large buys of used  workstations  at reduced rates.  This allowed the Company to
reduce  its  average  cost  of  used  workstations  by  approximately  2% of the
manufacturer's list price over the comparable period.

                                        7
<PAGE>

Another  factor  contributing  to increased  sales and an improved  gross profit
margin during the reporting period was the Company's induction into the Haworth,
Inc. RetroFit Vendor Program late in the comparable period. Haworth selected the
Company to participate in this prestigious  program which allows Haworth dealers
to buy refurbished Haworth  workstations from the Company and allows the Company
to buy  Haworth  parts  directly  from  Haworth.  This has  proved  to be a good
partnership.  Although  the  sales  are  made  at a  substantial  discount,  the
reduction  in gross  profit is offset  by the right to buy parts  directly  from
Haworth at a discounted price.

The Company's selling and administrative expenses were reduced from 19% of sales
in the comparable  period to 16% for the reporting  period.  The 3% decrease was
primarily  a result of a lower  overall  percentage  of fixed  expenses  and the
wholesale/retail  sales mix. The Company's  wholesale sales generally have lower
selling expenses than those of retail sales.

The Company's  other income and expenses,  which consists  primarily of interest
expense,  improved by $67,478 or 86% from the comparable period to the reporting
period.  This  improvement was primarily due to the elimination of the Company's
interest expense and minimum interest requirements  associated with its previous
line of credit  agreement.  Effective July 30, 1997, the Company  entered into a
new  borrowing  agreement  with M&I  Thunderbird  Bank,  lowering the  Company's
borrowing rate and eliminating the minimum interest  payments assessed under the
previous  line of credit.  The Company now carries a zero dollar  balance on the
new line of credit and believes it has built a strong working  relationship with
M&I Thunderbird.

The increased revenues, improved gross margin, and lower selling, administrative
and interest  expense resulted in a $581,416 or 225% increase in net income over
the comparable period.

INCOME TAXES

As  of  March  31,  1998,  the  Company  had  federal  loss   carryforwards   of
approximately   $2,120,000  and  state  loss   carryforwards   of  approximately
$1,920,000. 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.

FINANCIAL CONDITION AND LIQUIDITY

The  Company's  financial  condition and  liquidity  have improved  dramatically
during  the  reporting  period.  The  primary  forces  affecting  the  Company's
financial  condition  and  liquidity  are results of  operations,  collection of
accounts receivable,  ability to turn inventory, and rate of growth. The results
of operations and rate of growth during the period were discussed above.

The  Company's  accounts  receivable  turns  improved   substantially  over  the
comparable period. The number of days sales in the Company's accounts receivable
as of March 31, 1998 were 37,  compared to 51 days as of March 31, 1997.  As the
Company's standard terms are net 30 days for existing customers and 50% down/50%
net 30 days for new customers,  the Company hopes to maintain a collection  rate
at or near 30 days.

The  Company  was also  able to  improve  its  inventory  turns.  The  Company's
inventory turns were 6.75 for the year ended March 31, 1998, as compared to 4.24
for the year ended March 31, 1997. This  improvement was achieved through better
general management and purchasing  practices,  increased brokering of product to
other  refurbishers,  and  implementation of a Just-In-Time  Inventory  whenever
possible.
                                        8
<PAGE>

The cumulative  effect of the improved  accounts  receivable and inventory turns
and the improved  results of  operations  resulted in cash provided by operating
activities  of  $1,252,483  for the  reporting  period.  The  cash  provided  by
operations  allowed  the  Company to pay off its  credit  line,  further  reduce
long-term debt and increase its cash on hand by $590,907.

As of March 31,  1998,  the  Company  had net worth of  $2,215,554  and  working
capital of $1,912,692.  Management  believes cash flow from current  operations,
cash reserves, and the availability on the Company's $1,000,000 credit line will
provide  adequate  funds to sustain the  Company's  growth  without the need for
additional outside capital.

FUTURE OUTLOOK

Management is extremely  proud of the  operating  results  achieved  during this
reporting  period.  The Company  reported a 35%  increase in revenues and a 225%
increase in net income. These results exceeded management's initial expectations
for the reporting  period.  Management  plans to continue to pursue  gradual and
focused growth; however, at a more modest rate than during the reporting period.
In order to facilitate  continued  growth,  the Company  intends to increase its
warehouse,  office and showroom  space at the Tempe,  Arizona  location  through
building  improvements  and  expansion.   Management  hopes  to  complete  these
improvements before the end of the calendar year 1998.

The Company  intends to pursue growth in both the wholesale and retail  markets.
The wholesale division intends to develop, strengthen and maintain dealer/broker
relationships.  In addition to  nurturing  the accounts  established  in the San
Francisco/Bay  Area and Los Angeles  markets,  the Company will  concentrate  on
targeted  growth in other markets  throughout  the western  United  States.  The
retail  division  will continue to focus on hiring,  training and  maintaining a
qualified and competent sales staff and continue to develop advertising programs
designed to increase our local exposure.

Now that the Company has successfully  navigated through its "turn-around" stage
and has shown significantly improved results of operations,  management hopes to
continue  to  build on this  growth  and is open to a  conservative  acquisition
program for additional growth and increased shareholder value.

The Company is currently  investigating  and taking corrective action to protect
itself from any potential computer hardware and software difficulties related to
Year 2000 compliance.  The Company intends to complete all corrective  action by
June,  1999.  Management  believes the capital  expenditure  associated with the
corrective  actions  can be funded  out of cash  reserves  and the effect on the
Company's future results of operations will not be material.

                                        9
<PAGE>

ITEM 7  FINANCIAL STATEMENTS



                           RECONDITIONED SYSTEMS, INC.

                              FINANCIAL STATEMENTS
                             MARCH 31, 1998 AND 1997




                                       10
<PAGE>

                          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,  1998 and  1997,  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,  1998 and 1997,  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 5, 1998

                                       11
<PAGE>

                           RECONDITIONED SYSTEMS, INC.
                                 BALANCE SHEETS
                             MARCH 31, 1998 AND 1997

                                     ASSETS

CURRENT ASSETS:                                          1998         1997
                                                         ----         ----

Cash and cash equivalents (Notes 1, 2 and 3)         $  733,031    $  142,124
Accounts receivable - trade, net of allowance
 for doubtful accounts of $30,000 and $31,000,
 respectively (Notes 1, 5 and 6)                        962,122       999,087
Inventory, net (Notes 1, 5 and 6)                       925,258     1,197,840
Prepaid expenses and other current assets                58,885        25,439
                                                     ----------    ----------

      TOTAL CURRENT ASSETS                            2,679,296     2,364,490
                                                     ----------    ----------
PROPERTY AND EQUIPMENT: (NOTES 1, 5 AND 6)

Machinery and equipment                                 227,953       221,630
Office furniture and equipment                          194,914       244,637
Leasehold improvements                                   36,682        35,620
Vehicles                                                 13,632        13,632
                                                     ----------    ----------
                                                        473,181       515,519
Accumulated depreciation                               (338,453)     (334,413)
                                                     ----------    ----------

                                                        134,728       181,106
                                                     ----------    ----------
OTHER ASSETS:

Notes receivable - officers (Notes 3 and 4)             150,000            --
Refundable deposits                                      13,930        14,539
Other                                                     4,204        11,074
                                                     ----------    ----------

                                                        168,134        25,613
                                                     ----------    ----------

                                                     $2,982,158    $2,571,209
                                                     ==========    ==========

                   The Accompanying Notes are an Integral Part
                           of the Financial Statements

                                       12
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                                 BALANCE SHEETS
                             MARCH 31, 1998 AND 1997

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:                                    1998            1997
                                                        ----            ----

Credit line (Note 5)                                 $        --    $   444,336
Current maturities of long-term debt (Note 6)             33,786         50,254
Accounts payable                                         444,900        437,333
Customer deposits                                         44,530         29,078
Accrued expenses and other current liabilities           243,388        201,124
                                                     -----------    -----------

      TOTAL CURRENT LIABILITIES                          766,604      1,162,125
                                                     -----------    -----------

LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 6)              --         33,060
                                                     -----------    -----------

COMMITMENTS (NOTE 7)                                          --             --

STOCKHOLDERS' EQUITY:  (NOTES 9 AND 10)

Common stock, no par value; 20,000,000
  shares authorized; 1,474,084 shares
  issued and 1,473,950 shares outstanding            $ 4,586,982    $ 4,586,982
Accumulated deficit                                   (2,367,674)    (3,207,204)
                                                     -----------    -----------

                                                       2,219,308      1,379,778
Less: treasury stock, 134 shares, at cost                 (3,754)        (3,754)
                                                     -----------    -----------

                                                       2,215,554      1,376,024
                                                     -----------    -----------

                                                     $ 2,982,158    $ 2,571,209
                                                     ===========    ===========

                   The Accompanying Notes are an Integral Part
                           of the Financial Statements

                                       13
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                            STATEMENTS OF OPERATIONS
                   FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

                                                        1998         1997
                                                        ----         -----

Sales                                                $9,583,441    $7,121,637

Cost of sales                                         7,168,365     5,453,597
                                                     ----------    ----------

Gross profit                                          2,415,076     1,668,040

Selling & administrative expenses                     1,564,819     1,331,721
                                                     ----------    ----------

Income from operations                                  850,257       336,319
                                                     ----------    ----------

Other income (expense):
 Interest income                                          9,771        10,336
 Interest expense                                       (20,173)      (96,320)
 Other                                                     (325)        7,779
                                                     ----------    ----------

                                                        (10,727)      (78,205)
                                                     ----------    ----------

Income before income taxes                              839,530       258,114

Provision for income taxes (Note 8)                          --            --
                                                     ----------    ----------

Net income                                           $  839,530    $  258,114
                                                     ==========    ==========

Basic earnings per share (Notes 1 and 11)            $     0.57    $     0.18
                                                     ==========    ==========

Basic weighted average number
  of shares outstanding                               1,473,950     1,473,950
                                                     ==========    ==========
Diluted earnings per common
  and common equivalent share (Notes 1 and 11)       $     0.51    $     0.16
                                                     ==========    ==========
Diluted weighted average number
  of shares outstanding                               1,655,762     1,593,704
                                                     ==========    ==========

                   The Accompanying Notes are an Integral Part
                           of the Financial Statements

                                       14
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                   FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>
                     COMMON      COMMON    PREFERRED  PREFERRED     RETAINED
                     STOCK       STOCK       STOCK      STOCK       EARNINGS     TREASURY
                     SHARES      AMOUNT      SHARES     AMOUNT      (DEFICIT)     STOCK        TOTAL
                     ------      ------      ------     ------      ---------     -----        -----
<S>                <C>        <C>          <C>       <C>          <C>           <C>      <C>        
BALANCE AT
MARCH 31, 1996      1,621,300  $2,489,143   555,555   $2,156,717   $(3,465,318)  $(3,754)  $1,176,788

CONVERSION OF
PREFERRED STOCK     7,222,215   2,097,839  (555,555)  (2,156,717)           --        --      (58,878)
TO COMMON
STOCK, NET OF
COSTS OF $58,878
(NOTE 9)

REVERSE SPLIT OF
COMMON STOCK       (7,369,565)         --        --           --            --        --           --
(NOTE 9)

NET INCOME                 --          --        --           --       258,114        --      258,114
                   ----------  ----------  --------   ----------   -----------   -------   ----------
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
                   ==========  ==========  ========   ==========   ===========   =======   ==========
</TABLE>


                   The Accompanying Notes are an Integral Part
                           of the Financial Statements

                                       15
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                            STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED MARCH 31, 1998 AND 1997


                                                         1998           1997
                                                         ----           -----
Cash Flows from Operating Activities:
  Cash received from customers                       $ 9,620,081    $ 6,686,906
  Cash paid to suppliers and employees                (8,353,071)    (6,628,483)
  Interest received                                        5,646         10,336
  Interest paid                                          (20,173)      (101,026)
                                                     -----------    -----------
      Net cash provided (used) by
      operating activities                             1,252,483        (32,267)
                                                     -----------    -----------

Cash Flows from Investing Activities:
  Loans to officers                                     (150,000)            --
  Purchase of property and equipment                     (17,712)       (30,604)
  Other                                                       --         37,081
                                                     -----------    -----------
      Net cash provided (used) by
      investing activities                              (167,712)         6,477
                                                     -----------    -----------

Cash Flows from Financing Activities:
   Proceeds from credit line and
     long-term borrowings                              2,643,000      6,400,000
   Principal payments on credit line,
     long-term borrowings and
     obligations under capital leases                 (3,136,864)    (6,273,906)
   Preferred stock conversion costs                           --        (58,878)
                                                     -----------    -----------
      Net cash provided (used) by
      financing activities                              (493,864)        67,216
                                                     -----------    -----------

Increase in cash and cash equivalents                    590,907         41,426

Cash and cash equivalents at beginning of year           142,124        100,698
                                                     -----------    -----------

Cash and cash equivalents at end of year             $   733,031    $   142,124
                                                     ===========    ===========


                   The Accompanying Notes are an Integral Part
                           of the Financial Statements

                                       16
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                   FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

                                                          1998          1997
                                                          ----          ----
Reconciliation of Net Income to Net Cash
 Provided (Used) by Operating Activities:

   Net income                                         $  839,530     $ 258,114

Adjustments to reconcile net income to
 net cash  provided  (used) by operating
 activities:

   Depreciation and amortization                          68,256        64,415
   Provision for doubtful accounts                        (1,198)       23,198
   Loss on disposal of fixed assets                        2,704            --

Changes in assets and liabilities:

   Trade receivables                                      38,163      (465,708)
   Inventory                                             272,582       178,691
   Prepaid expenses and other current assets             (32,837)         (560)
   Accounts payable and accrued expenses                  65,283       (90,417)
                                                      ----------     ---------

      Net cash provided (used) by operating
       activities                                     $1,252,483     $ (32,267)
                                                      ==========     =========

Non-Cash Investing and Financing Activities:

During the year ended March 31, 1998, the Company had no non-cash activities.

During the year ended March 31,  1997,  the  Company  recognized  investing  and
financing  activities that affected its assets,  liabilities  and  stockholders'
equity,  but did not  result  in  cash  receipts  or  payments.  These  non-cash
activities are as follows:

               Conversion of 555,555  share of the Company's  Series A Preferred
               Stock into 7,222,215 shares of common stock (See Note 9).

               1 for 6 reverse-split of common stock (see Note 9).

               Acquired equipment via trade-in of like-kind equipment.


                   The Accompanying Notes are an Integral Part
                           of the Financial Statements

                                       17
<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.

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,
         1998 and 1997,  the Company had  established  a reserve for damaged and
         obsolete inventory in the amount of $25,000.

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

                                       18
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

--------------------------------------------------------------------------------
                                     NOTE 1.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS,
                        AND USE OF ESTIMATES (CONTINUED)
--------------------------------------------------------------------------------
DEFERRED INCOME TAXES:
         Deferred  income  taxes are  provided  on a 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
         and 1996 are not included in the  computation  of diluted  earnings per
         share  because  their  effect would be  antidilutive.  The earnings per
         share and the weighted  average  number of shares  outstanding  for the
         year ended March 31, 1997 give retroactive  effect to the conversion of
         preferred  stock to common stock and the reverse  split of common stock
         which were effective on August 12, 1996 (see Note 9).

NEW ACCOUNTING PRONOUNCEMENTS:
         During the year ended March 31, 1998, the Company adopted  Statement of
         Financial  Accounting Standards No. 128, "Earnings per Share" (SFAS No.
         128).  This  pronouncement  provides a different  method of calculating
         earnings per share than was required by APB 15,  "Earnings  per Share".
         The earnings per share for the year ended March 31, 1997 were  restated
         to give effect to this pronouncement.

                                       19
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):
          Statement  of  Financial  Accounting  Standards  No.  130,  "Reporting
          Comprehensive  Income"  (SFAS No. 130) issued by the FASB is effective
          for financial  statements  with fiscal years  beginning after December
          15, 1997. Earlier  application is permitted.  SFAS No. 130 establishes
          standards for reporting  and display of  comprehensive  income and its
          components in a full set of general-purpose financial statements.  The
          Company  does not expect  adoption  of SFAS No. 130 to have a material
          effect, if any, on its financial position or results of operations.

--------------------------------------------------------------------------------
                                     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,  1998,  the  Company  had
approximately $417,000 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, 1998             March 31, 1997
                                 --------------             --------------
                             Carrying                   Carrying
                              Amount    Fair Value       Amount     Fair Value
                              ------    ----------       ------     ----------

Cash and cash equivalents    $733,031    $733,031       $142,124     $142,124

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.

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

--------------------------------------------------------------------------------
                                     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
accrues at a rate equal to that of the  Company's  lender's base rate plus 2.5%,
payable annually beginning December 19, 1998.

--------------------------------------------------------------------------------
                                     NOTE 5.
                        PLEDGED ASSETS AND LINE OF CREDIT
--------------------------------------------------------------------------------

As of March 31, 1997, the Company had outstanding borrowings of $444,336 under a
$1,200,000 revolving line of credit agreement with Norwest Business Credit, Inc.
Interest  on that line of credit  agreement  was payable at the bank's base rate
plus four  percent  (4%),  and had a minimum  monthly  interest  requirement  of
$4,000.  Borrowings  on the line of credit  could  not  exceed a total of eighty
percent  (80%) of  eligible  accounts  receivable  and thirty  percent  (30%) of
eligible inventory.  At March 31, 1997, the maximum amount available on the line
of credit was approximately $675,000. Accounts receivable,  inventory,  property
and equipment and intangibles  were assigned as collateral for amounts  borrowed
under this loan agreement.  The credit facility  contained various convenants by
the Company,  including  covenants that the Company would  maintain  certain net
worth  thresholds,  would meet  certain  annual net income  requirements,  would
maintain  certain  debt  service  coverage  ratios,  and would not enter into or
engage in various  types of agreements or business  activities  without  written
approval from Norwest Business Credit, Inc.

On July 30,  1997,  the Company  terminated  its line of credit  agreement  with
Norwest Business  Credit,  Inc. and entered into a line of credit agreement with
M&I  Thunderbird  Bank.  Under  this new  $1,000,000  revolving  line of  credit
agreement,  which is effective through July 31, 1998, interest is payable at the
bank's base rate plus two percent (2%). 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, 1998, the Company had no outstanding
borrowings on the line of credit and was in compliance with all of the covenants
of the agreement.
                                       21
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

--------------------------------------------------------------------------------
                                     NOTE 6.
                                 LONG-TERM DEBT
--------------------------------------------------------------------------------

Long-term debt consists of the following:                      1998       1997
                                                               ----       ----

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   $   --

8.25%  note  payable to  National  Bank of  Arizona,  due in
monthly  installments  of $4,087,  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, 1997, the Company
was in  compliance  with  these  financial  ratios and other
covenants.  In addition, this note payable was guaranteed by
certain former Board members.                                       --   76,071


Capital lease obligations                                          932    7,243
                                                              --------  -------
                                                                33,786   83,314

Less:  current maturities                                      (33,786) (50,254)
                                                              --------  -------

         Long-term portion                                    $     --  $33,060
                                                              ========  =======

                                       22
<PAGE>
                          RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

--------------------------------------------------------------------------------
                                     NOTE 7.
                           OPERATING LEASE COMMITMENTS
--------------------------------------------------------------------------------

The Company  leases  warehouse  and office space in Tempe,  Arizona,  as well as
certain equipment and vehicles 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
              ---------                     ------
                1999                       $282,974
                2000                        280,971
                2001                        280,412
                                           --------
                                           $844,357
                                           ========

Rent expense under operating lease agreements for the years ended March 31, 1998
and 1997 was approximately $268,750 and $277,500, respectively.

--------------------------------------------------------------------------------
                                     NOTE 8.
                                  INCOME TAXES
--------------------------------------------------------------------------------

Deferred tax assets consists of the following components:

                                               March 31, 1998     March 31, 1997
                                               --------------     --------------
    Deferred tax assets:
       State loss carryforwards                 $ 175,000          $   250,000
       Federal loss carryforwards                 725,000            1,015,000
                                                ---------          -----------

                                                  900,000            1,265,000
       Less:  valuation allowance                (900,000)          (1,265,000)
                                                ---------          -----------
                                                $      --          $        --
                                                =========          ===========


                                       23
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

--------------------------------------------------------------------------------
                                     NOTE 8.
                            INCOME TAXES (CONTINUED)
--------------------------------------------------------------------------------

Due to significant  losses  incurred during the years ended March 31, 1994, 1995
and 1996 and the  uncertainty  of the  utilization  of the  operating  losses in
future periods, the Company established,  and continues to maintain, a valuation
allowance equal to the full amount of its deferred tax assets.

The  Company's  tax expense  (benefit)  differed  from the  statutory  rate,  as
follows:

                                                            1998         1997
                                                            ----         ----

Statutory rate applied to income                         $ 331,000    $  97,000
  before income taxes

Increase (decrease) in income taxes resulting from:
   Utilization of net operating loss deductions           (343,000)    (119,000)
   Other                                                    12,000       22,000
                                                         ---------    ---------

                                                         $      --    $      --
                                                         =========    =========

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

                                   Amount             Expiration
                                   ------             ----------
                  Federal          $2,120,000            2011
                  Arizona          $1,920,000            2001

--------------------------------------------------------------------------------
                                     NOTE 9.
                       REORGANIZATION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------

On August 5, 1996, at the Company's annual shareholders  meeting,  the Company's
shareholders  approved,  among other things, a  reorganization  of the Company's
capital structure.  The reorganization,  which was effective on August 12, 1996,
consisted of the automatic  conversion  of each share of the Company's  Series A
Convertible  Preferred  Stock,  together  with any and all  accrued  but  unpaid
dividends  through the conversion date, into thirteen shares of common stock and
a one-for-six  reverse stock split  (immediately  following the preferred  stock
conversion). All fractional shares resulting from the reverse split were rounded
up to the next whole share.

                                       24
<PAGE>
                           RECONDITIONED SYSTEMS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

On August 19,  1996,  the Board of Directors  approved  the  repricing of 16,666
stock options held by the Company's  President and Chief Executive Officer,  and
16,666 stock options held by the Company's Chief  Financial  Officer from $16.50
per share to $1.00 per share.  In addition,  at the same time,  the Board issued
83,334,  83,334,  and 100,000 stock options with an exercise  price of $1.00 per
share to 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 Company has agreed to register the shares  issuable
upon exercise of the option by filing a registration  statement on Form S-8 with
the Securities  and Exchange  Commission.  The option  exercise price equals the
fair market value of the underlying common stock on August 19, 1996.

In accordance  with  accounting for such options  utilizing the intrinsic  value
method,  there is no related  compensation  expense  recorded  in the  Company's
financial  statements  for the year ended March 31, 1997.  There were no options
granted  during  the year  ended  March  31,  1998.  Had  compensation  cost for
stock-based  compensation been determined based on the fair value of the options
at the grant dates  consistent  with the method of SFAS 123, the  Company's  net
income and  earnings per share for the year ended March 31, 1997 would have been
reduced to the pro forma amounts presented below:

                                                        1997
                                                        ----
Net income, as reported                               $258,114
Net income, pro forma                                  253,054

Basic earnings per share, as reported                 $   0.18
Basic earnings per share, pro forma                   $   0.17

Diluted earnings per share, as reported               $   0.16
Diluted earnings per share, pro forma                 $   0.16

The fair value of option  grants is estimated as of the date of grant  utilizing
the  Black-Scholes  option-pricing  model with the  following  weighted  average
assumptions  for  grants in 1998 and 1997,  expected  life of options of two (2)
years,  expected  volatility of forty percent (40%),  risk-free interest rate of
eight  percent  (8.0%),  and a zero percent (0%)  dividend  yield.  The weighted
average fair value at date of grant for options granted during 1997 approximated
$.03.

                                       25

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

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

For the years ended March 31, 1998 and 1997,  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.  The earnings per
share and the weighted  average number of shares  outstanding for the year ended
March 31, 1997 give  retroactive  effect to the conversion of preferred stock to
common  stock and the  reverse  split of common  stock which were  effective  on
August 12, 1996 (see Note 9).

                                                              MARCH 31,
                                                        1998             1997
                                                        ----             ----
BASIC EPS

Net income                                           $  839,530       $  258,114
                                                     ==========       ==========
Weighted average number of shares
  outstanding                                         1,473,950        1,473,950
                                                     ==========       ==========

Basic earnings per share                             $     0.57       $     0.18
                                                     ==========       ==========

DILUTED EPS

Net income                                           $  839,530       $  258,114
                                                     ==========       ==========
Weighted average number of shares
  outstanding                                         1,473,950        1,473,950

Effect of dilutive securities:
  Stock options                                         181,812           92,224
                                                     ----------       ----------
Common stock including assumed
  conversions                                         1,655,762        1,566,174
                                                     ==========       ==========

Diluted earnings per share                           $     0.51       $     0.16
                                                     ==========       ==========

Certain  outstanding  warrants  which  expired  June  30,  1997 and 1996 are not
included in the  computation of diluted  earnings per share because their effect
would be antidilutive.

                                       26
<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 14,  1998.  Such  information  included  in the Proxy
Statement  is  incorporated   herein  by  reference.   The  Company  expects  to
disseminate the Proxy Statement to stockholders on or about July 1, 1998.

         MATERIAL  INCORPORATED  HEREIN  BY  REFERENCE  AND  LOCATION  
         IN  PROXY STATEMENT FOR 1998 ANNUAL MEETING:

ITEM NO.      ITEM DESCRIPTION                         PROXY STATEMENT
--------      ----------------                         ---------------

  9        Directors, Executive Officers,        Proposal One - Election of 
           Promoters, and Control Persons;       Directors
           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 $150,000 in notes receivable from officers. 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 accrues at a rate equal to that of the Company's lender's base rate
plus 2.5%, payable annually beginning December 19, 1998.

                                       27
<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
---      -----------                                                   ---------
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
4.8      Warrants issued to Nutmeg Securities, Inc.                          4
*4.9     Options issued to Wayne R. Collignon                                5
*4.10    Options issued to Dirk D. Anderson                                  5
*4.11    Amendment to Options issued to Wayne Collignon                      6
*4.12    Amendment to Options issued to Dirk D. Anderson                     6
*4.13    Options issued to Wayne R. Collignon                                6
*4.14    Options issued to Dirk D. Anderson                                  6
*4.15    Options issued to Scott W. Ryan                                     6
*4.16    Options issued to Scott W. Ryan                                     6
10.1     Lease Agreement, dated April 12, 1990 between Boston Safe
         Deposit and Trust Company, as Lessor, and Registrant as Lessee      1
10.17    Loan documents between National Bank of Arizona and the Registrant  2
*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                                                     5
*10.26   Amendment to Employment Agreement between Registrant and
         Dirk Anderson                                                       5
10.27    Amendments to Loan document between Norwest Business Credit
         and Registrant                                                      5
10.28    Amendment to Loan document between Norwest Business Credit
         and Registrant                                                      6
10.29    Loan document between Registrant and M&I Thunderbird Bank           7
*10.30   Loan document between Registrant and Wayne R. Collignon             8
*10.31   Loan document between Registrant and Dirk D. Anderson               8
27       Financial Data Schedule                                             9

(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 Proxy Statement on July 15, 1996
(5)  Filed with Form 10-QSB on November 14, 1996
(6)  Filed with 10-KSB on June 26, 1997
(7)  Filed with 10-QSB on November 14, 1997
(8)  Filed with 10-QSB on February 10, 1998
(9)  Filed herewith
(*)  Indicates a compensatory plan or arrangement

(b)  REPORT ON FORM 8-K

No  reports on Form 8-K were filed  during the last  quarter of the fiscal  year
covered by this Report.

                                       28
<PAGE>

                                   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 26, 1997

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 26, 1997

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

DATE:    June 26, 1997

BY: /s/  SCOTT W. RYAN
   ---------------------------
   Scott W. Ryan, Chairman of the Board of Directors

DATE:    June 26, 1997

BY: /s/  SUSAN J. ZINGA
   ---------------------------
   Susan J. Zinga, Member of the Board of Directors

DATE:    June 26, 1997

                                       29