<PAGE>
 
================================================================================
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                 FORM 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     AND EXCHANGE ACT OF 1934 [Fee Required]

     For the fiscal year ended September 30, 1998  
                                                Commission File Number:  0-17192

                        CYPRESS FINANCIAL SERVICES, INC.
                 (Name of Small Business Issuer in its Charter)

                  Nevada                            84-1061382
      (State or other jurisdiction of             (IRS Employer
       incorporation or organization)            Identification No.)

     5400 Orange Avenue, Suite 200, Cypress, California       90630
         (Address of principal executive offices)           (Zip Code)

Issuer's Telephone Number:  (714) 995-0627

Securities registered under Section 12(b) of the Exchange Act:
                (Title of each class)               (Name of each exchange on
                                                        which registered)
                       NONE                                    NONE

Securities registered under Section 12(g) of the Exchange Act:
                               (Title of class)
                                 COMMON STOCK

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 is not 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]

State issuer's revenues for its most recent fiscal year:  $7,148,016.

The aggregate market value of the Registrant's Common Stock held by non-
affiliates is $3,214,959.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  There were 6,527,571 shares of the
Registrant's Common Stock issued and outstanding as of November 30, 1998.

================================================================================
<PAGE>
 
ITEM 1  DESCRIPTION OF BUSINESS

General

Cypress Financial Services, Inc. provides accounts receivable management
services to various health care providers, banks, financial institutions, and
retail firms. These services include, among other things, billing, delinquent
debt recovery, management of litigation and bankruptcy claims, and workers'
compensation lien claim resolution. Having been in the business since 1977, the
Company augments its 21 years of experience and vast knowledge base in
receivable management with the innovative use of advanced telecommunications and
operating systems technology to provide its clients with responsive and thorough
service. The most critical element for optimum client service, however, still
remains with the Company's human resources. Accordingly, the Company has
established experience-based selection criteria to guide its recruiting program.
The Company complements its recruiting process with a training program carefully
designed to equip its people with the essential knowledge and attitude to
perform as professional receivable management specialists.

The Company focuses its services on the three segments of the accounts
receivable management industry that it believes it knows best and deems most
significant - healthcare, banking and retail. The services are rendered through
wholly owned subsidiaries as identified and discussed below.

Services to Healthcare Providers

The Company began providing accounts receivable management services to the
healthcare industry in 1977 when Medical Control Services, Inc. (MCSI) was
founded. The Company's healthcare division (i.e. MCSI and its subsidiaries) has
service contracts with over 1,000 clients that include hospitals, medical
groups, doctors, laboratories, radiology centers, emergency rooms, and home
health organizations. This division has serviced over $400 million in receivable
placements since inception and received $50 million in new placements during
fiscal year 1998. No client accounted for more than 5% of the Company's revenue
in fiscal year 1998. Additionally, out of MCSI's top 10 revenue producing
clients, 6 have been utilizing the Company's services for at least 12 years and
accounted for approximately 22% of MCSI's service revenue in fiscal year 1998.
The following briefly describes the core services performed for healthcare
providers:

     Pre-Collect Services

     My Boss, Inc. d.b.a. Business Office Support Services (BOSS) was
     incorporated in California in 1989 to provide its clients with pre-
     collection management of their accounts receivable. BOSS acts as an
     extension of its clients' accounts receivable department by utilizing its
     staff of trained specialists and its advanced data processing support
     systems to replace or supplement the traditional accounts receivable
     department. By using its employees, computers and predictive dialing
     technology, BOSS is able to more timely and effectively reach the customers
     and receive payments than the traditional method of pre-collection demand
     letters. The pre-collection services offered by BOSS are aimed at lowering
     the cost of collection for its clients and increasing recovery rates of
     receivables by minimizing the probability of such receivables to become
     delinquent. BOSS acts as the accounts receivable department allowing the
     client's personnel to focus on revenue producing activities of their
     business. In fiscal year 1988, BOSS received placements of approximately $6
     million.
<PAGE>
 
     Billing Services

     The Company currently performs bill submission and follow-up services for
     its healthcare clients. This service is integrated into the debt recovery
     service that it currently provides to health care providers. The Company
     intends to expand this service to include, among other services, actual
     bill creation and coding services as the Company aims to provide a full
     service receivable management menu to its healthcare provider clients.

     Delinquent Debt Recovery

     Managing and collecting delinquent receivable accounts currently comprises
     a significant portion of the Company's receivable management service to
     health care providers. The Company relies on its more than two decades of
     experience in providing effective receivables management to its health care
     provider clients. Its skilled and experienced staff facilitates the
     transfer of debtor account information with little or no disturbance to the
     medical business office. Once the data is in-house, the Company applies its
     technology to access state and national files containing debtor information
     and their assets. On an as needed basis, the Company's specialty recovery
     department provides instant legal advice to recovery specialists to
     facilitate any immediate action that may be necessary to increase the
     probability of recovery of the clients' receivables. In fiscal year 1998,
     MCSI received placements of approximately $27 million of delinquent
     receivable accounts.

     Insurance Claims Management

     Lien Solutions, Inc. (LSI) began providing Workers' Compensation case
     resolution services in 1985. LSI developed a system to resolve contested
     Workers' Compensation claims and provide better solutions for the day to
     day problems in the medical business office. Workers' Compensation claims
     are more complex than other debt assigned to the Company. This type of
     receivables claim is unique because the Workers' Compensation Appeals Board
     (WCAB) has exclusive jurisdictions over all claims. The State legislature
     mandates the WCAB and periodically enacts legislation controlling lien
     claims, making it cumbersome for most healthcare business office personnel
     to keep up with regulatory changes impacting certain claims. LSI has
     established a unique lien service menu that allows for a complete follow
     through on all claims assigned for resolution. In addition, LSI extends its
     specialized service to third party payer disputes, such as personal injury
     liens, Medicare, HMO denials and lien subrogation. LSI received placements
     of approximately $17 million during fiscal year 1998.

Banking and Financial Institutions

Merchants' Recovery Services, Inc. (MRSI) was founded in 1982 to provide third
party accounts receivable recovery services to non-healthcare commercial
businesses. Historically, MRSI's recovery services have been provided to banks
and financial institutions solely on a contingency fee basis which ranged from
25% to 50% depending on the size, age and the Company's assessment of the
collectibility of the accounts placed for service. Account assignments are
generally covered by month to month contracts.

In the early nineties, certain banks and financial institutions, primarily
credit card issuers, changed their approach in the management of their charged
off consumer receivable portfolios. These financial institutions began to sell a
portion of their charged off consumer receivable portfolio to certain delinquent
debt recovery firms and investment groups in lieu of third party placements. The
practice gained general acceptance from the major credit card issuers such that
in 1997, approximately 62% of the $31.29 billion 
<PAGE>
 
in charged off credit card receivables were sold to a growing buyer market. The
growth was largely fueled by the availability of funds to finance the purchases
of the charged off credit card portfolios. Sources of such funds primarily came
from investment banks, insurance companies and retirement fund managers who
began to accept the historical data and collection experience of certain
accounts receivable servicers as sufficient to establish the estimated
collectible value embedded in charged off credit card portfolios. Accordingly,
charged off credit card portfolios were regarded as acceptable collateral for
asset backed securities. In 1995, the first of many private securitizations of
charged off credit card receivables was consummated. Through September 1998,
over $1 billion of relatively high yielding investment grade and non-investment
grade bonds have been sold in private securitizations to fund purchases of
charged off credit card receivable portfolios.

In February 1994, the Company began purchasing charged off credit card for its
own account. However, the Company realized that the benefits associated with
purchasing and owning charged off credit card portfolios comes with significant
risk. Charged off credit card portfolios, by their nature, are exposed to a
significant amount of liquidation risk. Consumer factors as well as loan
underwriting and/or account data related factors generally cause such risk.
Consumer related risk factors include, among other things, the consumers'
deteriorating economic condition caused by an unprecedented life event (e.g.
divorce, illness, death, and job loss), the consumers' inability to manage
fiscal responsibilities, or the consumers' contemptuous attitude towards credit.
Underwriting risks could be inherent in, among other things, the credit issuer's
general underwriting policies as driven by certain market penetration
strategies. Data or account information risks are primarily caused by the
quality of the credit issuer's or its agents' servicing operations. In general,
the availability of current and historic account information could increase the
probability of economically liquidating a portfolio's estimated collectible
value (ECV).

The economic benefit of owning such portfolios therefore relies heavily on a
buyer's ability to properly quantify the remaining ECV in a charge off portfolio
and to profitably acquire such ECV. Having serviced delinquent credit card
portfolios since 1981, the Company has utilized its extensive experience, vast
knowledge base and access to pools of data on delinquent consumer debt, to
identify and segment the quantitative and qualitative attributes of an
account/debtor that are most relevant to a successful recovery of a delinquent
debt. These attributes are weighed according to their degree of significance and
converted into a pricing matrix. This matrix is used to estimate the price that
the Company would be willing to pay for a portfolio based on the ECV. Based on
historical data, the Company has been able to maintain an ECV to price ratio of
approximately 5.88 to 1 on its most seasoned portfolios (i.e. portfolios
purchased between February 1994 and January 1997).

The Company intends to pursue longer-term fee-for-service contracts with banks
and financial institutions. It realizes, however, that it has to adapt to the
significant changes that has occurred in this industry segment in order for the
Company to compete in this business segment. The traditional means of obtaining
business volume through building relationships and optimum client service was
giving way to the "commoditization" of charged off credit card receivables.
Accordingly, the Company will continue to purchase consumer receivables for its
own account.

Ownership of the accounts allows the Company to provide the consumers/debtors
additional options in settling their respective debt. As such, the recovery
processes and techniques used to settle purchased accounts can differ from
accounts worked on a fee for service basis.

The Company regards its pool of purchased portfolios as a database which could
include consumers who are in various stages of reestablishing their credit. The
Company's process basically allows the sorting of potentially good borrowers
from the pool of bad borrowers. The process then allows the conversion of the
accounts of potentially good borrowers, which have not been settled in cash, to
be transferred into a new installment contract that would be more conducive
towards the consumer's current financial position. The 
<PAGE>
 
goal is to find the least burdensome way for the consumer to be able to make
consistent payments on its obligation until full settlement. The Company
believes that the pools of accounts created by this process will be the primary
source for the assets sold in future securitizations. The Company also realizes
the importance of the consumer data accumulated on the performing loans; such
data could prove beneficial if and when the Company decides to expand its
services to this select pool of paying customers.

Services to Retail Segment

MRSI has been providing accounts receivable management services to the retail
segment for over 20 years. The Company has developed a particular expertise in
the handling of accounts financed by automotive finance companies, which account
for a large portion of the Company's client base in this segment. In addition,
the Company receives accounts from a national furniture outlet chain, a major
Southern California utility service, a large financier of home appliances, and
many other independent operators, The Company has recently diversified its
operation to include the collection of commercial (business to business)
accounts, which could open an entirely new market to the Company.

Support Services

The Company realizes that to provide effective and thorough receivable
management services to its client, it needs to establish other services and
systems to support its core operations.

     Litigation Management

     The Company has in place a specialty recovery department with a full time
     attorney to manage all aspects of litigation and bankruptcy related
     activities. The attorney and support staff all have more than ten years of
     full time employment with the Company. Litigation management includes
     filing legal actions on collection accounts; enforcement of judgments
     entered on the Company's collection accounts as well as client assigned
     judgments; and the perfecting of Chapter 13 bankruptcy proofs of claim
     nationwide.

     All collection accounts with a verified asset and significant balances are
     submitted to the legal department for evaluation. The legal department
     processes those accounts within the state of California. Those accounts
     outside the state of California are forwarded to a nationwide network or to
     select attorney firms that have a working relationship with the legal
     department.

     The Company's first twenty years in the collection industry were enhanced
     by its in house legal staff. It has accumulated California judgments with a
     dollar value in excess of $32 million, which is continually replenished.
     All California judgments accrue interest at the rate of 10% per annum. The
     specialty recovery department employs experienced and knowledgeable skip
     tracers and asset locators to tap this revenue source. Most of the
     judgments are secured by California real property; a substantial portion of
     which are bankruptcy proof. The specialty recovery is able to renew these
     older judgments every ten years through a very low cost legal procedure.

     Consumers continue to increase the rate at which they are filing Chapter 13
     bankruptcy proceedings. The specialty recovery department aggressively
     pursues collection of these accounts by timely filing the respective proof
     of claim and monitoring these accounts for compliance with the repayment
     plan. This revenue source is low cost yet provides a wealth of information
     about the consumers if they fail to complete the plan.

     Litigation management services are available to all of the Company's
     clients.
<PAGE>
 
     Management Information Systems

     The Company recognizes the value of combining human resources with the
     latest computer and telecommunications technology to manage its receivables
     effectively. Accordingly, the Company maintains sophisticated data
     processing support and management information systems that is most friendly
     to use by its work force of recovery specialists.

     The Company's management application software system is compiled under a
     widely used high level programming language. It operates under a Microsoft
     Windows environment distributed by a Novel network system. A central
     computer file server connected to an array of disk drives maintains the
     Company's management information database. The Company's recovery
     specialists utilize individualized personal computers to access and record
     customer information using Microsoft Windows point and click application
     screens.

     Locating customers who move without notice has always been one of the most
     important activities in debt recovery. To address this problem the
     Company's recovery specialists have on-line access to large databases of
     consumer information. These databases are constantly updated and contain
     the latest customer demographic information which, could include but are
     not limited to, telephone numbers, property ownership records, fictitious
     business name records, UCC listings, and other pertinent information that
     facilitate locating customers. To complement these sources, the Company
     utilizes the services of national credit reporting companies and other
     national consumer information databases to add to its internal skip-tracing
     tools.

     The Company utilizes a combination of its new telephone technology with its
     predictive dialing computer system to make customer-calling campaigns. The
     computer dialer is given a large number of customers to dial. Upon
     connection with a given telephone number the system attempts to recognize a
     live voice by detecting busy signals, recorders, and disconnected numbers
     before sending the call to a waiting recovery specialist. As the call is
     being routed to an available specialist, the computer finds the customer in
     the database and paints their work card on the PC screen and dialog begins
     with the customer.

     In the service business, one of the key differentiating factors is
     knowledge. The Company's long experience in the receivable management
     business has allowed the Company to accumulate a knowledge base that
     allowed it to perform and, therefore, retain long-standing relationships
     with its existing client base. Increasing client demand in a competitive
     environment, however, requires the Company to continue to expand its
     knowledge base in receivable management. The Company believes that a
     distinctive organizational knowledge can only be acquired through the
     proper management of the data it continuously gathers from its daily
     consumer interaction. This data based knowledge will continue to drive the
     continuous improvement in the Company's recovery strategies and consumer
     management for its client's benefit and its own.

     To accommodate the expected increase in consumer volume, the Company is in
     the process of expanding its data management capability by migrating on to
     a larger open database operating system. The new system will integrate with
     the Company's current receivable management software and existing
     telecommunication technology. The hardware will provide the latest computer
     technology with more than enough speed to handle an increasing number of
     users locally as well as expansion throughout the country utilizing the
     Internet. The open database management system was selected as the choice to
     maintain unlimited growth in the storage of the Company's ongoing and
     historical consumer information.
<PAGE>
 
     Recruiting and Training

     Notwithstanding the factors discussed above, the most critical factor that
     impacts the Company's ability to execute its operating mission is its
     ability to manage the three R's of human resources Recruit, Retool, Retain.

     An effective recruiting program mitigates the follow on issues that could
     surround the retooling (training) and retention processes. Accordingly, the
     Company has established an experience-based selection criteria to drive its
     recruiting program. The criteria are based upon a careful study of the
     skills common to its successful and long time employees. The selection
     process is conducted through a standardized scoring matrix that effectively
     sorts candidates according to their ability to demonstrate the success
     traits that the Company looks for.

     The Company's retooling (training) process is comprised of three major
     programs. The Basic Training Course is a twelve-week training process. It
     starts with a three-week classroom course that focuses on teaching the five
     basic skill sets required to become an effective recovery specialist.
     Graduates of this course are accepted to the training division, the purpose
     of which is to allow the trainees to work on live accounts and fine tune
     the skills taught during the preceding three week course under the close
     supervision of training supervisors. This nine-week process allows both the
     trainees and the Company to determine the real aptitude of trainees to
     become recovery specialists.

     The Advanced Training Course is designed for the recovery specialists to be
     trained on selected specialty skills (e.g. healthcare billing, recovery,
     specialty recovery, loan servicing, insurance processing etc.). It also
     provides a continuous improvement training program that allows employees to
     expand their skills on some of the more difficult or technical aspects of
     the job (e.g. negotiation skills, customer service techniques, team
     building concepts and recent regulatory pronouncements).

     The Management Training Course is currently being designed to create a
     program for employees who show management and leadership skills to fill the
     Company's supervisor and division managerial needs. This course will
     include management development courses such as coaching, oral and written
     communications, budgeting, time management etc.).

     The Company has a training center, which it believes is thoughtfully
     designed to foster a learning environment. It is currently managed by a
     Director of Recruiting and Training assisted by two recruiting and training
     specialists. The Company regards training as a critical component of its
     business and will continue to allocate the appropriate resources to keep
     this process effective.

     The Company is in the process of revising its compensation and benefit
     programs to create a package that would economically maximize the
     probability of retaining its good employees. While the Company believes
     that the current pay structure is adequate and competitive, it intends to
     develop creative short and long term incentive programs to induce
     productivity from its employees and to promote loyalty and tenure.
<PAGE>
 
Marketing

The Company maintains a full-time staff of sales representatives that
continuously solicit business by pursuing leads from existing clients, using
multiple business and commerce directories, and utilizing promotional materials.
Recently, the Company began promoting its services on the Internet by
establishing a WEB page which describes the Company's services. In addition, the
Company has started to advertise its services through more traditional media,
including newspapers and magazines.

Government Regulation

The Company is regulated by the Fair Debt Collection Practice Act and the
Telephone Consumer Protection Act which are enforced by the Federal Trade
Commission. In this regard, the Company devotes continuous efforts, through
training of personnel and monitoring of compliance in order to provide ethical,
innovative, high quality accounts receivable management and collection business
which meets the needs of its clients and that complies with the law.

Although the Company believes that it is currently in compliance with applicable
statutes and regulations, there can be no assurance that the Company will always
be able to maintain such compliance. The failure to comply with such statutes
and regulations could have a material adverse effect upon the Company.
Furthermore, the adoption of additional statutes and regulations, changes in the
interpretation and enforcement of current statutes and regulations, or the
expansion of the Company's business into jurisdictions that have adopted more
stringent regulatory requirements than those in which the Company currently
conducts business could have a material adverse effect upon the Company.

Competition

The accounts receivable management and collection business is highly
competitive. The Company competes with a number of national, regional, and local
companies with operations similar to those of the Company. Many of the Company's
competitors have far greater resources than the Company and have access to
capital markets which may be unavailable to the Company.

The Company believes that the principal competitive factors affecting the
Company's receivable management and collection business is increasingly based
upon collection performance, price, and services provided. These competitive
factors have generally caused a downward adjustment to commission rates. The
Company believes that it can compete effectively by offering its clients
innovative receivable management solutions and by continually enhancing its
collection procedures.

There is substantial competition for the acquisition and management of
distressed and non-performing consumer obligations and accounts receivables.
Although the amount of non-performing and other distressed obligations available
for sale is quite large, there are numerous competitors for these assets that
have more resources than the Company.

Employees

As of September 30, 1998, the Company had 80 full time employees and 13 part-
time employees, of whom 5 are management personnel, 2 are sales and marketing
personnel, 6 are legal personnel, 26 are MRSI collectors, 13 are MCSI
collectors, 14 are LSI collectors, 14 are BOSS pre-collection representatives, 2
are finance personnel, 2 are computer technicians, 1 is a building
superintendent and 8 are operations support personnel. The Company believes that
its relations with its employees are good. The Company is a not a party to any
collective bargaining agreement.
<PAGE>
 
ITEM 2   DESCRIPTION OF PROPERTIES

The Company owns its office building and property located at 5400 Orange Avenue,
Cypress, California where it conducts its operations. The office building, which
was purchased in 1993, contains approximately 50,000 square feet of office
space. Currently, the Company occupies approximately 35,000 square feet for its
operations, and makes the remainder of the building available for lease to third
party tenants. Although the Company may establish remote offices to better serve
its clients, the Company believes that its current facility is suitable and
adequate for its current and anticipated operations.


ITEM 3   LEGAL PROCEEDINGS

As of September 30, 1998, the Company is not involved in any material
litigation, although the Company is involved, from time to time, in litigation
that is incident to its collection business. The Company regularly initiates
legal proceedings as a plaintiff in connection with its routine collection
activities.


ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1998.


                                    PART II
                                        
ITEM 5   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common stock, $.001 par value, is traded under the symbol "CYFS"
through the OTC Electronic Bulletin Board maintained by the National Association
Securities of Security Dealers, Inc. (the "NASDAQ"), which has no financial
eligibility standards and is totally separate from NASDAQ. The Electronic
Bulletin Board does not constitute an active trading market and trading in the
Company's Common Stock is limited and sporadic. The following table sets forth
the range of high bid and low bid quotations for the Common Stock for the
periods indicated. The quotations are inter-dealer prices in the over-the-
counter market without retail mark-ups, markdowns or commissions, and may not
represent actual transactions.
<TABLE>
<CAPTION>
 
                                             1998             1997    
                                          -----------      -----------
                                          High   Low       High   Low 
                                          ----   ----      ----   ----
<S>                                       <C>    <C>       <C>    <C> 
            4th Quarter ending 9/30       2.00   0.94      1.75   1.19
            3rd Quarter ending 6/30       2.59   0.94      3.25   0.94
            2nd Quarter ending 3/31       1.63   1.00      3.75   2.00
            1st Quarter ending 12/31      2.50   1.13      3.87   2.75 
</TABLE>

As of September 30, 1998 there were 1,850 holders of record of the Company's
Common Stock.

Dividend Policy

The Company has never paid a dividend and does not anticipate paying any cash
dividends in the foreseeable future. The Company intends to retain any earnings
to provide funds to finance future growth.
<PAGE>
 
ITEM 6   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

General

The Company provides accounts receivable management services to various health
care providers, banks, financial institutions, and retail firms. These services
include, among other things, billing, delinquent debt recovery, management of
litigation and bankruptcy claims, and workers' compensation lien claim
resolution. In the early nineties, financial institutions, primarily credit card
issuers, began changing their approach regarding the management of charged off
consumer receivables. These financial institutions started to sell portions of
their charged off portfolios to certain delinquent debt recovery firms and
investment groups in lieu of third party placements. Accordingly, in February
1994, the Company began to purchase portfolios of consumer receivables for its
own account, and has continued to do so through fiscal 1998.

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report.

This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, competition, which has and will continue to put
price pressure on the Company's third party collection business, the cost and
availability of capital to finance its portfolio receivables, and overall macro-
economic conditions.
 
Results of Operations
 
The following table sets forth summary income statement data on a historical 
basis.

<TABLE> 
<CAPTION> 
                                                                   % Positive  
                                            1998         1997       (Negative) 
                                         ----------   ----------   ----------- 
<S>                                      <C>          <C>          <C>  
Revenue                                  $7,148,016   $4,970,356          43.8%
                                                                               
Operating expenses:                                                            
  Salaries, wages and related benefits    3,379,049    3,438,660           1.7 
  Selling, general and administrative     1,967,584    1,636,711         (20.2)
  Depreciation                              162,882      196,499          17.1 
                                         ----------   ----------       ------- 
     Total operating expenses             5,509,515    5,271,870           4.5 
                                         ----------   ----------       ------- 
Income (loss) from operations             1,638,501     (301,514)        643.4 
                                                                               
Other income (expense)                     (133,072)    (174,715)         23.8 
                                         ----------   ----------       ------- 
Income (loss) before provision                                                 
(benefit) for income taxes                1,505,429     (476,229)        416.1 
                                                                               
Provision (benefit) for income taxes        465,602      (21,702)      2,245.4 
                                         ----------   ----------       ------- 
Net income (loss)                        $1,039,827   $ (454,527)        328.8%
                                         ==========   ==========       =======  
</TABLE>
<PAGE>
 
Revenue increased $2.1 million or 43.8% to $7.1 million for 1998 from $5.0
million in 1997. $2.3 million of revenue was attributable to the net gain
recognized from the sale of certain Portfolio Receivables as asset-backed
securities through a private securitization. Revenue from Portfolio Receivables
purchased by the Company increased to $1.4 million in 1998 from $1.0 million in
1997. Service fees decreased to $3.4 million in 1998 from $4.0 million in 1997,
primarily due to the shift in Company resources from third party collections to
collecting Portfolio Receivables purchased for its own account. While the
Company will continue to identify Portfolio Receivables to sell through
securitizations, it believes the pools of accounts created through the
conversion of charged off receivables into new installment contracts will be the
primary source of assets sold in future securitizations. This source of revenue,
therefore, might be less significant in future periods as a percentage of total
revenue.

As of September 30, 1998, the Company's direct purchases of Portfolio
Receivables had a remaining face value of $16.8 million as compared to a
remaining face value of $165.0 million as of September 30, 1997. This decrease
was due to the sale of certain Portfolio Receivables totaling $149.5 million
through a private securitization in August, 1998. During fiscal 1998, the
Company purchased over $21 million of such obligations for its own account.

Salaries, wages and related benefits decreased by 1.7% to $3.38 million in 1998
from $3.44 million in 1997. Although the Company made specific personnel changes
throughout the year, total salaries, wages and related benefits remained
relatively unchanged.

Selling, general and administrative expenses increased to $1.97 million in 1998
from $1.64 million in 1997. Most of this increase can be attributed to
management's decision to reserve against receivables generated by an operating
division of the Company which was sold during the fourth quarter of 1998. The
Company is proceeding with collection efforts, including legal proceedings, in
an attempt to satisfy these receivables. However, management's assessment of
collectibility merited a fiscal 1998 charge. In addition, general and
administrative expenses increased as a result of the Company's ongoing expansion
efforts in anticipation of the strategic growth plan it will pursue during the
next three years. Specifically, the Company owns the 50,000 square foot building
where its headquarters are located. During the year, the Company relocated and
redesigned several of its operating divisions/subsidiaries to better facilitate
anticipated growth, including designating approximately 2,500 square feet of the
building to its training facility and increased it training staff by 200%. As
the Company continues to grow, tenants are displaced and their contributions to
certain general and administrative expenses are foregone.

Depreciation decreased 17.1% to $163,000 in 1998 from $196,000 in 1997. This
decrease was the result of certain Company assets reaching a fully depreciated
state. However, in late 1998, the Company made certain technology upgrades as
well as furniture purchases which had little impact on depreciation expense in
1998, but will obviously impact future periods.

Interest expense decreased to $265,000 for 1998 from $306,000 in 1997. This
13.3% decrease resulted from retiring the Company's credit facility and
equipment loans in the fourth quarter of 1998 using proceeds of a $3,000,000
private placement as well as a $2,750,000 securitization.

The Company's EBITDA (defined as earnings before interest, taxes, depreciation
and amortization and is a measure of the Company's free cash flow) increased to
$1.9 million in 1998 from $48,000 in 1997.

Liquidity and Capital Resources

The Company is funded primarily through cash flows from operations.
Historically, the Company has used its credit facility to acquire Portfolio
Receivables. However, in July 1998, the Company sold 2,000,000 shares of its
common stock to Pacific Life Insurance Company, representing 28% of the
<PAGE>
 
outstanding common stock of the Company on a fully diluted basis for $3,000,000.
Additionally, in August 1998, the Company completed its first securitization of
Portfolio Receivables which generated net cash flows to the Company of
$2,552,000. The combined $5,552,000 was used to retire the Company's credit
facility and existing equipment loans leaving the balance available for
expansion as well ongoing purchases of Portfolio Receivables under a forward
flow contract with a major financial institution.

The Company currently has outstanding long-term debt with financial institutions
of $1,986,000 which is secured by a mortgage and certain equipment. The
Company's mortgage note has a remaining balance of $1,844,000, carries an
interest rate of 8% per annum and is due in December 2000. Management is
currently evaluating the feasibility of refinancing the mortgage note payable.
The Company also finances certain capital leases for computer equipment that
have a remaining balance of approximately $142,000 at September 30, 1998.
Management expects to continue to service its outstanding long-term debt through
its cash flows from operations.

In addition to capital required for the Company's existing business and its
growth, the Company may require additional capital resources if it should choose
to expand its operations by acquisitions of other businesses. Although the
Company has no commitments to make any acquisition, it does regularly review
proposals to make acquisitions in the accounts receivable management field and
considers acquisitions a significant component of its strategic plan.

There can be no assurance that such additional financing, if required, will be
available to the Company, nor can there be any assurance as to the cost of any
such financing that may be available. The Company is exploring the possibility
of issuing additional debt and/or equity to provide additional capital, but has
no commitment to do so.

Year 2000

State of Readiness -- Since early 1997, the Company has been addressing the
impact of the Year 2000 to its data processing systems. Key financial
information and operational systems were addressed and detailed plans were
developed to ensure that Year 2000 system modifications were in place by
September 1998 for all critical systems. As most of the critical software is
purchased from vendors which have already made the necessary Year 2000 changes,
the Company is concentrating its efforts on testing of its "Year 2000 Compliant"
systems.

Costs to Address Year 2000 Issues -- In the process of identifying the Company's
critical systems and determining the extent to which they must be modified or
replaced, management has found no systems which need to be replaced or
extensively modified to ensure they will function as intended. Accordingly,
management does not anticipate a material adverse impact to the Company's
results of operations or financial position.

Risks for the Company -- The primary risk of failure to adequately address the
Year 2000 problem would be the inability to accurately process and track
financial records and transactions. Additionally, the Company is exposed to risk
if its customers, clients, and financial institutions are unable to adequately
address the Year 2000 dates in their own data processing systems. The Company
has contacted all of the major customers, clients and financial institutions
with whom it does business to ensure that they are addressing the issue for
themselves and their customers.

Contingency Plans -- Should the Company's vendor for its core processing
applications fail to provide the modifications necessary to correctly recognize
Year 2000 dates, as a contingency plan for core operations, the Company would
out source its mainframe computer applications. For non-core operations, the
Company will rely on manual processing until modifications or replacement
systems are in place.
<PAGE>
 
Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS Nos.
130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of
an Enterprise and Related Information," respectively. SFAS Nos. 130 and 131 are
effective for fiscal years beginning after December 15, 1997, with earlier
adoption permitted. The Company believes that adoption of these standards will
not have a material impact on the Company.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal
quarters beginning after June 15, 1999, with earlier adoption permitted. The
Company believes that adoption of this standard will not have a material impact
on the Company.

Forward Looking Statements

Certain statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, as well as elsewhere in this
Annual Report on Form 10-KSB are forward-looking statements, and the actual
results and developments may be materially different from those expressed in or
implied by such statements.


ITEM 7   FINANCIAL STATEMENTS

See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this report.


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

On April 28, 1997, the Company's Board of Directors approved the engagement of
Arthur Andersen LLP to serve as the Company's independent public accountants and
to conduct the audit of the Company's financial statements for the fiscal year
ending September 30, 1997, replacing the firm of Corbin & Wertz, CPAs, who had
been engaged to audit the Company's financial statement for the fiscal years
ended September 30, 1995 and 1996. The change in accountants was made with the
view that it was in the best interests of the Company and its shareholders to
engage a nationally recognized accounting firm to audit its financial
statements. The audit reports provided by Corbin & Wertz, CPAs for the fiscal
years ended September 30, 1995 and 1996 did not contain any adverse opinion or a
disclaimer of opinion nor any report qualified in any respect, and management of
the Company knows of no past disagreements between the Company and Corbin &
Wertz, CPAs on any matter of accounting principles of practice, financial
statement disclosure or auditing, scope or procedure.


                                   PART III
                                        
ITEM 9   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Information required by this item will be contained in the Company's Information
Statement to be filed With the Securities and Exchange Commission within 120
days after September 30, 1998 and is incorporated herein by reference.
<PAGE>
 
ITEM 10  EXECUTIVE COMPENSATION

The information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1998 and is incorporated herein by
reference.


ITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1998 and is incorporated herein by
reference.


ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1998 and is incorporated herein by
reference.


                                    PART IV
                                        
ITEM 13  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits:  See "Exhibit Index".

    (b)  Reports on Form 8-K. No reports on Form 8-K were filed during the last
         quarter of the fiscal year ended September 30, 1998.
<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.

                                              CYPRESS FINANCIAL SERVICES, INC.


Date:  December 28, 1998                      By: /s/ Manuel Occiano
                                                  ----------------------------
                                              Manuel Occiano
                                              Director and
                                              Chief Executive Officer


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 on the
date indicated.

Signatures                            Title                    Date Signed
------------------------------------------------------------------------------

/s/ Farrest Hayden           Chairman of the Board           December 28, 1998
---------------------------
Farrest Hayden


/s/ Manuel Occiano           Director and Chief Executive    December 28, 1998
---------------------------  Officer
Manuel Occiano                  


/s/ Richard H. Keyes         Director                        December 28, 1998
---------------------------                                          
Richard H. Keyes


/s/ Otto J. Lacayo           Director                        December 28, 1998
---------------------------                                                   
Otto J. Lacayo


/s/ John C. Hindman          Chief Financial Officer and     December 28, 1998
---------------------------  Principal Accounting Officer
John C. Hindman                     
<PAGE>
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                                                                          Page
                                                                          ----
Report of Independent Public Accountants                                   F-2
 
Consolidated Balance Sheets as of September 30, 1998 and 1997              F-3
 
Consolidated Statements of Operations for the years ended
    September 30, 1998 and 1997                                            F-4
 
Consolidated Statements of Shareholders' Equity (Deficit)
    for the years ended September 30, 1998 and 1997                        F-5
 
Consolidated Statements of Cash Flows for the years ended
    September 30, 1998 and 1997                                     F-6 to F-7
 
Notes to Consolidated Financial Statements                         F-8 to F-19

                                      F-1
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                    ----------------------------------------


To the Shareholders of Cypress Financial Services, Inc.:

We have audited the accompanying consolidated balance sheets of Cypress
Financial Services, Inc. (a Nevada Corporation) and subsidiaries as of September
30, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cypress Financial
Services, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.



                                    ARTHUR ANDERSEN LLP


Orange County, California
November 19, 1998

                                      F-2
<PAGE>
 
                        CYPRESS FINANCIAL SERVICES, INC.
                        --------------------------------
                                AND SUBSIDIARIES
                                ----------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------

                          SEPTEMBER 30, 1998 and 1997
                          ---------------------------
                                        
                                     ASSETS
                                     ------
<TABLE>
<CAPTION>
                                                          1998         1997    
                                                       ----------   ---------- 
<S>                                                    <C>          <C>        
Cash                                                   $2,329,751   $  271,455 
Restricted cash                                           418,168      397,298 
Accounts receivable, net of allowance for doubtful                             
 accounts of $328,841 and $95,845, respectively           393,786      445,006 
Portfolio receivables                                     765,033      470,561 
Property, net                                           2,743,152    2,696,234 
Notes receivable from officers                            152,012        4,025 
Prepaid expenses and other                                125,394       99,725 
                                                       ----------   ---------- 
       Total assets                                    $6,927,296   $4,384,304 
                                                       ==========   ==========  

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
                 ----------------------------------------------
<CAPTION>
<S>                                                    <C>           <C>        
Accounts payable                                       $   54,328   $    50,206 
Trust payables                                            418,168       397,298 
Accrued liabilities                                       162,503       146,972 
Line of credit                                                -       1,150,000 
Notes payable                                           1,843,743     2,671,131 
Capital lease obligations                                 141,798       180,698 
Deferred income taxes                                     465,000           -   
                                                       ----------   ----------- 
              Total liabilities                         3,085,540     4,596,305 
                                                       ----------   ----------- 
COMMITMENTS AND CONTINGENCIES                                                   
                                                                                
SHAREHOLDERS' EQUITY (DEFICIT):                                                 
  Series A convertible, redeemable preferred stock,                             
   $0.001 par value, stated at $2.00 liquidation                                
   preference per share, 5,000,000 shares authorized;                           
   345,000 shares issued and outstanding at                                     
   September 30, 1998 and 1997                            690,000       690,000 
  Common stock, $0.001 par value; 30,000,000 shares                             
   authorized; 6,527,571 and 4,520,271 shares issued                            
   and outstanding at September 30, 1998 and 1997,                              
   respectively                                             6,527         4,520 
  Paid-in capital                                       3,522,403       510,480 
  Accumulated deficit                                    (377,174)   (1,417,001)
                                                       ----------   ----------- 
              Total shareholders' equity (deficit)      3,841,756      (212,001)
                                                       ----------   ----------- 
                                                       $6,927,296   $ 4,384,304 
                                                       ==========   =========== 
</TABLE>

  The accompanying notes are an integral part of these consolidated balance 
                                    sheets.

                                      F-3
<PAGE>
 
                        CYPRESS FINANCIAL SERVICES, INC.
                        --------------------------------
                                AND SUBSIDIARIES
                                ----------------

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     -------------------------------------

                FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
                -----------------------------------------------
<TABLE>
<CAPTION>
 
                                                         1998          1997   
                                                      -----------   -----------
<S>                                                   <C>           <C>        
REVENUES:                                                                      
   Service fees                                       $3,366,831    $3,968,741 
   Portfolio receivables revenue                       1,418,037     1,001,615 
   Net gain on sale of portfolio receivables           2,363,148           - 
                                                      ----------    ---------- 
                                                       7,148,016     4,970,356 
                                                      ----------    ---------- 
OPERATING EXPENSES:                                                            
   Salaries, wages and related benefits                3,379,049     3,438,660 
   Selling, general and administrative                 1,967,584     1,636,711 
   Depreciation                                          162,882       196,499 
                                                      ----------    ---------- 
                                                       5,509,515     5,271,870 
                                                      ----------    ---------- 
INCOME (LOSS) FROM OPERATIONS                          1,638,501      (301,514)
                                                      ----------    ---------- 
OTHER INCOME (EXPENSE):                                                        
   Interest expense, net                                (265,072)     (305,796)
   Gain on sale of assets                                  8,700             - 
   Rental operations, net                                123,300       131,081 
                                                      ----------    ---------- 
                                                        (133,072)     (174,715)
                                                      ----------    ---------- 
INCOME (LOSS) BEFORE PROVISION (BENEFIT)                                       
   FOR INCOME TAXES                                    1,505,429      (476,229)
                                                                               
PROVISION (BENEFIT) FOR INCOME TAXES                     465,602       (21,702)
                                                      ----------    ---------- 
NET INCOME (LOSS)                                     $1,039,827    $ (454,527)
                                                      ==========    ========== 
                                                                               
Earnings per share:                                                            
   Basic                                              $     0.21    $    (0.10)
   Diluted                                            $     0.19    $    (0.10)
                                                                               
Number of shares used in computing earnings                                    
 per share:                                                                    
   Basic                                               5,015,762     4,509,914 
   Diluted                                             5,425,832     4,509,914 
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4
<PAGE>
 
                        CYPRESS FINANCIAL SERVICES, INC.
                        --------------------------------
                                AND SUBSIDIARIES
                                ----------------

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
           ---------------------------------------------------------

                FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
                -----------------------------------------------
<TABLE>
<CAPTION>
                                   Series A Convertible,
                                        Redeemable
                                      Preferred Stock          Common Stock                                             Total
                                     -----------------    -----------------------      Paid-in       Accumulated    Shareholders'
                                     Shares     Amount     Shares       Amount         Capital         Deficit      Equity (Deficit)
                                     -------   --------   ---------   -----------   -------------   --------------  ----------------
<S>                                <C>         <C>        <C>         <C>           <C>             <C>             <C>
BALANCES, at September 30, 1996      345,000   $690,000   4,500,271        $4,500      $  495,500     $  (962,474)      $  227,526  

 Stock issued in exchange for                                                                                                       
  services provided                        -          -      10,000            10          12,490               -           12,500  

 Warrants exercised                        -          -      10,000            10           2,490               -            2,500  
                                                                                                                                    
 Net loss                                  -          -           -             -               -        (454,527)        (454,527)
                                     -------   --------   ---------        ------      ----------   -------------       ----------  
BALANCES, at September 30, 1997      345,000    690,000   4,520,271         4,520         510,480      (1,417,001)        (212,001)

 Stock issued in exchange for                                                                                                       
  services provided                        -          -       7,300             7           7,293               -            7,300  

 Options issued in exchange for                                                                                                     
  services provided                        -          -           -             -           6,630               -            6,630  

 Stock issued                              -          -   2,000,000         2,000       2,998,000               -        3,000,000  

 Net income                                -          -           -             -               -       1,039,827        1,039,827  
                                     -------   --------   ---------        ------      ----------   -------------       ----------  
BALANCES, at September 30, 1998      345,000   $690,000   6,527,571        $6,527      $3,522,403     $  (377,174)      $3,841,756  
                                     =======   ========   =========        ======      ==========   =============       ==========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
<PAGE>
 
                        CYPRESS FINANCIAL SERVICES, INC.
                        --------------------------------
                                AND SUBSIDIARIES
                                ----------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

                FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
                -----------------------------------------------
<TABLE>
<CAPTION>
                                                                      1998          1997             
                                                                  ------------   ----------           
<S>                                                               <C>            <C>                 
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                
    Net income (loss)                                             $ 1,039,827    $(454,527)           
    Adjustments to reconcile net income (loss) to net cash                                           
        provided by (used in) operating activities:                                                  
        Depreciation and amortization                                 175,890      218,607           
        Stock issued in exchange for services provided                  7,300       12,500           
        Stock options issued in exchange for services provided          6,630          -           
        Changes in operating assets and liabilities:                                                 
            (Increase) decrease in restricted cash                    (20,870)      55,292           
            Decrease in accounts receivable, net                       51,220      147,566           
                (Increase) decrease in portfolio receivables         (294,473)      15,944           
                (Increase) in prepaid expenses and other              (26,309)     (76,288)           
                Decrease (increase) in accounts payable                 4,122      (22,736)           
            Decrease (increase) in trust payables                      20,870      (55,292)           
            Increase (decrease) in accrued liabilities                 15,531     (186,098)           
                Increase in deferred income taxes                     465,000          -           
                                                                  -----------    ---------           
                    Net cash provided by (used in) operating                                         
                     activities                                     1,444,738     (345,032)           
                                                                  -----------    ---------           
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                
   Purchases of property                                             (222,167)     (90,881)           
                                                                  -----------    ---------           
                    Net cash used in investing activities            (222,167)     (90,881)           
                                                                  -----------    ---------           
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                
    Issuance of common stock                                        3,000,000            -           
    Net (repayments on) borrowings from line of credit             (1,150,000)     157,915           
    Net loans to officers                                            (147,987)      (1,250)           
    Proceeds from notes payable                                           -        120,000           
    Principal payments on notes payable                              (827,388)     (68,895)           
    Principal payments on capital lease obligations                   (38,900)     (23,608)           
    Proceeds from warrants exercised                                      -          2,500           
                                                                  -----------    ---------           
                    Net cash provided by financing activities         835,725      186,662             
                                                                  -----------    ---------           
NET INCREASE (DECREASE) IN CASH                                     2,058,296     (249,251)           
                                                                                                     
CASH, at beginning of period                                          271,455      520,706           
                                                                  -----------    ---------           
CASH, at end of period                                            $ 2,329,751    $ 271,455           
                                                                  ===========    =========            
</TABLE>

  The accompanying notes are an integral part of these consolidated financial 
                                  statements.                                  

                                      F-6
<PAGE>
 
                        CYPRESS FINANCIAL SERVICES, INC.
                        --------------------------------
                                AND SUBSIDIARIES
                                ----------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

          FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997 - Continued
          -----------------------------------------------------------
                                        
<TABLE>
<CAPTION>
                                                1998       1997
                                              --------   --------
<S>                                           <C>        <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    INFORMATION--
        Cash paid during the period for:
            Interest                          $330,090   $428,482
                                              ========   ========
            Income taxes                      $    800   $ 88,979
                                              ========   ========
</TABLE>



SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING, FINANCING AND OPERATING
 ACTIVITIES--

   During the year ended September 30, 1998, the Company issued 7,300 shares of
    its common stock to employees in exchange for services provided. The
    services were valued at the market value of the common stock on the date
    issued, which totaled $7,300.

   During the year ended September 30, 1998, the Company issued options to
    purchase 8,000 shares of its common stock to a consultant in exchange for
    services provided. The services were valued at the fair value of the options
    on the grant date, which totaled $6,630.

   During the year ended September 30, 1997, the Company issued 10,000 shares of
    its common stock to a consultant in exchange for services provided. The
    services were valued at the market value of the common stock on the date
    issued, which totaled $12,500.

   During the year ended September 30, 1997, based upon agreement between the
    parties, the Company offset interest payable to shareholders with notes
    receivable from shareholders in the amount of $57,725.

   The Company entered into four capital leases during the year ended September
    30, 1997. The value of the property purchased totaled $204,306.

  The accompanying notes are an integral part of these consolidated financial 
                                  statements.                                  

                                      F-7
<PAGE>
 
                        CYPRESS FINANCIAL SERVICES, INC.
                        --------------------------------
                                AND SUBSIDIARIES
                                ----------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                               SEPTEMBER 30, 1998
                               ------------------

1.   Organization and Summary of Significant Accounting Policies
     -----------------------------------------------------------

     a.  Organization and Basis of Presentation
         --------------------------------------

     Cypress Financial Services, Inc., a Nevada corporation, (together with its
     subsidiaries, the Company), provides accounts receivable management,
     administration, and debt collection services primarily to health care
     providers and consumer credit issuers. In addition to its third party
     collection business, in January 1995, the Company began acquiring accounts
     receivable and other consumer obligations for its own collection portfolio.

     The Company operates primarily through wholly-owned subsidiaries that serve
     specific segments of the collections service industry. The Company's
     subsidiaries include: (i) Merchants Recovery Services, Inc. (MRSI), a
     company that primarily offers accounts receivable collection services to
     banks, credit unions, public utilities, and retailers; (ii) Medical Control
     Services, Inc. (MCSI), a collection agency servicing the health care
     industry; (iii) Lien Solutions, Inc. (LSI), a company that specializes in
     the recovery of unpaid worker's compensation claims primarily for
     healthcare service providers, including hospitals and doctors; (iv) My
     Boss, Inc. dba Business Office Support Services (BOSS), a company that
     provides pre-collection consulting and credit monitoring services to
     medical providers and other businesses that extend credit; and (v) Pacific
     Process Serving, Inc. (PPS), a statewide legal document process service
     company.

     b.  Principles of Consolidation
         ---------------------------
     The consolidated financial statements include the accounts of Cypress
     Financial Services, Inc. and its wholly-owned subsidiaries. All significant
     intercompany accounts have been eliminated in consolidation.

     c.  Accounts Receivable
         -------------------
 
     Accounts receivable represent accounts in which the Company provides
     collection services for entities in the commercial, retail and medical
     industries for a fee. Service fees are reported as income when earned.
     Servicing costs are charged to expense as incurred. No one customer
     accounted for more than 10 percent of total revenues for the years
     presented.

                                      F-8
<PAGE>
 
     d.  Portfolio Receivables
         ---------------------
 
     Portfolio receivables (Receivables) represent liquidating portfolios of
     delinquent accounts which have been purchased by the Company for collection
     and are stated at the lower of cost or net realizable value. Cost is
     reduced by cash collections on an account by account basis until such time
     collections equal cost. Net realizable value represents management's
     estimate of the remaining net proceeds to be realized from a given
     portfolio, based on an account by account evaluation of the remaining
     uncollected delinquent receivables and on the historical collection
     experience of the specific portfolio and similar portfolios. Revenues from
     collections on purchased portfolios of receivables are recognized on an
     account by account basis after the cost of each account has been recovered.
     Gains and losses are recorded as appropriate when Receivables are sold. The
     Company considers a transfer of Receivables where the Company surrenders
     control over the Receivables a sale to the extent that consideration other
     than beneficial interests in the transferred Receivables is received in
     exchange for the Receivables.

     On January 1, 1997, the Company adopted Statement of Financial Accounting
     Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
     Financial Assets and Extinguishments of Liabilities." The adoption of SFAS
     No. 125 did not have a material effect on the operations of the Company.

     e.  Residual Interests in Securitizations and Gain on Sale of Portfolio
         -------------------------------------------------------------------
         Receivables
         -----------

     The Company purchases Receivables with the intention of reselling them to
     investors as asset-backed securities through securitizations.  During 1998,
     the Company completed its first securitization.  Management intends to
     enter into additional securitizations in the future.  The securitizations
     will generally be structured as follows: First, the Company sells a
     portfolio of Receivables to a wholly-owned subsidiary which has been
     established for the limited purpose of buying and reselling the Company's
     Receivables. This wholly-owned subsidiary in turn issues interest-bearing
     asset-backed securities (the Certificates) which are purchased by one or
     more investors. The proceeds from the sale of the Certificates are then
     used to purchase the Receivables from the Company. In addition, the Company
     provides a credit enhancement for the benefit of the investors in the form
     of an initial cash deposit to a specific account held by the trust which is
     required to be maintained at specific levels.

     At the closing of a securitization, the Company removes from its
     consolidated balance sheet the Receivables sold and adds to its
     consolidated balance sheet (i) the cash received and (ii) the basis
     associated with the portion of the Receivables retained from the
     securitizations (Residuals), which relates to (a) the cash held on deposit
     by the trust and (b) the discounted cash flows to be received by the trust
     in the future. The excess of the cash received and the assets retained by
     the Company over the carrying value of the Receivables sold, less
     transaction costs, equals the net gain on sale of Receivables recorded by
     the Company.

     In future periods, the Company will recognize additional revenue from the
     Residuals if the actual performance of the Receivables is higher than the
     original estimate or the Company may increase the estimated fair value of
     the Residuals. If the actual performance of the Receivables is lower than
     the original estimate, then an adjustment to the carrying value of the
     Residuals may be required if the estimated fair value of the Residuals is
     less than the carrying value.

                                      F-9
<PAGE>
 
     The Company is responsible for the ongoing servicing of the Receivables.
     At this time, no value has been attributed to the related servicing rights
     on the basis that the cost to service is expected to equal the servicing
     fees generated.

     f.  Property
         --------

     Equipment, furnishings and automobiles are carried at cost and depreciated
     using both straight-line and accelerated methods over the estimated useful
     lives of the assets, which are generally 5 to 7 years. The building is
     being depreciated over a period of 39 years.

     Repairs and maintenance are charged to expense as incurred; replacements
     and betterments are capitalized.

     g.  Trust Accounts and Restricted Cash
         ----------------------------------

     The Company maintains trust accounts for the benefit of its customers.
     Related funds are deposited in trust bank accounts and reflected as a trust
     liability until such amounts held in trust are remitted to customers. The
     trust account cash balances of $418,168 and $397,298 are reflected as
     restricted cash and trust payables in the accompanying consolidated balance
     sheets at September 30, 1998 and 1997, respectively.

     h.  Fair Value of Financial Instruments
         -----------------------------------

     Fair values of financial instruments are estimated using available market
     information and other valuation methodologies. The fair values of the
     Company's financial instruments are estimated to approximate the related
     book value, unless otherwise indicated.

     i.  Earnings Per Share
         ------------------

     During fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share
     (EPS)."  This standard is effective for both interim and annual reporting
     periods ending after December 15, 1997.  SFAS No. 128 replaces primary EPS
     with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is
     computed by dividing reported earnings by weighted average shares
     outstanding. Diluted EPS is computed in the same way as fully diluted EPS,
     except that the calculation now uses the average share price for the
     reporting period to compute dilution from options under the treasury stock
     method. All earnings per share amounts have been restated to conform to the
     SFAS No. 128 requirements.

                                      F-10
<PAGE>
 
     For the year ended September 30, 1998, the computations of basic and
     diluted EPS were as follows:

<TABLE> 
<CAPTION> 
                                                          Basic EPS  Diluted EPS
                                                          ---------  -----------
<S>                                                      <C>         <C> 
September 30, 1998
  Numerator -- net income                                $1,039,827  $1,039,827
 
  Denominator -- weighted average shares outstanding      5,015,762   5,015,762
 
  Plus -- net shares issued in assumed preferred 
   stock conversion                                                     345,000
    
  Plus -- net shares issued in assumed stock option 
  exercises                                                              65,070
    
 
  Diluted denominator                                                 5,425,832

 
  Earnings per share                                     $     0.21  $     0.19
                                                         ==========  ==========
</TABLE>

     For the year ended September 30, 1997, the denominator in the diluted EPS
     computation was the same as the denominator for basic EPS due to the
     antidilutive effects of preferred stock and stock options on the Company's
     net loss.  As of September 30, 1998 and 1997, the Company had outstanding
     stock options of 57,300 and 118,650, respectively, that were antidilutive.

     j.  Income Taxes
         ------------

     The Company accounts for income taxes using the liability method in
     accordance with SFAS No. 109, "Accounting for Income Taxes," which requires
     the asset and liability method of accounting for income taxes.

     k.  Stock Option Plan
         -----------------

     As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
     the Company accounts for stock-based employee compensation plans in
     accordance with APB Opinion No. 25, "Accounting for Stock Issued to
     Employees," and related interpretations. The Company provides the pro forma
     net earnings, pro forma earnings per share, and stock based compensation
     plan disclosure requirements set forth in SFAS No. 123.

     l.  New Pronouncements
         ------------------

     In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
     Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about
     Segments of an Enterprise and Related Information," respectively. SFAS Nos.
     130 and 131 are effective for fiscal years beginning after December 15,
     1997, with earlier adoption permitted. The Company believes that adoption
     of these standards will not have a material impact on the Company.

                                      F-11
<PAGE>
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
     Instruments and Hedging Activities."  SFAS No. 133 is effective for fiscal
     quarters beginning after June 15, 1999, with earlier adoption permitted.
     The Company believes that adoption of this standard will not have a
     material impact on the Company.

     m.  Rental Operations
         -----------------

     The Company leases a portion of its building to unrelated parties.
     Management allocates certain costs incurred to rental operations based on a
     ratio of square footage to the total square footage of the respective
     building. The results of rental operations for the years ended September
     30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
 
                                               1998        1997
                                             ---------   ---------
<S>                                          <C>         <C>
          Rental income                      $254,233    $288,139
          Interest expense                    (47,091)    (63,303)
          Depreciation and amortization       (12,567)    (16,468)
          Utilities and other                 (71,275)    (77,287)
                                             --------    --------
                                             $123,300    $131,081
                                             ========    ========
</TABLE>

     n.  Use of Estimates
         ----------------

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make certain
     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 reported periods. Actual results could materially
     differ from those estimates.

     o.  Reclassification
         ----------------

     Certain amounts in the accompanying 1997 financial statements have been
     reclassified to conform to 1998 presentation.

2.  Portfolio Receivables
    ---------------------

The cost basis of portfolio receivables activity consists of the following as of
September 30, 1998 and 1997, and for the years then ended:
<TABLE>
<CAPTION>
 
<S>                                                             <C>
     Portfolio receivables at September 30, 1996                $ 486,505
      Purchases of portfolio receivables                          735,862
      Collections applied to cost basis                          (413,995)
      Sales of portfolio receivables applied to cost basis       (337,811)
                                                                ---------
     Portfolio receivables at September 30, 1997                  470,561
      Purchases of portfolio receivables                          930,405
      Collections applied to cost basis                          (276,874)
      Sales of portfolio receivables applied to cost basis       (359,059)
                                                                ---------
     Portfolio receivables at September 30, 1998                $ 765,033
                                                                =========
</TABLE>

                                      F-12
<PAGE>
 
For the years ended September 30, 1998 and 1997, the Company had gross
collections from the portfolio receivables of $1,532,849 and $1,252,407,
respectively, of which $1,255,975 and $838,412 were recognized as revenue in the
accompanying consolidated statements of operations.

Due to the nature of these portfolio receivables, there is no assurance that
historical collection results will reflect the future collectibility of the face
value of the portfolio receivables.

3.  Related Party Transactions
    --------------------------

On August 14, 1998 the Company sold Receivables with a book value of $224,634 to
a wholly-owned subsidiary for $2,750,000, which issued interest-bearing asset-
backed securities to Pacific Life Insurance Company for the same amount. As
permitted by SFAS No. 125, the Company considers a transfer of Receivables where
the Company surrenders control over the Receivables a sale to the extent that
consideration other than beneficial interests in the transferred Receivables is
received in exchange for the Receivables. The sale resulted in a net gain of
$2,363,148 as reflected in the accompanying consolidated statements of
operations and a carried residual interest of $36,098.  As discussed further in
Note 7, Pacific Life Insurance Company purchased 2,000,000 shares of common
stock from the Company during the year.

4.  Property
    --------
 
Property consists of the following:
<TABLE> 
<CAPTION> 
                                                     1998         1997
                                                  ----------   ----------
<S>                                               <C>          <C>  
            Land                                  $  866,575   $  866,575
            Building                               1,540,577    1,540,577
            Equipment and furnishings              1,758,188    1,548,654
            Autos                                    132,415      132,415
                                                  ----------   ----------
                                                   4,297,755    4,088,221
              Less--Accumulated depreciation       1,554,603    1,391,987
                                                  ----------   ----------
                                                  $2,743,152   $2,696,234
                                                  ==========   ==========
</TABLE>

Depreciation expense for the years ended September 30, 1998 and 1997 totaled
$175,249 and $212,967, respectively. At September 30, 1998 and 1997, the net
book value of equipment under capital leases was $129,394 and $170,255,
respectively.

5.  Line of Credit
    --------------                         

Through August 1998, the Company had a line of credit agreement (the Agreement)
with a financial institution. Under the terms of the Agreement, the Company
could borrow up to $1,500,000. The Company was required to pay interest monthly
at the bank's reference rate plus 1.5 percent (10.0 percent at September 30,
1997). As of September 30, 1997, net borrowings amounted to $1,150,000 leaving
$350,000 available under the Agreement. The borrowings were secured by
substantially all of the Company's assets as defined under the Agreement. In
August 1998, the outstanding borrowings were paid in full and the Agreement was
cancelled.

                                      F-13
<PAGE>
 
6.  Notes Payable
    -------------
<TABLE> 
<CAPTION> 
                                                                     1998          1997                  
                                                                   ----------   ----------                          
<S>                                                                <C>          <C> 
Notes payable consists of the following:                                                                
                                                                                                        
     Mortgage note payable to bank, collateralized by land                                              
         and building, due in monthly payments of $14,089,                                              
         including interest at 8 percent per annum, through                                             
         December 2000, at which time the entire principal                                              
         balance is due and payable.                               $1,843,743   $1,862,410              
     Note payable to bank, secured by certain equipment,                                                
         due in monthly payments of $10,969, including                                                  
         interest at 11 percent per annum, through June 2000,                                           
         at which time the entire principal balance is due                                              
         and payable.                                                     -        688,721                         
     Note payable to a financial institution, secured by                                                
         portfolio receivables, due in monthly payments                                                 
         based on collections through August 1998, at which                                             
         time the entire principal balance is due and payable.            -        120,000
                                                                   ----------   ----------              
                                                                   $1,843,743   $2,671,131              
                                                                   ==========   ==========               
</TABLE> 

Annual maturities of notes payable at September 30, 1998 are as follows:

<TABLE> 
<CAPTION> 
 
     Years Ending
     September 30,
     -------------
<S>                                                     <C>  
          1999                                          $   20,223
          2000                                              21,504
          2001                                           1,802,016
                                                        ----------
                                                        $1,843,743
                                                        ==========

</TABLE> 

                                      F-14
<PAGE>
 
7.  Capital Transactions
    --------------------

    a.  Series A Convertible, Redeemable Preferred Stock
        ------------------------------------------------
     On September 30, 1996, the Company converted the balance of notes issued in
     connection with the acquisition of MCSI totaling $690,000 into 345,000
     shares of the Company's Series A convertible, redeemable preferred stock.
     The preferred stock is convertible into shares of common stock at $2.00 per
     share at the option of the holders through September 29, 1999, at which
     time the shares may be converted at a rate of $1.50 per share of common
     stock, subject to antidilution provisions. The underlying common stock
     reserved for conversion are subject to registration rights under the
     Securities Act of 1933, at which time such shares will be automatically
     converted into common stock. The Company has the right to redeem these
     preferred shares at $2.00 per share. If such shares have not been redeemed
     or converted by September 29, 1999, the redemption price increases to $2.50
     per share, subject to antidilution provisions. The holders of the Company's
     Series A convertible, redeemable preferred shares are entitled to the same
     voting and dividend rights as the common shareholders. Such preferred
     shares have a liquidation preference at $2.00 per share over common
     shareholders.

     b.  Common Stock Issuances
         ----------------------

     On July 2, 1998, the Company sold 2,000,000 shares of its common stock to
     Pacific Life Insurance Company, representing 28% of the outstanding common
     stock of the Company on a fully diluted basis for $3,000,000.

     On June 5, 1998, the Company issued 7,300 shares of its common stock to
     employees in exchange for services provided. The services were valued at
     the market value of the common stock on the date issued, which totaled
     $7,300.

     On June 2, 1997, the Company issued 10,000 shares of its common stock as
     payment for services provided by an outside consultant. The services were
     valued at the market value of the common stock on the date issued, which
     totaled $12,500.

     On February 12, 1997, a former owner of The Christmas Guild (TCG) exercised
     warrants to purchase 10,000 shares of the Company's common stock at $0.25
     per share.

     c.  Stock Option Plan
         -----------------

     In 1995, the Company adopted, and the shareholders approved, the Cypress
     Financial Services, Inc. 1995 Stock Option Plan (the Plan) which authorized
     450,000 stock option grants to purchase the Company's common stock. In
     August 1998, the Board of Directors and Shareholders approved a 500,000
     share increase to the Plan increasing the total number of shares reserved
     for issuance pursuant to the Plan to 950,000.

                                      F-15
<PAGE>
 
     The Plan provides for the grant by the Company of options to purchase
     shares of the Company's common stock to its officers, directors, employees,
     consultants and advisors. The Plan provides that it is to be administered
     by a committee appointed by the Board of Directors (the Committee) all of
     whom are "disinterested" under 16b-3 of the Securities Exchange Act of
     1934, as amended. The Committee has discretion, subject to the terms of the
     Plan, to select the persons entitled to receive options under the Plan, the
     terms and conditions on which options are granted, the exercise price, the
     time period for vesting such shares, the number of shares subject thereto,
     and whether such options shall qualify as "incentive stock options" within
     the meaning of Section 422 of the Internal Revenue code, or "non-qualified
     stock options."

     The Company has granted 869,400 options under the Plan of which 72,100 have
     been forfeited. These options are issued at fair market value or at a 10
     percent premium over fair market value if the individual is a 10 percent or
     more shareholder. All options granted expire ten years from the date of
     grant. At September 30, 1998, there were 152,700 additional shares
     available for grant under the Plan.

     A summary of the status of the Plan at September 30, 1998 and 1997 and
     changes during the years then ended is presented in the table and narrative
     below:

<TABLE>
<CAPTION>
                                                        September 30, 1998                        September 30, 1997
                                             -------------------------------------     --------------------------------------
                                                                       Weighted                                   Weighted
                                                                        Average                                   Average
                                                                       Exercise                                   Exercise
                                                   Shares                Price               Shares                Price
                                             ---------------      ----------------     ---------------      -----------------
<S>                                          <C>                  <C>                  <C>                  <C>
Outstanding at beg. of year                          118,650                 $2.75                  -                      -
        Granted                                      740,000                 $1.17             129,400                  $2.75
        Exercised                                          -                     -                 -                      -
        Forfeited                                    (61,350)                $2.75             (10,750)                 $2.75
                                                     -------                 -----             -------                  -----
Outstanding at end of year                           797,300                 $1.29             118,650                  $2.75
                                                     =======                 =====             =======                  =====
 
Exercisable at end of year                           307,300                 $1.33             118,650                  $2.75
                                                     =======                 =====             =======                  =====
 
Weighted average fair value of
  options granted                                                            $1.07                                      $2.09
                                                                             =====                                      =====
Weighted average remaining
  contractual life                                                             9.6                                        9.0
                                                                             =====                                      =====
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
     the Black Scholes pricing model with the following assumptions used for the
     grants in fiscal years 1998 and 1997: weighted average risk-free interest
     rate of 4.5 and 6.6 percent, respectively; a weighted average volatility of
     90.6 and 77.1 percent, respectively; an expected life of 7 years; and no
     expected dividend yield.

                                      F-16
<PAGE>
 
     As permitted by SFAS No. 123, the Company continues to account for the Plan
     based on APB Opinion No. 25, under which no compensation cost has been
     recognized.  Pro forma disclosures, as if the Company had adopted the cost
     recognition method, are shown below.  This alternative method recognizes
     the fair value of stock options granted in net income during the period
     that the stock options vest.  Had compensation cost for stock options
     awarded under this plan been determined consistent with this methodology,
     the Company's net income and earnings per share for the year ended
     September 30, 1998 would have reflected the following pro forma amounts:
<TABLE>
<CAPTION>
                                                        1998         1997
                                                     ----------   ----------
<S>                                    <C>           <C>          <C>
               Net Income (Loss):      As Reported   $1,039,827   $(454,527)
                                       Pro Forma     $  817,410   $(702,066)
               Basic EPS:              As Reported   $     0.21   $   (0.10)
                                       Pro Forma     $     0.16   $   (0.16)
               Diluted EPS:            As Reported   $     0.19   $   (0.10)
                                       Pro Forma     $     0.15   $   (0.16)
</TABLE>

8.  Commitments and Contingencies
    -----------------------------

     a.  Lessee
         ------

     The Company leases certain equipment under non-cancelable capital and
     operating leases which expire at various times through fiscal 2002. Future
     annual minimum lease payments, in the aggregate, under capital and
     operating leases at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
 
Years Ending
September 30,                                   Capital    Operating
-------------                                   --------   ---------
<S>                                             <C>        <C>
 1999                                           $ 57,915      $6,731
 2000                                             63,182         -
 2001                                             63,182         -
 2002                                             10,532         -
                                                --------      ------
Total minimum lease payments                     194,811      $6,731
                                                              ======
Less -- Amounts representing interest             53,013
                                                --------
Present value of capital lease obligations      $141,798
                                                ========
</TABLE>

     Rent expense under all operating leases totaled $22,938 in 1998 and $48,795
     in 1997.

                                      F-17
<PAGE>
 
     b.  Lessor
         ------
 
     As discussed in Note 1, the Company leases a portion of its building to
     unrelated entities under operating leases which expire at various times
     through September 1, 2003. The Company leases to several tenants on a
     month-to-month basis. Future annual collections under non-cancelable
     operating leases as of September 30, 1998 are scheduled as follows:
<TABLE>
<CAPTION>
          Years Ending
          September 30,
          -------------
<S>                                            <C> 
              1999                             $137,601
              2000                              140,270
              2001                               92,747
              2002                               65,061
              2003                               61,819
                                               --------
                                               $497,498
                                               ========
</TABLE> 

     c.  Employment Agreements
         ---------------------
  
     In November 1996, the Company entered into a three-year agreement with one
     of its employees. In September 1998, the Company entered into three-year
     employment agreements with two of its officers. The agreements provide for
     annual salaries, paid vacations and other related benefits. The minimum
     annual compensation pursuant to such agreements, excluding provisions for
     fringe benefits (e.g., vacations, etc.), will be approximately $380,000 in
     fiscal 1999.

     d.  Litigation
         ----------

     As of September 30, 1998, the Company is not involved in any litigation
     that is material to its financial position or results of operations,
     although the Company is involved, from time to time, in litigation that is
     incidental to its collection business. The Company regularly initiates
     legal proceedings as a plaintiff in connection with its routine collection
     activities.

9.  Income Taxes
    ------------

The provisions (benefits) for income taxes for the years ended September 30,
1998 and 1997 are shown in the table below:

<TABLE>
<CAPTION>
                                     1998       1997
                                   --------   --------
<S>                                <C>        <C>
Federal:
  Current                          $    -     $(27,767)
  Deferred                          322,710        -
State:
  Current                            15,413      6,065
  Deferred                          127,479        -
                                   --------   --------
Total tax provision (benefit)      $465,602   $(21,702)
                                   ========   ========
</TABLE>

                                      F-18
<PAGE>
 
Although not affecting the total provision, actual income tax payments may
differ from the amounts shown as current as a result of the final determination
as to the timing of certain deductions and credits.

The total tax provision (benefit) differs from the Federal statutory rate of 34
percent for the reasons shown in the table below:
<TABLE>
<CAPTION>
                                         1998     1997
                                        ------   ------
<S>                                     <C>      <C>
Federal statutory tax rate               34.0%    (34.0)%
State income taxes, net of Federal
   income tax benefit                     7.9       1.3
NOL Carryback                               -      (5.8)
Other                                    (2.4)      0.8
Valuation Allowance                     (13.4)     33.1
                                        -----    ------
Actual tax provision (benefit)           26.1%    (4.6)%
                                        =====    ======
</TABLE>

Because certain items of income and expense are not recognized in the same year
in the financial statements of the Company as in its Federal and California tax
returns, deferred assets and liabilities are created. As of September 30, 1998
and 1997, the accompanying consolidated balance sheets reflect net deferred tax
liabilities of $465,000 and $0, respectively. The net deferred tax liabilities
as of September 30, 1998 and 1997 are disclosed in the table below:
<TABLE>
<CAPTION>
                                       Components    Components
                                          1998          1997
                                       -----------   ----------
<S>                                    <C>           <C>
Deferred tax assets:
  Allowance for doubtful accounts       $ 142,388     $  32,587
  Vacation accrual                         30,647       169,809
  Net operating loss                      314,328           -
  Deferred state taxes                     43,343           -
  Other                                     3,231           -
                                        ---------     ---------
  Total deferred tax assets               533,937       202,396
                                        ---------     ---------
 
Deferred tax liabilities:
  Securitization                         (974,433)          -
  Other                                    (9,693)          -
                                        ---------     ---------
  Total deferred tax liabilities          984,126           -
                                        ---------     ---------
  Valuation allowance                           -      (202,396)
                                        ---------     ---------
Net deferred tax liability              $(450,189)    $     -
                                        =========     =========
</TABLE>

                                      F-19
<PAGE>
 
                                 EXHIBIT INDEX
                                        

EXHIBIT                             DESCRIPTION
NUMBER
--------------------------------------------------------------------------------

   2.1     Definitive Purchase Agreement and Plan of Reorganization dated
           September 12, 1995 incorporated by reference from Registrant's 
           Form 8-K dated September 12, 1995, Exhibit 7(b)(i).

   3.1     Amended and Restated Articles of Incorporation as filed with the
           Secretary of State of Nevada on December 7, 1995, incorporated by
           reference from Registrant's Form 8-K filed on December 20, 1995,
           Exhibit 3.1.

   3.2     Bylaws of the registrant, incorporated by reference from Registrant's
           Registration Statement on Form S-18 (SEC No. 33-12361-LA) filed on
           March 18, 1987, Exhibit 3.2.

   3.3     Certificate of Determination re: Series A Preferred Stock,
           incorporated by reference from Registrant's Form 10-k filed on
           December 27, 1996.

   4.1     Specimen of Common Stock of Registrant, incorporated by reference
           from Registrant's Form 8-K filed on December 20, 1995, Exhibit 4.2.

  10.2     1995 Stock Option Plan of Registrant, incorporated by reference
           from Registrant's Form 8-K filed on December 20, 1995, Exhibit 10.2.

  10.3     Preferred Stock Purchase Agreement dated September 30, 1996,
           incorporated by reference from Registrant's Form 10-K filed on
           December 27, 1996.

  10.4     Executive Employment Agreements of Manuel Occiano dated September 16,
           1998 1998 and John Hindman dated September 4, 1998

  27       Financial Data Schedule

   ___________________