<PAGE>
 
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                                 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, 1996  Commission File Number:  0-17192

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


            NEVADA                                      95-3137322
   (State or other jurisdiction of                    (I.R.S 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 each 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: $5,371,942.

The aggregate value of the Registrant's Common Stock held by non-affiliates of
the Registrant is $2,315,000.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  There were 4,500,271 shares of the
Registrant's Common Stock issued and outstanding as of November 30, 1996.

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

GENERAL

     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 started to acquire accounts receivable and other
consumer obligations for its own collection portfolio. The types of distressed
and discounted obligations the Company has or intends to acquire for its own
portfolio include performing and non-performing installment loans, secured and
unsecured consumer and commercial loans, credit card obligations and accounts
receivable. The Company's sources for these distressed and discounted
obligations are federal and state banking and savings and loan institutions,
hospitals, finance companies, insurance companies, credit unions, consumer
credit issuers, and other collection agencies.

     The Company operates primarily through wholly-owned subsidiaries or
divisions that serve specific segments of the collection service industry. The
Company's subsidiaries or divisions include: (i) Medical Control Services, Inc.
("MCSI"), a collection agency servicing the health care industry; (ii) Merchants
Recovery Services, Inc. ("MRSI"), a company that primarily offers accounts
receivable collection services to banks, credits unions, public utilities and
retailers; (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) Revenue Practice Enhancements ("RPE"), a
division of MCSI that offers complete electronic billing services for doctors'
offices.

HISTORY

     The Company was originally incorporated under the name "Oxford Venture
Corporation" on February 7, 1987. On June 7, 1988, the Company acquired all of
the capital stock of The Christmas Group, Inc., a California corporation, which
remained a subsidiary of the Company. On June 24, 1988, the Company changed its
name to "The Christmas Guild, Inc."

     From 1989 until September 12, 1995 the Company was operationally inactive
at which time it entered into a Definitive Securities Purchase Agreement and
Plan of Reorganization with Medical Control Services, Inc., a California
corporation. Pursuant to such agreement, the Company acquired all of the
outstanding capital stock of MCSI and its subsidiaries. MCSI has been in the
accounts receivable management administration and debt collection business since
1977. On December 7, 1995, the Company amended and restated its Articles of
Incorporation to change its name to "Cypress Financial Services, Inc."

OPERATING SUBSIDIARIES

     The Company does business through the following operating subsidiaries
under trade names which serve the collection, billing and other office support
needs of the collection service industry:

                                       1
<PAGE>
 
     MEDICAL CONTROL SERVICES , INC.

     MCSI was incorporated in California in 1977 as a collection agency
servicing the health care industry. MCSI has service contracts with over 1,000
clients that include, hospitals, medical groups, doctors, laboratories,
radiology centers, emergency rooms and convalescent homes. The volume of annual
collection assignments for MCSI reached in excess of $35 million in fiscal 1996.
MCSI also operates RPE, a division that offers medical providers out sourcing
services for their patient billing process. RPE utilizes state of the art
billing software that covers all national private insurance carriers, including
Medicaid and Medicare.

     MERCHANTS RECOVERY SERVICES, INC.

     MRSI was incorporated in California in 1982 to serve the accounts
receivable collection needs for commercial businesses. MRSI has service
contracts with over 1,000 clients that include banks, credit unions, public
utilities, and wholesale and retail establishments. The volume of annual account
assignments reached in excess of $86 million in fiscal 1996. In January 1995,
MRSI began to diversify from purely a debt collection service on a contingency
basis to include direct purchases of credit card debt from banks and other
sources of distressed or discounted consumer obligations for its own collection
and/or re-sale. Since commencing this program in January 1995, MRSI purchased
over $92 million of such obligations for its own portfolio, including $55
million during fiscal 1996. See "Portfolio Management."

     LIEN SOLUTIONS, INC.

     LSI was incorporated in California in 1984 to provide specialized
collection services to clients that have complex collection needs. LSI has
developed sophisticated systems and procedures for resolving its clients
contested workers compensation claims which, unlike typical collection matters,
are governed by the Workers' Compensation Appeals Board, which has exclusive
jurisdiction over such claims. In addition, LSI also extends its specialized
service to third-party payor disputes, such as personal injury liens, Medicare,
HMO denials and lien subrogation. In fiscal 1996, LSI received collection
assignments in excess of $16 million.

     MY BOSS, INC. DBA 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 representatives and its sophisticated data processing support systems
to replace or supplement the traditional accounts receivable department. By
using its employees, computers and predictive dialing, BOSS is able to more
effectively receive payment from its clients' patients 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 its clients receivables before the receivables become bad
debt. BOSS acts as the accounts receivable department allowing the client's
personnel to focus on other productive tasks. In fiscal 1996, BOSS received
collection assignments in excess of $25 million.

                                       2
<PAGE>
 
CONTINGENT COLLECTION SERVICE AGREEMENTS

     The Company is generally retained on a month-to-month-basis by its clients
to administer current receivables or to collect past due debts with fees payable
on a contingent basis based upon the amount collected. The Company negotiates
its commission rate with each client, depending upon the size, aging and general
collectibility of the accounts.

PORTFOLIO MANAGEMENT

     Over the past several years there has been a substantial amount of
discounted consumer debt being sold by financial institutions as a result of
changes in the financial regulatory requirements of such entities. These changes
in the financial requirements have led to numerous mergers, as well as other
means of recapitalizing these institutions. One method some of these financial
institutions use to strengthen their current financial condition is to charge-
off non-performing loans or other delinquent credit facilities and sell these
accounts to third parties like the Company for immediate cash.

     Typically loans or accounts sold by the originating creditors are sold in
large portfolios that range in size from tens of thousands to multi-million
dollars in outstanding balances. By utilizing the Company's data systems and
technology, the Company is able to quickly analyze the integrity of a given
portfolio of such assets and other debtor information provided by the
originating lenders. As a result of its credit and collection analysis, and
based on its extensive collection experience, the Company is able to approximate
the collection value of the portfolio and thereby determine the amount that
should be paid for the portfolio. Although only a small percent of the total
outstanding principal balances of most of the portfolio can ultimately be
collected, the Company is able to acquire the portfolio at such deep discounts
from the portfolio's total principal amount that the Company can generate a
significant cash flow on its investment by utilizing its existing collection
systems and technology.

     Once a portfolio is purchased, the Company utilizes its general accounts
receivable management and debt collection services to generate cash flow on the
portfolio. Because the cost to acquire the portfolio is extremely low for each
individual account within the portfolio, the Company can offer more attractive
settlement and payment options to the individual debtors than those debtors have
been offered by the originating lender or that can be offered by the Company on
a contingent basis. The cash flow generated from the Company's portfolio
collections is then used to acquire additional portfolio assets. As of September
30, 1996, the Company's own portfolio of distressed and discounted obligations
had an outstanding face value of $59 million.

MANAGEMENT INFORMATION SYSTEMS

     The Company maintains sophisticated data processing support and management
information systems. All departments have access to computer systems that
utilizes large data bases on CD-ROMs for skip tracing purposes that enable the
Company to obtain information about the debtors or their property from various
data sources, including, TRW, Trans Union, DataQuick, California situs, and
county records.

                                       3
<PAGE>
 
     The Company is currently upgrading its systems and believes that upon
completion, its processing support and management information systems will be
sufficient to substantially expand its business without significant additional
capital expenditure.

CUSTOMERS

     The Company generally has a broad and well diversified client base that
includes hospitals, medical groups, laboratories, convalescent homes, banks,
credit unions, public utilities, and wholesale and retail establishments.

     Although the Company has several large customers, and the loss of any one
of these customers could have a material adverse effect on the Company's
operations, no customer comprises more than 10% of the Company's consolidated
revenues. Moreover, as the Company continues to increase the amount of
obligations acquired for its own portfolio, the Company will become less
dependent on the revenue generated from its third party clients on a contingency
basis.

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 advertising 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 comply 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.

                                       4
<PAGE>
 
COMPETITION

     The accounts receivable management and collection business is highly
competitive. The Company competes with a number of national, local and regional
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, 1996, the Company had 84 full time employees and 23
part-time employees, of whom 4 are management personnel, 6 are sales and
marketing personnel, 4 are legal personnel, 15 are MCSI collectors, 17 are MRSI
collectors, 18 are LSI collectors, 26 are BOSS pre-collection representatives, 1
is an RPE billing clerk, 2 are accounting personnel and 14 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.

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 26,000 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, 1996, the Company is not involved in any litigation in
which it is a defendant, 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, 1996.

                                       5
<PAGE>
 
                                    PART II

ITEM 5    MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDERS
          MATTERS

     On September 30, 1996, the Company's Common Stock began trading in the 
over-the-counter market and prices are quoted on NASDAQs Electronic Bulletin
Board under the symbol "CYFS". The opening bid price was $2.50 per share without
taking into account retail markups, markdowns or commissions and may not
represent actual transactions. In addition, because a significant amount of the
Company's securities are restricted securities pursuant to Rule 144, the
aggregate amount of shares held by non-affiliates that are not restricted is
limited. Therefore, any trading in the Company's Stock is expected to be limited
and sporadic.

     Prior to such listing, there was no established public trading market for
the Company's Common Stock.  As of December 15, 1996, there were approximately
1,500 Common Stock shareholders.

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.

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

GENERAL

     The Company is engaged primarily in the collection of receivables owned by
entities in the commercial, retail and medical industries.  Commencing in
January, 1995, the Company began purchasing a significant amount of portfolio
receivables for its own collection account.  The Company anticipates that the
purchase of portfolio receivables for its own collection account will become a
significant portion of its future operations.

     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. The
Company reported nine months of operating activity at September 30, 1995 as a
result of the recapitalization of MCSI and the acquisition of Company by MCSI on
September 12, 1995 and the change in its fiscal year from December 31 to
September 30. Accordingly, management has provided its analysis of the nine
months ended September 30, 1995 compared to the year ended September 30, 1996,
although inherent limitations exist in the comparability of such financial
information.

     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 receivables portfolio and overall macro-
economic conditions.

                                       6
<PAGE>
 
RESULTS OF OPERATIONS
 
     Revenues for the twelve month months ended September 30, 1996, were
$5,372,000 as compared to revenues of $3,394,000 for the nine months ended
September 30, 1995. The increase in revenues, on an annualized basis, resulted
primarily from an increase in revenues attributable to collection of its own
portfolio of distressed and discounted obligations. For the twelve months ended
September 30, 1996, the Company recognized approximately $501,000 in revenues
from the collection of receivables from its own portfolio as compared with
$21,000 in such revenues recognized for the nine months ended September 30,
1995. Revenues from collection of its own portfolios are recognized only after
the cost of such portfolios has been recovered. As of September 30, 1996, the
Company had paid approximately $2,300,000 and recovered approximately $1,813,000
of such costs through the sale and collection of certain of its portfolio
receivables, leaving a portfolio carrying value of approximately $487,000 at
September 30, 1996. As of September 30, 1996, the Company's remaining
outstanding balance on its own portfolio was approximately $58 million as
compared to an outstanding balance of approximately $27 million at September 30,
1995.

     In addition to the increase in revenues attributable to collection of its
own portfolio, the  Company's third party collection revenues for the period
ended September 30, 1996 increased approximately 8%, on an annualized basis, as
compared to the nine months ended September 30, 1995.  Despite continuing
reductions in the commission rates on its third party collection business, the
Company was able to increase its collection revenues as a result of upgrading
certain collection tools, prioritizing its debtors and a new contract with one
of its existing customers.

     Although the Company believes that its third party collection business
will continue to experience downward pressure on commission rates, increased
revenues from its own portfolio of distressed and discounted obligations will
make the Company less sensitive to competitive contingent fee price pressure.
Management believes that the revenues generated from its own portfolios will
continue to increase as a percentage of  the Company's total revenues.

     Operating expenses for the twelve months ended September 30, 1996 were
$5,132,000 as compared to $3,369,000 for the nine months ended September 30,
1995.  The increase in expenses, on an annualized basis, was directly
attributable to the Company's continued expansion into direct purchases of
discounted obligations for its own portfolio and the related costs to collect
such receivables.  In addition, the Company hired nine new collection personnel
and incurred additional training and telecommunications expenses related to its
expanded collection efforts.

     Income from operations for the twelve months ended September 30, 1996 was
approximately $240,000 as compared to $25,000 for the nine months ended
September 30, 1995.  The increase in operating income is directly related to the
expansion into direct purchases of portfolio receivables.

     Interest expense for the twelve months ended September 30, 1996 increased
to $315,000 from $156,000 for the nine months ended September 30, 1995 due to
the increase in borrowings to acquire its portfolio receivables.  The Company
expects to continue to utilize its credit facility to finance future
acquisitions of portfolio receivables.

     The Company owns the 50,000 square foot commercial building where its
headquarters are located. The Company occupies approximately 51% of the building
with the remaining 49% being occupied by tenants on short-term leases.  Net
rental income for the twelve months ended September 30, 1996 was

                                       7
<PAGE>
 
$143,000 as compared to $121,000 for the nine months ended September 30, 1995.
The decrease in net rental income for 1996 on an annualized basis was due to the
Company occupying more space within the building and to lower average monthly
rental  rates  for the remaining space over the prior period.

     The Company reported net profit of $30,000 for the twelve months ended
September 30, 1996 as compared to a net loss of $24,000 for the nine months
ended September 30, 1995.  The increase in net income resulted from the
expansion into purchases of portfolio receivables for its own account.

LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 1995, the Company had $750,000 of notes payable to the
shareholders of MCSI, which were incurred in connection with the acquisition.
During the twelve months ended September 30, 1996, $60,000 was repaid to one
shareholder.  The remaining $690,000 of notes payable  was converted Series A
Preferred Stock on September 30, 1996.

     Historically, the Company has funded its operations through cash flows from
operations. Management intends to generate increased revenues through additional
purchases of discounted obligations for its own portfolio. The Company's credit
facility, which has been increased to $1,250,000 and carries an interest rate of
prime plus 2% on any outstanding balance or 10.25% at September 30, 1996, and
which expires on January 23, 1997, has been used primarily for the purchase of
portfolio receivables. The outstanding balance of the line of credit at
September 30, 1996 was approximately $992,000. Management intends to either
renew the obligation through its existing bank, or consider extinguishing the
indebtedness through a placement of alternative debt securities or equity
securities. There are no assurances that such refinancing will be obtained by
management. The Company has also financed certain of its equipment and fixtures
with a term note that carries an interest rate of 11% that is due in June, 2000.
As of September 30, 1996, the balance on this term note was approximately
$740,000.

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

     In October 1995, the Company's Board of Directors approved the engagement
of Corbin & Wertz to conduct an audit of the Company's financial statements for
the period ended September 30, 1995.  The engagement of Corbin & Wertz as the
Company's independent auditors follows the replacement of Janet Loss, C.P.A.,
P.C. who had been engaged to audit The Christmas Guild, Inc's financial
statements for the fiscal years ended June 30, 1989 through 1994.

     The audit reports provided by Janet Loss, C.P.A., P.C. did not contain an
adverse opinion or a disclaimer of opinion nor was the report qualified in any
respect.

     Management of the Company knows of no past disagreements between The
Christmas Guild, Inc and Janet Loss, C.P.A., P.C. on any matter of accounting
principles or practices, financial statement disclosure or auditing, scope or
procedure.

                                       8
<PAGE>
 
                                   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, 1996 and is incorporated herein by
reference.

ITEM 10.  EXECUTIVE COMPENSATION

     The information required by this item will be contained in the Company's
Information Statement be filed with the Securities and Exchange Commission
within 120 days after September 30, 1996 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, 1996 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, 1996 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, 1996.

                                       9
<PAGE>
 
                                  SIGNATURES

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

                                   CYPRESS FINANCIAL SERVICES, INC.


Date:  December 20, 1996           By: /s/ Farrest Hayden
                                       ------------------------------
                                   Farrest Hayden
                                   Chairman of the Board and
                                   Chief Executive Officer

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

<TABLE> 
<CAPTION> 
Signatures                    Title                       Date Signed
----------                    -----                       -----------

<S>                       <C>                             <C> 
/s/ Farrest Hayden        Chairman of the Board           December 20, 1996
-------------------                                                
Farrest Hayden            Chief Executive Officer
                          and President


/s/ Otto J. Lacayo        Director, Chief Financial       December 20, 1996
--------------------                                                
Otto J. Lacayo            Officer and Vice President
                          (Principal Accounting Officer)


/s/ Daniel Najor          Director                        December 20, 1996
------------------                                               
Daniel Najor

/s/ Graham E. Gill        Director                        December 20, 1996
-------------------                                            
Graham E. Gill
</TABLE> 

<PAGE>
 
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                            Page
                                                            ----
CYPRESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Independent Auditors' Report . . . . . . . . . . . . . . .   F-2

Consolidated Balance Sheet As Of September
  30, 1996 . . . . . . . . . . .  . . . . . . . . . . . . .  F-3

Consolidated Statements Of Operations For The
  Year Ended September 30, 1996 And For The
  Period From January 1, 1995 To September
  30, 1995 . . . . . . . . . . . . . . . . . . . . . . . .   F-4

Consolidated Statements Of Shareholders'
  Equity (Capital Deficiency) For The Year
  Ended September 30, 1996 and For The Period
  From January 1, 1995 To September 30, 1995 . . . . . . .   F-5

Consolidated Statements Of Cash Flows For
  The Year Ended September 30, 1996 And For
  The Period From January 1, 1995 To
  September 30, 1995 . . . . .  . . . . . . . . . . . . . .  F-6

Notes To Consolidated Financial Statements
  For The Year Ended September 30, 1996 And
  For The Period From January 1, 1995 To
  September 30, 1995  . . . . . . . . . . . . . . .  F-8 to F-21

                                      F-1
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
                         ----------------------------


The Board of Directors
Cypress Financial Services, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Cypress Financial
Services, Inc. and subsidiaries (the "Company") as of September 30, 1996, and
the related consolidated statements of operations, shareholders' equity (capital
deficiency) and cash flows for the year then ended and for the period from
January 1, 1995 to September 30, 1995.  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, 1996, and the results of
their operations and their cash flows for the year ended September 30, 1996 and
for the period from January 1, 1995 to September 30, 1995 in conformity with
generally accepted accounting principles.

As more fully described in Note 1 to the consolidated financial statements, the
Company has restated its 1995 consolidated financial statements to reflect its
revised accounting for the reverse acquisition of The Christmas Guild, Inc. by
Medical Control Services, Inc.



                                                       CORBIN & WERTZ

Irvine, California
November 1, 1996

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

                          CONSOLIDATED BALANCE SHEET

                              September 30, 1996


<TABLE> 
                                ASSETS (Note 4)
<S>                                                              <C>       
Cash                                                             $  520,706
Restricted cash (Note 1)                                            452,590
Accounts receivable, net of allowance for                                  
 doubtful accounts of $15,000 (Note 1)                              592,572
Portfolio receivables (Note 2)                                      486,505
Property, net of accumulated depreciation                                  
 of $1,245,286 (Notes 1 and 5)                                    2,619,014
Notes receivable from shareholders (Note 3)                          60,500
Other                                                                24,077
                                                                 ----------
                                                                           
                                                                 $4,755,964
                                                                 ========== 

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable                                                 $   72,942
Trust payables (Note 1)                                             452,590
Accrued liabilities                                                 390,795
Line of credit (Note 4)                                             992,085
Long-term debt (Note 5)                                           2,620,026
                                                                 ----------
                                                                           
   Total liabilities                                              4,528,438
                                                                 ---------- 
 
Commitments and contingencies (Notes 6 and 7)
 
Shareholders' equity (Notes 1 and 6):
 Series A convertible, redeemable preferred
  stock, $0.001 par value, $2.00 liquidation
  preference per share, 5,000,000 shares
  authorized; 345,000 shares issued and
  outstanding                                                       690,000
 Common stock, $0.001 par value; 30,000,000                                
  shares authorized; 4,500,271 shares issued                               
  and outstanding                                                     4,500
 Paid-in capital                                                    495,500
 Accumulated deficit                                               (962,474)
                                                                 ----------
 Total shareholders' equity                                         227,526
                                                                 ---------- 

                                                                 $4,755,964
                                                                 ==========
</TABLE>


               See independent auditors' report and accompanying
                  notes to consolidated financial statements

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

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  For The  
                                                                Period From 
                                                  For The        January 1,
                                                 Year Ended       1995 To
                                               September 30,   September 30,
                                                    1996            1995
                                               --------------  --------------
<S>                                            <C>             <C>
Revenues (Note 1):
  Service fees                                     $4,870,062    $3,372,408
  Income on portfolio receivables                                          
   (Note 2)                                           501,880        21,229
                                                   ----------    ----------
                                                    5,371,942     3,393,637
                                                   ----------    ----------
                                                                           
Operating expenses:                                                        
  Salaries, wages and related benefits              3,401,800     2,063,596
  Selling, general and administrative                                      
   (Notes 1 and 7)                                  1,595,105     1,195,962
  Depreciation                                        134,736       109,318
                                                   ----------    ----------
                                                    5,131,641     3,368,876
                                                   ----------    ----------
                                                                           
Income from operations                                240,301        24,761
                                                   ----------    ----------
                                                                           
Other income (expense):                                                    
  Interest expense, net (Notes 4,                                          
   5 and 6)                                          (314,850)     (155,967)
  Rental operations (Notes 1 and 7)                   143,475       121,399
  Other                                                   ---       (11,798)
                                                   ----------    ----------
                                                     (171,375)      (46,366)
                                                   ----------    ----------
                                                                           
Income (loss) before provision for                                         
 income taxes                                          68,926       (21,605)
                                                                           
Provision for income taxes (Note 8)                    39,000         3,200
                                                   ----------    ----------
                                                                           
Net income (loss)                                  $   29,926    $  (24,805)
                                                   ==========    ==========
                                                                           
Net income (loss) per share (Note 1)                    $0.01        $(0.01)
                                                   ==========    ==========
                                                                           
Weighted average shares outstanding                                        
 (Note 1)                                           4,500,271     2,399,085
                                                   ==========    ========== 
 
</TABLE>


               See independent auditors' report and accompanying
                  notes to consolidated financial statements

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



                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (CAPITAL DEFICIENCY) 

                  For The Year Ended September 30, 1996 And 
           For The Period From January 1, 1995 To September 30, 1995


<TABLE>
<CAPTION>
                                                        Series A Convertible,                Retained    
                                                             Redeemable                      Earnings    
                                       Common Stock        Preferred Stock      Paid-in    (Accumulated 
                                    ------------------  ---------------------
                                    Shares      Amount  Shares         Amount   Capital      Deficit)       Total 
                                    ------      ------  ------         ------   --------   ------------     ----- 
<S>                                 <C>         <C>     <C>          <C>        <C>        <C>          <C>       
Balances at January 1, 1995         2,249,000   $2,249      ---      $    ---   $  7,251   $ 272,905    $ 282,405 
                                                                                                                  
Common stock issued for                                                                                           
 cash (Notes 1 and 6)               2,100,000    2,100      ---           ---    497,900         ---      500,000 
                                                                                                                  
Common stock of TCG retained                                                                                      
 in connection with reverse                                                                                       
 acquisition (Notes 1 and 6)          151,271      151      ---           ---       (151)        ---          --- 
                                                                                                                  
Dividend to MCSI shareholders                                                                                     
 (Notes 1 and 6)                          ---      ---      ---           ---     (9,500)   (390,500)    (400,000)
                                                                                                                  
Accrued dividend to MCSI                                                                                          
 shareholders (Notes 1 and 6)             ---      ---      ---           ---        ---    (850,000)    (850,000)
                                                                                                                  
Net loss                                  ---      ---      ---           ---        ---     (24,805)     (24,805)
                                  -----------  -------  -------  ------------  ---------   ---------    --------- 
                                                                                                                  
Balances at September 30, 1995      4,500,271    4,500      ---           ---    495,500    (992,400)    (492,400)
                                                                                                                  
Preferred stock issued in                                                                                         
 satisfaction of related party                                                                                    
 notes payable (Note 6)                   ---      ---  345,000       690,000        ---         ---      690,000 
                                                                                                                  
Net income                                ---      ---      ---           ---        ---      29,926       29,926 
                                  -----------  -------  -------  ------------  ---------   ---------    --------- 
                                                                                                                  
Balances at September 30, 1996      4,500,271   $4,500  345,000      $690,000   $495,500   $(962,474)   $ 227,526 
                                  ===========  =======  =======  ============  =========   =========    =========  
</TABLE>


               See independent auditors' report and accompanying
                  notes to consolidated financial statements

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

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                  For The  
                                                                Period From 
                                                  For The        January 1,
                                                 Year Ended       1995 To
                                               September 30,   September 30,
                                                    1996            1995
                                               --------------  --------------
<S>                                            <C>             <C>
Cash flows from operating activities:
  Net income (loss)                                $  29,926       $ (24,805)
  Adjustments to reconcile net income
   (loss) to net cash provided by
   (used in) operating activities:
    Depreciation and amortization                    153,151         123,129
    Changes in operating assets and
     liabilities:
      Accounts receivable, net                      (294,382)       (109,716)
      Portfolio receivables                           (3,172)       (483,333)
      Accounts payable                               (26,661)        (36,627)
      Accrued liabilities                            150,543         151,765
      Other                                           (3,200)         11,798
                                                   ---------       ---------
 
  Net cash provided by (used in)
   operating activities                                6,205        (367,789)
                                                   ---------       ---------
 
Cash flows from investing activities:
  Other assets                                           ---          (4,860)
  Notes receivable from shareholders                     ---          (6,250)
  Purchases of equipment                             (44,145)        (63,272)
                                                   ---------       ---------
 
  Net cash used in investing activities              (44,145)        (74,382)
                                                   ---------       ---------
 
Cash flows from financing activities:
  Net borrowings from line of credit                 332,990         659,095
  Proceeds received from long-term debt                  ---         182,012
  Repayment on notes payable to related
   parties (Notes 1 and 6)                           (60,000)       (100,000)
  Repayments on long-term debt                       (76,578)        (51,582)
  Dividends paid to former MCSI
   shareholders (Notes 1 and 6)                          ---        (400,000)
  Proceeds from issuance of common stock
   (Notes 1 and 6)                                       ---         500,000
                                                   ---------       ---------
 
  Net cash provided by financing activities          196,412         789,525
                                                   ---------       ---------
 
Net increase in cash                                 158,472         347,354
 
Cash, at beginning of period                         362,234          14,880
                                                   ---------       ---------
 
Cash, at end of period                             $ 520,706       $ 362,234
                                                   =========       =========
</TABLE>


Continued

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

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

<TABLE> 
<CAPTION> 
                                                                  For The  
                                                                Period From 
                                                  For The        January 1,
                                                 Year Ended       1995 To
                                               September 30,   September 30,
                                                    1996            1995
                                               --------------  --------------
<S>                                            <C>             <C>
Supplemental disclosure of cash flow
 information -
  Cash paid during the period for:
    Interest                                       $ 326,231       $ 201,244
                                                   =========       =========
    Income taxes                                   $   6,330       $   7,973
                                                   =========       =========
</TABLE> 

Supplemental disclosure of noncash investing and financing activities:
  During the year ended September 30, 1996, the Company issued
   345,000 shares of its Series A convertible, redeemable preferred
   stock in satisfaction of $690,000 in notes payable to the former
   shareholders of MCSI, which are current shareholders and
   officers of the Company (Note 6).


               See independent auditors' report and accompanying
                  notes to consolidated financial statements

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

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

Organization and Basis of Presentation
--------------------------------------

Cypress Financial Services, Inc. (formerly The Christmas Guild,  Inc.), is a
Nevada Corporation organized in February 1987 under the name Oxford Venture
Corporation.

On June 7, 1988, Oxford Venture Corporation acquired all of the capital stock of
The Christmas Group, Inc., a California corporation organized in August 1980.
Concurrently, Oxford Venture Corporation changed its name to The Christmas
Guild, Inc. ("TCG").

On September 12, 1995, TCG acquired the issued and outstanding common stock of
Medical Control Services, Inc. and its wholly owned subsidiaries ("MCSI") for
2,249,000 shares of its common stock, $400,000 in cash and notes payable
totaling $850,000 (see Note 6).  Concurrently, TCG issued 2,100,000 shares of
its common stock to new investors for $400,000 in cash and a 30-day note
receivable for $100,000 (which was paid prior to September 30, 1995).  The
original shareholders of TCG retained 151,271 shares after the consummation of
the above transactions.  Concurrent with the acquisition, TCG changed its name
to Cypress Financial Services, Inc. ("Cypress").

As TCG had no significant operations prior to the acquisition, the purchase was
accounted for as a reverse acquisition whereby MCSI has been identified as the
acquiring corporation.  Accordingly, the accompanying consolidated financial
statements reflect the accounts of MCSI for all periods presented.  The
accompanying consolidated financial statements include the accounts of TCG from
the date (September 12, 1995) of the stock-for-stock exchange.

The 2,249,000 shares issued to acquire the common stock of MCSI are reflected in
the accompanying consolidated financial statements as if the shares were issued
and outstanding for all periods presented.  The 151,271 shares retained by the
original TCG shareholders are reflected in the accompanying consolidated
financial statements as consideration issued by MCSI to acquire the net assets
of TCG.  Management determined that the fair value of the 151,271 shares was
nominal based on the fair value of the net assets received from TCG.  The
2,100,000 shares issued to new investors is reflected as a recapitalization of
MCSI in the accompanying consolidated statements of shareholders' equity
(capital deficiency).  The $400,000 of cash paid, and the $850,000


Continued

                                      F-8
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-------------------------------------------------------------------------------

of notes issued, to the former shareholders of MCSI have been reflected as
dividends in the accompanying consolidated statements of shareholders' equity
(capital deficiency) (see Note 6).  The former shareholders of MCSI are current
shareholders and officers of Cypress.

The proforma results of operations of Cypress as a result of the reverse
acquisition for the nine month period ended September 30, 1995 would not be
materially different from the historical information presented herein.

Restatement
-----------

Cypress previously reported the reverse merger with TCG as an acquisition by TCG
of MCSI.  The estimated fair value of the consideration given by TCG was
determined to be $6,872,500.  The consideration was allocated to net assets
acquired, resulting in goodwill totaling $2,003,311 (after taking into effect a
$3,240,000 impairment adjustment recorded after the acquisition in September
1995).  In July 1996, management of Cypress determined that generally accepted
accounting principles require the acquisition to be accounted for as a reverse
acquisition, with MCSI being the acquiring corporation.  Accordingly, management
restated the consolidated financial statements for fiscal 1995 to properly
reflect the effects of the reverse acquisition.

The effect of the restatement on the previously reported consolidated balance
sheet of Cypress as of September 30, 1995 was as follows:

<TABLE>
     <S>                                                    <C>        
     Decrease in property, net                              $(1,663,535)
     Decrease in reimbursable collection                               
      costs                                                    (604,482)
     Decrease in goodwill                                    (2,098,120)
     Decrease in deferred income taxes                          912,739
     Other                                                      (17,578)
                                                            -----------
                                                                       
     Net decrease in shareholders' equity                   $(3,470,976)
                                                            =========== 
</TABLE>


Continued

                                      F-9
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-------------------------------------------------------------------------------

Business
--------

Cypress Financial Services, Inc. and its wholly-owned subsidiaries (collectively
the "Company") are engaged in the collection of receivables owned by entities in
the commercial, retail and medical industries.  The majority of the Company's
collection efforts are concentrated in California.  In 1995, the Company began
purchasing liquidating portfolios of delinquent unsecured consumer receivables
for its own account.

Principles of Consolidation
---------------------------

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

Use of Estimates
----------------

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reported periods.
Actual results could materially differ from those estimates.  Significant
estimates made by management include, but are not limited to, the provision for
losses on uncollectible accounts receivable and portfolio receivables.

Fair Value of Financial Instruments
-----------------------------------

These historical consolidated financial statements contain financial instruments
whereby the fair market value of the financial instruments could be different
than that recorded on a historical basis in the accompanying historical
consolidated financial statements.  The financial instruments consist of cash,
accounts receivable, portfolio receivables, notes receivable from shareholders,
accounts payable, line of credit and long-term debt.  The carrying amounts of
the Company's financial instruments generally approximate their fair values at
September 30, 1996.  In the case of the notes receivable from shareholders (see
Note 3), it was not practical to determine fair values due to the lack of a
market for such financial instruments.


Continued

                                      F-10
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-------------------------------------------------------------------------------

Cash
----

The Company maintains cash balances in a financial institution in excess of
amounts insured by Federal agencies.  The potential uninsured amount, before
taking into consideration issued but uncashed checks, aggregates $863,337 at
September 30, 1996.

Accounts Receivable
-------------------

Accounts receivable represents accounts in which the Company provides collection
services for entities in the commercial, retail and medical industries for a
fee.  Service fees are recorded as income when the clients' accounts receivable
are collected. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral.  The Company maintains allowances for
potential credit losses and such losses to date have been within management's
expectations.

As of September 30, 1996, the Company had one receivable totaling approximately
$331,000 or $56% of total accounts receivable from the Company's largest
customer.  The customer has requested that a discount be offered by the Company
in the amount of approximately $60,000.  Management does not intend to discount
this receivable and, accordingly, has not reduced the account receivable for the
requested discount in the accompanying consolidated balance sheet.

Portfolio Receivables
---------------------

Portfolio receivables represent liquidating portfolios of delinquent accounts
which have been purchased by the Company for  collection and are stated on a
portfolio by portfolio basis at the lower of cost or net realizable value.  Cost
is reduced by cash  collections on a portfolio by portfolio 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 (see Note 2).


Continued

                                      F-11
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-------------------------------------------------------------------------------

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.

Property consists of the following at September 30, 1996:

<TABLE>
     <S>                                               <C>        
     Land                                              $   866,575
     Building                                            1,540,577
     Equipment and furnishings                           1,324,733
     Autos                                                 132,415
                                                       -----------
                                                         3,864,300
                                                                  
     Less accumulated depreciation                      (1,245,286)
                                                       -----------
                                                                  
          Property, net                                $ 2,619,014
                                                       =========== 
</TABLE>

Depreciation expense for the periods ended September 30, 1996 and 1995, totaled
$152,511 and $122,649, respectively.

Trust Accounts
--------------

The Company maintains trust accounts for the benefit of its clients.  Related
funds are deposited in trust bank accounts and reflected as a trust liability
until such amounts held in trust are remitted to clients.  The trust account
cash balance of $452,590 is reflected as restricted cash in the accompanying
consolidated balance sheet at September 30, 1996.


Continued

                                      F-12
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-------------------------------------------------------------------------------

Income Taxes
------------

The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109").  Under Statement 109, an asset and liability method is used
whereby deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes.  Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse.  A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future operations (see
Note 8).

Revenue Recognition
-------------------

Fees related to the collection of receivables owned by the Company's customers
are recognized upon the collection of the receivables.  As of September 30,
1996, the Company has obtained legal judgments for the collection of receivables
(and related interest) owned by the Company's customers amounting to
approximately $33,000,000 (unaudited).  In addition, as of September 30, 1996,
the Company has incurred approximately $788,673 (unaudited) in legal and court
costs which have not been collected and have been charged to operations over
prior periods.  No one customer accounted for more than 10% of total revenues
for the periods presented.

Revenues from collections on purchased portfolios of receivables are recognized
after the cost of each portfolio has been recovered.

Net Income (Loss) Per Share
---------------------------

Net income (loss) per share is computed using the weighted average shares
outstanding.  The Company's common stock equivalents consist of Series A
convertible, redeemable preferred stock and employee stock options (see Note 6).
The impact of common stock equivalents outstanding during the year ended
September 30, 1996 was not significant.  There were no common stock equivalents
outstanding for the period from January 1, 1995 to September 30, 1995.


Continued

                                      F-13
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
-------------------------------------------------------------------------------

Rental Operations
-----------------

The Company leases a portion of its building to unrelated parties (see Note 7).
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 year ended September 30, 1996 and for
the nine-month period ended September 30, 1995 are as follows:

<TABLE>
<CAPTION>
 
                                                     1996        1995  
                                                  ----------  ----------
     <S>                                          <C>         <C>      
     Rental income                                 $318,634    $243,950
     Interest expense                               (69,106)    (50,839)
     Utilities                                      (88,278)    (58,381)
     Depreciation                                   (17,775)    (13,331)
                                                   --------    --------
                                                                       
                                                   $143,475    $121,399
                                                   ========    ======== 
</TABLE>

New Disclosure Standard
-----------------------

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement No. 123").  Statement No. 123 is primarily a disclosure standard for
the Company because it will continue to account for employee stock options under
Accounting Principal Board Opinion No. 25.  The disclosure requirements for the
Company required by Statement No. 123 are effective for financial statements
issued after fiscal year 1996.

NOTE 2 - PORTFOLIO RECEIVABLES
------------------------------

Portfolio receivables activity consists of the following as of September 30,
1996 and 1995, and for the year and nine months then ended:

<TABLE>
<CAPTION>
                                              Face Value   Cost Basis  
                                             ------------  ----------- 
<S>                                          <C>           <C>         
Portfolio receivables at                                               
 January 1, 1995                             $       ---   $      ---  
                                                                       
Purchases of portfolio                                                 
 receivables                                  37,158,755      951,913  
                                                                       
Collections                                     (136,618)    (115,389)  
</TABLE>


Continued

                                      F-14
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 2 - PORTFOLIO RECEIVABLES, continued
-----------------------------------------

<TABLE>
<CAPTION>
                                                   Face Value    Cost Basis
                                                  -------------  -----------
<S>                                               <C>            <C>       
Sales of portfolio receivables                                             
 applied to carrying value                         (10,213,770)    (353,191)
                                                  ------------   ----------
                                                                           
Portfolio receivables at                                                   
 September 30, 1995                                 26,808,367      483,333
                                                                           
Purchases of portfolio                                                     
 receivables                                        54,870,470    1,350,637
                                                                           
Collections                                           (891,052)    (389,172)
                                                                           
Sales of portfolio receivables                                             
 applied to carrying value                         (22,129,027)    (958,293)
                                                  ------------   ----------
                                                                           
Portfolio receivables at                                                   
 September 30, 1996                               $ 58,658,758   $  486,505
                                                  ============   ========== 
</TABLE>

NOTE 3 - NOTES RECEIVABLE FROM SHAREHOLDERS
-------------------------------------------

The notes receivable from shareholders bear an interest rate of 6% per annum and
are due on various dates from March 16, 1997 to December 12, 1997.  No payments
for principal or interest were made to the Company during the periods presented,
and no interest income has been recorded in the accompanying consolidated
statements of operations.

NOTE 4 - LINE OF CREDIT
-----------------------

The Company has a line of credit agreement (the "Agreement") with a financial
institution which expires on January 23, 1997.  Under the terms of the
Agreement, the Company may borrow up to $1,250,000.  The Company is required to
pay interest monthly at the bank's reference rate plus 2.0% (10.25% at September
30, 1996).  As of September 30, 1996, net borrowings amounted to $992,085.  At
September 30, 1996, the Company has $257,915 available under this line of
credit.  The borrowings are secured by substantially all of the Company's assets
as defined under a security agreement.  The Company is required to comply with
certain covenants which are more thoroughly described under the agreement.


Continued

                                      F-15
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 5 - LONG-TERM DEBT
-----------------------

Long-term debt consists of the following at September 30, 1996:

Note payable to bank, secured by certain
equipment, due in monthly payments of
$10,969, including interest at 11% per
annum, through June 2000 at which time
the entire principal balance is due and
payable.                                               $   740,390

Mortgage note payable to bank,
collateralized by land and building, due
in monthly payments of $14,089,
including interest at 8% per annum,
through December 2000 at which time the
entire principal balance is due and payable.             1,879,636
                                                        ----------

Total long-term debt                                   $ 2,620,026
                                                        ==========


Annual maturities of long-term debt at September 30, 1996 are as follows:

<TABLE>
<CAPTION>
          Years Ending
          September 30,
          -------------
          <S>                                <C>       
             1997                            $   74,612
             1998                                80,943
             1999                                89,599
             2000                               586,282
             2001                             1,788,590
                                             ----------
                                                       
                                             $2,620,026
                                             ========== 
</TABLE>

The Company must comply with certain covenants as defined under the agreements.


Continued

                                      F-16
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 6 - CAPITAL TRANSACTIONS
-----------------------------

Series A Convertible, Redeemable Preferred Stock
------------------------------------------------

In connection with the acquisition of MCSI (Note 1), the Company issued notes
aggregating $850,000 payable to the former MCSI shareholders, $100,000 and
$60,000 of which were paid in September 1995 and April 1996, respectively. In
1995, the Company reflected the issuance of the notes payable as an accrued
dividend and, accordingly, such amounts were deducted in the accompanying
consolidated statement of shareholders' equity (capital deficiency). The
remaining principal balance was originally due on or about June 12, 1996,
together with interest at 8%, per annum.

As of September 30, 1996, unpaid interest totaling $57,725 has been reflected as
an accrued liability in the accompanying consolidated balance sheet.  Interest
expense totaling $57,725 and $3,300 was incurred on these notes for the year
ended September 30, 1996 and the nine-month period ended September 30, 1995,
respectively.

On September 30, 1996, the Company converted the balance of such notes 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 enjoy the same voting and dividend rights as do the common
shareholders.  Such preferred shares have a liquidation preference at $2.00 per
share over common shareholders.

Common Stock Issuances
----------------------

On September 12, 1995, the Company issued 2,100,000 shares of its common stock
for $400,000 and a $100,000 non-interest bearing note which was paid in
September 1995.  On the same date, the Company reflected 151,271 shares of its
common stock retained in connection with the reverse acquisition of TCG (see
Note 1).  Management determined such shares to be of no value as TCG had no
operations nor underlying assets.


Continued

                                      F-17
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 6 - CAPITAL TRANSACTIONS, continued
----------------------------------------

Stock Option Plan
-----------------

In October 1995, the Board of Directors and shareholders approved the 1995 Stock
Option Plan and reserved a total of 450,000 shares of the Company's stock
available for non-qualified and qualified stock options under the plan through
October 2005.  All options under the plan must be granted with exercise prices
which are greater than or equal to fair value of the underlying common stock at
the date of grant.  Under the terms of the plan, non-qualified options granted
expire upon termination of the plan and vest 100% on the date of grant.  The
Company intends to grant options which are non-qualified in nature.  If options
to purchase common stock are granted which intend to qualify for Internal
Revenue Code Section 422, such options will contain provisions which comply with
such code section.  In September 1996, non-qualified options to purchase 129,400
shares were granted with an exercise price of $2.75 per share.  No options were
canceled or forfeited in 1996.  All options were exercisable at September 30,
1996.

NOTE 7 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

Lessee
------

The Company leases certain equipment under non-cancelable operating leases which
expire at various times through fiscal 1999.  Future annual minimum lease
payments, in the aggregate, under operating leases at September 30, 1996 are as
follows:

<TABLE>
<CAPTION>
          Years Ending
          September 30,
          -------------
          <S>                                     <C>    
             1997                                 $54,695
             1998                                  27,893
             1999                                   5,982
                                                  -------
                                                         
                                                  $88,570
                                                  ======= 
</TABLE>

Rent expense under all operating leases totaled $61,270 in 1996 and $46,942 for
the period from January 1, 1995 to September 30, 1995.


Continued

                                      F-18
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
-------------------------------------------------

Lessor
------

The Company leases a portion of its building to unrelated entities under
operating leases which expire at various times through December 1, 2000.  The
Company leases to several tenants on a month-to-month basis.  Future annual
collections under non-cancelable operating leases as of September 30, 1996 are
scheduled as follows:

<TABLE>
<CAPTION>
          Years Ending
          September 30,
          -------------
          <S>                                     <C>    
             1997                                 $164,992
             1998                                  102,824
             1999                                   41,268
             2000                                   10,317
                                                  --------
                                                          
                                                  $319,401
                                                  ======== 
</TABLE>

Rental income activity is further discussed in Note 1.

Employment Agreements
---------------------

In August 1995, the Company entered into three-year employment agreements with
four 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.), is approximately $546,000 and $500,000 in fiscal 1997 and 1998,
respectively.

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

The provision for income taxes for the year ended September 30, 1996 consists
of:

<TABLE>
<CAPTION>
                                    Current  Deferred    Total  
                                    -------  --------    -----
     <S>                            <C>      <C>       <C>     
     U.S. Federal                   $26,000  $    ---   $26,000
     State and local                 13,000       ---    13,000
                                    -------  --------   -------
                                                               
                                    $39,000  $    ---   $39,000
                                    =======  ========   ======= 
</TABLE>


Continued

                                      F-19
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 8 - INCOME TAXES, continued
--------------------------------

The provision for incomes taxes for the nine-month period ended September 30,
1995 consists of:

<TABLE>
<CAPTION>
                                    Current  Deferred   Total  
                                    -------  --------   -----
     <S>                            <C>      <C>       <C>     
     U.S. Federal                   $   ---  $    ---  $   ---
     State and local                  3,200       ---    3,200
                                    -------  --------  -------
                                                              
                                    $ 3,200  $    ---  $ 3,200
                                    =======  ========  ======= 
</TABLE>

The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at September 30, 1996 are presented
below:

<TABLE> 
<S>                                                    <C> 
Deferred tax assets:
  Accounts receivable, principally due to
   allowance for doubtful accounts                     $  6,021
  Compensated absences principally due to                      
   accrual for financial reporting                       38,937
  Less valuation allowance                              (44,958)
                                                       --------
                                                               
     Net deferred tax assets                           $    ---
                                                       ======== 
</TABLE>

The valuation allowance increased $16,297 and $4,455 during the year ended
September 30, 1996 and nine-month period ended September 30, 1995, respectively.

Income tax expense for the year ended September 30, 1996 differs from the
amounts computed by applying the U.S. Federal income tax rate of 34% to income
before income taxes as a result of the following:

<TABLE>
<CAPTION>
                                                $       %
                                             -------   ----
<S>                                          <C>       <C>
Computed "expected" tax expense              $23,435   34.0%
 
Increase (reduction) in income taxes
 resulting from:
  Non-deductible meals and entertainment
   expense                                     1,357    2.0
  Change in valuation allowance               16,297   23.6
  State and local income taxes                 4,259    6.2
  Other                                       (6,348)  (9.2)
                                             -------   ----
 
                                             $39,000   56.6%
                                             =======   ====
</TABLE>


Continued

                                      F-20
<PAGE>
 
                       CYPRESS FINANCIAL SERVICES, INC.
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                   For The Year Ended September 30, 1996 And
           For The Period From January 1, 1995 To September 30, 1995


NOTE 8 - INCOME TAXES, continued
--------------------------------

Income tax expense for the nine-month period ended September 30, 1995 differs
from the amounts computed by applying the U.S. Federal income tax rate of 34% to
income before income taxes as a result of the following:

<TABLE>
<CAPTION>
                                               $        %
                                            -------   -----
<S>                                         <C>       <C>
Computed "expected" tax benefit             $(7,346)  (34.0%)
 
Increase (reduction) in income taxes
 resulting from:
  Non-deductible meals and entertainment
   expense                                    3,000    13.9
  Change in valuation allowance               4,455    20.6
  State and local income taxes               (1,340)   (6.2)
  Other                                       4,431    20.5
                                            -------   -----
 
                                            $ 3,200    14.8%
                                            =======   =====
</TABLE>

NOTE 9 - FOURTH QUARTER ADJUSTMENTS
-----------------------------------

During the fourth quarter of 1996, the Company recorded the following
significant charges to the accompanying consolidated statement of operations:

<TABLE>
<S>                                               <C>     
Accrued salaries and related benefits             $118,415
Accrued interest on notes payable to                      
 related parties converted into Series                    
 A convertible, redeemable preferred                      
 stock (Note 6)                                     57,725
Depreciation expense                                58,711
                                                  --------
                                                          
                                                  $234,851
                                                  ======== 
</TABLE>

The adjustments referred to above equally impact the net income (loss) and the
net income (loss) per share of each of the quarters in fiscal 1996.

                                      F-21
<PAGE>
 
                                 EXHIBIT INDEX


EXHIBIT                       DESCRIPTION                        SEQUENTIALLY
                              -----------                          
NUMBER                                                           NUMBERED
------                                                           --------

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, 1987, Exhibit 3.2.

3.3       Certificate of Determination re: Series A Preferred Stock.**

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. **
___________________

**  Being filed and incorporated herein

                                       22