<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  F O R M 10-K
(Mark One)
   [X]                    ANNUAL REPORT PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 1998

                                       OR

   [ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the Transition period from ___ to ___.

                         Commission file Number 0-16271

                                    DVI, INC
               (Exact name of registrant as specified in charter)

                   Delaware                                    22-2722773
 (State or other jurisdiction of incorporation           (I.R.S. Employer
            or organization)                          Identification No.)

                 500 Hyde Park
          Doylestown, Pennsylvania                                 18901
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code (215) 345-6600

Securities registered pursuant to Section 12(b) of the Act:

                                                          Name of each Exchange
Title of Each Class                                         on which Registered

Common Stock
par value $.005 per share                          New York Stock Exchange, Inc.

9 7/8% Senior Notes due 2004                       New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:

Warrants to Purchase
   Common Stock
 (Title of Class)


         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. Yes X No

         The aggregate market value of the Registrant's Common Stock (its only
voting stock) held by nonaffiliates of the Registrant as of August 18, 1998 was
approximately $201,812,373 based upon the last reported sale price of the Common
Stock on the New York Stock Exchange on that date. (Reference is made to Page 12
herein for a statement of the assumptions upon which this calculation is based.)

         As of August 18, 1998, the Registrant had 14,080,358 shares of Common
Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III incorporates information by reference from the Registrant's
definitive Proxy Statement to be filed with the Commission within 120 days after
the close of the Registrant's fiscal year.
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                                     PART I

ITEM 1. BUSINESS

OVERVIEW

DVI, Inc. (the "Company" or "DVI") is an independent specialty finance company
that provides financing to healthcare providers, principally through its medical
equipment finance business and its related medical receivables finance business.
As of June 30, 1998, the Company's total assets and shareholder's equity were
$816.9 million and $172.3 million, respectively.

DVI, Inc. conducts its business through two operating subsidiaries, DVI
Financial Services and DVI Business Credit. The Company conducts securitizations
through special-purpose, indirect, wholly-owned subsidiaries. The Company also
conducts other structured financings through limited-purpose subsidiaries or
through its operating subsidiaries. The borrowers under the Company's various
warehouse credit facilities are DVI Financial Services or DVI Business Credit.

MEDICAL EQUIPMENT FINANCE

The Company finances the acquisition of diagnostic imaging and other types of
sophisticated medical equipment used by outpatient healthcare providers, medical
imaging centers, groups of physicians, integrated healthcare delivery networks
and hospitals. The Company's equipment finance business operates by providing
financing directly to end users of equipment and, more recently, by providing
finance programs for vendors of diagnostic and patient treatment devices. The
Company also purchases equipment loans from originators that generally do not
have access to cost-effective permanent funding ("Wholesale Program"). The
Company's typical equipment loan has an initial principal balance ranging from
$50,000 to $2.0 million. The majority of the Company's equipment loans are
structured on a fixed interest rate basis, such that the full cost of the
equipment and all financing costs are repaid during the financing term, which
typically is five years. Because most of the Company's equipment loans are
structured as notes primarily secured by equipment or direct financing leases
with a bargain purchase option for the equipment user, the amount carried by the
Company on its balance sheet for total residual interest in equipment is small
($14.3 million as of June 30, 1998). Total equipment financing loans originated
in the Company's fiscal year ended June 30, 1998 were $524.7 million. Of this
amount, approximately $320.6 million was provided by the Company directly to end
users; $53.2 million was generated through the Wholesale Program; $14.3 million
was generated through various vendor finance programs and $136.6 million was
international business.

The Company has traditionally focused its financing activities on the outpatient
diagnostic and treatment services sector of the healthcare industry. This sector
typically consists of radiologists and other diagnostic service providers who
were among the first in the healthcare industry to move away from the hospital
setting toward outpatient treatment centers. The Company expects the range of
services provided in an outpatient setting to expand and intends as part of its
business strategy to focus on the equipment used and medical receivables
generated as a result of that expansion.

Relatively high cost MRI and CT equipment have been the principal equipment
types acquired by the Company's customers and financed by the Company, and the
Company expects it will continue to finance substantial amounts of these types
of equipment as a result of its experience and expertise in the industry and
because that market has been relatively underserved by traditional financing
sources. More recently, the Company has targeted the growing, and substantially
more competitive, lower cost diagnostic and patient treatment device market,
where it is seeking to leverage its reputation for expertise in medical
equipment financing and its ability to provide financing to a wide range of
healthcare providers.

MEDICAL RECEIVABLES FINANCE

The Company provides lines of credit to a wide variety of healthcare providers.
Substantially all of the lines of credit are collateralized by third party
medical receivables due from Medicare, Medicaid, HMOs, PPOs and commercial
insurance companies. The Company's medical receivables loans are structured as
floating rate revolving lines of credit secured by all medical receivables
generated by the borrowers, as well as other collateral. These lines of credit
generally range from $1.0 million to $15.0 million; however, commitments are
also provided for multiple obligor structures ranging from $16.0 million to
$40.0 million. While the Company's medical receivables finance business is newer
and substantially smaller than its medical equipment finance business, the
Company expects this business unit to grow as a result of its recent success in
accessing the securitization markets and other sources of permanent funding. New
commitments of credit for the medical

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receivables business for the year ended June 30, 1998 were $183.2 million, and
medical receivables funded as of June 30, 1998 were $137.3 million.

Medical receivables financing is readily available for many hospitals and for
physicians seeking relatively small amounts of funding. However, for outpatient
healthcare providers seeking funding in excess of approximately $500,000, the
principal sources of financing generally are limited to specialty finance
companies or factoring companies that purchase receivables at a discount. The
Company believes the principal reasons for the lack of financing in these areas
historically have been the uncertainty of the value of the receivables, the lack
of permanent funding vehicles, and the potential for fraud due to the difficulty
of verifying the performance of healthcare services. More recently, interest in
providing financing for this sector has increased as a result of improved
understanding of the expected reimbursement levels for healthcare services and
the availability of historical performance data on which to base credit
decisions. The Company believes that loans secured by medical receivables are
often more attractive to borrowers that generate high-quality medical
receivables because those borrowers find the Company's financing has a lower
cost than the cost to those borrowers of factoring their receivables. The
Company makes loans in an amount approximately equal to 70% to 85% of the
aggregate amount of the net collectible value of eligible receivables pledged by
the borrower.

OTHER FINANCING PRODUCTS

Consistent with its strategy of seeking to provide its healthcare provider
clients with comprehensive solutions to their financing needs, the Company
continually explores and from time to time provides additional financing
products beyond those described above. These have included unsecured lines of
credit and secured financing for clients' acquisitions of assisted living
facilities. In November 1997, the Company acquired a healthcare-based merchant
banking group whose key product offerings are private debt placement, loan
syndication, bridge financing and mortgage loan arrangement for clients
operating in the long term/assisted care and specialized hospital markets.

CREDIT UNDERWRITING

The Company believes the credit underwriting process that it uses when
originating loans is effective in managing its risk. The process follows
detailed procedures and benefits from the significant experience of the Company
in evaluating the creditworthiness of potential borrowers. The Company also has
been successful in restructuring those credits which do become delinquent. The
Company's net charge-offs, as a percentage of average net financed assets, were
0.24%, 0.08% and 0.35% for the years ended June 30, 1998, 1997, and 1996,
respectively, and average delinquencies, as a percentage of average managed net
financed assets, for the same periods were 5.33%, 4.44% and 4.57%, respectively.
The Company's historical levels of net charge-offs and delinquencies are not
necessarily predictive of future results. Various factors, including changes in
the way the Company's customers are paid for their services, other developments
in the healthcare industry, and new technological developments affecting the
resale value of equipment financed by the Company could cause the Company's
future net charge-offs and delinquency rates to be higher than those experienced
historically.

CAPITAL REQUIREMENTS

The Company's strong growth in loan origination and net financed receivables has
required substantial amounts of external funding. The Company, through its
operating subsidiaries, finances its equipment and medical receivables loans on
an interim basis with secured credit facilities provided by banks and other
financial institutions. These interim "warehouse" facilities are refinanced
using asset securitizations, whole loan sales, and other structured finance
techniques that permanently fund most of the Company's equipment loans and
medical receivables loans. Permanently funded equipment and medical receivables
loans are funded through the life of the respective assets. These permanent
financings require additional capital to be invested by the Company to fund
reserve accounts or to meet the overcollateralization required in the
securitizations and sales of the Company's loans.

RECENT GROWTH

In recent years, the Company has grown substantially. Total equipment financing
loans originated by the Company grew from $46.4 million in the year ended June
30, 1992 to $524.7 million in the year ended June 30, 1998. The Company's
managed net financed receivables grew from $92.4 million as of June 30, 1992 to
$1.2 billion as of June 30, 1998. In the Company's medical receivables financing
business, which was established in 1993, new commitments of credit in the year
ended June 30, 1998 were $183.2 million compared with $101.1 million in the year
ended June 30, 1997. Medical receivables funded at June 30, 1998 totaled $137.3
million, an increase of $51.7 million over the prior fiscal year end.

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BUSINESS STRATEGY

The Company is seeking to continue its growth by expanding its existing share of
the medical equipment financing markets (which historically have been and
continue to be its largest, most important business segment) and by generating
financing opportunities in other areas of the health care industry. The
principal components of this strategy are as follows:

-  Generate additional business through existing customers and relationships
   with equipment manufacturers. The Company will continue to target the market
   for high cost medical equipment, where it enjoys relationships with a large
   number of users of sophisticated medical equipment. The Company also has a
   close working relationship with some of the largest manufacturers of
   diagnostic imaging equipment, which it maintains by meeting those
   manufacturers' needs to arrange financing for the higher-cost equipment they
   sell to healthcare providers. The Company believes these relationships,
   together with its extensive expertise in the medical industry, can result in
   a continuing source of financing opportunities.

-  Expand medical receivables financing business. The Company has penetrated the
   medical receivables financing market by generating financing opportunities
   amongst its existing equipment finance customer base, particularly those
   customers that are expanding to provide additional healthcare services, as
   well as clients who are in segments of the healthcare market not serviced by
   DVI Financial Services. The Company is also exploring financial products to
   augment those it currently offers.

-  Establish equipment financing relationships with manufacturers of lower cost
   diagnostic and patient treatment devices. The Company is seeking to use its
   reputation as a medical equipment financing specialist and its ability to
   finance a wide range of healthcare providers, to establish a presence in the
   relatively more competitive market for financing lower-cost medical
   equipment. The Company intends to finance increased amounts of diagnostic and
   patient treatment devices such as ultrasound, nuclear medicine and X-ray
   equipment. For the year ended June 30, 1998, the Company's loan originations
   for that market were $14.3 million.

-  Originate medical equipment loans on a wholesale basis. The Company intends
   to continue its Wholesale Program, in which it obtains medical equipment
   loans by purchasing them from originators. The Company uses its expertise
   both in analyzing healthcare credits and utilizing securitization to service
   originators that often need access to sources of permanent financing for the
   equipment loans they originate. During the year ended June 30, 1998, the
   Company purchased $53.2 million in medical equipment loans through the
   Wholesale Program.

-  Leverage existing expertise by offering additional financing products focused
   on the healthcare industry. The Company seeks to the extent appropriate to
   build and develop relationships with existing and potential future clients by
   offering financing products in addition to its core medical equipment and
   medical receivables financing products.

-  Grow through acquisitions. The Company periodically seeks to enhance its
   internal growth rate through the acquisition of specialty businesses that it
   believes will fit within its existing operations and long-term business
   strategy. During its most recent fiscal year, the Company acquired a small
   healthcare merchant banking operation and a venture leasing business and
   plans to gradually integrate these activities with other DVI financing
   services offered to the healthcare industry. In September 1998, the Company
   announced its intention to acquire substantially all the assets and retain
   all the employees of a 15-year old "small ticket" medical equipment financing
   business to serve as a platform for it to expand its vendor sales program and
   offer customers an efficient method to finance lower cost medical equipment.

-  Capitalize on international medical equipment financing needs. During the
   year ended June 30, 1998 the Company continued establishing international
   operations in order to capitalize on growing overseas markets for sales of
   medical equipment and devices.


   The Company recently entered into a joint venture, MSF Holding Ltd., with the
   International Finance Corporation (an affiliate of The World Bank), the
   Netherlands Development Finance Company, and a subsidiary of First Union
   National Corporation. Through MSF Holding Ltd., the Company will provide
   finance programs for vendors and manufacturers of diagnostic and patient
   treatment equipment and devices in Latin America, including Brazil,
   Argentina, Columbia and Mexico. The joint venture commenced with a planned
   committed loan facility of $65 million and paid-in capital of $20 million. In
   addition, the joint venture is in discussions with a major investment banking
   firm to develop and implement a permanent funding program for the equipment
   loans originated by the joint venture. The Company owns 59% of the joint
   venture holding company which operates through free-trade zone subsidiaries
   in Uruguay. The Company expects the customer base for equipment vendors to be
   private clinics, diagnostic centers and local hospitals. The Company believes
   that this arrangement may prove to be a suitable model for its other
   international activities.

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   The Company has a joint venture based in Singapore with a major manufacturer
   of medical equipment and a financial institution to service the medical
   equipment market in the Asia-Pacific region. DVI Europe is the Company's
   branch established in the United Kingdom to service the medical equipment
   industry in Europe.

   While the Company believes these international operations have significant
   potential, it expects that the potential will be realized over the long term.


SALES AND MARKETING

The Company generates most of its financing opportunities from two sources: (i)
healthcare providers with whom the Company's sales organization has
relationships; and (ii) medical equipment manufacturers that use third parties
to finance the sale of their products. Generally, medical equipment
manufacturers refer customers to the Company for financing because they believe
the Company has the ability to understand and measure the creditworthiness of
the customer's business and provide the financing necessary for the completion
of the equipment sale.

The Company has established a close working relationship with major
manufacturers of diagnostic imaging and radiation care equipment by meeting
their needs to arrange financing for the higher cost equipment they sell to
healthcare providers. These manufacturers include Hitachi Medical Systems
America, Philips Medical Systems and Elekta AB, among others. The Company
believes these relationships afford it a competitive advantage over other
providers of medical equipment financing.

The Company is seeking to expand its equipment finance business into the
relatively more competitive patient diagnostic and treatment device market. The
Company believes its experience and expertise in financing a wide range of
healthcare providers and meeting the equipment financing needs of the customers
of major manufacturers of diagnostic imaging and radiation care equipment will
help it build relationships with patient treatment device manufacturers. To
establish relationships with patient treatment device manufacturers, the Company
expects to train the manufacturers' sales personnel in the use of equipment
financing as a sales tool and to provide equipment financing programs that make
these device manufacturers more competitive. The Company believes that the
patient treatment device market is more diverse than the diagnostic imaging
market because of the larger number of manufacturers and types of products, and
the lower price range of products in the patient diagnostic and treatment device
market. The patient treatment device manufacturers targeted by the Company
produce products with an average cost of between $50,000 and $300,000. For the
year ended June 30, 1998, the loan origination for this business unit was $14.3
million.

The Company also has a domestic business unit dedicated to the Wholesale Program
which the Company started in June 1994. The Company purchases equipment loans
from originators that generally do not have access to cost effective permanent
funding for their loans. During the years ended June 30, 1998 and June 30, 1997,
the Company purchased an aggregate of $53.2 and $85.0 million of equipment loans
from 17 and 12 originators, respectively. The Company expects to continue this
business at approximately current levels.

In the medical receivables finance business, the lines of credit originated by
the Company are secured by pledges of (i) specific receivables due the provider,
(ii) the overall receivables portfolio of the healthcare provider, and (iii)
other forms of credit enhancement such as cash collateral, letters of credit and
guarantees. The Company's medical receivables loan marketing specialists assist
the Company's equipment loan sales force in originating medical receivables
loans. The growth and cross selling of the medical receivables financing
business to the Company's existing client base should not be restricted because
of the lack of access to permanent funding. The Company has closed two medical
receivable term securitizations for $100 million and has also established two
credit facilities totaling $125.0 million for medical receivables.


The Company's sales and marketing organization consists of 36 healthcare finance
specialists located in various parts of the United States. These individuals
generally have a credit industry and/or medical equipment background. The
Company usually places sales personnel in geographic areas where they have
knowledge of the local market. The Company believes that sales personnel who
understand local economic and political trends are a more valuable component of
its credit underwriting process.

CAPITAL RESOURCES AND TRANSACTION FUNDING

The Company obtains initial funding for most of its equipment loans through
warehouse facilities provided by banks and other financial institutions. Loans
made under these facilities are repaid when the Company permanently funds its
equipment

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loans through securitization, or other limited-recourse permanent funding
programs, including loan sales. Typically, equipment loans are held for 30 to
180 days before they are permanently funded.

The Company's need for capital, in addition to the funding provided under its
warehouse and permanent funding facilities, is affected by two primary factors:
(i) the level of credit enhancement required under its various warehouse and
permanent funding facilities and (ii) the amount of loans held at any time by
the Company that do not qualify as eligible collateral under those facilities.
Because of the manner in which the Company accounts for its business operations,
it may require substantial amounts of capital, even in periods that it reports
positive earnings. This arises principally because there are timing differences
between the Company's recognition for accounting purposes of various items of
expense and income and its actual receipt of cash that cause the Company's cash
flow at times of strong growth in loan origination to be lower than its reported
earnings. The two most significant of these differences are the deferral of the
Company's costs to originate each loan which are amortized for accounting
purposes over the life of the loan, even though the costs are paid in cash at
the time of the loan origination and the recognition of gain on the sale of a
loan for accounting purposes at the time the sale is deemed to have occurred,
even though in many transactions treated as sales of loans for accounting
purposes the cash is received over the same time period as the original
amortization schedule of the loan. While these factors tend to reduce the
Company's liquidity at times of strong growth in loan origination, they may have
the effect of improving the Company's cash flow from operations in the short
term if the Company's loan growth were to decline.


CONTINUING NEED FOR CAPITAL

Each of the Company's warehouse facilities and permanent funding vehicles
require the Company to provide equity or a form of recourse credit enhancement
to the respective lenders or investors and generally do not permit the Company
to fund general corporate requirements. Therefore, the actual liquidity, or
funds available to the Company to finance its growth, are limited to the cash
generated from net financed receivables and the available proceeds of equity or
debt securities issued by DVI, Inc. At times of strong origination growth the
Company's cash flows from operations are insufficient to fund these
requirements. As a result, the Company's need to fund its high growth rates in
loan origination necessitates substantial external funding to provide the equity
or capital required as recourse credit enhancement with which to leverage
borrowings. The Company has no binding commitments for the capital it expects it
will continue to require, and its ability to obtain that capital in the future
will be dependent on a number of factors including the condition of the capital
markets and economic conditions generally.

WAREHOUSE FACILITIES

As of June 30, 1998, the Company had an aggregate maximum of $373.2 million
potentially available for equipment loan financing under various warehouse
facilities of which it had borrowed an aggregate of $65.5 million. These
facilities are provided by a syndicate of banks that participate in a revolving
credit arrangement and by investment banking firms that the Company uses for
securitizations. The loans made under the bank warehouse facility (i) bear
interest at floating rates; (ii) are full recourse obligations of the Company;
and (iii) typically advance an amount equal to approximately 95.0% of the cost
of the equipment subject to the loans being made thereunder. Loans made under
the bank warehouse facility typically are repaid with the proceeds of advances
made under securitization facilities. Those advances in turn are typically
repaid with proceeds from permanent fundings. Loans funded under securitization
facilities cease to be eligible collateral if they are not funded within a
specified period of time. The amount advanced under the securitization
facilities is 92% of the discounted value of the pledged receivables. If the
Company were unable to arrange continued access to acceptable warehouse
financing, the Company would have to curtail its loan origination, which in turn
would have a material adverse effect on the Company's financial condition and
operations.

PERMANENT FUNDING PROGRAM

Since 1991, the most important source of permanent funding for the Company for
equipment loan financing has been securitization and other forms of structured
finance. Securitization is a process in which a pool of equipment loans (in the
Company's case, typically 100 to 150) is transferred to a special-purpose
financing vehicle which issues notes to investors. Principal and interest on the
notes issued to investors by the securitization subsidiary are paid from the
cash flows produced by the loan pool, and the notes are secured by a pledge of
the assets in the loan pool as well as by other collateral. In the
securitizations sponsored by the Company, equipment loans funded through the
securitizations must be credit enhanced to receive an investment grade credit
rating. Credit enhancement can be provided in a number of ways, including cash
collateral, letters of credit, a subordinated tranche of each individual
transaction or an insurance policy. Typically, securitizations sponsored by the
Company are enhanced through a combination of some or all of these methods. In
the

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securitizations sponsored to date by the Company, the Company effectively has
been required to furnish credit enhancement equal to the difference between (i)
the aggregate principal amount of the equipment loans originated by the Company
and transferred to the Company's special purpose finance subsidiary and the
related costs of consummating the securitization and (ii) the net proceeds
received by the Company in such securitizations. The requirement to provide this
credit enhancement reduces the Company's liquidity and requires it periodically
to obtain additional capital. There can be no assurance that the Company will be
able to obtain additional capital.

For accounting purposes, the Company's securitizations are treated as either
financings (on-balance sheet transactions) or sales (off-balance sheet
transactions). An on-balance sheet transaction is one in which the loans being
securitized remain on the Company's balance sheet as an asset for their
originally contracted term as a result of the consolidation of the assets and
liabilities of the special purpose vehicle with the Company's for financial
accounting purposes. An off-balance sheet transaction removes the loans from the
Company's balance sheet and results in the Company recognizing a gain on the
sale of the underlying loans upon completion of the securitization.

The Company continually seeks to improve the efficiency of its permanent funding
techniques by reducing up-front costs and minimizing the cash requirements of
the Company. The Company may consider alternative structures, including
senior/subordinated tranches, and alternative forms of credit enhancement, such
as letters of credit and surety bonds. The transaction expenses of each
securitization and other forms of structured financing will depend on market
conditions, costs of securitization and the availability of credit enhancement
options to the Company. The Company expects to continue to use securitization
and other forms of structured financing, on both a public and private basis, as
its principal source of permanent funding for the foreseeable future.

To be cost efficient, a securitization must cover a relatively large and diverse
portfolio of equipment loans. One of the basic requirements of the credit rating
agencies that rate the notes issued in securitizations relates to borrower
concentration and requires that no single credit (borrower) may constitute a
significant portion of the pool of equipment loans being securitized (in the
Company's case, the limit is generally about 3%). Because of these concentration
requirements the Company generally must accumulate in excess of $75 million in
loans for each securitization. The credit rating agencies also have other
concentration guidelines such as equipment type and the geographic location of
the obligors. These requirements mean that not all of the equipment loans held
in the Company's warehouse facilities at any point in time can be placed in one
securitization.

If for any reason the Company were to become unable to access the securitization
market to permanently fund its equipment loans, the consequences for the Company
would be materially adverse. The Company's ability to complete securitizations
and other structured finance transactions depends upon a number of factors,
including general conditions in the credit markets, the size and liquidity of
the market for the types of receivable-backed securities issued or placed in
securitizations sponsored by the Company and the overall financial performance
of the Company's loan portfolio. The Company does not have binding commitments
from financial institutions or investment banks to provide permanent funding for
its equipment or medical receivables loans.

SENIOR NOTES

On January 30, 1997, the Company completed a public offering of $100.0 million
principal amount of 9 7/8% Senior Notes due 2004 ("Senior Notes"). The agreement
with respect to the Senior Notes contains, among other things, limitations on
the Company's ability to pay dividends and to make certain other kinds of
payments. That agreement also prohibits the Company from incurring additional
indebtedness unless certain financial ratio tests are met. Interest is payable
semi-annually on February 1 and August 1 of each year. The Senior Notes will be
redeemable at the option of the Company in whole or in part at any time on or
after February 1, 2002 at specified redemption prices. The proceeds from the
sale are being used (i) to fund the Company's growth, including increasing the
amount of equipment and medical receivables loans the Company can fund, (ii) to
develop the Company's new international operations, including the purchase of
receivables originated outside the United States and investment in joint
ventures, (iii) for other working capital needs and (iv) for general corporate
purposes.



COMMON STOCK OFFERING

On May 28, 1998, the Company issued 2,300,000 shares of common stock through an
underwritten public offering. The aggregate price to the public of such shares
was $49.3 million and the aggregate net proceeds to the Company were $46.6

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million. Also on May 28, 1998, the Company issued 340,000 shares of common stock
to certain stockholders of the Company. The price to such stockholders and the
aggregate net proceeds to the Company for such shares was $6.9 million. These
net proceeds received do not reflect issuance costs totaling $0.4 million. The
proceeds from the May 28th stock issuances are being used (i) to fund the
Company's growth, including increasing the amount of equipment and medical
receivables loans the Company can fund, (ii) to develop the Company's expanding
international operations, (iii) for other working capital needs and (iv) for
general corporate purposes. On June 30, 1998, approximately $445.9 million of
common stock, preferred stock, depositary shares, debt securities and warrants
remained registered and unissued under the Securities Act.

HEDGING STRATEGY

The Company's equipment loans are virtually all structured on a fixed interest
rate basis. When the Company originates equipment loans, it bases its pricing in
part on the "spread" it expects to achieve between the interest rate it charges
its equipment loan customers and the effective interest cost it will pay when it
permanently funds those loans. Increases in interest rates between the time the
loans are originated and the time they are permanently funded could narrow,
eliminate or even reverse the spread between the interest rate the Company
realizes on its equipment loans and the interest rate that the Company pays
under its warehouse facilities or under a permanent funding program. In an
attempt to protect itself against that risk, the Company uses a hedging
strategy. The Company uses derivative financial instruments, such as forward
rate agreements, Treasury locks, and interest rate swaps, caps and collars to
manage its interest rate risk. The derivatives are used to manage three
components of this interest rate risk: interest sensitivity adjustments, pricing
of anticipated loan securitizations and sales, and interest rate spread
protection. The Company seeks to manage the credit risk of possible counterparty
default in these derivative transactions by dealing exclusively with
counterparties with investment grade ratings.

Forward rate agreements are for interest sensitivity adjustments in conjunction
with cash market activities and are used to extend the repricing period of
short-term floating rate warehouse facilities. Treasury locks and collars are
used to hedge the interest rate risk on anticipated loan securitizations and
sales. Treasury lock and collar transactions lock in specific rates and a narrow
range of rates, respectively, of Treasury notes having maturities comparable to
the average life of the anticipated securitizations and sales. Interest rate
swaps and caps are used for interest rate spread protection to protect from
rising interest rates in certain loan sale facilities where the cash flows from
the loans sold are fixed rate but the borrowing costs are variable rate.

The Company believes that, in the event of a 10% movement in interest rates, any
changes in the fair value of its derivative instruments would be proportionately
offset by the changes in the fair values of the underlying hedged asset or
liability.

There can be no assurance that the Company's hedging strategy or techniques will
be effective, that the profitability of the Company will not be adversely
affected during any period of changes in interest rates, or that the costs of
hedging will not exceed the benefits. A substantial and sustained increase in
interest rates could adversely affect the Company's ability to originate loans.
In certain circumstances, the Company, for a variety of reasons, may retain for
an indefinite period certain of the equipment loans it originates. In such
cases, the Company's interest rate exposure may continue for a longer period of
time than the Company otherwise considers desirable.

MEDICAL RECEIVABLE FINANCING

The Company funds its medical receivable financing business through various
sources. Warehouse facilities totaling $125 million are available through a bank
and an investment bank. The Company has established a revolving credit agreement
with a syndicate of banks to be used to warehouse medical receivables loans up
to $95 million. An additional warehouse facility of $30 million is available
through an investment bank. The Company had $17.3 million outstanding under
these facilities at June 30, 1998.

While the medical receivable financing business shares certain characteristics,
including an overlapping customer base, with the Company's medical equipment
financing business, there are many differences, including unique risks.
Healthcare providers could overstate the quality and characteristics of their
medical receivables, which the Company analyzes in determining the amount of the
line of credit to be secured by such receivables. After the Company has
established or funded a line of credit, the healthcare providers could change
their billing and collection systems, accounting systems or patient records in a
way that could adversely affect the Company's ability to monitor the quality
and/or performance of the related medical receivables. In addition, there are
substantial, technical legal issues associated with creating and maintaining
perfected security interests in medical receivables. Payors may attempt to
offset their payments to the providers against debts

                                       8
<PAGE>   9
owed to the payors by the healthcare providers. The Company may have a conflict
of interest when the Company acts as servicer for an equipment-based
securitization and originates medical receivables loans to borrowers whose
previous equipment loans have been securitized. The Company's efforts to develop
suitable sources of funding for its medical receivables financing business
through securitization or other structured finance transactions may be
constrained or hindered due to the fact that the use of structured finance
transactions to fund medical receivables is a relatively new process.

CREDIT RISK

Loans to outpatient healthcare providers, which constitute a substantial portion
of the Company's customers, often require a high degree of credit analysis.
Although the Company seeks to mitigate its risk of default and credit losses
through its underwriting practices and loan servicing procedures and through the
use of various forms of non-recourse or limited recourse financing (in which the
financing sources that permanently fund the Company's equipment and other loans
assume some or all of the risk of default by the Company's customers), the
Company remains exposed to potential losses resulting from a default by an
obligor. Obligors' defaults could cause the Company to make payments to the
extent that the Company is obligated to do so and, in the case of its permanent
equipment and other funding arrangements, to the extent of the Company's
remaining credit enhancement position; could result in the loss of the cash or
other collateral pledged as credit enhancement under its permanent equipment and
other funding arrangements; or could require the Company to forfeit any residual
interest it may have retained in the underlying equipment. During the period
after the Company initially funds a loan and prior to the time it funds the loan
on a permanent basis, the Company is exposed to full recourse liability in the
event of default by the obligor. In addition, under the terms of securitizations
and other types of structured finance transactions, the Company generally is
required to replace or repurchase equipment and other loans in the event they
fail to conform to the representations and warranties made by the Company, even
in transactions otherwise designated as nonrecourse or limited recourse.

Defaults by the Company's customers could also adversely affect the Company's
ability to obtain additional financing in the future, including its ability to
use securitization or other forms of structured finance. The sources of such
permanent funding take into account the credit performance of the equipment and
other loans previously financed by the Company in deciding whether and on what
terms to make new loans. In addition, the credit rating agencies and insurers
that are often involved in securitizations consider prior credit performance in
determining the rating to be given to the securities issued in securitizations
sponsored by the Company and whether and on what terms to insure such
securities. To date, all of the Company's medical receivable loans (as opposed
to its equipment loans) have been funded on a full recourse basis whereby the
Company is fully liable for any losses that are incurred.

Under the Company's Wholesale Program, the Company purchases equipment loans
from originators that generally do not have direct access to the securitization
market as a source of permanent funding for their loans. The Company does not
work directly with the borrowers at the origination of these equipment loans
and, therefore, is not directly involved in structuring the credits. However,
the Company independently verifies credit information supplied by the
originator. Accordingly, the Company faces a somewhat higher degree of risk when
it acquires loans under the Wholesale Program. During the years ended June 30,
1998 and 1997, loans purchased under the Wholesale Program constituted 13.7% and
23.0%, respectively, of the total domestic loans originated during the period.
There can be no assurance that the Company will be able to grow this business
successfully or avoid the credit risks related to wholesale loan origination.

COMPETITION

The Company competes with equipment manufacturers that sell and finance their
own products, leasing subsidiaries of national and regional commercial banks and
other leasing and financing companies. Many of the Company's competitors have
significantly greater financial and marketing resources than the Company. In
addition, the levels of competition in the lower-cost diagnostic and patient
treatment device market and medical receivable financing market are greater than
the levels of competition historically experienced by the Company in the higher
cost medical equipment market. There can be no assurance that the Company will
be able to compete successfully in any or all of its targeted markets.


YEAR 2000

The Company believes, based on discussions with current systems vendors, that
its software applications and operational programs will properly recognize
calendar dates beginning in the Year 2000. In addition, the Company is
discussing with its customers and suppliers the possibility of any interface
difficulties relating to the Year 2000 which may affect the Company. To date, no
significant concerns have been identified; however, there can be no assurance
that there will not be any Year

                                       9
<PAGE>   10
2000-related operating problems or expenses that will arise with the Company's
computer systems and software of its vendors, customers and suppliers.

GOVERNMENT REGULATION

Although most states do not regulate the equipment financing business, certain
states do require licensing of lenders and financiers, limitations on interest
rates and other charges, adequate disclosure of certain contract terms and
limitations on certain collection practices and creditor remedies. In addition,
the operation of certain types of diagnostic imaging and patient treatment
equipment is regulated by federal, state and/or local authorities. For example,
a shared service provider or healthcare provider using equipment financed by the
Company may be required to obtain and maintain approvals from governmental
authorities in order to service other healthcare providers with whom it has
entered into service agreements. Failure by the Company's customers to comply
with these requirements could adversely affect their ability to meet their
obligations to the Company. The ability of the Company's equipment financing
customers to satisfy their obligations to the Company also could be adversely
affected by changes in regulations which limit or prohibit the referral of
patients by physicians who have invested in healthcare facilities financed by
the Company.

EMPLOYEES

As of July 3, 1998, the Company had 193 full-time employees consisting of 8
executive officers, 36 sales and sales management personnel, and 149
administrative, accounting and technical personnel. None of the Company's
employees are covered by a collective bargaining agreement, and management
believes that its relationship with its employees is good.


ITEM 2. PROPERTIES

The Company owns no real property and leases all of its offices. The Company's
principal executive offices are located in Doylestown, Pennsylvania. In total,
the Company leases an aggregate of approximately 62,400 square feet of office
space in various states. The Company believes that the present facilities are
adequate to meet its foreseeable needs.


ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any pending litigation or legal proceedings, or,
to the best of its knowledge, any threatened litigation or legal proceedings,
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.


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

There were no matters submitted to a vote of security holders during the three
months ended June 30, 1998.


EXECUTIVE OFFICERS OF THE REGISTRANT

As of June 30, 1998, the executive officers of DVI, Inc. were:

<TABLE>
<CAPTION>
         NAME                         AGE        POSITION
         ----                         ---        --------
<S>                                   <C>        <C>
         Michael A. O'Hanlon          51         Director, President and Chief Executive Officer
         Steven R. Garfinkel          55         Executive Vice President and Chief Financial Officer
         Richard E. Miller            46         Executive Vice President and President, DVI Financial Services, Inc.
         Anthony J. Turek             55         Executive Vice President and Chief Credit Officer
         John P. Boyle                48         Vice President and Chief Accounting Officer
         Melvin C. Breaux             57         Vice President, Secretary and General Counsel
         Cynthia J. Cohn              39         Vice President and Executive Vice President, DVI Business Credit Corporation
         Alan J. Velotta              50         Vice President and President, DVI Business Credit Corporation
</TABLE>

         MICHAEL A. O'HANLON is the Company's president and chief executive
         officer and has served as such since November 1995. Mr. O'Hanlon was
         president and chief operating officer from September 1994 to November
         1995. From the time Mr. O'Hanlon joined the Company in March 1993 until
         September 1994, he served as executive vice president of the Company.
         Mr. O'Hanlon became a director of the Company in November 1993.

                                       10
<PAGE>   11
         Before joining the Company, for nine years, he served as president and
         chief executive officer of Concord Leasing, Inc., a major source of
         medical, aircraft, ship, and industrial equipment financing.
         Previously, Mr. O'Hanlon was a senior executive with Pitney Bowes
         Credit Corporation. Mr. O'Hanlon received his MBA from the University
         of Connecticut, and his Bachelor of Business Administration Degree from
         the Philadelphia College of Textiles and Science.

         STEVEN R. GARFINKEL is an executive vice president of the Company and
         its chief financial officer. Mr. Garfinkel also serves on the executive
         committee of the Company. Mr. Garfinkel joined the Company in 1995. His
         responsibilities include corporate finance, loan funding, balance sheet
         management, treasury, accounting and financial reporting, internal
         control, financial and strategic planning, and human resources. Mr.
         Garfinkel has extensive experience in developing and managing corporate
         finance relationships, money market funding, derivative hedging,
         financial planning and management information systems. Prior to joining
         the Company, Mr. Garfinkel spent twenty-nine years with two large bank
         holding companies: CoreStates Financial Corp. and First Pennsylvania
         Corporation. For twenty years he was either controller or treasurer of
         those organizations. Mr. Garfinkel received his Master of Business
         Administration degree from Drexel University, and his Bachelor of Arts
         degree from Temple University.

         RICHARD E. MILLER is an executive vice president of the Company and
         president of DVI Financial Services Inc. He joined the Company in April
         1994. Mr. Miller also serves on the executive committee of the Company.
         His primary responsibility is to manage operations and the Company's
         sales organization of financing specialists that interface directly
         with the Company's customers. Before joining the Company, he served for
         six years as vice president of sales for Toshiba America Medical
         Systems, a major manufacturer of medical imaging equipment. Previously,
         Mr. Miller was national sales manager for Thomsen CGR, a French
         manufacturer of medical imaging equipment, which was acquired by
         General Electric Medical Systems. Mr. Miller has a Bachelor of Arts
         degree from Eastern College.

         ANTHONY J. TUREK is an executive vice president and the chief credit
         officer of the Company. Mr. Turek has served in that capacity since
         joining the Company in March 1988. Mr. Turek also serves on the
         executive committee of the Company. Before joining the Company, Mr.
         Turek was vice president of commercial banking at Continental Illinois
         National Bank from 1968 to 1988. For the last five years of his tenure
         at Continental Illinois National Bank, Mr. Turek managed the equipment
         leasing and transportation divisions. His prior responsibilities
         included management positions in the special industries, metropolitan
         and national divisions of the Bank of America. Mr. Turek received his
         Master of Science degree from the University of Missouri and his
         Bachelor of Science degree from Iowa State University.

         JOHN P. BOYLE is a vice president and chief accounting officer of the
         Company. Mr. Boyle joined the Company in January 1995. His primary
         responsibility is managing the Company's accounting, tax and financial
         reporting functions. Mr. Boyle is a General Securities Principal and a
         CPA with twenty years of experience in the financial services industry.
         Mr. Boyle spent five years of his professional career with Peat Marwick
         Mitchell & Co. in Philadelphia. Beyond his accounting background, he
         has extensive experience in credit and corporate finance matters. Mr.
         Boyle received his Bachelor of Arts degree from Temple University.

         MELVIN C. BREAUX is general counsel, secretary and a vice president of
         the Company, as well as general counsel and a vice president of DVI
         Financial Services Inc. Prior to joining the Company in July 1995, Mr.
         Breaux was a partner in the Philadelphia, Pennsylvania law firm of
         Drinker, Biddle, & Reath for 17 years and an associate of the firm for
         8 years. As a member of that firm's banking and finance department, he
         specialized in secured and unsecured commercial lending transactions, a
         wide variety of other financing transactions, and the general practice
         of business law. Mr. Breaux received his Juris Doctor degree from the
         University of Pennsylvania School of Law and his Bachelor of Arts
         degree from Temple University.

         CYNTHIA J. COHN has been a vice president of the Company since October
         1988 and executive vice president of DVI Business Credit Corporation
         since January 1994. Ms. Cohn has been employed by the Company in a
         sales and management capacity since July 1986. She is responsible for
         the operations support and marketing functions of DVI Business Credit
         Corporation, the Company's medical receivables financing subsidiary.
         She served as an assistant vice president from July 1987 to October
         1988. Prior to joining the Company, Ms. Cohn served as research
         coordinator for Cantor, Fitzgerald Co., Inc., a stock brokerage firm,
         from February 1983 to July 1986, where she was responsible for
         development and coordination of that firm's research product for both
         institutional

                                       11
<PAGE>   12
         and retail clientele. Ms. Cohn received her Bachelor of Arts degree
         from Ithaca College.


         ALAN J. VELOTTA is the president of DVI Business Credit Corporation and
         has served in this capacity since April 1997. Mr. Velotta is also a
         vice president of the Company. His primary responsibilities are to
         manage the unit that originates the Company's medical receivable-backed
         loans. When Mr. Velotta joined the Company in April 1994, he served as
         the group managing director of DVI Capital, the Company's wholesale
         equipment financing operation. Prior to joining the Company, for four
         years, Mr. Velotta served as vice president of operations for Picker
         Financial Group, the captive leasing company of Picker International.
         Previously, Mr. Velotta was vice president/central division manager for
         Chrysler Capital Corporation for eleven years. Mr. Velotta received a
         Bachelor of Science degree in Marketing from Cleveland State
         University.


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


         For the purposes of calculating the aggregate market value of the
         shares of Common Stock of the Registrant held by nonaffiliates, as
         shown on the cover page of this report, it has been assumed that all
         the outstanding shares were held by nonaffiliates except for the shares
         owned by directors and executive officers of the Company, by CIBC Trust
         Company and by the Ronald Baron group. However, this should not be
         deemed to constitute an admission that all such persons or entities
         are, in fact, affiliates of the Registrant, or that there are not other
         persons who may be deemed to be affiliates of the Registrant. Further
         information concerning shareholdings of officers, directors and
         principal shareholders is included in the Company's definitive proxy
         statement relating to its scheduled December 1998 Annual Meeting of
         Shareholders to be filed with the Securities and Exchange Commission.

                                       12
<PAGE>   13
                                     PART II

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

PRICE RANGE OF COMMON STOCK

The common stock of DVI, Inc. is listed on the New York Stock Exchange. The
following table sets forth high and low sales prices per share of common stock
as reported on the Composite Tape for the periods indicated:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1998                                               HIGH         LOW
-------------------------------                                               ----         ---
<S>                                                                         <C>          <C>
First Quarter .........................................................     $16 3/4      $14 1/8
Second Quarter ........................................................      21           16 3/8
Third Quarter .........................................................      27 1/4       18 3/8
Fourth Quarter ........................................................      25 1/2       19 3/4
</TABLE>


<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997                                               HIGH         LOW
-------------------------------                                               ----         ---
<S>                                                                         <C>          <C>
First Quarter .........................................................     $17 7/8      $11 3/8
Second Quarter ........................................................      15           12 3/8
Third Quarter .........................................................      13 1/2       10 7/8
Fourth Quarter ........................................................      14 7/8       11 1/8
</TABLE>



DIVIDEND POLICY

The Company has not declared or paid any cash dividends since its inception, and
the Company anticipates that any future earnings will be retained for investment
in corporate operations. Any declaration of dividends in the future will be
determined in light of the conditions affecting the Company at that time,
including, among other things, its earnings, financial condition, capital
requirements, level of debt and the terms of any contractual limitations on
dividends. The Company's principal warehouse facility prohibits DVI Financial
Services, the Company's principal operating subsidiary, from paying cash
dividends. In addition, the agreement with respect to the Company's Senior Notes
and 9 1/8% Convertible Subordinated Notes due 2002 places limitations on the
payment of dividends by the Company and its subsidiaries.

As of August 18, 1998, there were approximately 4,398 beneficial holders of the
Company's common stock.

                                       13
<PAGE>   14
ITEM 6. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION (IN THOUSANDS,
        EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                    YEARS ENDED JUNE 30,
                                                                -----------------------------------------------------------
                                                                 1998         1997         1996         1995          1994
                                                                 ----         ----         ----         ----          ----
STATEMENT OF OPERATIONS DATA:
<S>                                                            <C>          <C>          <C>          <C>           <C>
Finance and other income ................................      $74,355      $56,334      $49,038      $35,985       $20,609
Interest expense ........................................       49,212       38,395       30,489       22,860         8,833
Net interest and other income ...........................       25,143       17,939       18,549       13,125        11,776
Selling, general and administrative expenses ............       18,493       14,117        9,933        7,891         6,049
Provision for losses on receivables .....................        4,735        2,386        2,325        1,261         1,716
Earnings from continuing operations before minority
 interest, equity in net loss of investees,
 provision for income taxes, and discontinued
 operations  ............................................       22,892       15,475       14,323        7,015         4,313
Net earnings from continuing operations .................       12,858        8,563        8,165        4,069         2,260
Net diluted earnings per share from continuing operations      $  1.03      $  0.74      $  0.77      $  0.60*      $  0.34*
Weighted average number of dilutive shares outstanding ..       13,246       12,487       11,569        8,352*        6,786*
</TABLE>



<TABLE>
<CAPTION>
                                                                       JUNE 30,
                                           ----------------------------------------------------------------
                                             1998          1997          1996           1995          1994
                                             ----          ----          ----           ----          ----
BALANCE SHEET DATA:
<S>                                        <C>           <C>           <C>           <C>           <C>
Cash and cash equivalents ...........      $ 15,192      $  9,187      $  2,391      $  1,963      $  1,714
Cash and cash equivalents, restricted        47,582        26,461        32,550        12,241        13,065
Total assets ........................       816,920       634,528       560,939       432,876       265,949
Borrowings under warehouse facilities        82,828        44,962       168,108       155,172        34,586
Long-term debt, net .................       467,853       435,238       267,568       219,130       162,964
Shareholders' equity ................       172,285        95,660        85,302        40,299        33,993
</TABLE>


The Company has not declared or paid any cash dividends since its inception.
(See Dividend Policy.)
See Item 7 for management's discussion of discontinued operations.

* Calculated on a fully diluted basis.

                                       14
<PAGE>   15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


GENERAL

The Company is an independent specialty finance company that conducts a medical
equipment finance business and a related medical receivables finance business.
The Company finances diagnostic imaging and other types of sophisticated medical
equipment used by outpatient healthcare providers, medical imaging centers,
groups of physicians, integrated healthcare delivery networks and hospitals. The
Company also provides lines of credit to a wide variety of healthcare providers,
substantially all of which are collateralized by third party medical receivables
due from Medicare, Medicaid, HMOs, PPOs and commercial insurance companies.

CERTAIN ACCOUNTING CONSIDERATIONS

EQUIPMENT FINANCING

For accounting purposes, the Company classifies equipment contracts it
originates as notes secured by equipment, direct financing leases or operating
leases. Notes secured by equipment and direct financing leases are generally
those transactions in which the obligor has substantially all of the benefits
and risks of ownership of the equipment. Operating leases are generally those
which only provide for the rental of the asset. The different classifications
can result in accounting treatments that provide substantially different income
and costs during the transaction term. Direct financing leases and notes secured
by equipment are reflected on the Company's balance sheet as "investment in
direct financing leases and notes secured by equipment or medical receivables."
These transactions result in amortization of finance income over the transaction
term in the amounts computed using the interest method.

The Company enters into two types of direct financing lease transactions, which
are referred to as "conditional sales agreements" and "fair market value
transactions." Conditional sales agreements and notes secured by equipment
represent those transactions in which no residual interest in the underlying
equipment is retained by the Company. Fair market value transactions are those
transactions in which the Company retains a residual interest in the equipment.
This residual interest is recorded on the Company's books as an estimate of the
projected fair market value of the financed equipment at the end of the
transaction term. At the inception of notes secured by equipment and direct
financing lease fixed payment transactions, "unearned income" represents the
amount by which the gross transaction receivables and the estimated residual
value (on fair market value transactions) exceed equipment cost. At the
inception of notes secured by equipment and direct financing lease variable rate
transactions, the beginning receivable balance is equal to the equipment cost
only. Variable rate contracts have scheduled principal payments and variable
interest payments that are calculated and accrued monthly on the remaining
principal balance.


Leases and contracts for the rental of equipment which do not meet the criteria
of direct financing leases are accounted for as operating leases. Equipment
under an operating lease or a rental contract is recorded on the balance sheet
at the Company's cost under the caption of "equipment on operating leases" and
depreciated on a straight-line basis over the estimated useful life of the
equipment.

Notes secured by equipment and direct financing lease transactions are all "net"
transactions under which the obligor must make all scheduled payments, maintain
the equipment, insure the equipment against casualty loss and pay all
equipment-related taxes. In fair market value transactions, at the end of the
initial financing term, the obligor has the option to purchase the equipment for
its fair market value, extend the financing term under renegotiated payments or
return the equipment to the Company. If the equipment is returned to the
Company, the Company must sell or lease the equipment to another user.

In transactions classified as notes secured by equipment and direct financing
leases that the Company permanently funds through securitization or other
structured finance transactions which the Company treats as debt, income is
deferred and recognized using the interest method over the respective term of
the transactions. If an obligor defaults, the Company may not receive all of the
unamortized income associated with the transaction.

                                       15
<PAGE>   16
MEDICAL RECEIVABLES FINANCING

In addition to its core equipment finance business, the Company provides lines
of credit under which the Company makes full recourse loans to healthcare
providers that are secured by medical receivables and other collateral. The
interest and fee income generated from these loans are recognized over the terms
of the lines of credit, which are typically one to three years, and are recorded
as amortization of finance income.

INCOME CLASSIFICATIONS

The Company has classified income under the categories of "amortization of
finance income," "other income" and "net gain on sale of financing
transactions." Amortization of finance income consists of the interest component
of scheduled payments on notes secured by equipment (or medical receivables) and
direct financing leases, and is calculated using the interest method whereby the
income is reported over the term of the transactions. Other income consists
primarily of contract fees and late charges, dividends on investments in
investees' preferred stock, servicing fees, placement fees, and gains/losses
from asset disposals. Net gain on sale of financing transactions consists of
gains recognized when the Company funds transactions through whole loan sales.


DISCONTINUED OPERATIONS

In June 1993, the Company adopted a formal plan to discontinue its healthcare
services segment. At the end of fiscal 1993, the Company established a reserve
for the divestiture of the operations and recorded a loss on discontinued
operations and disposal of discontinued operations. As of June 30, 1994, the
Company had disposed of or entered into definitive agreements to sell the
outpatient facilities, had written off the investment and assets of the
remainder, and recorded an additional $3.1 million after-tax charge in excess of
the amounts of estimated losses reported as of June 30, 1993 for the disposition
of this segment of the Company's business.

RESULTS OF OPERATIONS

IMPACT OF FINANCING STRATEGIES

The Company's financing strategy is to obtain permanent funding for its
equipment and medical receivable loans through securitization and to sell the
remainder to reduce borrower concentration and to manage the Company's leverage.
When funding loans through securitization, the issuer generally can structure
the securitization so that the funding is treated for accounting purposes either
as long-term debt secured by equipment loans owned by the Company, or as a sale.
The accounting method to report finance income differs significantly depending
on which of the two structures the issuer uses. When the Company sponsors a
securitization, it treats the proceeds as long-term debt on its financial
statements and reports the finance income over the term of the equipment loans
that are funded. When the Company sells loans, it recognizes the unamortized
finance income at the time the funding takes place; however, even in a funding
treated as a sale, the Company may recognize servicing and/or interest income on
its subordinated interest over the remaining term of the equipment loans sold.

Over the past few years the Company has focused its strategy on increasing its
market share. There can be no assurance that the Company's historical growth
rate or current profitability can be sustained in the future. Additionally, the
Company's expense levels are based in part on its expectations for future
financing volumes, and the Company may be unable to adjust spending in a timely
manner to compensate for a decrease in demand for financing of medical equipment
and receivables. Accordingly, operating results may be adversely impacted by
future fluctuations in such demand. The Company believes that general economic
conditions have not had a material adverse effect on the Company's recent
operating results. There can be no assurances, however, that general economic
conditions will not have a material adverse effect on the Company in the future.

YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997

Total equipment financing loans originated were $524.7 million in fiscal 1998
compared with $401.7 million in fiscal 1997, an increase of 30.6%. Net financed
assets totaled $728.1 million at June 30, 1998, an increase of $147.3 million or
25.4% over the prior year. Not included in net financed assets were the loans
sold, but still serviced by the Company, which increased to $546.2 million as of
June 30, 1998 compared to $389.6 million as of

                                       16
<PAGE>   17
June 30, 1997, an increase of 40.2%. Managed net financed assets, the aggregate
of those appearing on the Company's balance sheet and those which have been sold
and are still serviced by the Company, totaled $1.2 billion as of June 30, 1998,
representing a 32.1% increase over the total as of June 30, 1997.

In the Company's medical receivable financing business, new commitments of
credit in fiscal 1998 were $183.2 million compared with $101.1 million in fiscal
1997, an increase of 81.2%. Medical receivables funded at June 30, 1998 totaled
$137.3 million, an increase of $51.7 million or 60.4% over the prior year.

Total finance and other income increased 32.0% to $74.4 million for the year
ended June 30, 1998 from $56.3 million the prior year. A component of total
finance and other income, amortization of finance income, increased 27.9% to
$63.3 million for the year ended June 30, 1998 from $49.5 million for the year
ended June 30, 1997. The increase was primarily a result of the overall increase
in the size of the Company's loan portfolio. The remaining component of total
finance and other income, other income, increased 62.1% to $11.0 million in
fiscal 1998 as compared to $6.8 million in fiscal 1997. The increase is due
mainly to fees earned on larger portfolios, placement fees, and servicing
income.

For the year ended June 30, 1998, interest expense increased 28.2% to $49.2
million from $38.4 million in the prior year. The increase in interest expense
is primarily a result of the growth of the Company's loan portfolio and growth
in international markets. The weighted average interest rate on discounted
receivables, the largest component of interest expense, decreased to 8.02% as of
June 30, 1998 compared to 8.60% as of June 30, 1997.

The net gain on sale of financing transactions increased 49.4% to $21.0 million
for the year ended June 30, 1998 compared with a gain of $14.0 million for the
same period in the prior year. Loans sold during the year ended June 30, 1998
were $292.7 million compared to $233.0 million during the prior fiscal year. The
increase is due mainly to better and more efficient executions, and lower
transaction costs resulting from larger transactions.

Selling, general and administrative expenses ("SG&A") increased 31.0% to $18.5
million for the year ended June 30, 1998 from $14.1 million for the year ended
June 30, 1997. The increase over the prior fiscal year is related primarily to
the development of its medical receivables, vendor finance and international
businesses and the 38.0% growth in average managed net financed assets. To
support this growth, the Company increased its personnel to 193 employees from
137 one year earlier.

The provision for losses on receivables was $4.7 million for the year ended June
30, 1998 as compared to $2.4 million for the previous year. On a quarterly
basis, the Company evaluates its ability to collect its receivables and records
a provision for amounts deemed uncollectible. In the opinion of management, the
provisions are adequate based on current trends in the Company's delinquencies
and losses. The Company's charge-offs for the quarters ended September 30, 1997,
December 31, 1997, March 31, 1998, and June 30, 1998 were $360,000, $272,000,
$556,000, and $596,000, respectively, which represents 5.45%, 3.50%, 6.39%, and
5.99%, respectively, of the quarter-end allowance for losses.

Earnings before minority interest, provision for income taxes and equity in net
losses of investees increased 47.9% to $22.9 million for the year ended June 30,
1998 compared to $15.5 million a year earlier. Net earnings were $12.9 million
or $1.03 per diluted share for the year ended June 30, 1998 as compared to net
earnings of $8.6 million or $0.74 per diluted share in the prior year.

The Company's cash and cash equivalents at June 30, 1998 and June 30, 1997 were
$15.2 million and $9.2 million, respectively. The following describes the
changes from June 30, 1997 to June 30, 1998 in the items which had the most
significant impact on the Company's cash flow during the year ended June 30,
1998.

The Company's net cash provided by operating activities was $1.9 million for the
year ended June 30, 1998 compared to $69.8 million net cash provided by
operations for the year ended June 30, 1997. The decrease in cash provided
during the year ended June 30, 1998 is attributed mainly to the fiscal year 1997
collection of the amount due from a 1996 portfolio sale.

The Company's net cash used in investing activities increased to $122.0 million
for the year ended June 30, 1998, as compared to $105.9 million for the year
ended June 30, 1997. This increase is attributed primarily to cash used to
acquire equipment of $541.7 million during the year ended June 30, 1998 compared
to $429.5 million for the year

                                       17
<PAGE>   18
ended June 30, 1997. These uses of cash were offset by $473.0 million and $373.0
million of portfolio receipts net of amounts included in income and proceeds
from the sale of financing transactions for the same periods.

The Company's net cash provided by financing activities was $126.0 million for
the year ended June 30, 1998 compared to $42.9 million for the year ended June
30, 1997. This results from a net increase in the Company's borrowings over
repayments of $66.3 million for the year ended June 30, 1998, as compared to a
$41.6 million net increase in borrowings over repayments for the year ended June
30, 1997. In fiscal year 1998, the equity and private offerings provided $57.9
million.


YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

Total equipment financing loans originated were $401.7 million in fiscal 1997
compared with $316.8 million in fiscal 1996, an increase of 26.8%. Net financed
assets totaled $580.6 million at June 30, 1997, an increase of $126.2 million or
27.8% over the prior year. Not included in net financed assets were the loans
sold, but still serviced by the Company, which increased to $389.6 million as of
June 30, 1997 compared to $218.6 million as of June 30, 1996, an increase of
78.2%. Managed net financed assets, the aggregate of those appearing on the
Company's balance sheet and those which have been sold and are still serviced by
the Company, totaled $925.8 million as of June 30, 1997, representing a 44.6%
increase over the total as of June 30, 1996.

In the Company's medical receivable financing business, new commitments of
credit in fiscal 1997 were $101.1 million compared with $40.0 million in fiscal
1996, an increase of 152.8%. Medical receivables funded at June 30, 1997 totaled
$85.6 million, an increase of $47.0 million or 149.4% over the prior year.

Total finance and other income increased 14.9% to $56.3 million for the year
ended June 30, 1997 from $49.0 million the prior year. A component of total
finance and other income, amortization of finance income, increased 11.3% to
$49.5 million for the year ended June 30, 1997 from $44.5 million for the year
ended June 30, 1996. The increase was primarily a result of the overall increase
in the size of the Company's loan portfolio. The remaining component of total
finance and other income, other income, increased 50.1% to $6.8 million in
fiscal 1997 as compared to $4.5 million in fiscal 1996. The increase was due
mainly to fees earned on larger portfolios and servicing income.

For the year ended June 30, 1997, interest expense increased 25.9% to $38.4
million from $30.5 million in the prior year. The increase in interest expense
was primarily a result of the growth of the Company's loan portfolio and
issuance of Senior Notes. The weighted average interest rate on discounted
receivables, the largest component of interest expense, decreased to 8.60% as of
June 30, 1997 compared to 8.64% as of June 30, 1996.

The net gain on sale of financing transactions increased 74.8% to $14.0 million
for the year ended June 30, 1997 compared with a gain of $8.0 million for the
prior year. Loans sold during the year ended June 30, 1997 were $233.0 million
compared to $175.1 million during the prior fiscal year. The increase is due
mainly to better and more efficient executions, and lower transaction costs
resulting from larger transactions.

Selling, general and administrative expenses ("SG&A") increased 42.1% to $14.1
million for the year ended June 30, 1997 from $9.9 million for the year ended
June 30, 1996. The increase over the prior fiscal year was related primarily to
the development of its medical receivables, vendor finance and international
businesses and the 35.1% growth in average managed net financed assets. To
support this growth, the Company increased its personnel to 137 employees from
129 one year earlier.

The provision for losses on receivables was $2.4 million for the year ended
June 30, 1997 as compared to $2.3 million for the previous year. On a quarterly
basis, the Company evaluates its ability to collect its receivables and records
a provision for amounts deemed uncollectible. In the opinion of management, the
provisions were adequate based on current trends in the Company's delinquencies
and losses. The Company's charge-offs for the quarters ended September 30,
1996, December 31, 1996, March 31, 1997, and June 30, 1997 were $10,000,
$5,000, $255,000 and $166,000, respectively, which represents 0.23%, 0.10%,
5.24% and 2.78%, respectively, of the quarter-end allowance for losses.   
                         
                                       18
<PAGE>   19
Earnings before minority interest, provision for income taxes and equity in net
losses of investees increased 8.0% to $15.5 million for the year ended June 30,
1997 compared to $14.3 million a year earlier. Net earnings were $8.6 million or
$0.74 per diluted share for the year ended June 30, 1997 as compared to net
earnings of $8.2 million or $0.77 per diluted share in the prior year.


The Company's net cash provided by operating activities was $69.8 million for
the year ended June 30, 1997 compared to $71.2 million net cash used in
operations for the year ended June 30, 1996. The increase in cash provided
during the year ended June 30, 1997 was attributed mainly to the amount due from
the portfolio sale at June 30, 1996 being received.

The Company's net cash used in investing activities increased to $105.9 million
for the year ended June 30, 1997, compared to $25.4 million for the year ended
June 30, 1996. This increase was attributed primarily to cash used to acquire
equipment and to finance notes secured by medical receivables of $477.8 million
during the year ended June 30, 1997 compared to $304.3 million for the year
ended June 30, 1996. These uses of cash were offset by $373.0 million and $280.5
million of portfolio receipts, net of amounts included in income and proceeds
from the sale of financing transactions for the same periods.

The Company's net cash provided by financing activities was $42.9 million for
the year ended June 30, 1997 down from $97.1 million for the year ended June 30,
1996. This resulted from a net increase in the Company's borrowings over
repayments of $41.6 million for the year ended June 30, 1997, as compared to a
$59.2 million net increase in borrowings over repayments for the year ended June
30, 1996. In fiscal 1997, the Company completed a public offering of $100.0
million of Senior Notes. In 1996, the equity offering provided $29.0 million.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

The Company's equipment financing business requires substantial amounts of
capital and borrowings. The Company obtains warehouse funding from commercial
and investment banks. The Company's warehouse borrowings are full recourse
obligations, while the Company's permanent funding is obtained principally on a
limited recourse basis. In the case of limited recourse funding, the Company
retains some risk of loss because it shares in any losses incurred, and/or it
may forfeit the residual interest (if any) the Company has in the underlying
sold or permanently funded assets if defaults occur.

A substantial portion of the Company's debt represents permanent funding of
equipment loans obtained on a limited recourse basis and is structured so that
the cash flow from the underlying loans services the debt. Most of the Company's
warehouse borrowings are used to temporarily fund the equipment loans and
medical receivables. These borrowings are repaid with the proceeds obtained from
the permanent funding and cash flow from the underlying transactions.

As a result of the rapid growth of the Company's equipment financing business,
the amount of warehouse and permanent funding it requires has significantly
increased. To meet its requirements for increased warehouse funding, the Company
has expanded its warehouse facilities with banks and has obtained warehouse
facilities with investment banking firms the Company uses for its
securitizations. To meet its requirements for increased permanent funding, the
Company has enhanced its ability to fund equipment loans by both securitization
and whole loan sales. If suitable sources of both warehouse and permanent
funding are not available in the future, the Company's growth will be
constrained and may be forced to use less attractive funding sources in order to
ensure its liquidity.

In addition to the interim and permanent funding referred to above, the
Company's continued growth in loan origination and net financed assets requires
substantial amounts of external funding, primarily to fund the reserve account
or overcollateralization requirements that are applied in connection with
securitization and sales of the Company's loans. These funds essentially provide
the credit enhancement for the Company's leveraged investments in its loan
portfolios, and typically are obtained through sales of debt or equity
securities by the Company.

As a result of these external funding requirements, in June 1994, the Company
completed a $15.0 million private placement of Convertible Subordinated Notes.
The agreement with respect to the Convertible Subordinated Notes

                                       19
<PAGE>   20
contains, among other things, limitations on the Company's ability to pay
dividends and to make certain other kinds of payments. This agreement also
prohibits the Company from incurring additional indebtedness unless certain
financial ratio tests are met. In August 1995, the Company completed a public
offering of 2,875,000 shares of its common stock for which it received net
proceeds of $29.0 million. In January 1996, holders of 615,605 of the Company's
warrants and units, issued in February 1991, redeemed their warrants and units
for shares of the Company's common stock at $12.00 or $12.60 per share by the
final exercise date of January 26, 1996. As a result of the redemption, the
Company received cash proceeds of $7.4 million.

On January 30, 1997, the Company completed a public offering of $100.0 million
principal amount of 9 7/8% Senior Notes due 2004. The agreement with respect to
the Senior Notes contains, among other things, limitations on the Company's
ability to pay dividends and to make certain other kinds of payments. This
agreement also prohibits the Company from incurring additional indebtedness
unless certain financial ratio tests are met. Interest is payable semi-annually
on February 1 and August 1 of each year, commencing on August 1, 1997. The
Senior Notes will be redeemable at the option of the Company in whole or in part
at any time on or after February 1, 2002 at specified redemption prices. The
proceeds from the sale are being used (i) to fund the Company's growth,
including increasing the amount of equipment and medical receivables loans the
Company can fund, (ii) to develop the Company's new international operations,
including the purchase of receivables originated outside the United States and
investment in joint ventures, (iii) for other working capital needs and (iv) for
general corporate purposes.

On October 30, 1997, the Company completed a private placement of 300,000 shares
of DVI common stock with a group of European financial institutions for net
proceeds of $4.9 million.

On April 24, 1998, the Company registered under the Securities Act of 1933, as
amended ("Securities Act"), $500.0 million of common stock, preferred stock,
depositary shares, debt securities, and warrants with the Securities and
Exchange Commission ("SEC"). The SEC declared the registration statement
(Registration No. 333-50895) effective on May 4, 1998.

On May 28, 1998, the Company issued 2,300,000 shares of common stock through an
underwritten public offering. The aggregate price to the public of such shares
was $49.3 million and the aggregate net proceeds to the Company were $46.6
million. Also on May 28, 1998, the Company issued 340,000 shares of common stock
to certain stockholders of the Company. The price to such stockholders and the
aggregate net proceeds to the Company for such shares was $6.9 million. These
net proceeds received do not reflect issuance costs totaling $0.4 million. The
proceeds from the May 28th stock issuances are being used (i) to fund the
Company's growth, including increasing the amount of equipment and medical
receivables loans the Company can fund, (ii) to develop the Company's expanding
international operations, (iii) for other working capital needs and (iv) for
general corporate purposes. On June 30, 1998, approximately $445.9 million of
common stock, preferred stock, depositary shares, debt securities and warrants
remained registered and unissued under the Securities Act.

Although the Company believes that cash available from operating, investing and
financing activities will be sufficient to fund the Company's current needs for
its equipment financing and its related medical receivable businesses, there can
be no assurance in this regard, and the Company may encounter liquidity problems
which could affect its ability to meet such needs while attempting to withstand
competitive pressures or adverse economic conditions.

WAREHOUSE FACILITIES

At June 30, 1998, the Company had available an aggregate of $373.2 million under
various warehouse facilities for equipment loan financing. The Company's primary
credit facility, a revolving credit agreement with a syndicate of banks
("Agreement"), provides for the borrowing of up to $112.0 million. Borrowings
under this facility bear interest at the Company's option of (i) prime minus
0.25% or (ii) from 1.00% to 1.20% over the 30, 60 or 90-day LIBOR rate based on
the Company's leverage ratio as defined in the Agreement. The Agreement is
renewable annually at the bank syndicate's discretion. The Agreement prohibits
the Company from paying dividends other than dividends payable solely in shares
of the Company's stock and limits borrowings to specified levels determined by
ratios based on the Company's tangible net worth. As of June 30, 1998, the
Company was in compliance with the financial covenants of the Agreement.

                                       20
<PAGE>   21
The Company has two $100.0 million interim equipment loan funding facilities
with investment banks. These facilities are available to fund certain equipment
loans which are to be securitized. Loans made under this facility bear interest
at a rate of 0.85% over the 30-day LIBOR rate. Borrowings under the facility are
secured by certain equipment loans and the equipment financed thereunder. In
addition, the Company has $66.2 million of loan warehouse capacity which
includes a $50.0 million facility for loans originated in Brazil and a $6.2
million facility for loans originated in Australia.

The Company has a $5.0 million facility with a bank for the funding of loans
ineligible for securitization.

The Company has two credit facilities for its medical receivables financing
business. The first facility is a revolving credit facility with a syndicate of
banks for borrowings up to $95 million. Borrowings in this facility bear
interest at LIBOR plus 1.45% and mature in April 1999. The second facility is
for $30.0 million with an interest rate of 30-day LIBOR plus 1.90% and matures
in September 1998.

The Company's use of securitization significantly affects its needs for
warehouse facilities. When using a securitization, the Company is required to
hold loans in warehouse facilities until a sufficient quantity is accumulated to
meet the various requirements of the credit rating agencies and others involved,
and to make a securitization cost effective. Generally, loans totaling $75 to
$250 million will be placed in each securitization pool.

PERMANENT FUNDING METHODS

The Company has completed 21 securitizations or other structured finance
transactions for medical equipment financings and medical receivables financings
totaling $1.57 billion, including two public debt issues of $75.7 million and
$90.0 million and 19 private placements of debt and whole loan sales totaling
$1.4 billion. In January 1996, the Company completed a $25.0 million private
placement securitization of medical receivables loans with a domestic insurance
company to fund its medical receivables financing business. In February 1998,
the Company closed a $75 million private term securitization of medical
receivables loans. The Company expects to continue to use securitization, on
both a public and private basis, as its principal means to permanently fund its
loans for the foreseeable future. If for any reason the Company were to become
unable to access the securitization market to permanently fund its equipment
loans, the consequences for the Company would be materially adverse.

The Company's use of securitization significantly affects its liquidity and
capital requirements due to the amount of time required to assemble a portfolio
of loans to be securitized. When using a securitization, the Company is required
to hold loans in warehouse facilities until a sufficient quantity is accumulated
in order to attract investor interest and allow for a cost-effective placement.
This increases the Company's exposure to changes in interest rates and
temporarily reduces its warehouse facility liquidity.

The Company has a $180 million facility with an option to sell to it certain
equipment loans and leases. As of June 30, 1998, there was $80.1 million sold to
this facility. The Company's obligations under this facility include servicing
of the assets and assisting the owner in the securitization of the assets if the
owner chooses to securitize.

Generally, the Company does not have binding commitments for permanent funding,
either through securitization or whole loan sales. The Company has non-binding
agreements with investment banking entities to fund future equipment loans
through securitization. While the Company expects to be able to continue to
obtain the permanent funding it requires for its equipment financing business,
there can be no assurance that it will be able to do so. If, for any reason, any
of these types of funding were unavailable in the amounts and on terms deemed
reasonable by the Company, the Company's equipment financing activities would be
adversely affected. The Company believes cash flows generated from operations
and its warehouse facilities are sufficient to meet its near-term obligations.

HEDGING STRATEGY

When the Company borrows funds through warehouse facilities, it is exposed to a
certain degree of risk caused by interest rate fluctuations. Although the
Company's equipment loans are structured and permanently funded on a fixed
interest rate basis, it uses warehouse facilities until permanent funding is
obtained. Because funds borrowed through warehouse facilities are obtained on a
floating interest rate basis, the Company uses hedging techniques to protect its
interest rate margins during the period that warehouse facilities are used and
securitization and sales are anticipated. The Company uses derivative financial
instruments, such as forward rate agreements, Treasury locks,

                                       21
<PAGE>   22
interest rate swaps, caps and collars to manage its interest rate risk. The
derivatives are used to manage three components of this risk: interest
sensitivity adjustments, hedging anticipated loan securitizations and sales, and
interest rate spread protection. The Company's hedging techniques may not
necessarily protect it from interest rate risks in all interest rate
environments.

FOREIGN EXCHANGE FORWARD CONTRACTS

The Company has international operations and has foreign currency exposures at
some of these operations due to lending in currencies other than the local
currency. As a general practice, the Company has not hedged the foreign exchange
exposure related to either the translation of overseas earnings into U.S.
dollars, or the translation of overseas equity positions back to U.S. dollars. A
foreign exchange forward contract is used to hedge the amount receivable to the
U.S. parent for a specific portfolio in Deutsche Marks. At June 30, 1998, the
Company had 7.5 million Deutsche Marks in forward contracts. Foreign exchange
forward contracts are accounted for as hedges to the extent they are designated,
and are effective as hedges of foreign currency. The net gain/loss deferred at
June 30, 1998 is immaterial.

INCOME TAX ISSUES

Historically, the Company has deferred a portion of its federal and state income
tax liability because of its ability to obtain depreciation deductions from
transactions structured as fair market value leases. In addition, the Company
has structured all sales of financing transactions since the quarter ended June
30, 1997 as borrowings for tax purposes versus a sale for book (GAAP) purposes.
Future sales of financing transactions may also be structured in this manner.

INFLATION

The Company does not believe that inflation has had a material effect on its
operating results during the past three years. There can be no assurance that
the Company's business will not be affected by inflation in the future.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Any statements contained in this Form 10-K which are not historical facts are
forward-looking statements; and, therefore, many important factors could cause
actual results to differ materially from those in the forward-looking
statements. Such factors include, but are not limited to, changes (legislative
and otherwise) in the healthcare industry, those relating to demand for DVI's
services, pricing, market acceptance, the effect of economic conditions,
litigation, competitive products and services, the results of financing efforts,
the ability to complete transactions, and other risks identified in the
Company's Securities and Exchange Commission filings.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Company and its
subsidiaries are filed on the pages listed below, as part of Part II, Item 8.

                                       22
<PAGE>   23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                        Page
                                                                                      Number
                                                                                      ------
<S>                                                                                  <C>
Independent Auditors' Report ......................................                       24

Consolidated Balance Sheets as of June 30, 1998 and 1997 ..........                    25-26

Consolidated Statements of Operations for the years ended
     June 30, 1998, 1997 and 1996 .................................                       27
 
Consolidated Statements of Shareholders' Equity for the years ended
     June 30, 1998, 1997 and 1996 .................................                       28

Consolidated Statements of Cash Flows for the years ended
     June 30, 1998, 1997 and 1996 .................................                    29-30


Notes to Consolidated Financial Statements ........................                    31-45
</TABLE>

                                       23
<PAGE>   24
INDEPENDENT AUDITORS' REPORT



Board of Directors and Shareholders
DVI, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of DVI, Inc. and
its subsidiaries (the "Company") as of June 30, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, such consolidated financial statements present fairly, in all
material respects, the financial position of DVI, Inc. and its subsidiaries as
of June 30, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1998
in conformity with generally accepted accounting principles.


DELOITTE & TOUCHE LLP

Parsippany, New Jersey
August 7, 1998
(September 15, 1998 as to Note 17)

                                       24
<PAGE>   25
CONSOLIDATED BALANCE SHEETS



ASSETS
<TABLE>
<CAPTION>
                                                                                                              June 30,
                                                                                                   -----------------------------
(in thousands of dollars except share data)                                                           1998                1997
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>                 <C>
Cash and cash equivalents ...............................................................          $  15,192           $   9,187

Cash and cash equivalents, restricted ...................................................             47,582              26,461


Receivables:
   Investment in direct financing leases and notes secured by equipment or
     medical receivables:
       Receivables in installments ......................................................            572,679             496,861
       Receivables and notes - related parties ..........................................              6,563               9,453
       Recourse credit enhancements .....................................................             51,883              46,095
       Notes collateralized by medical receivables ......................................            137,316              85,649
       Residual valuation ...............................................................             14,287               8,276
       Unearned income ..................................................................            (69,367)            (69,739)
                                                                                                   ---------           ---------
   Net investment in direct financing leases and notes secured
     by equipment or medical receivables ................................................            713,361             576,595

   Less: Allowance for losses on receivables ............................................             (9,955)             (5,976)
                                                                                                   ---------           ---------

Net receivables .........................................................................            703,406             570,619

Equipment on operating leases
 (net of accumulated depreciation of $3,189 and $2,301, respectively) ...................             14,773               4,041

Furniture and fixtures
   (net of accumulated depreciation of $2,600 and $1,710, respectively) .................              4,225               2,405

Investments in investees ................................................................              7,120               6,609

Goodwill, net ...........................................................................              3,646               3,953

Other assets ............................................................................             20,976              11,253
                                                                                                   ---------           ---------

Total assets ............................................................................          $ 816,920           $ 634,528
                                                                                                   =========           =========
</TABLE>

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

                                       25
<PAGE>   26
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                  June 30,
                                                                                      ----------------------------------
(in thousands except share data)                                                        1998                      1997
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                      <C>
Accounts payable ...........................................................          $  48,030                $  30,850

Accrued expenses and other liabilities .....................................             18,271                   19,208

Borrowings under warehouse facilities ......................................             82,828                   44,962

Deferred income taxes ......................................................             19,393                    8,610

Long-term debt, net:

     Discounted receivables (primarily limited recourse) ...................            342,120                  317,863
     9 7/8% Senior notes due 2004 ..........................................             96,486                   95,883
     Other debt ............................................................             15,808                    8,168
     Convertible subordinated notes ........................................             13,439                   13,324
                                                                                      ---------                ---------
Total long-term debt, net ..................................................            467,853                  435,238
                                                                                      ---------                ---------

Total liabilities ..........................................................            636,375                  538,868

Commitments and contingencies (Note 12)

Minority interest in consolidated subsidiaries .............................              8,260                       --

Shareholders' equity:
     Preferred stock, $10.00 par value; authorized 100,000 shares; no shares
           issued
     Common stock, $.005 par value; authorized 25,000,000 shares;
        outstanding 14,080,358 and 10,590,859 shares, respectively .........                 70                       53
     Additional capital ....................................................            133,516                   69,194
     Retained earnings .....................................................             39,387                   26,529
     Cumulative translation adjustments ....................................               (688)                    (116)
                                                                                      ---------                ---------

Total shareholders' equity .................................................            172,285                   95,660
                                                                                      ---------                ---------

Total liabilities and shareholders' equity .................................          $ 816,920                $ 634,528
                                                                                      =========                =========
</TABLE>

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

                                       26
<PAGE>   27
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                       Year Ended June 30,
                                                                              ----------------------------------------
(in thousands except per share data)                                            1998            1997            1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>             <C>
Finance and other income:
   Amortization of finance income .....................................       $ 63,332        $ 49,535        $ 44,509
   Other income .......................................................         11,023           6,799           4,529
                                                                              --------        --------        --------

Total finance and other income ........................................         74,355          56,334          49,038
Interest expense ......................................................         49,212          38,395          30,489
                                                                              --------        --------        --------

Net interest and other income .........................................         25,143          17,939          18,549
Net gain on sale of financing transactions ............................         20,977          14,039           8,032
                                                                              --------        --------        --------

Net finance income ....................................................         46,120          31,978          26,581

Selling, general and administrative expenses ..........................         18,493          14,117           9,933
Provision for losses on receivables ...................................          4,735           2,386           2,325
                                                                              --------        --------        --------

Earnings before minority interest, equity in net loss of investees, and
   provision for income taxes .........................................         22,892          15,475          14,323

Minority interest in net loss of consolidated subsidiaries ............            126              --              --
Equity in (net loss) of investees .....................................           (439)           (281)            (66)
Provision for income taxes ............................................          9,721           6,631           6,092
                                                                              --------        --------        --------

Net earnings ..........................................................       $ 12,858        $  8,563        $  8,165
                                                                              ========        ========        ========

Net earnings per share:
   Basic ..............................................................       $   1.12        $   0.78        $   0.82
                                                                              ========        ========        ========

   Diluted ............................................................       $   1.03        $   0.74        $   0.77
                                                                              ========        ========        ========
</TABLE>


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


                                       27
<PAGE>   28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                               Unrealized 
                                              Common Stock                      Gain on   
                                             $.005 Par Value                   Available-                                   Total
                                          --------------------    Additional    for-Sale       Retained                Shareholders'
(in thousands of dollars)                   Shares      Amount     Capital     Investments     Earnings       CTA           Equity
----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>       <C>         <C>              <C>          <C>        <C>
Balances at July 1, 1995 ............      6,753,685      $34      $ 29,403      $ 1,061       $ 9,801      $    --       $  40,299
   Issuance of common stock upon
     exercise of stock options
     and warrants ...................        822,690        4         8,934                                                   8,938
   Net proceeds from issuance of
     common stock ...................      2,875,000       14        28,947                                                  28,961
   Sale of available-for-sale
     investments, net of deferred
     tax benefit of $769 ............                                             (1,061)                                    (1,061)
   Net earnings .....................                                                            8,165                        8,165
                                          ----------      ---      --------      -------       -------      -------       ---------
Balances at June 30, 1996 ...........     10,451,375      $52      $ 67,284      $    --       $17,966      $    --       $  85,302
   Issuance of common stock
    upon exercise of stock
    options and warrants ............         82,881        1         1,310                                                   1,311
   Conversion of subordinated notes .         56,603                    600                                                     600
   Currency translation adjustment ..                                                                          (116)           (116)
   Net earnings .....................                                                            8,563           --           8,563
                                          ----------      ---      --------      -------       -------      -------       ---------
Balances at June 30, 1997 ...........     10,590,859      $53      $ 69,194      $    --       $26,529      $  (116)      $  95,660
   Issuance of common stock
    upon exercise of stock
    options and warrants ............        149,499                  1,756                                                   1,756
   Net proceeds from issuance of
    common stock ....................      2,940,000       15        57,918                                                  57,933
   Issuance of common stock for
    acquisition of MEFC .............        400,000        2         4,648                                                   4,650
   Currency translation adjustment ..                                                                          (572)           (572)
   Net earnings .....................                                                           12,858           --          12,858
                                          ----------      ---      --------      -------       -------      -------       ---------
Balances at June 30, 1998 ...........     14,080,358      $70      $133,516      $    --       $39,387      $  (688)      $ 172,285
                                          ==========      ===      ========      =======       =======      =======       =========
</TABLE>


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


                                       28
<PAGE>   29
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    Year Ended June 30,
                                                                      ---------------------------------------------
(in thousands of dollars)                                                1998              1997              1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net earnings ..............................................        $  12,858         $   8,563         $   8,165
                                                                      ---------         ---------         ---------
   Adjustments to reconcile net earnings to net
    cash provided by (used in) operating activities:
    Equity in net loss of investees ..........................              439               281                66
    Depreciation and amortization ............................           12,050            10,289             7,983
    Additions to allowance accounts ..........................            4,735             2,386             2,325
    Net gain on sale of financing transactions ...............          (20,977)          (14,039)           (8,032)
    Minority interest ........................................             (126)               --                --
    Cumulative translation adjustments .......................              (71)               37                --
    Changes in assets and liabilities:
    (Increases) decreases in:
       Cash and cash equivalents, restricted .................          (21,121)            6,090           (20,281)
       Amounts due from portfolio sale .......................               --            54,797           (54,797)
       Receivables ...........................................           (6,999)          (14,086)          (29,505)
       Other assets ..........................................           (9,697)           (3,260)            3,095
    Increases (decreases) in:
       Accounts payable ......................................           16,328             7,285            17,592
       Accrued expenses and other liabilities ................            3,713             7,558             1,361
       Deferred income taxes .................................           10,783             3,865               797
                                                                      ---------         ---------         ---------
    Total adjustments ........................................          (10,943)           61,203           (79,396)
                                                                      ---------         ---------         ---------
   Net cash provided by (used in) operating activities .......            1,915            69,766           (71,231)
                                                                      ---------         ---------         ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Cost of equipment acquired ................................         (541,715)         (429,515)         (292,618)
   Portfolio receipts net of amounts included in income and
    proceeds from sale of financing transactions .............          473,018           372,973           280,541
   Net increase in notes collateralized by medical receivables          (49,703)          (48,293)          (11,667)
   Furniture and fixtures additions ..........................           (2,897)           (1,017)             (985)
   Investments in investees ..................................           (1,148)              (24)           (2,059)
   Cash received from sale of investments in investees .......              549                --             1,341
                                                                      ---------         ---------         ---------
   Net cash used in investing activities .....................         (121,896)         (105,876)          (25,447)
                                                                      ---------         ---------         ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Exercise of stock options and warrants ....................            1,756             1,311             8,938
   Equity offering ...........................................           57,933                --            28,961
   Borrowings under:
    Warehouse facilities .....................................          802,811           498,576           485,585
    Long-term debt ...........................................          156,884           283,825           120,705
   Repayments on:
    Warehouse facilities .....................................         (765,237)         (621,862)         (472,649)
    Long-term debt ...........................................         (128,161)         (118,944)          (74,434)
                                                                      ---------         ---------         ---------
   Net cash provided by financing activities .................          125,986            42,906            97,106
                                                                      ---------         ---------         ---------
</TABLE>

                                                                       continued


                                       29
<PAGE>   30
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                    Year Ended June 30,
                                                                      ---------------------------------------------
(in thousands of dollars)                                                1998              1997              1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>               <C>
Net increase in cash and cash equivalents ....................        $   6,005         $   6,796         $     428
Cash and cash equivalents, beginning of year .................            9,187             2,391             1,963
                                                                      ---------         ---------         ---------

Cash and cash equivalents, end of year .......................        $  15,192         $   9,187         $   2,391
                                                                      =========         =========         =========

CASH PAID DURING THE YEAR FOR:
   Interest...................................................        $  44,786         $  31,073         $  29,984
                                                                      =========         =========         =========
   Income taxes ..............................................        $   1,508         $   4,777         $   3,507
                                                                      =========         =========         =========
</TABLE>


SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:

In June 1998 the purchase price for MEFC of $4.7 million was reclassified from
accrued liabilities to shareholders' equity to reflect the issuance of 400,000
common shares.

In June 1998, an additional investment of $2.0 million was made to MEC of which
$852,000 is still payable.

During the year ended June 30, 1997, the Company transferred the net book value
of equipment on operating leases in the amount of $491,000 to inventory which is
classified with other assets.

At June 30, 1998 and 1997, the Company has recorded in receivables in
installments and accrued expenses amounts of $2.5 million and $1.9 million,
respectively, representing the present value of future obligations the Company
has guaranteed.

In July 1996, $600,000 of convertible subordinated notes were converted into
common stock.

During the year ended June 30, 1996, the Company converted a $541,000 note
receivable into shares of common stock of a domestic entity.


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


                                       30
<PAGE>   31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  NATURE OF OPERATIONS

DVI, Inc. (the "Company" or "DVI") is primarily engaged in the business of
providing equipment and receivable financing for domestic and foreign users of
diagnostic imaging, radiation therapy and other medical technologies. The
Company's customer base consists principally of outpatient healthcare providers,
physician groups and hospitals. By the terms of the underlying financing
contracts, the Company's customers are generally considered in default if
payment on a contract has not been received. Equipment under direct financing
leases and notes secured by equipment, along with obligor guarantees and vendor
recourse, serve as collateral for unpaid contract payments. Receivables under
medical receivables financing transactions serve as collateral for unpaid
contract payments.

ABILITY TO ACCESS THE SECURITIZATION MARKET - The Company's ability to complete
securitizations and other structured finance transactions depends upon a number
of factors, including general conditions in the credit markets, the size and
liquidity of the market for the types of receivable-backed securities issued or
placed in securitizations sponsored by the Company and the overall financial
performance of the Company and its loan portfolio. Additionally, the Company's
ability to securitize assets is dependent upon its ability to provide credit
enhancement, which reduces the Company's liquidity and periodically requires it
to obtain additional capital to enable the Company to expand its operations.

CREDIT RISK - Many of the Company's customers are outpatient healthcare
providers that have complex credit characteristics. Providing financing for
these customers involves considerable credit analysis.

CONTINUING NEED FOR CAPITAL - The Company's ability to maintain and build its
financing business is dependent on its ability to obtain substantial amounts of
warehouse and long-term debt financing.

REGULATION AND CONSOLIDATION - Additional regulatory attention has been directed
towards physician-owned healthcare facilities and other arrangements whereby
physicians are compensated, directly or indirectly, for referring patients to
such healthcare facilities. Furthermore, the market is subject to consolidation
among outpatient facilities, physician groups and hospitals. The Company's
source of customers is subject to the effects of regulatory actions and market
consolidation.

INVESTMENTS IN FOREIGN AND INITIAL OPERATIONS - In an effort to mitigate the
impact of regulation and consolidation and to expand the Company's market, the
Company has initiated operations internationally and has made investments in
certain emerging markets. The Company established a joint venture based in
Singapore to service the medical equipment market in the Asia-Pacific region.
DVI Europe is the Company's branch established in the United Kingdom to service
the medical equipment industry in Europe.

The Company recently entered into a joint venture, MSF Holding Ltd., with the
International Finance Company (an affiliate of The World Bank), the Netherlands
Development Finance Company, and a subsidiary of First Union National
Corporation. Through MSF Holding Ltd. the Company will provide finance programs
for vendors and manufacturers of diagnostic and patient treatment devices in
Latin America, including Brazil, Argentina, Colombia and Mexico. The joint
venture commenced with a planned committed loan facility of $65 million and
paid-in capital of $20 million. In addition, the joint venture is in discussions
with a major investment banking firm to develop and implement a permanent
funding program for the equipment loans originated by the joint venture. The
Company owns 59% of the joint venture holding company which operates through
free-trade zone subsidiaries in Uruguay. The Company expects the customer base
for equipment vendors to be private clinics, diagnostic centers, and local
hospitals. The Company believes that this arrangement may prove to be a suitable
model for its other international activities.

The success and ultimate recovery of these investments is dependent upon many
factors including foreign regulation, customs, currency exchange, the
achievement of management's planned projections for these markets and the
Company's ability to manage these operations.


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION POLICY - All majority-owned subsidiaries are consolidated and all
material intercompany accounts and transactions are eliminated. Investments in
20%-50% owned entities are accounted for by the equity method of accounting, and
investments in less than 20% owned entities are accounted for by the cost
method.


                                       31
<PAGE>   32
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
reporting period. Actual results could differ from those estimates.

TRANSLATION ADJUSTMENTS - All assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date.
Revenues, costs and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments are accumulated as a
separate component of shareholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations.

CASH EQUIVALENTS - Cash equivalents include highly-liquid securities with
original maturities of 90 days or less.

CASH AND CASH EQUIVALENTS, RESTRICTED - Cash and cash equivalents, restricted
consist of cash, certificates of deposit and mutual funds maintained by the
Company which are pledged as collateral for certain limited recourse borrowings
related to direct financing leases, notes secured by equipment and operating
leases. The Company accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115
requires the classification of investments in debt and equity securities into
three categories: held to maturity, trading and available-for-sale. At June 30,
1998 and 1997, the Company has only available-for-sale securities with
maturities less than 90 days, which are included in restricted cash. Equity
securities classified as available-for-sale securities are reported at estimated
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of shareholders' equity, net of deferred taxes.

INVESTMENT IN DIRECT FINANCING LEASES AND NOTES SECURED BY EQUIPMENT - At
contract commencement, the Company records the gross contract receivable,
initial direct costs, estimated residual value of the financed equipment, if
any, and unearned income of fixed payment contracts. The principal portion and
initial direct costs of variable rate contracts are recorded at commencement and
interest is calculated and accrued monthly on the remaining principal balance.
Included in this category are loans to officers for investment purposes which
are not directly related to the Company's operations, and for the purpose of
financing a personal residence. At June 30, 1998 and 1997, unamortized initial
direct costs amounted to $6.6 million and $7.0 million, respectively. Initial
direct costs, net of any fees collected, are deferred and amortized over the
life of the contract using the interest method which reflects a constant
effective yield.

RECOURSE CREDIT ENHANCEMENTS - The most important source of permanent funding
for the Company for equipment loan financing has been securitization and other
forms of structured finance. Principal and interest on the notes issued to
investors by the securitization subsidiary are paid from the cash flows produced
by the loan pool, and the notes are secured by a pledge of the assets in the
loan pool as well as by other collateral. In the securitizations sponsored by
the Company, equipment loans funded through the securitizations must be credit
enhanced to receive an investment grade credit rating. Credit enhancement can be
provided in a number of ways, including cash collateral, letters of credit, a
subordinated tranche of each individual transaction or an insurance policy.
Typically, securitizations sponsored by the Company are enhanced through a
combination of some or all of these methods. In the securitizations sponsored to
date by the Company, the Company effectively has been required to furnish credit
enhancement equal to the difference between (i) the aggregate principal amount
of the equipment loans originated by the Company and transferred to the
Company's special-purpose finance subsidiary and the related costs of
consummating the securitization and (ii) the net proceeds received by the
Company in such securitizations. The majority of the credit enhancements are
recorded as subordinated interests of the present value of the discounted cash
flows. The recorded assets are relieved based on the unique structure of the
credit enhancement and the proportional cash flow.

NOTES COLLATERALIZED BY MEDICAL RECEIVABLES - Notes collateralized by medical
receivables consist of notes receivable resulting from working capital and other
loans made to entities in the healthcare industry and receivables purchased from
unrelated entities. The purchased receivables are stated at the lower of the
Company's cost or the estimated collectible value.

RESIDUAL VALUATION - Residual values, representing the estimated value of the
equipment at the end of the lease term, are recorded in the financial statements
at the inception of each fair market value lease as amounts estimated by
management based upon its experience and judgment.

RECEIVABLES IMPAIRMENT - Impaired receivables are measured based on the present
value of the expected cash flows discounted at the receivables' effective
interest rate or the fair value of the collateral. A receivable is considered
impaired when it becomes probable the Company will be unable to collect all
amounts due according to the contract terms.

EQUIPMENT ON OPERATING LEASES - Leases which do not meet the criteria for direct
financing leases are accounted for as operating leases. Equipment on operating
leases is recorded at cost and depreciated on a straight-line basis over the
estimated useful life of the


                                       32
<PAGE>   33
equipment. The residual values for operating leases are excluded from the leased
equipment's net depreciable basis. The Company evaluates residual value for
potential impairment on an ongoing basis and records any required changes in
valuation. Rental income is recorded monthly on a straight-line basis. Initial
direct costs associated with operating leases are deferred and amortized over
the lease term on a straight-line basis which approximates a constant effective
yield.

FURNITURE AND FIXTURES - Furniture and fixtures are stated at cost less
accumulated depreciation and are depreciated using the straight-line method over
their estimated useful lives (generally five years).

INVESTMENTS IN INVESTEES - The investments in investees consist of common and
nonvoting preferred equity interests in unrelated entities. The Company accounts
for its investments in the common stock of these entities using either the cost
or equity method of accounting, depending upon its ownership interests and its
ability to influence policies and operations of the investee. The investment in
the preferred stock of the investee is recorded at the lower of cost or
estimated realizable value.

GOODWILL - Goodwill represents the excess purchase price over the net tangible
assets stemming from the acquisition of Medical Equipment Finance Corporation
("MEFC"). Goodwill relating to the acquisition of MEFC is being amortized over a
fifteen year period. The Company evaluates the recoverability of its goodwill
separately for each applicable business acquisition at each balance sheet date.
The recoverability of goodwill is determined by comparing the carrying value of
the goodwill to the estimated operating income of the related entity on an
undiscounted cash flow basis. Should the carrying value of the goodwill exceed
the estimated operating income for the expected period of benefit, an impairment
for the excess is recorded at that time.

OTHER ASSETS - Other assets consist of prepaid financing costs, accrued
interest, advances related to the Company's serviced portfolio, equipment held
for sale or lease, which is stated at the lower of cost or its net realizable
value, and miscellaneous accounts receivable.

ACCOUNTS PAYABLE - Accounts payable includes equipment payables for equipment
fundings of $40.8 million and $29.2 million at June 30, 1998 and 1997,
respectively.

DEBT ISSUANCE COSTS - Debt issuance costs related to the Company's warehouse
facilities, securitizations, senior notes and convertible subordinated notes are
offset against the related debt and are being amortized over the life of the
notes using the interest method.

AMORTIZATION OF FINANCE INCOME - Amortization of finance income primarily
consists of three categories: income on fixed payment transactions, income on
variable rate transactions and income on medical receivables. The interest
component of scheduled payments on notes secured by equipment and direct
financing lease fixed payment transactions is calculated using the interest
method in order to approximate a level rate of return on the net investment. The
interest component of notes secured by equipment and direct financing lease
variable rate transactions is calculated and accrued monthly on the remaining
principal balance. The interest component on medical receivables is calculated
and accrued monthly on the average balance outstanding during the period.

NET GAIN ON SALE OF FINANCING TRANSACTIONS - Gains arising from the sale of
direct financing leases and investments in notes secured by equipment occur when
the Company obtains funding through the whole loan sale of a transaction to a
third party.

RECOURSE OBLIGATIONS - Subsequent to a sale, the Company has no or limited
remaining interest in the transaction or equipment and no obligation to
indemnify the purchaser in the event of a default on the transaction by the
obligor, except when the sale agreement provides for participation in defined
excess interest spreads or limited recourse in which the Company guarantees
reimbursement under the agreement up to a specific maximum. Consequently, in the
event of default by the obligor, the investor would exercise its rights under
the lien with limited or no further recourse against the Company.

OTHER INCOME - Other income consists primarily of contract fees and late
charges, dividends on investments in investees' preferred stock, servicing fees,
placement fees, and gains/losses from asset disposals, and is recorded when
earned.

TAXES ON INCOME - Deferred taxes on income result from temporary differences
between the reporting of income for financial statement and tax reporting
purposes. Such differences arise principally from recording hedging gains and
losses, gains on sales of financing transactions, and lease transactions in
which the operating lease method of accounting is used for tax purposes and the
financing lease method is used for financial statement purposes. Under the
operating lease method, leased equipment is recorded at cost and depreciated
over the useful life of the equipment and lease payments are recorded as revenue
when earned.

NET EARNINGS PER SHARE - The Company adopted SFAS No. 128, Earnings per Share,
as of October 1, 1997. This statement is effective for financial statements
issued for periods ending after December 15, 1997 and has been applied
retroactively. The adoption of this statement did not have a material impact on
the Company's financial position or results of operations.


                                       33
<PAGE>   34
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation
using the intrinsic value method under which the Company has not recognized
compensation expense.


HEDGING INSTRUMENTS - The Company uses various interest rate contracts such as
forward rate agreements, Treasury locks, interest rate swaps, caps and collars
to manage its interest rate risk from its floating rate liabilities and
anticipated securitization and sale transactions. No contracts are held for
trading purposes. Gains or losses from forward rate agreements used to hedge
floating rate exposure within warehouse funding facilities are deferred and
amortized to interest expense over the hedged period. When hedge transactions
are matched to anticipated securitizations, which are accounted for as a
financing, gains or losses from the hedge transactions are deferred and
amortized to interest expense over the term of the securitized transaction. When
hedge transactions are matched to anticipated sales or securitizations, which
are accounted for as sales, gains or losses from the hedge transactions are
recognized as part of the gain or loss on the sale. Foreign exchange forward
contracts are accounted for as hedges to the extent they are designated, and are
effective as hedges of foreign currency. The net gain or loss is recorded as a
cumulative translation adjustment in shareholders' equity.

RECENT ACCOUNTING DEVELOPMENTS - In June 1996, the FASB issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. This statement provides an accounting and reporting standard for transfers
and servicing of financial assets, and extinguishment of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. This statement provides standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
adoption of SFAS No. 125 did not have a material impact on the Company's
financial position and the results of operations.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and
No. 131, Disclosures about Segments of an Enterprise and Related Information.
These statements are effective for fiscal years beginning after December 15,
1997 and early adoption is permitted. The Company intends to adopt both
standards effective July 1, 1998.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management has not
completed an analysis of the impact of applying this new statement.

RECLASSIFICATIONS AND RESTATEMENTS - Certain amounts as previously reported have
been reclassified to conform to the year ended June 30, 1998 presentation.

NOTE 3. INVESTMENT IN DIRECT FINANCING LEASES AND NOTES SECURED BY EQUIPMENT OR
MEDICAL RECEIVABLES AND EQUIPMENT ON OPERATING LEASES

Receivables in installments are due in varying amounts and are collateralized by
the underlying equipment, along with obligor guarantees and vendor recourse.
Notes collateralized by medical receivables consist of notes receivable
resulting from working capital loans and are due at maturity. Scheduled rents on
operating leases relate to noncancelable operating leases and are due in
installments of varying amounts. Information regarding scheduled collections for
direct financing leases, notes secured by equipment or medical receivables and
operating leases are as follows:


<TABLE>
<CAPTION>
                             Direct Financing
                             Leases and Notes            Scheduled
                               Secured by                Rents on
                              Equipment or               Operating                  Total
Year Ending June 30,        Medical Receivables            Leases                  Receivable
--------------------        -------------------            ------                  ----------
<S>                         <C>                        <C>                       <C>
1999 .............            $284,409,000               $ 2,993,000               $287,402,000
2000 .............             225,300,000                 2,315,000                227,615,000
2001 .............             135,505,000                 2,250,000                137,755,000
2002 .............              75,274,000                 1,940,000                 77,214,000
2003 .............              33,415,000                 1,415,000                 34,830,000
Thereafter .......              14,538,000                   428,000                 14,966,000
                              ------------               -----------               ------------
   Subtotal ......             768,441,000                11,341,000                779,782,000
Residual valuation              14,287,000                        --                 14,287,000
                              ------------               -----------               ------------
   Total .........            $782,728,000               $11,341,000               $794,069,000
                              ============               ===========               ============
</TABLE>


                                       34
<PAGE>   35
The total receivable balance of $794.1 million is comprised of direct financing
leases (28%), notes secured by equipment (54%), medical receivables (17%), and
scheduled rents on operating leases (1%). The Company is exposed to credit risk
on these receivables. At June 30, 1998, of the 3,614 debtors, the top ten
obligors represented 12.07% of the portfolio. Geographic concentration for the
top five states was New York (21.37%), California (15.37%), Florida (10.80%),
Texas (9.42%), and New Jersey (9.09%). International loans, those outside the 50
United States, represented 16.60% of the portfolio.

Residual valuation represents the estimated amount to be received at contract
termination from the disposition of equipment financed under fair market value
leases. Amounts to be realized at contract termination depend on the fair market
value of the related equipment and may vary from the recorded estimate. Residual
values are reviewed periodically to determine if the equipment's anticipated
fair market value is below its recorded value.

During the years ended June 30, 1998 and 1997, the Company sold receivables to
third parties realizing gains of $21.0 million and $14.0 million, respectively.
In connection with certain of these transactions, the Company retained
subordinated interests in the receivables totaling $51.9 million and $46.1
million at June 30, 1998 and 1997, respectively. In accordance with provisions
of SFAS No. 115, the Company classifies subordinated interests as trading
securities which are recorded at fair value with any unrealized gains or losses
recorded in the results of operations in the period of the change in fair value.
Valuations at origination and at each reporting period are based on discounted
cash flow analyses. There can be a wide range in market assumptions which are
used by participants in the market to value such assets. Accordingly, the
Company's estimate of fair value is subjective. Under the sale agreement, the
Company is required to fund any losses on the receivables up to its subordinated
interests. Once repurchased or substituted such leases are included within the
Company's portfolio and are evaluated within the allowance for possible losses
on receivables.

At June 30, 1998, receivables amounting to $558.7 million were assigned as
collateral for long-term debt.

The following is an analysis of the allowance for losses on receivables:

<TABLE>
<CAPTION>
Year Ended June 30,                                        1998                    1997                    1996
------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                     <C>                     <C>
Balance, beginning of year ................            $ 5,976,000             $ 4,026,000             $ 3,282,000

Provision for losses on receivables .......              4,735,000               2,386,000               2,325,000

Allowance assumed in business acquisition .                879,000                      --                      --

Write-offs, net ...........................             (1,635,000)               (436,000)             (1,581,000)
                                                       -----------             -----------             -----------

Balance, end of year ......................            $ 9,955,000             $ 5,976,000             $ 4,026,000
                                                       ===========             ===========             ===========
</TABLE>

The net investment of non-performing loans, including the managed portfolio, on
which income recognition was suspended was $22.6 million and $20.7 million at
June 30, 1998 and 1997, respectively. Cash collected on all non-accrual loans is
applied to the net investment.

NOTE 4.  INVESTMENTS IN INVESTEES

At June 30, 1995, the Company held available-for-sale securities with a market
value of $3.2 million, which it accounted for at market with the unrealized gain
of $1.8 million recorded as a component of shareholders' equity. During the year
ended June 30, 1996, the Company sold its investments in common stock of
Healthcare Imaging Services, Inc. (HIS) and Diagnostic Imaging Services, Inc.
(DIS). The Company did not record a gain or loss on these transactions.

At June 30, 1998 and 1997, the Company holds Series F and Series G preferred
stock of DIS valued at $2.5 million (2,482,000 shares) and $2.0 million
(2,000,000 shares), respectively. The Series F and G preferred stock have
liquidation preferences at $1.00 per share, are redeemable at the option of DIS
at $1.00 per share plus accrued dividends, are convertible, under certain
conditions, into common stock of DIS at $2.482 per share for Series F and $2.00
per share for Series G, and are entitled to annual cumulative dividends ranging
from $0.05 per share to $0.10 per share. In addition, the majority shareholder
of DIS has the right to repurchase the Series F and G preferred stock for $4.5
million plus accrued dividends through September 2001.


                                       35
<PAGE>   36
During the year ended June 30, 1996, the Company converted a note receivable
totaling $541,000 into shares of outstanding stock of EQ Computer Products and
Services ("CP&S"), whose business is in the distribution of parts and components
used in the repair and maintenance of microcomputer and associated peripherals.
CP&S sells to computer maintenance firms, independent computer service
organizations and original equipment manufacturers, throughout the United
States, engaged in the maintenance and repair of their own computer equipment
and equipment manufactured by others. During the year ended June 30, 1997, CP&S
issued additional shares and had a reverse stock split. As of June 30, 1997, the
Company had 273,773 shares or 14.25% of the outstanding stock of CP&S. The
Company accounts for the investment in this entity under the cost method of
accounting as it does not exert significant influence over the entity. On June
30, 1998, the Company sold its entire investment in CP&S for an insignificant
gain.

In November 1995, the Company entered into a joint venture with two other
partners to establish Medical Equipment Credit Pte Ltd. ("MEC"). MEC pursues
opportunities in the Asia-Pacific diagnostic imaging marketplace. Initial
capitalization of MEC is 7,000,000 shares of common stock ($5.0 million), and
ownership is based on the percentage of the initial capitalization invested by
each of the three joint venture partners. The Company's ownership is 40% based
on the initial $2.0 million investment. The Company accounts for its investment
in MEC under the equity method of accounting. At June 30, 1998, 1997 and 1996,
the Company recognized losses of approximately $439,000, $231,000, and $41,000,
respectively, on this investment.

NOTE 5.  INTEREST BEARING DEBT

WAREHOUSE FACILITIES - The Company's primary credit facility, pursuant to a
revolving credit agreement with a syndicate of banks ("Agreement"), provides for
the borrowing of up to $112.0 million. Borrowings under this facility bear
interest at the Company's option of (i) prime minus 0.25% or (ii) from 1.00% to
1.20% over the 30, 60 or 90-day LIBOR rate based on the Company's leverage ratio
as defined in the Agreement. The Agreement is renewable annually at the bank
syndicate's discretion. The Agreement prohibits the Company from paying
dividends other than dividends payable solely in shares of the Company's stock
and limits borrowings to specified levels determined by ratios based on the
Company's tangible net worth. As of June 30, 1998, the Company was in compliance
with the financial covenants of the Agreement.

The Company has two $100.0 million interim funding facilities available for
certain equipment loan financing transactions which are to be securitized. These
facilities bear interest at a rate of 0.85% over the 30-day LIBOR rate.
Borrowings under the facilities are secured by certain equipment contracts and
the equipment financed thereunder. In addition, the Company has a $50.0 million
interim facility for loans originated in Brazil and a $6.2 million facility for
loans originated in Australia.

The Company has a $5.0 million facility with a bank for the funding of loans
ineligible for securitization.

The Company has two credit facilities for its medical receivables financing
business. The first facility is a revolving credit facility with a syndicate of
banks for borrowings up to $95 million. Borrowings in this facility bear
interest at LIBOR plus 1.45%. The second facility is for $30.0 million with an
interest rate of 30-day LIBOR plus 1.90% and matures in September 1998.

LONG-TERM DEBT - The discounted receivables are direct financing lease
obligations, notes secured by equipment and medical receivables which were
securitized and sold to investors primarily on a limited or nonrecourse basis.
They are collateralized by the underlying equipment and medical receivables.

Future annual maturities of discounted receivables, net of capitalized issuance
costs of $7.2 million, are as follows:

<TABLE>
<CAPTION>
Year Ending June 30,
--------------------------------------------------
<S>                                  <C>
1999 .........................       $ 94,115,000
2000 .........................         75,228,000
2001 .........................        144,183,000
2002 .........................         20,004,000
2003 .........................          6,915,000
Thereafter ...................          1,675,000
                                     ------------
   Total .....................       $342,120,000
                                     ============
</TABLE>

All of the discounted receivables have been permanently funded through ten
structured transactions which were initiated during fiscal years 1993 through
1998. Debt under these securitizations are limited recourse and bear interest at
fixed rates ranging between 5.62% to 12.85% and floating interest rates ranging
between 0.83% and 2.25% over 30-day LIBOR. All of the receivables are serviced
by the


                                       36
<PAGE>   37
Company and the related securitization agreements require that the Company
comply with certain servicing requirements, require limited cash collateral or
residual interests and contain various recourse provisions.

Included above is $15.5 million from the Company's securitization of some of its
net retained subordinated positions in its securitizations and whole loan sales.
This transaction was completed on July 31, 1996.

The Company has net convertible subordinated notes outstanding of $13.4 million
and $13.3 million at June 30, 1998 and 1997, respectively. The notes are
convertible into common shares at $10.60 per share at the discretion of the
noteholders, bear interest at a rate of 9 1/8% payable in quarterly installments
of interest only and mature in June 2002. There were no conversions in fiscal
year 1998. During the year ended June 30, 1997, $600,000 of these notes were
converted into 56,603 shares of common stock of the Company. Cumulatively, $1.1
million of these notes have been converted into 103,772 shares of common stock
of the Company.

On January 30, 1997, the Company completed a public offering of $100.0 million
principal amount of 9 7/8% Senior Notes due 2004. Interest is payable
semiannually on February 1 and August 1 of each year, commencing on August 1,
1997. The Senior Notes will be redeemable at the option of the Company in whole
or in part at any time on or after February 1, 2002 at specified redemption
prices. The proceeds from the sale are being used (i) to fund the Company's
growth, including increasing the amount of equipment and medical receivables
loans the Company can fund, (ii) to develop the Company's new international
operations, including the purchase of receivables originated outside the United
States and investment in joint ventures, (iii) for other working capital needs
and (iv) for general corporate purposes.

In addition, the Company has a $4.7 million facility with a foreign bank to fund
a portfolio of equipment loans in Turkey.

The following chart summarizes interest-bearing credit facilities as of June 30,
1998 and 1997:


(in thousands of dollars)

<TABLE>
<CAPTION>
                                                              As of June 30, 1998          As of June 30, 1997
                              Amount         Maturity        ---------------------        ----------------------
  Credit Facility            Available         Date           Balance         Rate        Balance          Rate
  ---------------            ---------         ----           -------         ----        -------          ----
<S>                          <C>             <C>             <C>             <C>          <C>              <C>
SHORT-TERM DEBT
Warehouse facilities .        $498,208        Various        $ 82,828         7.71%        $ 44,962         7.10%


LONG-TERM DEBT

Discounted receivables        $     --        Various        $342,120         8.02%        $317,863         8.60%
9 7/8 Senior notes ...        $     --          2004         $ 96,486        10.90%        $ 95,883        10.96%
Other debt ...........        $     --        Various        $ 15,808         8.38%        $  8,168         7.63%
Convertible sub. debt         $     --          2002         $ 13,439        10.30%        $ 13,324        10.38%
</TABLE>

NOTE 6.  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

The following represents a summary of the major components of selling, general
and administrative expenses:

(in thousands of dollars)

<TABLE>
<CAPTION>
Year Ended June 30,               1998           1997          1996
--------------------------------------------------------------------
<S>                             <C>            <C>            <C>
Salaries and benefits ..        $ 7,433        $ 5,276        $3,241
Professional fees ......          4,191          2,860         2,572
Travel and entertainment          1,495            868           503
Occupancy and Equipment           3,097          2,383         1,863
Other ..................          2,277          2,730         1,754
                                -------        -------        ------
Total SG&A .............        $18,493        $14,117        $9,933
                                =======        =======        ======
</TABLE>


                                       37
<PAGE>   38
NOTE 7.  INCOME TAXES

The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
Year Ended June 30,            1998               1997               1996
-----------------------------------------------------------------------------
<S>                        <C>                  <C>               <C>
Current taxes .....        ($ 1,539,000)        $2,766,000        $ 6,120,000
Foreign ...........             399,000                 --                 --
Deferred ..........          10,861,000          3,865,000            (28,000)
                           ------------         ----------        -----------
      Total .......        $  9,721,000         $6,631,000        $ 6,092,000
                           ============         ==========        ===========
</TABLE>

A reconciliation of the provision for income taxes to the amount of income tax
expense that would result from applying the federal statutory rate (35%) to
earnings from continuing operations is as follows:

<TABLE>
<CAPTION>
Year Ended June 30,                                          1998                        1997                         1996
----------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>        <C>               <C>        <C>               <C>
Provision for income taxes at the
   federal statutory rate ..................     $7,896,000        35.0%      $5,448,000        35.0%      $4,993,000        35.0%
State income taxes,
   net of federal tax benefit ..............      1,023,000         4.5%         850,000         5.4%       1,045,000         7.3%
Foreign taxes,
   net of federal tax benefit ..............        259,000         1.1%              --          --               --          --
Limitation on utilization of foreign losses         332,000         1.5%              --          --               --          --
Other ......................................        211,000         0.9%         333,000         2.1%          54,000         0.4%
                                                 ----------        ----       ----------        ----       ----------        ----
      Total ................................     $9,721,000        43.0%      $6,631,000        42.5%      $6,092,000        42.7%
                                                 ==========        ====       ==========        ====       ==========        ====
</TABLE>


Earnings before minority interest, equity in net loss of investees, and
provision for income taxes consist of the following:

<TABLE>
<CAPTION>
Year Ended June 30,            1998               1997               1996
----------------------------------------------------------------------------
<S>                        <C>                <C>                <C>
Domestic ..........        $21,783,000        $15,040,000        $14,323,000
Foreign ...........          1,109,000            435,000                 --
                           -----------        -----------        -----------
Total .............        $22,892,000        $15,475,000        $14,323,000
                           ===========        ===========        ===========
</TABLE>

The major components of the Company's net deferred tax liabilities of $19.4
million and $8.6 million at June 30, 1998 and 1997, respectively, are as
follows:

<TABLE>
<CAPTION>
Year Ended June 30,                                 1998                 1997
----------------------------------------------------------------------------------
<S>                                             <C>                  <C>
Accumulated depreciation ...............        $ 30,576,000         $ 23,511,000
Deferred recognition of lease income ...         (16,086,000)         (14,740,000)
Deferred gain on financing transactions            8,955,000            1,977,000
Loss on hedging activities .............           1,397,000            1,258,000
Allowances for uncollectible receivables          (3,584,000)          (2,322,000)
State income taxes .....................          (1,004,000)            (454,000)
Other ..................................            (861,000)            (620,000)
                                                ------------         ------------
      Total ............................        $ 19,393,000         $  8,610,000
                                                ============         ============
</TABLE>

NOTE 8.  SHAREHOLDERS' EQUITY

During fiscal 1998, the Company issued 300,000 shares of its common stock in a
private offering and 2,640,000 in a public offering for which it received net
proceeds of $4.9 million and $53.1 million, respectively. The net proceeds were
used (i) to fund the Company's growth, (ii) develop the Company's international
operations, including the origination of medical equipment loans outside the
United States, (iii) for other working capital needs, and (iv) for general
corporate purposes. The 400,000 shares for the 1995 MEFC acquisition were issued
in June 1998.


                                       38
<PAGE>   39
In March 1998, the Company issued options to purchase a total of 50,000 common
shares at $15.3125 per share to non-employee Directors of the Company. The
options vest at various dates through August 2000 and expire in March 2008.

In November 1997, the Company acquired a healthcare-based merchant banking group
whose key services are private debt placement, loan syndication, bridge
financing, and mortgage loan arrangement for the long-term/assisted care and
specialized hospital markets. The Company issued 84,011 shares of its common
stock for the acquisition. The transaction was accounted for as a pooling of
interests and therefore, all prior financial statements presented have been
restated as if the merger took place at the beginning of such periods. The
shares were allocated to the four companies and accounted for by the pooling of
interests as follows:

<TABLE>
<S>                                        <C>           <C>
J. G. Wentworth Securities, Inc. ..        42,005        Fiscal 1995
J. G. Wentworth Mortgage Funding LP        27,100        Fiscal 1997
J. G. Wentworth Partners LP .......        10,840        Fiscal 1997
J. G. Wentworth Partners, Inc. ....         4,066        Fiscal 1997
                                           ------
Total .............................        84,011
                                           ======
</TABLE>

In June 1997, the Company granted options to purchase 100,000 shares of the
Company's common stock at an exercise price of $13.50 per share as compensation
to a financial advisory firm. The options will vest on a pro-rata basis over a
twenty-four month period, or 4,167 shares per month. The options are exercisable
for a period of five years from the date of grant.

In January 1996, holders of 615,605 of the Company's warrants and units issued
in February 1991 redeemed their warrants and units for shares of the Company's
common stock at $12.00 and $12.60 per share by the final exercise date of
January 26, 1996. As a result of the redemption, the Company received cash
proceeds of $7.4 million. In addition, in November 1990, the Company issued
warrants to purchase 35,000 common shares at $8.50 per share to an unrelated
party. Such shares were exercised during the year ended June 30, 1996.

In August 1995, the Company completed a public offering of 2,875,000 shares of
its common stock for which it received net proceeds of $29.0 million. The net
proceeds were utilized to reduce short-term indebtedness and for general
corporate purposes.

Prior to June 30, 1994, the Company issued warrants to purchase a total of
80,000 common shares at prices between $7.625 and $8.375 per share to all
non-employee directors of the Company. During each of the years ended June 30,
1998 and 1997, 10,000 shares at $8.375 and 10,000 at $7.625 were converted. The
warrants vested at various dates through November 1996 and expire at various
dates through 2003.

In June 1994, the Company issued convertible subordinated notes to related and
unrelated parties which are convertible at the option of the holder into
1,415,094 shares of common stock at $10.60 per share. There were no conversions
to common stock during fiscal 1998. During the year ended June 30, 1997,
$600,000 of these notes were converted into 56,603 shares of common stock. As of
June 30, 1998, cumulative conversions of these notes were $1.1 million into
103,772 shares of common stock.

NOTE 9.  STOCK OPTION PLAN AND INCENTIVE AGREEMENT

The Company had a stock option plan from August 1986 that provided for the
granting of options to employees to purchase up to 1,250,000 shares of the
Company's common stock at the fair market value at the date of grant. Options
granted under this plan generally vest over three to five years from the date of
grant and expire ten years after the date of the grant. Any unexercised options
are canceled 90 days subsequent to the termination of the employee and are
returned to the plan. This plan expired in August 1996.

The Company has a stock option plan from August 1996 that provides for the
granting of options to employees, consultants and directors to purchase up to
1,500,000 shares of the Company's common stock at the fair market value at the
date of grant. Options granted under this plan generally vest over three to five
years from the date of grant and expire ten years after the date of the grant.
Any unexercised options are canceled 90 days subsequent to the termination of
the employee and are returned to the plan. This plan expires August 2006.


                                       39
<PAGE>   40
The following table summarizes the employee activity under the plans for the
periods indicated:

<TABLE>
<CAPTION>
                                                                           Weighted Average
                                       Options         Exercise Price       Exercise Price
                                     Outstanding          Per Share            Per Share
--------------------------------------------------------------------------------------------
<S>                                  <C>               <C>      <C>           <C>
Outstanding at July 1, 1995            680,294         $ 1.44 - $13.50        $    8.16
Granted ....................           130,500         $11.63 - $13.13        $   12.96
Exercised ..................          (152,085)        $ 1.44 - $13.50        $    8.38
Canceled ...................           (37,000)
                                     ---------

Outstanding at June 30, 1996           621,709         $ 1.75 - $13.13        $    9.14
Granted ....................           186,500         $12.75 - $14.63        $   14.36
Exercised ..................           (40,875)        $ 5.00 - $10.38        $    7.56
Canceled ...................            (8,534)
                                     ---------

Outstanding at June 30, 1997           758,800         $ 1.75 - $14.63        $   10.47
Granted ....................           597,500         $14.44 - $25.06        $   16.83
Exercised ..................          (109,499)        $ 1.75 - $15.31        $    7.94
Canceled ...................            (1,350)
                                     ---------


Outstanding at June 30, 1998         1,245,451         $ 4.06 - $25.06        $   13.75
                                     =========
</TABLE>


The following table summarizes stock options outstanding at June 30, 1998:

<TABLE>
<CAPTION>
                            Number of Options          Weighted Average            Weighted Average
Range of Exercise Price        Outstanding         Remaining Contractual Life       Exercise Price
-----------------------        -----------         --------------------------       --------------
<S>                         <C>                    <C>                             <C>
   $ 4.01  - $ 6.00              52,800                       3                         $ 5.01
   $ 6.01  - $ 9.00             137,400                       4                         $ 8.08
   $ 9.01  - $14.00             300,784                       6                         $11.30
   $14.01  - $15.00             181,167                       8                         $14.62
   $15.01  - $18.00             403,300                       8                         $15.36
   $18.01  - $20.00              80,000                       8                         $19.16
   $20.01  - $25.50              90,000                       8                         $21.91
                              ---------
                              1,245,451                       7                         $13.75
                              =========
</TABLE>

As of June 30, 1998, options to purchase 514,817 shares were exercisable.

If compensation cost for the Company's stock option plan had been determined
based on the fair value at the date of awards consistent with the fair value
method described in SFAS No. 123, the Company's net income, basic earnings per
share, and diluted earnings per share would be reduced to the proforma amounts
at June 30, 1998 of $12.0 million, $1.05 and $0.97 and at June 30, 1997 of $8.7
million, $0.78 and $0.70, respectively. Significant assumptions used to
calculate the fair value of the awards for June 30, 1998 and 1997, respectively,
are as follows: weighted average risk free rate of return of 6.0% and 6.3%;
expected option life of 60 months; expected volatility of 38% and 32%; and no
expected dividends in either year.

The Company has an employee incentive agreement ("Agreement"). Under the
Agreement, the Company has agreed, subject to the discretion of its Compensation
Committee, to issue from time to time an aggregate of not more than 200,000
shares of common stock of the Company ("Incentive Shares") to certain of its
employees if the last sale price of the Company's common stock is $16.00 per
share or higher for 30 consecutive calendar days at any time before December 31,
2001, provided that any such employee must be employed by the Company during the
above-described 30-day period in order to receive any Incentive Shares under the
Agreement. The Company has agreed that, if there is an event or series of events
that constitutes a sale of the Company at any time prior to December 31, 1998
and the consideration to be received for each share of common stock of the
Company in such sale of the Company is $13.00 or higher, the Company will issue
the Incentive Shares to the employees. If the criteria for the issuance of the
Company's common stock are met, the Company will record compensation expense
equal to the fair value of the common shares issued at the date upon which the
rights to receive such shares are awarded by the Compensation Committee.


                                       40
<PAGE>   41
NOTE 10.  RECONCILIATION OF EARNINGS PER SHARE CALCULATION

<TABLE>
<CAPTION>
                                                                Year Ended June 30,
                                                        --------------------------------------
(in thousands except per share data)                    1998           1997           1996
----------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>
BASIC

Income available to common shareholders ........        $12,858        $ 8,563        $ 8,165
Average common shares ..........................         11,464         10,968          9,947
Basic earnings per common share ................        $  1.12        $  0.78        $  0.82
                                                        =======        =======        =======


DILUTED

Income available to common shareholders ........        $12,858        $ 8,563        $ 8,165
Effect of dilutive securities:
  Convertible debentures .......................            736            736            765
                                                        -------        -------        -------
Diluted income available to common shareholders         $13,594        $ 9,299        $ 8,930

Average common shares ..........................         11,464         10,968          9,947
Effect of dilutive securities:
  Warrants .....................................             97             29             37
  Options ......................................            374            179            217
  Convertible debentures .......................          1,311          1,311          1,368
                                                        -------        -------        -------
Diluted average common shares ..................         13,246         12,487         11,569

Diluted earnings per common share ..............        $  1.03        $  0.74        $  0.77
                                                        =======        =======        =======
</TABLE>

NOTE 11.  RELATED PARTY TRANSACTIONS

The Company's principal executive offices located in Doylestown, Pennsylvania
are leased from a party related to a shareholder and director of the Company.
The lease commenced in December 1994 and the Company recorded rent expense under
this lease of $322,229, $242,510, and $222,750 for the years ended June 30,
1998, 1997, and 1996, respectively.

At June 30, 1998 and 1997, receivables in installments from investees totaled
$6.6 million and $9.5 million, respectively.


As of June 30, 1998 and 1997, the Company had loans receivable from Company
officers totaling $550,000 and $505,000, respectively.

As of June 30, 1998 and 1997, the Company had investments in preferred stock and
dividends of DIS totaling $5.1 million.

As of June 30, 1998 and 1997, the Company had convertible subordinated notes at
an unamortized cost totaling $9.6 million to related parties.

NOTE 12.  COMMITMENTS AND CONTINGENCIES

FACILITY LEASES - The Company leases its facilities under noncancelable
operating leases with terms in excess of one year. The lease for the Company's
principal facility expires in August 2007. Rent expense for the years ended June
30, 1998, 1997 and 1996 amounted to $883,000, $673,000 and $655,000,
respectively. Future minimum lease payments under these leases are as follows:


                                       41
<PAGE>   42
<TABLE>
<CAPTION>
                                                                     Future Minimum
Year Ending June 30,                                                 Lease Payments
<S>                                                                  <C>
1999 ............................................                     $1,186,000
2000 ............................................                      1,316,000
2001 ............................................                      1,126,000
2002 ............................................                      1,125,000
2003 ............................................                      1,034,000
Thereafter ......................................                      2,152,000
                                                                      ----------
   Total ........................................                     $7,939,000
                                                                      ==========
</TABLE>

CONTINGENCIES - Under certain limited recourse agreements, the Company may be
required to provide for losses incurred on uncollected lease and medical
receivables previously securitized. At June 30, 1998, the maximum contingent
liability under the limited recourse agreements amounted to $51.9 million. This
contingent liability, however, could be offset by any proceeds received from the
resale or remarketing of available equipment financed under the agreements or
outstanding medical receivables collected.

The Company has a revolving $180 million interim securitization facility with an
option to sell to it certain equipment loans and leases. As of June 30, 1998,
$80.1 million of equipment loans and leases were being serviced for this
facility. The Company's obligations under this facility include servicing of the
assets and assisting the owner in the securitization of the assets, if the owner
chooses to securitize.

The Company has credit lines of $7.0 million available from four foreign banks,
of which $4.4 million was used as of June 30, 1998 to provide for the future
payment of guarantees made by DVI Europe, a branch office of DVI Financial
Services. The Company records the present value of the future obligation as an
asset within receivables and corresponding liability within other liabilities at
the date the guarantee is assumed. At June 30, 1998 the present value recorded
for these guarantees was $3.0 million, while the estimated future value was $4.3
million.

The Company has receivables from and investments in DIS aggregating $13.3
million and $13.8 million at June 30, 1998 and 1997. DIS received a qualified
going concern opinion from its auditors on its December 31, 1997, 1996 and 1995
financial statements. Management has reviewed the value of the collateral that
secures the loans to DIS and is confident that there is sufficient collateral to
cover loans outstanding.

LITIGATION - The Company is involved in litigation both as a plaintiff and
defendant in matters arising out of the Company's normal business activities.
Management does not expect the outcome of these lawsuits to have a material
adverse effect on the consolidated financial statements of the Company.

As of June 30, 1998 the Company had loan commitments of $289.5 million not
funded.

NOTE 13.  BENEFIT PLANS

The Company maintains and administers an Employee Savings Plan ("Plan") pursuant
to Internal Revenue Code Section 401(k). The Plan provides for discretionary
contributions as determined by the Company's Board of Directors. The Company
contributed $60,000, $60,000, and $45,000 to the Plan during the years ended
June 30, 1998, 1997 and 1996, respectively.

NOTE 14.  ACQUISITIONS

On November 1, 1997, the Company acquired a healthcare-based merchant banking
group whose key services are private debt placement, loan syndication, bridge
financing, and mortgage loan arrangement for the long-term/assisted care and
specialized hospital markets. The group included J. G. Wentworth Partners, Inc.;
J. G. Wentworth Partners, LP; J. G. Wentworth Mortgage Funding, LP; and J. G.
Wentworth Securities, Inc. (collectively, "Wentworth"). The Company issued
84,011 shares of its common stock for the acquisition at a price of $18.45 per
share. The transaction was accounted for as a pooling of interests and
therefore, all prior financial statements presented have been restated as if the
merger took place at the beginning of such periods.


                                       42
<PAGE>   43
Separate results of operations for the periods prior to the merger are as
follows:

<TABLE>
<CAPTION>
                                      Four months ended      Year ended          Year ended
(In thousands of dollars)             October 31, 1997      June 30, 1997       June 30, 1996
---------------------------------------------------------------------------------------------
<S>                                   <C>                   <C>                 <C>
TOTAL FINANCE AND OTHER INCOME:

      DVI, Inc.                            $21,385            $ 55,971             $ 49,013
      Wentworth                                632                 363                   25
                                           -------            --------             --------
      Total                                $22,017            $ 56,334             $ 49,038
                                           =======            ========             ========

NET EARNINGS:

      DVI, Inc.                            $ 2,389            $  8,941             $  8,175
      Wentworth                                 12                (378)                 (10)
                                           -------            --------             --------
      Total                                $ 2,401            $  8,563             $  8,165
                                           =======            ========             ========
</TABLE>

In June 1998, the Company acquired for cash a partnership interest in and
certain assets of Third Coast Capital, L.L.C. ("TCC"), for $9.3 million. TCC is
a Chicago-based venture leasing operation, founded in 1996, and provides
asset-based financing to emerging growth companies for their key operating
assets through lease lines of credit and other financial structures. The
purchase price was allocated to individual assets based on estimates of their
fair market value and resulted in no goodwill. The acquired assets are included
in the Company's balance sheet for the year ended June 30, 1998 with no effect
on operating statements. Had the purchase of TCC occurred two years prior, its
revenue and net earnings would have had an immaterial effect on the consolidated
results of the Company's operations for fiscal years 1998 and 1997.

 NOTE 15.  ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

A summary of the estimated fair value of the Company's consolidated financial
instruments at June 30, 1998 and 1997 is presented below. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessary to interpret market data to develop the estimated fair
values. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

<TABLE>
<CAPTION>
                                                            Carrying        Estimated Fair
Year Ended June 30, 1998                                     Amount             Value
-------------------------------------------------------------------------------------------
<S>                                                       <C>               <C>
Assets:
  Receivable in installments
  (excluding investment in direct financing leases)...    $227,469,390        $227,603,558
Liabilities:
  Discounted receivables..............................    $342,120,099        $344,187,124
</TABLE>


<TABLE>
<CAPTION>
                                                           Carrying         Estimated Fair
Year Ended June 30, 1997                                    Amount              Value
-------------------------------------------------------------------------------------------
<S>                                                       <C>               <C>
Assets:
  Receivable in installments
  (excluding investment in direct financing leases)...    $236,843,000        $236,532,000
Liabilities:
  Discounted receivables..............................    $317,863,000        $294,729,000
</TABLE>

The carrying values of cash and cash equivalents, restricted cash and cash
equivalents, amounts due from portfolio sales, notes collateralized by medical
receivables, accounts payable, accrued expenses and other liabilities,
borrowings under warehouse facilities, senior notes, other debt and convertible
subordinated notes approximate fair values at June 30, 1998 and 1997.

The methods and assumptions used to estimate the fair values of other financial
instruments are summarized as follows:


                                       43
<PAGE>   44
RECEIVABLE IN INSTALLMENTS: The fair value of the financing contracts was
estimated by discounting expected cash flows using the current rates at which
loans of similar credit quality, size and remaining maturity would be made as of
June 30, 1998 and 1997. The Company believes that the risk factor embedded in
the entry-value interest rates applicable to performing loans for which there
are no known credit concerns results in a fair valuation of such loans on an
entry-value basis. In accordance with SFAS 107, the Company has excluded
receivables from lease contracts of approximately $349.3 million and $252.9
million as of June 30, 1998 and 1997, respectively, from the receivable in
installments fair value calculation.

DISCOUNTED RECEIVABLES: The fair value of discounted receivables, related to the
securitization of leases and notes, was estimated by discounting future cash
flows using rates currently available for debt with similar terms and remaining
maturities.

The fair value estimates presented herein were based on information available as
of June 30, 1998 and 1997. Although the Company is not aware of any factors that
would significantly affect the estimated fair values, such values have not been
updated since June 30, 1998; therefore, current estimates of fair value may
differ significantly from the amounts presented herein. All instruments held by
the Company are classified as other than trading.

DERIVATIVE ACTIVITY:

<TABLE>
<CAPTION>
                                                 June 30, 1998                                  June 30, 1997
                             -----------------------------------------------   ---------------------------------------------------
                                Notional             Fair         Deferred        Notional           Fair          Deferred
                                 Amount              Value     Gains/(Losses)      Amount            Value       Gains/(Losses)
----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>                  <C>          <C>            <C>                  <C>           <C>
Swaps.................       $ 23.5 million       $ (21,397)         -        $  23.4 million      $ 115,000          -
Options...............       $150.0 million       $(107,938)    $(443,559)    $  25.0 million      $ (49,000)         -
Forwards:
  Treasury locks......              -                  -             -        $  70.0 million      $  75,000          -

Foreign exchange currency
  forward.............       DM 7.5 million       $  36,650     $ (10,000)             -                 -            -
</TABLE>

The Company uses off-balance sheet derivative financial instruments to hedge
interest rate risk. The Company's interest rate risk is associated with variable
rate funding of the fixed rate loans and the timing difference between temporary
funding through the warehouse and permanent funding through either
securitization or sale. The derivatives are used to manage three components of
this risk: interest sensitivity adjustments, pricing of anticipated loan
securitizations and sales, and interest rate spread protection. Credit risk
exists for these derivative instruments in the form of the failure of the
counterparty to make required payments in favor of the Company. The risk is
minimized through the use of counterparties with investment grade ratings. The
fair value of the derivative instruments is derived from dealer quotes.

SWAPS:

Swaps are used to hedge the interest rate spreads for various loan sale
facilities where cash flows from loans are fixed rate, but the borrowing costs
are variable. The interest rate swaps pay fixed rates of 5.38% to 5.84% and
receive either a floating rate of the H-15 composite commercial paper rate or
six-month LIBOR. The swaps mature through October 2004.

FORWARDS AND OPTIONS:

Treasury lock agreements, which are forward contracts, and option collars are
used to hedge the interest rate risk associated with anticipated securitizations
and/or sales. These instruments lock in a specific rate, or a narrow range of
rates, of Treasury notes identified to have a comparable maturity to the average
life of the anticipated transaction in order to fix the rate either over the
life of the securitization or to fix the sale price as applicable. The open
positions at June 30, 1998 are for securitizations and sales expected to occur
in the first and second quarters of fiscal 1999. In 1998, the Company deferred
$1.3 million in losses associated with transactions securitized compared with
$1.6 million in deferred losses in 1997. The Company recognized losses on loan
sales of $243,000, $132,000 and $27,000 for years ended June 30, 1998, 1997 and
1996, respectively.

FOREIGN EXCHANGE FORWARD CONTRACTS - The Company has international operations
and foreign currency exposures at some of these operations due to lending in
currencies other than the local currency. As a general practice, the Company has
not hedged the foreign exchange exposure related to either the translation of
overseas earnings into U.S. dollars or the translation of overseas equity
positions


                                       44
<PAGE>   45
back to U.S. dollars. A foreign exchange forward contract is used to hedge the
amount receivable to the U.S. parent for a specific portfolio in Deutsche Marks.
At June 30, 1998, the Company had 7.5 million Deutsche Marks in forward
contracts. Foreign exchange forward contracts are accounted for as hedges to the
extent they are designated, and are effective as hedges of foreign currency. The
net gain/loss deferred at June 30, 1998 is immaterial.


NOTE 16.  QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the quarterly results of operations for the fiscal
years ended June 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                                   Fiscal 1998
                                                                                Three Months Ended
(in thousands, except per share data)                    September 30      December 31        March 31          June 30
-----------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>               <C>                <C>               <C>
Finance and other income                                    $16,134           $18,477          $19,486           $20,258
Net finance income                                            9,530            11,477           11,566            13,547
Earnings before minority interest, provision for
   income taxes and equity in net loss of investees           4,752             5,338            5,488             7,314
Net earnings                                                  2,590             3,014            3,365             3,889
Net earnings per common and common
   equivalent share - basic                                $   0.23          $   0.27         $   0.30          $   0.32
                                                           ========          ========         ========          ========
Net earnings per common and common
   equivalent share - diluted                              $   0.22          $   0.25         $   0.27          $   0.29
                                                           ========          ========         ========          ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                   Fiscal 1997
                                                                                Three Months Ended
(in thousands, except per share data)                    September 30      December 31        March 31          June 30
-----------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>               <C>                <C>               <C>
Finance and other income                                    $12,616           $13,690          $15,108           $14,920
Net finance income                                            6,647             7,632            7,769             9,930
Earnings before minority interest, provision for
   income taxes and equity in net loss of investees           3,521             3,748            3,734             4,472
Net earnings                                                  2,001             2,199            1,986             2,377
Net earnings per common and common
   equivalent share - basic                                $   0.18          $   0.20         $   0.18          $   0.22
                                                           ========          ========         ========          ========
Net earnings per common and common
   equivalent share - diluted                              $   0.17          $   0.19         $   0.17          $   0.21
                                                           ========          ========         ========          ========
</TABLE>

NOTE 17. SUBSEQUENT EVENTS

On July 21, 1998 (the "Filing Date"), Allegheny Health Education and Research
Foundation and its affiliates ("Allegheny") filed for protection under Chapter
11 of the United States Bankruptcy Code. As of the Filing Date, the Company had
receivables from Allegheny of $14,401,000 arising from the rental by the Company
of equipment owned by the Company pursuant to fair market value leases. As of
this date, no events have occurred and no facts have been discovered by the
Company with respect to the Company's receivables from Allegheny that would
indicate that any material diminution in the value of these receivables is
likely.

On September 15, 1998, the Company announced its intention to acquire for cash
substantially all the assets and retain all the employees of Affiliated Capital
Corporation ("Affiliated") from Irwin Financial Corporation. The purchase, as
well as the assets' ultimate purchase price which will approximate $74.0
million, is subject to the completion of due diligence, certain governmental
approvals, and the execution of a definitive purchase agreement. The purchase
price will be allocated to the assets on the basis of their estimated fair
market value and is expected to result in intangible assets of approximately
$6.0 million which will be amortized on a straight line basis over a 15-year
period. The purchase is expected to close near the end of DVI's first fiscal
quarter. Affiliated is a Chicago-based medical equipment leasing company,
founded 15 years ago, and employs 39 people. It operates in five regional sales
offices and generates $50.0 million of new lease transactions a year through 27
vendor relationships. Affiliated has approximately 8,700 customer contracts
involving doctors and dentists and the average cost of the new leased equipment
is $15,000. Had the purchase of Affiliate occurred at the beginning of fiscal
1998 the Company's total finance and other income would have increased by $9.1
million and net earnings would have decreased by $49,000.

                                       45
<PAGE>   46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

Not Applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding the Company's directors is incorporated herein by
reference to the Company's definitive proxy statement filed not later than
October 28, 1998, with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
Information regarding the Company's Executive Officers is set forth in Part I of
this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-K is incorporated herein by
reference to the Company's definitive proxy statement filed not later than
October 28, 1998 with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 403 of Regulation S-K is incorporated herein by
reference to the Company's definitive proxy statement filed not later than
October 28, 1998, with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 404 of Regulation S-K is incorporated herein by
reference to the Company's definitive proxy statement filed not later than
October 28, 1998, with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:

     (1) Financial Statements:

         See Index to Consolidated Financial Statements included as part of this
Form 10-K on Page 23.

     (2) Financial Statement Schedules:

<TABLE>
<CAPTION>
              SCHEDULE                                                                   PAGE
              NUMBER                    DESCRIPTION                                     NUMBER
              ------                    -----------                                     ------
<S>           <C>                       <C>                                             <C>
               II.                      Amounts Receivable from Related Parties .......   48
</TABLE>

         All other schedules are omitted because of the absence of conditions
         under which they are required or because all material information
         required to be reported is included in the consolidated financial
         statements and notes thereto.

     (3) Exhibits:

         See Index to Exhibits of this Form 10-K on Pages 49-50.

(b)  REPORTS ON FORM 8-K:

     There were no reports on Form 8-K filed during the fourth quarter of the
fiscal year ended June 30, 1998.

                                       46
<PAGE>   47
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                      DVI, INC.
                                      (Registrant)



Date:   September 25, 1998            by /S/ MICHAEL A. O'HANLON
                                         --------------------------------------
                                         Michael A. O'Hanlon
                                         President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                        Title                                   Date
---------                                        -----                                   ----
<S>                                              <C>                                     <C>
Principal Financial Officer:

/S/ STEVEN R. GARFINKEL
-----------------------------
Steven R. Garfinkel                              Executive Vice President and
                                                 Chief Financial Officer                 September 25, 1998


Principal Accounting Officer:

/S/ JOHN P. BOYLE
-----------------------------
John P. Boyle                                    Vice President and
                                                 Chief Accounting Officer                September 25, 1998
</TABLE>




<TABLE>
<CAPTION>
Directors                         Date                                                             Date
---------                         ----                                                             ----
<S>                               <C>                            <C>                               <C>
/S/ GERALD L. COHN                September 25, 1998             /S/ MICHAEL A. O'HANLON           September 25, 1998
-----------------------------                                    -----------------------------
Gerald L. Cohn                                                       Michael A. O'Hanlon


/S/ WILLIAM S. GOLDBERG           September 25, 1998             /S/ HARRY T. J. ROBERTS           September 25, 1998
-----------------------------                                    -----------------------------
William S. Goldberg                                                  Harry T. J. Roberts


/S/ JOHN E. MCHUGH                September 25, 1998             /S/ NATHANIEL SHAPIRO             September 25, 1998
-----------------------------                                    -----------------------------
John E. McHugh                                                       Nathaniel Shapiro
</TABLE>

                                       47
<PAGE>   48
                           DVI, INC. AND SUBSIDIARIES

              SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES


<TABLE>
<CAPTION>
                                  BALANCE AT
                                   BEGINNING                                            BALANCE AT
NAME OF DEBTOR                      OF YEAR          ADDITIONS         DEDUCTIONS       END OF YEAR
--------------                      -------          ---------         ----------       -----------
<S>                               <C>               <C>               <C>               <C>
Year ended June 30, 1998-

Michael A. O'Hanlon .....          $285,000          $ 10,000          $     --          $295,000
Mark H. Idzerda .........           220,000                --                --           220,000
Anthony J. Turek ........                --            35,000                --            35,000
                                   --------          --------          --------          --------
Total ...................          $505,000          $ 45,000          $     --          $550,000
                                   ========          ========          ========          ========

Year ended June 30, 1997-

Michael A. O'Hanlon .....          $344,000          $     --          $ 59,000          $285,000
Mark H. Idzerda .........                --           220,000                --           220,000
                                   --------          --------          --------          --------
Total ...................          $344,000          $220,000          $ 59,000          $505,000
                                   ========          ========          ========          ========

Year ended June 30, 1996-

    Michael A. O'Hanlon .          $ 59,000          $285,000          $     --          $344,000
                                   ========          ========          ========          ========

Year ended June 30, 1995-

    Michael A. O'Hanlon .          $ 20,000          $ 39,000          $     --          $ 59,000
                                   ========          ========          ========          ========

Year ended June 30, 1994-

    Michael A. O'Hanlon .          $     --          $ 20,000          $     --          $ 20,000
                                   ========          ========          ========          ========
</TABLE>

                                       48
<PAGE>   49
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                         DESCRIPTION
-----------                         -----------
<S>               <C>
   1.1            Underwriting Agreement between the Underwriters and the
                  Company with respect to the Company's Common Stock.(1)

   1.2            Underwriting Agreement dated January 27, 1997 by and between
                  the Underwriters and the Company with respect to the Senior
                  Notes. (2)

   3.1            Certificate of Incorporation of the Company.(3)

   3.2            By-Laws of the Company and Amendment to By-Laws of the Company
                  dated April 17, 1996. (8)

   4.1            Form of Common Stock Certificate.(3)

   4.2            Form of Global Note representing the Senior Notes.(2)

   4.3            Indenture dated January 27, 1997 between the Company and the
                  Trustee.(2)

   4.4            First Supplemental Indenture dated January 30, 1997 with
                  respect to the Senior Notes between the Company and the
                  Trustee.(2)

   10.1           DVI Financial Services Inc. Employee Savings Plan.(4)

   10.2           Amended 1986 Incentive Stock Option Plan.(4)

   10.3           Purchase Agreement dated as of October 22, 1991, by and among
                  DMR Associates, L.P., HIS Acquisition, Inc. And DVI Financial
                  Services Inc.(5)

   10.4           Direct Stock Option Agreements, dated as of October 16, 1990,
                  between the Company and each of the Company's directors other
                  than Mr. Higgins.(5)

   10.5           Amended and Restated Letter Agreement dated December 15, 1991,
                  between the Company and W.I.G. Securities Limited Partnership
                  regarding investment banking services.(5)

   10.6           Warrant dated April 27, 1992, executed by the registrant on
                  behalf of W.I.G. Securities Limited Partnership.(5)

   10.7           Note Purchase Agreement among the Registrant and the
                  Purchasers listed therein, dated as of June 21, 1994.(7)

   10.8           Amendment No. 1 to Note Purchase Agreement among the
                  Registrant and the Purchasers listed therein, dated as of
                  November 1994.(1)

   10.9           Amendment No. 1 to the MEFC Agreement dated as of June , 1995.
                  (1)

   10.10          Joint Venture Agreement dated November 10, 1995, among Philips
                  Medical Systems International B.V., DVI, Inc. and Philadelphia
                  International Equities, Inc.(8)

   10.11          Interim Loan and Security Agreement, dated as of February 20,
                  1997, between Prudential Securities Credit Corporation and DVI
                  Financial Services Inc.(9)

   10.12          Second Amended and Restated Loan Agreement dated February 28,
                  1997 by and among DVI Financial Services, Inc., the banks
                  signatory thereto, Fleet Bank, N.A. and CoreStates Bank, N.A.,
                  as Pre-Funding Lenders and Fleet Bank, N.A., as agent.(9)

   10.13          Loan and Security Agreement, dated as of January 29, 1997,
                  between Prime Bank and the Company.(9)

   10.14          Secured Credit Line Agreement, dated as of August 22, 1996,
                  between DVI Business Credit Receivables Corp. II, DVI Business
                  Credit Corporation and CS First Boston Mortgage Capital
                  Corp.(10)

   10.15          Loan and Security Agreement, dated as of September 6, 1996,
                  between DVI Financial Services Inc. and Lehman Commercial
                  Paper Inc.(10)

   10.16          Amendment, dated as of June 30, 1997, to Interim Loan and
                  Security Agreement between Prudential Securities Credit
                  Corporation and DVI Financial Services Inc.(10)

   10.17          Second Amendment, dated as of July 31, 1997, to Interim Loan
                  and Security Agreement between Prudential Securities Credit
                  Corporation and DVI Financial Services Inc.(10)

   10.18          Shareholders' Agreement dated as of April 27, 1998 by and
                  among DVI International, Inc. (the Company's wholly-owned
                  subsidiary), International Finance Corporation, Nederlandse
                  Financierings-Maatschappijvoor Ontwikkelinglanden N. V.,
                  Philadelphia International Equities Inc., and MSF Holding Ltd.
                  (11)

   10.19          Share Retention, Non-Competition and Put Option Agreement
                  dated April 27, 1998 among DVI, Inc., International Finance
                  Corporation, MSF Holding Ltd., Cadilur S. A., Estolur S. A.,
                  and Natuler S. A. (11)
</TABLE>

                                       49
<PAGE>   50
<TABLE>
<CAPTION>
<S>               <C>
   10.20          Share Retention, Non-Competition and Put Option Agreement
                  dated April 27, 1998 among DVI, Inc., Nederlandse
                  Financierings-Maatschappij voor Ontwikkelinglanden N. V, MSF
                  Holding Ltd., Cadilur S. A., Estolur S. A., and Natuler S. A.
                  (11)

   10.21          Guaranty Agreement dated as of April 27, 1998 by DVI, Inc. in
                  favor of Cadilur S. A. and Natuler S. A. (11)

   10.22          Limited Partnership Interest Purchase Agreement dated as of
                  June 30, 1998 by and among Cargill Leasing Corporation, Third
                  Coast SPC-I, L.L.C., Third Coast GP-I, and DVI Financial
                  Services Inc. (11)

   21             Subsidiaries of the Registrant.

   24             Power of Attorney.(4)
</TABLE>

-------------
(1)    Filed previously as an Exhibit to the Company's Registration Statement on
       Form S-1 (Registration No. 33-60547) and by this reference is
       incorporated herein.

(2)    Filed previously as an Exhibit to the Company's Current Report on Form
       8-K dated January 27, 1997 and by this reference incorporated herein.

(3)    Filed as an Exhibit to the Company's Registration Statement on Form S-3
       (Registration No. 33-84604) and by this reference incorporated herein.

(4)    Filed previously as an Exhibit to the Company's Registration Statement on
       Form S-18 (Registration No. 33-8758) and by this reference incorporated
       herein.

(5)    Filed previously as an Exhibit to the Company's Form 10-K (File No.
       0-16271) for the year ended June 30, 1990 and by this reference
       incorporated herein.

(6)    Filed previously as an Exhibit to the Company's Registration Statement on
       Form S-2 (Registration No. 33-46664) and by this reference is
       incorporated herein.


(7)    Filed previously as an Appendix to the Company's Consent Statement dated
       as of December 29, 1994 and by this reference is incorporated herein.

(8)    Filed previously as an Exhibit to the Company's Form 10-K (File No.
       0-16271) for the year ended June 30, 1996 and by this reference is
       incorporated herein.

(9)    Filed previously as an Exhibit to the Company's Form 10-Q for the quarter
       ended March 31, 1997 and by this reference is incorporated herein.

(10)   Filed previously as an Exhibit to the Company's Form 10-K (File No.
       1-11077) for the year ended June 30, 1997 and by this reference is
       incorporated herein.

(11) Filed herewith.

                                       50