BERTHEL FISHER & CO LEASING INC, 10KSB, 1997-03-31

BERTHEL FISHER & CO LEASING INC
10KSB, 1997-03-31
EQUIPMENT RENTAL & LEASING, NEC

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<PAGE> 1

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal year ended: December 31, 1996

Commission file number: 33-98346C

BERTHEL FISHER & COMPANY LEASING, INC.
(Name of small business issuer in its charter)

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IOWA 43-1312639
------------------------------ ---------------------------------
State or other jurisdiction of (IRS Employer Identification No.)
</TABLE>

incorporation or organization)

425 SECOND STREET SE, SUITE 600, CEDAR RAPIDS, IA 52401
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (319) 365-2506

Securities registered under Section 12(g) of the Exchange Act:

SERIES A SUBORDINATED 5 YEAR NOTES
SERIES B SUBORDINATED 8 YEAR NOTES

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]

Issuer's revenues for its most recent fiscal year were: $3,571,952

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 21, 1996, excluding the reported beneficial ownership of
all directors, officers and beneficial owners of more than 5% of the
registrant's voting stock, was $-0-. The Common Stock of the registrant,
which is the registrant's only voting stock, is not actively traded or
regularly quoted.

The number of shares outstanding of the registrant's Common Stock as of March
21, 1997 was 400,000.

Transitional Small Business Disclosure Format Yes No X

The exhibit index may be found on page 42 herein.

<PAGE> 2

BERTHEL FISHER & COMPANY LEASING, INC.

1996 FORM 10-KSB

TABLE OF CONTENTS

PAGE

PART I

<TABLE>
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Item 1. Business ......................................... 3
Item 2. Properties ....................................... 6
Item 3. Legal Proceedings ................................ 6
Item 4. Submission of Matters of a Vote of Shareholders .. 6
</TABLE>

PART II

<TABLE>
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Item 5. Market for the Registrant's Common
Equity and Related Stockholders Matters .......... 7
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations .... 9
Item 7. Financial Statements and Supplementary Data ...... 14
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ........... 37
</TABLE>

PART III

<TABLE>
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Item 9. Directors and Executive Officers of the
Registrant ....................................... 37
Item 10. Executive Compensation ........................... 39
Item 11. Security Ownership of Certain Beneficial
Owners and Management ............................ 40
Item 12. Certain Relationships and Related Transactions ... 41
Item 13. Exhibits and Reports on Form 8-K ................. 42

SIGNATURES........................................ 43
</TABLE>

<PAGE> 3

PART I

ITEM 1. BUSINESS

The Company was incorporated under the laws of the State of Iowa on
February 5, 1988, as a wholly owned subsidiary of Berthel Fisher & Company
("BFC"). The Company has been generally engaged in the equipment leasing
business since its inception in 1988, continuing the operations of the leasing
division that had been operated by BFC during 1986 and 1987. The address of
the Company is 425 Second Street, SE, Suite 600, Cedar Rapids, Iowa 52401. The
Company's telephone number is (319) 365-2506.

Recent changes in Management

In October, 1996, Mr. David R. Harvey resigned his position as a Director
and as the Company's President. He had served as President since 1993 and as
Executive Vice President from 1989 to 1993. In October, 1996, Mr. R. Brooks
Sherman, the Company's Treasurer, Chief Financial Officer and a Director also
resigned. Mr. Thomas J. Berthel, who has served as the Chief Executive Officer
since 1994 and as President from the inception of the Company to 1993, was
elected to serve as President. Ms. Nancy L. Lowenberg has been elected as Vice
President and Chief Operating Officer beginning January 2, 1997. Although Ms.
Lowenberg has experience in the banking industry, she does not have experience
in the leasing industry. Mr. Ronald O. Brendengen has been elected Treasurer
and Chief Financial Officer. Mr. Dan Wegmann has been elected Controller.

General

The Company provides a variety of lease financing programs through two of
its divisions, the Telecommunications Group and the General Equipment Group.
Although the Company's operation is generally located in the Midwest, its lease
portfolio includes leases throughout the United States. As of December 31,
1996, the Company employed 13 full time employees.

The Telecommunications Group represents the largest percentage of the
business generated by the Company for its own portfolio and for its affiliates.
Since the Company's formation in 1988, approximately 90% of the leases and
finance contracts originated by the Company for itself and for its affiliates
has been in the Public Communications Industry. The Public Communications
Industry includes companies that provide independent private payphone services
and telecommunications services to hotels, universities, hospitals and inmate
confinement facilities. The Company's leasing and financing programs are
marketed primarily to end-users on a nationwide basis. The marketing involves
visiting in person with these end-users, direct mail campaigns, attending trade
shows and advertising in selected trade publications. In addition, the Company
works closely with, and receives referrals from manufacturers that provide
equipment to the Public Communications Industry. The Company does not have any
formal business agreements with manufacturers. The Company relies upon its
customers to select the equipment the customers desire to lease from the
Company, and does not seek to influence a customer's choice of equipment.
Although the Company has provided leasing and financing programs of
general equipment since 1988, the General Equipment Group was not formally
established until 1995. This division specializes in providing lease financing
on equipment in the $5,000 to $250,000 range. This lease financing is
primarily marketed to manufacturers and vendors of equipment in this targeted
dollar range. Once a manufacturer or vendor relationship is established the
manufacturer or vendor refers their customers to the Company for the lease or
financing of specific equipment. The Company has working relationships, but no
formal agreements, with several manufacturers and vendors. The lease financing
programs are marketed to manufacturers and vendors by calling directly on those
companies, attending industry specific trade shows, and utilizing direct mail
and advertising. The Company has two salespeople in this division. The
General Equipment Group currently has relationships with two banks that permit
the Company and the banks to

<PAGE> 4

ITEM I. BUSINESS (CONTINUED)

work together to offer leasing to the bank's customers. The Company handles
all of the administration of leasing programs for the banks. It negotiates the
lease with the customer, closes the transaction and does the billing and
collections. The participating bank normally provides up to 80% of the funding
for these specific lease transactions. In selected transactions the bank will
receive a referral fee, but will not provide any of the funding for the
transaction. The Company has recently expanded its business in the ATM
industry. In 1995, the Company began a relationship with a manufacturer of ATM
cash dispensing equipment. The distributors for this manufacturer refer their
lease applicants to the Company for approval. If approved, the distributors
work together with their customers and the Company to complete the lease
transaction and install the ATM equipment. Lease customers are typically
owners of convenience stores, restaurants, bars or gas stations. The Company
has booked lease transactions through 32 distributors throughout the country.
The average transaction size is $11,000. Because the transaction size is
small, the Company limits its ATM business to credit worthy customers, and
relies heavily on background checks and personal guarantees. The Company has
originated over $4,000,000 of ATM business. This portion of the Company's
business has increased gradually, and represented approximately 22% of the
Company's lease and notes receivalbe portfolio as of December 31, 1996.
Approximately 42% of the Company's lease portfolio was comprised of
telecommunications equipment as of December 31, 1996.

Since 1991 the Company has sponsored two limited partnerships,
Telecommunications Income Fund IX, L.P. ("TIFIX") and Telecommunications Income
Fund X, L.P. ("TIFX"), whose purpose is to own leasing contracts. As the
sponsor and general partner of these partnerships, the Company has originated
and managed lease portfolios owned by the partnerships. The partnerships
benefit from the ownership of the portfolio of leases generated by the Company,
and the Company has been compensated for its efforts by receipt from the
partnerships of fees for origination of lease contracts, fees for management of
the lease portfolios during the partnerships' operating phase and a general
partner's interest.

The Company has certain conflicts of interest, including conflicts with
its parent company, Berthel Fisher & Company. The Company has addressed these
conflicts by establishing a board of directors that includes independent
directors. The Board addresses conflicts carefully, with a view to having
contractual relationships between the Company and its parent meet reasonable
standards that would be imposed if the Company were contracting with unrelated
third parties. The Company has the fiduciary duty of a general partner with
respect to TIFIX and TIFX. The main conflict between the Company and these
limited partnerships exists because the Company has a duty to supply lease
contracts to these partnerships to utilize cash generated for investment by the
partnerships. If there are insufficient lease contracts, in order to meet its
fiduciary duty to the partnerships, the Company will originate leases for the
partnerships before it originates leases for its own portfolio.

From 1995 through December, 1996, instead of sponsoring additional funds
such as TIFIX and TIFX, the Company pursued a business plan that focused on
originating leases and finance contracts for the Company's own portfolio while
continuing to provide lease originations to utilize cash available for lease
originations in TIFIX and TIFX. In December, 1996, primarily because the
Company did not have sufficient cash to continue implementing this plan, the
Board of Directors turned its efforts to re-establish the business plan that
the Company followed prior to 1995, i.e., to sponsor a fund such as TIFIX or
TIFX for which it will originate leases from which the Company will derive
management fees and origination fees. The Company will continue to originate
leases for its own portfolio.
The telecommunications industry, particularly the pay telephone and long
distance facets of the industry, is heavily regulated by the Federal
Communications Commission and by various state public utility commissions.
Regulation is not directed at the ownership or leasing of telecommunications
equipment, but is focused primarily on the business of the Company's customers
that operate in the telecommunications industry. Generally, regulation affects
rates that can be charged and the relationship of the regional Bell operating
companies ("RBOC's") to the rest of the pay telephone industry. Federal
legislation signed by the President in February, 1996, included many provisions
that affect positively the
<PAGE> 5
ITEM 1. BUSINESS (CONTINUED)

activities of the Company's customers who are independent pay telephone
providers. These provisions include the following major points: (i) generally
restrict the RBOC's from discriminating against other private pay telephone
providers, (ii) prohibit the RBOC's from subsidizing their payphone operations
from local exchange and exchange access revenue, (iii) compensate all pay
telephone providers for all completed interstate and intrastate calls,
including subscriber 800 calls, and (iv) pre-empt conflicting state
regulations. The FCC has proposed regulations affecting long distance rates.
The majority of the customers of the Company are operating within the range of
rates proposed by the FCC. Some customers are below the proposed range and
will be able to increase their rates. Those customers whose rates exceed the
highest rates permitted by the FCC will reduce their rates, but management does
not expect such reductions to affect those customers' ability to make lease
payments.

The Company's results of operations depend in part upon its ability to
realize the residual equipment value reflected on its balance sheet. At the
inception of a direct finance lease, the Company estimates the fair market
value of the underlying equipment that would be obtained at the end of the
initial lease term. This estimate is based upon the Company's judgement, as
supported by data from the used equipment market, discussions with
manufacturers, and consultations with equipment users. The estimated residual
value is recorded on the Company's balance sheet. Residual values ascribed to
individual items of equipment depend upon various variables including, but not
limited to, the technical specifications of the equipment, potential
obsolescence of the equipment, performance and capabilities of the equipment,
the scientific and financial strength and reputation of the equipment's
manufacturer and the widespread availability of long-term maintenance for the
equipment.

Realization of residual values depends on many factors, several of which
are not within the Company's control, including general market conditions at
the time of the original contract's expiration, the cost of comparable new
equipment, the extent, if any, to which the equipment has become
technologically or economically obsolescent during the contract term and the
effects of any additional or amended government regulations. Although it is
possible that technological obsolescence could affect the residual value of
telecommunications equipment, the Company's experience is that obsolescence
does not have a significant effect on residual values. Telecommunications
equipment can generally be upgraded to current technology using software or
hardware enhancements that can be installed on a cost effective basis.

Upon the expiration of an equipment lease contract for which a residual
value has been recorded, the original lease customer will (i) purchase the
equipment outright, (ii) extend the lease for an additional term, or (iii)
return the equipment to the company. Should the equipment be returned to the
Company, the Company generally seeks to sell or re-lease it. At the end of the
initial lease term, when the equipment is either sold or re-leased, the amount
by which the net proceeds exceed or fall short of the residual value is
recorded as a gain or loss, respectively. When equipment for which a gain has
been recorded is re-leased, the Company recognizes the gain ratably over the
term of the new lease.

To date the Company's primary source of funding has been its revolving
credit line. At November 30, 1996, the Company had a $10,000,000 revolving
credit line (the "Credit Agreement") with Firstar Bank Milwaukee, N.A.
("Firstar"), which was increased to $11,000,000 in December, 1996. As of
December 31, 1996, $540,956 was available under this line. The revolving
credit line can be terminated by Firstar upon the giving of ninety days notice.
In addition, the Company has $2,750,000 in fixed rate and long term credit
lines from two other banks.

<PAGE> 6

ITEM 1. BUSINESS (CONTINUED)

between the financing interest rate and the rates of return on a certain
portfolio of its lease portfolio but also to better utilize its revolving
credit line to write new lease business. At December 31, 1996, the Company had
outstanding borrowings of $2,273,632 from various banks in fixed rate loan
transactions.

In June, 1996, the Company began raising funds pursuant to a registration
statement on Form SB-2 filed with the Securities and Exchange Commission. The
Company terminated sales of the Company's Series A Subordinated 5 Year Notes
with detachable warrants and sales of Series B Subordinated 8 Year Notes with
detachable warrants (collectively the "Notes") in October after the Company
had sold $3,001,000 of the Notes. Series A Notes pay interest on a monthly
basis at an annual rate of 9.5% and are due 5 years from issuance. Series B
Notes pay interest on a monthly basis at an annual rate of 10% and are due 8
years from issuance. The termination of the sales of the notes was deemed
necessary by the Company as it pursued its plans to slow the growth of the
Company to better match its funding capacity.

The Company has not identified any single major competitor of the Company
in the Public Communications Industry. Banks are competitors on a local basis
for the leasing business of individual companies, and many other sources of
capital are used by business. The leasing industry is very capital intensive,
and banks limit the amount of credit they will provide to any one borrower.
Therefore, management believes that in many cases the Company is able to
provide lease financing to customers after customers reach their limit with
their normal bank lenders.

Management believes that its experience in the telecommunications industry
permitted it to compete favorably with other leasing companies that provide
lease financing. This experience allowed the Company to analyze lease
opportunities more quickly and thoroughly than its competition and to propose
lease terms that were advantageous to the Company. The Company's experience in
the telecommunications market enabled it to write leases that other lease
companies may decline because of their lack of experience in analyzing the
collateral and other factors that effect the efficacy of lease opportunities.
The Company uses salesmen and its managerial staff to find potential lease
candidates, and it receives a significant portion of its lease opportunities as
a result of its reputation for providing lease financing and advertising that
it places in telecommunications industry publications. There is aggressive
competition in the general equipment leasing market, and the Company expects to
meet that competition by providing competitive lease rates and service.

ITEM 2. PROPERTIES

The Company's headquarters are located in downtown Cedar Rapids, Iowa.
The premises consist of approximately 4,490 square feet, leased for a period of
five years at a rental of $4,864 per month.

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ITEM 3. LEGAL PROCEEDINGS
-----------------------------------------------

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
---------------------------------------------
</TABLE>

No matters were submitted to a vote of shareholders through the
solicitation of proxies or otherwise during the period covered by this report.

<PAGE> 7

PART II

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

There is no public trading market for any of the Company's debt or equity
securities.

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Number of Number of
Shareholders at Shares Outstanding
Title of Class December 31, 1996 at December 31, 1996
----------------------------- ----------------------------------------

Class A Common 1 400,000
Class B Nonvoting Convertible 31 75,500
Series A Preferred 1 30,341
</TABLE>

The Company has never paid or declared any dividends on its Common Stock
and does not intend to pay dividends on its Common Stock in the foreseeable
future.

The Class B Stock carries a 12% noncumulative dividend limited to 25% of
the Company's income before taxes each year up to a maximum of $1.20 per share.
The Class B Stock is convertible to Class A Common Stock of the Company on a
one for one basis. The Class B Stock is redeemable at $10.00 per share for a
30 day period after the tenth anniversary of the issuance date (April 1990 to
December 1991) at the option of the holder. Class B Stock not redeemed during
that time is automatically converted to Class A Common Stock on a one for one
basis. The Company declared dividends on Class B Stock of $-0- in 1996, $-0-
in 1995, and $114,600 (12%) in 1996.

Securities sold within the past three years not registered under the Securities
Act:

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Date Title Amount Sold
- ---------------------- ----------------------------------------------------

12/31/96 Units consisting of Series A $485,457
Preferred Stock, "A" Warrants
and "B" Warrants

Sold to: Berthel Fisher & Company
Principal Underwriter: Berthel Fisher & Co. Financial Services, Inc.
</TABLE>

Berthel Fisher & Company subscribed for $500,000 of the Units. $264,980
was issued upon conversion of debt, $220,477 of which was issued upon the
contribution to the Company of restricted stock of a public company having a
value of $220,477.

Exemption from registration from the Securities Act of the Units was
claimed under Regulation D. The Units consisting of Series A Preferred Stock,
"A" Warrants and "B" Warrants was offered only to accredited investors.

SERIES A PREFERRED STOCK

The Company's undesignated Preferred Stock may be issued in one or more
series, to bear such title or designation as may be fixed by resolution of the
Board of Directors prior to the issuance of any shares thereof. Each series of
Preferred Stock will have such voting powers, if any, preferences, and other
rights as determined by the Board of Directors, with such qualifications,
limitations or restrictions as may be stated in the resolutions of the Board of
Directors adopted prior to the issuance of any shares of such series of
Preferred stock.

<PAGE> 8
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS (CONTINUED)

The Series A Preferred Stock is the first series of Preferred Stock
designated by the Board of Directors. The Board has no present plans to issue
any other series of Preferred Stock. However, purchasers of the Preferred
Shares should be aware that the holders of any series of the Preferred Stock
which may be issued in the future could have voting rights, rights to receive
dividends or rights to distribution in liquidation superior to those of holders
of the Preferred Shares or Common Stock, thereby diluting or negating the
voting rights, dividend rights or liquidation rights of the holders of the
Preferred Shares of Common Stock.

Dividends

Each Share of Series A Stock is entitled to cumulative annual dividends of
8% payable if, as and when declared by the Board of Directors on March 31, June
30, September 30, and December 31, with dividends to be distributed April 15,
July 15, October 15 and January 15. With respect to the first dividend to be
paid after issuance of a particular share of Series A Stock, the 8% dividend
shall be prorated from the date of issuance to the March 31, June 30, September
30, or December 31 immediately following such date of issuance. Unpaid
dividends will accumulate and be payable prior to the payment of dividends on
the Common Stock. Series A Stock does not participate in dividends declared on
Common Stock or any other class of stock issued by the Company.

Conversion Rights

Unless previously redeemed by the Company, the holders of shares of Series
A Preferred Stock are entitled at any time to convert each share of Series A
Preferred Stock into .875 share of Class A common stock. No fractional shares
of common stock will be issued but in lieu thereof the Company shall pay an
equivalent amount in cash.

A & B Warrants

Each "A" Warrant grants the holder of the "A" Warrant the right to
purchase one share of Class A Common Stock ("Common Stock") of the Company for
$12.00 per Share. Each "B" Warrant grants the holder of the "B" Warrant the
right to purchase one share of Common Stock of the Company for $14.00 per
share. The "A" Warrants and "B" Warrants may be referred to herein
collectively as the "Warrants".

Each "A" Warrant expires on April 30, 1998. An "A" Warrant may be
exercised at any time prior to its expiration date. From and after the
expiration date of each "A" Warrant, each "A" Warrant not theretofore exercised
shall be void and of no effect. Each "B" Warrant expires on April 30, 1999. A
"B" Warrant may be exercised at any time prior to its expiration date. From
and after the expiration date of each "B" Warrant, each "B" Warrant not
theretofore exercised shall be void and of no effect. Each Warrant may expire
on an earlier date, upon certain changes in control, in the event of an initial
public offering.

The exercise price with respect to each "A" Warrant is $12.00 per Share of
Common Stock. The exercise price with respect to each "B" Warrant is $14.00
per Share of Common Stock. A Warrant may be exercised by paying the exercise
price and surrendering the Warrant Certificate to the Company and its principal
office with the Election to Purchase form set forth on the Warrant Certificate
duly completed and exercised by the Holder. Upon exercise of a Warrant and
payment of the exercise price, the number of Shares of Common Stock as to which
the Warrant is exercised will be issued. The payment of the exercise price
must be made in full and in cash at the principal office of the Company.

<PAGE> 9

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

Total revenues for the year ended December 31, 1996 increased
approximately 12% over the same period in 1995. Total revenues in 1995
increased by approximately 6% over the same period in 1994. The increases are
attributable to increases in lease income, interest income and gains on early
termination of leases and notes receivable. Management and lease acquisition
fees the Company receives from the limited partnerships for which it serves as
general partner have declined approximately 37% from 1994 to 1995.

Lease and interest income have continued to increase as the Company's net
investment in direct financing leases and its notes receivable have increased
through the use of proceeds of its subordinated note offering and its line of
credit. Gains on early termination of leases have increased due to sales of
approximately $3.7 million of net investment in direct financing leases by the
Company in 1996 to provide the Company the capacity to continue to originate
new business. These sales generated a gain of $34,097 in 1996. The Company
sold $2 million of leases under similar circumstances in 1995 resulting in a
gain of approximately $90,000. Early termination of leases in 1996 resulted in
gains of $113,203 compared to losses of $10,126 on early terminations in 1995.

Management and lease acquisition fees represent fees paid to the Company
by TIFIX and TIFX. The Company earns management fees from TIFIX and TIFX based
upon lease rentals received by the partnerships. Management fees decreased
approximately $163,000 or 10% in 1996 compared to 1995 due primarily to early
termination of leases in 1996 as well as delinquent lease payments from lessees
in 1996. Lease acquisition fees were approximately $858,000 in 1994, $124,000
in 1995 and $0 in 1996. The Company earned lease acquisition fees equal to 4%
of the cost of equipment in leases originated for TIFIX and TIFX initial lease
originations. The acquisition fees were only payable to the Company on leases
originated and funded with original debt and equity funds of TIFIX and TIFX and
not on reinvested capital. The Company ceased earning acquisition fees from
TIFIX in 1994 and TIFX in April, 1995 when their respective original equity and
debt funds were fully utilized, and originations began to be funded with
reinvested capital.

The growth in the number of leases and finance contracts originated
required the Company to hire additional personnel, primarily in the sales,
credit and documentation areas. The increase in the number of personnel
resulted in an increase of $258,456 from $452,407 to $710,863, in employee
compensation in 1995 as compared to 1994, and an increase of $143,939 in
employee compensation in 1996 compared to 1995. The Company's primary business
has historically been in the telecommunications industry with a minor emphasis
in the General Equipment Division. In 1995, however, the Company increased the
size of its general equipment sales force from one to six. The dollar size of
each of the leases and finance contracts originated within the General
Equipment Division is typically smaller than those in the telecommunications
industry, and there exists more competition for the Company in this division.
Accordingly, the Company needed additional sales personnel and credit and
documentation personnel in order to manage the anticipated increased volume.

The Company pays its Parent one-half of the management fees it receives
from TIFIX and TIFX. The management fee income decrease from 1995 to 1996, as
discussed above has, therefore, resulted in a decrease in management fee
expense. The management fee expense increase from 1994 to 1995 is in direct
correlation to the increase in management fee income for the corresponding
period. The Parent company has agreed to forego its share of these management
fees beginning March 1, 1997. See "Outlook" below.

The sale in 1995 of alarm monitoring contracts resulted in the elimination
of associated costs of approximately $83,000.

<PAGE> 10

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------

Other general and administrative expenses increased $183,065 from 1995 to
1996 and $267,602 from 1994 to 1995. The primary reason for these increases
are due to the costs associated with managing the increased size of the direct
financing lease portfolio. The lease portfolio has grown from $6.5 million in
1994 to $9.9 million in 1996. The Company charged to expense in 1996
approximately $78,000 of securitization fees. These securitization costs were
associated with the Company's attempt to securitize its assets. Since a
definitive agreement could not be finalized, costs associated with the
securitization process were expensed.

Interest expense increased $505,108 in 1995 compared to 1994 and increased
$563,590 from 1995 to 1996. During 1994 the Company made the decision to raise
funds within the Company to originate the majority of its new lease and finance
contract business rather than to raise funds through the sponsorship of new
limited partnerships. In March 1995, therefore, the Company negotiated an
increased availability in its revolving line of credit from $2,800,000 to
$10,000,000. This increased line of credit provided the Company with the funds
necessary to increase its lease and financing contract portfolios during 1995
and 1996. See note number 5 in the Notes to Consolidated Financial Statements
for further information.

The Company's provision for possible losses increased $107,682 from
$67,457 in 1994 to $175,139 in 1995. The provision increased $417,735 from
$175,139 in 1995 to $592,874 in 1996.

Since the Company's inception in 1988, three of its customers have filed
for protection of the Bankruptcy Act while lease or finance transactions with
the Company were outstanding. These bankruptcies are discussed below. Because
of the potentially serious ramifications to the Company of a customer
bankruptcy, the Company strives to place itself in a position to be able to
avoid losses in a bankruptcy situation. The Company relies primarily on
personal guarantees and first security interests in equipment to ameliorate the
effects of bankruptcy. In lease or finance transactions involving pay
telephones, the Company also obtains agreements from the owners of pay
telephone locations that permit the Company to operate the pay telephones after
a default of the Company's customer. This allows the Company to obtain the
most protection possible for the ongoing operation of equipment.

The first of the Company's customers to file for protection of the
Bankruptcy Act was Value-Added Communications ("VAC"), which filed a petition
under Chapter 11 of the Bankruptcy Act on October 10, 1995 in the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division. At the
time VAC's petition for bankruptcy was filed, VAC had several leases with the
Company. Measured at December 31, 1995, VAC's leases had a net investment
balance of $927,731, which represented approximately 6.2% of the Company's
total net investment in leases and financing contracts. As a result of the
Company's secured position with respect to its VAC leases and because VAC's
leases had been guaranteed by a strong guarantor, the Company was able to
negotiate a settlement with VAC that resulted in the VAC leases being paid in
full and the equipment being leased to MCI Telecommunication Corporation. This
lease was subsequently sold.

The second of the Company's customers to file for protection of the
Bankruptcy Act is United Tele-Systems of Virginia, Inc. ("UTS"). UTS filed a
petition under Chapter 11 of the Bankruptcy Act on May 6, 1996 in the United
States Bankruptcy Court for the Eastern District of Virginia, Norfolk Division.
On May 22, 1996, UTS' petition in bankruptcy was dismissed. At the time UTS'
petition for bankruptcy was filed, UTS had a finance contract with the Company
having a balance of $431,839, which represented approximately 2.8% of the
Company's total net investment in leases and financing contracts. The Company
exercised its right to manage the assets (pay telephones) financed for UTS.
This equipment is currently being serviced for the Company under a short-term
management agreement. The Company's intent is to sell the equipment or lease
the equipment to a new lessee. Based on lower than expected offers to purchase
the pay telephone equipment, management has established a specific reserve of
$324,000. The Company and UTS have been named in a lawsuit filed by another
creditor of UTS.

<PAGE> 11

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------

The creditor is claiming $360,000 in compensatory damages and $350,000 in
punitive damages. Management believes that this lawsuit has no merit and
intends to defend it vigorously.

The third of the Company's customers to file for protection of the
Bankruptcy Act is Soil Recovery Services, Inc. ("SRS"). On October 31, 1996,
an involuntary Petition for Relief under Chapter 7 of the U.S. Bankruptcy Code
filed against SRS. This was converted to a Voluntary Chapter 11 on November
25, 1996. At the time the first petition was filed, SRS had various leases
with the Company that had a net investment totaling $256,500 and represented
1.4% of the Company's total net investment in leases and finance contracts. A
specific reserve for losses of $100,000 has been established based on estimates
of realization values of the equipment under lease.

LIQUIDITY AND CAPITAL RESOURCES:

The Company relies primarily upon debt financing to originate its leases
and notes receivable. At November 30, 1996, the Company had a $10,000,000
revolving line of credit with Firstar Bank Milwaukee, N.A. with an expiration
date of November, 1997. This line of credit was increased to $11,000,000 in
December 1996. At December 31, 1996, $540,956 was available under this line of
credit. The line of credit bears interest at prime plus 1.76% and is
collateralized by substantially all of the Company's assets. It can be
canceled by Firstar on 90 days notice. The line of credit agreement is
guaranteed by the Company's parent and a major stockholder of the Company's
parent. The line of credit is discussed further below.

From time to time the Company will consolidate a portion of its lease
portfolio to be used as collateral for fixed rate and fixed term loans. The
Company determines the average maturity of the consolidated leases and obtains
fixed rate and fixed term loans using the consolidated leases as collateral.
The term and interest rate of the financing offered by banks financing this
collateral is matched to the average maturity of the leases. Utilizing this
type of financing allows the Company to establish a spread between the
financing interest rate and the rates of return on a certain portfolio of
leases. This type of financing permits the Company not only to plan for a
specific return on a portion of its lease portfolio but also to better utilize
its revolving credit line to write new lease business. Through December 31,
1996, the Company had outstanding borrowings of $2,273,632 from various banks
in fixed rate loan transactions.

The Company has also raised funds via private placement debt offerings.
At December 31, 1996, the Company was obligated on approximately $2,750,000 of
notes issued pursuant to private placement debt offerings, including
$2,000,000 payable to its parent. The amount due the parent is payable in 2005
while the other obligations are due at various dates through 1998.

The Company had a private placement best efforts offering in progress at
December 31, 1996 for the issuance of $2 million of Series A preferred stock
and warrants. The Company issued $424,774 of preferred stock and $60,682 of
warrants to its parent at December 31, 1996 in exchange for the conversion of
the subordinated note payable to its parent of $264,980 and the contribution of
restricted stock of a public company with an estimated fair value of $220,476.
See "Outlook" below.

In June, 1996, the Company's registration statement on Form SB-2 was
declared effective, and the Company began raising funds through the best
efforts public offering of its subordinated notes (the "Notes"). Through
October 1996, when sales in this offering were terminated by the Company, the
Company had raised $3,001,000 on a best efforts basis. These Notes were
offered in two series. Series A Notes pay interest on a monthly basis at an
annual rate of 9.5% and are due 5 years from issuance. Series B Notes pay
interest on a monthly basis at an annual rate of 10% and are due 8 years from
issuance. Sales of these Notes were suspended after management became aware of
the pending resignation of the president and chief financial officer, and after
the Company had decided to pursue plans

<PAGE> 12

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------

to slow the growth of the Company to better match its funding capacity and
decrease the size of its workforce.

The credit agreement establishing the Company's line of credit contains
various restrictive covenants that include, among others, restrictions on
dividend payments except to the holders of Class B and Series A Preferred
shares. The Company is also required to maintain minimum stockholders equity
of $650,000 measured on a quarterly basis. The Company was in violation of
this covenant at December 31, 1996, and has obtained an amendment to permit
compliance from the lender for 1996.

Further, the line of credit agreement requires the Company to maintain an
interest coverage ratio of 1.1 at year end. The Company was in violation of
this covenant at December 31, 1996, and has received an amendment to permit
compliance from the bank.

There can be no assurance that the Company will not continue to be in
violation of one or more of these covenants. Continued adverse operating
results could cause continued non-compliance with these covenants, in which
event the bank could immediately accelerate the maturity of the entire
outstanding balance under the line of credit or deny or restrict the Company's
access to funds under the line of credit, thus materially and adversely
affecting the Company's financial condition and continuing business operations.
Also, certain other debt obligations of the Company contain standard
cross-default provisions. Non-compliance with these covenants could result in
the immediate acceleration of the maturity of such other debt.

Outlook

This Section and other portions of this Annual Report on Form 10-KSB
contains statements relating to future results of the Company that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected
as a result of certain risks and uncertainties, including but not limited to
changes in economic conditions, changes in interest rates, availability to the
Company of lease business, changes in personnel, regulation of the
telecommunications industry, and the success or failure of the Company's
customers as well as other risks and uncertainties. The Company does not
undertake, and specifically disclaims, any obligation to update any forward
looking statements to reflect events or circumstances occurring after the date
of such statements.

Management of the company believes that the Company does not have
sufficient operating capital to continue originating leases for its own
portfolio for more than a few months. The business of the Company is dependent
upon being able to continue originating leases, both for its own portfolio and
for the portfolios of third party entities, such as TIFIX and TIFX. If the
Company cannot continue to originate

<PAGE> 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

leases, the Company will not be able to grow, either through the expansion of
its portfolio of leases or by deriving revenue from originating and managing
leases for other entities. The successful completion of the Company's business
plan is dependent upon having sufficient funds available to enable the Company
to continue to originate leases. The Company's primary source of capital for
itself is the private placement offering for the issuance of $2 million of Class
A preferred stock and warrants. There are many factors that may preclude the
Company from raising the necessary funds, including without limitation lack of
investor interest and failure of the Company to operate successfully in 1997.
If sufficient funds are not available from the offering, the Company will have
to consider the alternatives for obtaining capital, including the sale of
existing leases owned by the Company and obtaining new capital from the
Company's parent. Such alternative capital may not be available depending upon
a variety of factors, including without limitation the possibility that
purchasers of leases cannot be found, interest rates increase, the Company's
parent has no funds available to it or the Company fails to operate
effectively in 1997. The Company's long term success is highly dependent upon
the success of the Company in obtaining additional funds.

The Company's current business plan anticipates that the Company will
sponsor a limited partnership (the "Fund") similar to TIFIX and TIFX, for which
the Company will serve as general partner. The Company intends to register
interests in the fund under the Securities Act of 1933 and offer those
interests publicly. If such an offering is successful, the Company, as general
partner, would originate leases and finance contracts for the Funds, resulting
in the Company realizing acquisition fees and management fees. The Company
cannot predict whether it will sponsor the Fund and, if it does sponsor the
Fund, whether the Fund will have sufficient capital to begin operations any
time in 1997. The Company may not be able to rely upon the availability of the
Fund's capital to originate leases. The Fund could be delayed or abandoned due
to several factors, including the inability of the Company to qualify as the
general partner, the failure of the Fund's offering due to lack of investor
interest, delay in organizing the Fund, delay of the effectiveness of the
Fund's registration statement as well as other factors. If the public offering
is not successful, the Company would not be able to originate leases for the
Fund, and would not realize revenue from management fees and origination fees.
The Company's long term success is highly dependent upon the success of the
Company's planned sponsorship and subsequent successful offering of the Fund.

The credit agreement establishing the line of credit contains various
restrictive covenants that include, among others, restrictions on divided
payments except to the holders of Class B and Series A Preferred shares,
maintaining an interest coverage ratio and maintaining minimum stockholders
equity measured on a quarterly basis. The Company was in violation of the
minimum stockholders equity and interest coverage covenants at December 31,
1996, and received an amendment to permit compliance from the bank. Management
believes it will be able to maintain compliance with the covenants in 1997.
Management also expects, based on discussion with the lender, to renew the line
of credit when it comes due in November 1997. However, the Company may
continue to be in violation of one or more of these covenants, and if it does,
the bank may not continue to grant the amendments and waivers requested by the
Company. Continued adverse operating results could cause continued
noncompliance with these covenants, in which event the bank could immediately
accelerate the maturity of the entire outstanding balance under the line of
credit or deny or restrict the Company's access to funds under the line of
credit, thus materially and adversely affecting the Company's financial
condition and continuing business operations. Also, certain other debt
obligations of the Company contain standard cross-default provisions.
Non-compliance with these covenants could result in the immediate acceleration
of the maturity of such other debt.

<PAGE> 14

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and related information as of and for
the years ended December 31, 1996, 1995 and 1994 are included in Item 7:

Reports of Independent Auditors
Balance Sheets
Statements of Income
Statements of Changes in Partner's Equity
Statements of Cash Flows
Notes to Financial Statements

<PAGE> 15

INDEPENDENT AUDITORS' REPORT

To the Board of Directors

Berthel Fisher & Company Leasing, Inc.

We have audited the accompanying consolidated balance sheets of Berthel Fisher
& Company Leasing, Inc. (a wholly-owned subsidiary of Berthel Fisher & Company,
Inc.) as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholder's equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 1996 and 1995 consolidated financial statements present
fairly, in all material respects, the financial position of Berthel Fisher &
Company Leasing, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP/s/

Cedar Rapids, Iowa
March 26, 1997

<PAGE> 16

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Berthel Fisher & Company Leasing, Inc.

We have audited the accompanying consolidated statements of operations, changes
in stockholder's equity and cash flows of Berthel Fisher & Company Leasing,
Inc. (wholly-owned by Berthel Fisher & Company) for the year ended December 31,
1994. 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 audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Berthel Fisher & Company Leasing, Inc. for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.

Ernst & Young LLP

Des Moines, Iowa
January 31, 1995

<PAGE> 17

<TABLE>
<S> <C> <C>
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
ASSETS (Note 5):
Cash and cash equivalents $342,726 $153,849
Notes receivable (Note 2) 6,530,354 7,318,579
Net investment in direct financing leases (Note 2) 9,850,360 7,972,300
Allowance for possible loan and lease losses (Note 3) (412,916) (291,605)
---------------- ----------------
Notes receivable and direct financing leases, net 15,967,798 14,999,274
Equipment under operating leases, less accumulated depreciation of $50,517 277,964 -
Due from affiliates 30,930 89,844
Investments in:
Limited partnerships (Notes 4 and 12) 153,771 500,222
Not readily marketable securities, at cost 250,477 30,000
Furniture and equipment, less accumulated depreciation of
$120,200 in 1996 and $82,344 in 1995 222,853 206,623
Deferred income taxes (Note 6) 515,911 73,500
Deferred costs, less accumulated amortization of $158,924
in 1996 and $209,361 in 1995 (Notes 5 and 11) 635,194 239,042
Other assets 331,702 411,091
---------------- ----------------
TOTAL $18,729,326 $16,703,445
================ ================
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDER'S EQUITY (DEFICIT)
LIABILITIES:
Line-of-credit agreement (Note 5) $9,276,031 $8,575,500
Trade accounts payable 158,227 528,785
Due to affiliates 102,038 76,498
Accrued expenses 228,014 245,891
Payable to parent under tax allocation agreement (Note 6) - 15,460
Lease security deposits 374,876 129,960
Notes payable (Note 5) 2,310,805 3,235,521
Subordinated note payable to parent (Note 5) - 264,980
Subordinated debentures (Note 5) 725,000 725,000
Subordinated notes payable (Note 5) 2,995,522 -
Subordinated debenture payable to parent (Note 5) 2,000,000 2,000,000
---------------- ----------------
Total liabilities 18,170,513 15,797,595
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 12)
REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK (Note 7) 722,905 714,881
---------------- ----------------
STOCKHOLDER'S EQUITY (DEFICIT):
Series A preferred stock, no par value - authorized
shares, issued and outstanding 30,341 shares (Note 8) ($424,774 liquidation value,
convertible into 26,548 shares of Class A common stock) 422,835 -
Class A common stock, no par value-authorized 1,000,000
shares, issued and outstanding 400,000 shares 1,000 1,000
Common stock warrants (Note 9) 66,684 -
Retained earnings (accumulated deficit) (654,611) 189,969
---------------- ----------------
Total stockholder's equity (deficit) (164,092) 190,969
---------------- ----------------

TOTAL $18,729,326 $16,703,445
================ ================
See notes to consolidated financial statements.
</TABLE>

<PAGE> 18

<TABLE>
<S> <C> <C> <C>
BERTHEL FISHER & COMPANY LEASING, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
REVENUES:
Income from direct financing leases $1,376,154 $946,271 $796,969
Interest income 1,060,118 655,986 186,859
Management and lease acquisition fees
from affiliates (Notes 4 and 11) 849,266 1,156,632 1,824,302
Income from monitoring contracts - 66,978 76,331
Gain on early termination of leases 147,300 79,874 3,393
Gain on disposal of investments - 65,585 37,482
Other 139,114 201,650 61,208
------------------- ------------------ ------------------
Total revenues 3,571,952 3,172,976 2,986,544
------------------- ------------------ ------------------
EXPENSES:
Employee compensation and benefits 854,802 710,863 452,407
Management fees to affiliates (Note 11) 561,134 682,419 523,544
Expenses of monitoring contracts - 82,712 74,448
Other general and administrative expenses (Note 11) 1,062,298 879,233 611,631
Interest expense (Note 5) 1,791,120 1,227,530 722,422
Provision for possible loan and lease losses (Note 3) 592,874 175,139 67,457
------------------- ------------------ ------------------
Total expenses 4,862,228 3,757,896 2,451,909
------------------- ------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES AND DIVIDENDS
ON REDEEMABLE PREFERRED STOCK OF SUBSIDIARY (1,290,276) (584,920) 534,635
INCOME TAXES (Note 6) (453,720) (191,200) 197,400
------------------- ------------------ ------------------
INCOME (LOSS) BEFORE DIVIDENDS ON REDEEMABLE
PREFERRED STOCK OF SUBSIDIARY (836,556) (393,720) 337,235
DIVIDENDS ON REDEEMABLE PREFERRED STOCK OF
SUBSIDIARY - - (17,500)
------------------- ------------------ ------------------
NET INCOME (LOSS) (836,556) (393,720) 319,735
LESS NET INCOME ATTRIBUTABLE
TO CLASS B STOCK (Note 7) - - (114,600)
------------------- ------------------ ------------------
NET INCOME (LOSS) ATTRIBUTABLE TO
CLASS A COMMON STOCK $(836,556) $(393,720) $205,135
=================== ================== ==================
EARNINGS (LOSS) PER COMMON SHARE:
Primary $(2.09) $(.98) $.51
Fully diluted (2.09) (.98) .51
See notes to consolidated financial statements.
</TABLE>

- 2 -

<PAGE> 19

<TABLE>
<S> <C> <C> <C> <C> <C>
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
RETAINED TOTAL
SERIES A CLASS A COMMON EARNINGS STOCKHOLDER'S
PREFERRED COMMON STOCK (ACCUMULATED EQUITY
STOCK STOCK WARRANTS DEFICIT) (DEFICIT)
BALANCE AT DECEMBER 31, 1993 $1,000 $346,873 $347,873
Net income attributable to Class A
common stockholder - 205,135 205,135
Amortization of Class B stock issuance costs - (8,023) (8,023)
------------- ------------ -------------
BALANCE AT DECEMBER 31, 1994 1,000 543,985 544,985
Net loss attributable to Class A - (393,720) (393,720)
common stockholder
Amortization of Class B stock issuance costs - (8,023) (8,023)
Gain on redemption of Class B stock (Note 7) - 27,270 27,270
Gain on redemption of redeemable preferred
stock
of subsidiary (Note 1) - 20,457 20,457
------------- ------------ -------------
BALANCE AT DECEMBER 31, 1995 1,000 189,969 190,969
Net loss attributable to Class A
common stockholder - (836,556) (836,556)
Amortization of Class B stock issuance costs - (8,024) (8,024)
Issuance of Class A preferred stock and
warrants,
net of issuance costs of $1,939 $422,835 - $60,682 - 483,517
Subscription for Class A preferred stock
and warrants 12,726 - 1,818 - 14,544
Subscription receivable (12,726) - (1,818) - (14,544)
Issuance of common stock warrants - - 6,002 - 6,002
---------------------- ------------- ---------- ------------ -------------
BALANCE AT DECEMBER 31, 1996 $422,835 $1,000 $66,684 $(654,611) $(164,092)
====================== ============= ========== ============ =============
See notes to consolidated financial statements.
</TABLE>

- 3 -

<PAGE> 20

<TABLE>
<S> <C> <C> <C>
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
OPERATING ACTIVITIES:
Net income (loss) $(836,556) $(393,720) $319,735
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on early termination of leases (147,300) (79,874) (3,393)
Gain on disposal of investments - (65,585) (37,482)
Loss on abandonment of leasehold improvements - 20,672 -
Amortization of investment in monitoring contracts - 57,090 56,326
Depreciation of furniture and equipment 106,970 35,723 20,721
Amortization of deferred costs 102,273 93,131 71,808
Amortization of deferred revenue - (15,785) (52,974)
Other amortization 36,006 36,312 34,140
Provision for possible loan and lease losses 592,874 175,139 67,457
Deferred income taxes (457,871) (211,200) 74,700
Changes in operating assets and liabilities:
Due from affiliates 58,914 46,864 (51,167)
Receivable/payable to parent under tax allocation agreement - 43,460 (60,000)
Other assets 79,389 (242,089) (49,170)
Trade accounts payable, excluding equipment
purchase costs accrued (70,558) 180,336 23,077
Due to affiliates 25,540 (3,988) 59,643
Accrued expenses (17,877) 16,485 127,586
------------------- -------------- --------------
Net cash from operating activities (528,196) (307,029) 601,007
------------------- -------------- --------------
INVESTING ACTIVITIES:
Purchases of equipment for direct financing leases (11,687,165) (6,532,872) (3,680,741)
Repayments of direct financing leases 2,102,819 2,455,454 1,859,013
Proceeds from sale or early termination of direct
financing leases and notes receivable 9,439,276 2,954,920 523,688
Issuance of notes receivable (3,746,893) (5,543,306) (3,079,307)
Repayments of notes receivable 1,899,901 1,380,182 335,757
Investments in limited partnerships - (418,381) (159,446)
Repayment of loans to limited partnerships 308,165 - -
Distributions from limited partnerships 2,280 16,636 283,241
Proceeds from sale of monitoring contracts - 478,652 (526,483)
Proceeds from sale of investments - - 53,848
Net lease security deposits collected 244,916 7,882 32,635
Purchases of furniture and equipment (123,200) (134,560) (46,116)
------------------- -------------- --------------
Net cash from investing activities (1,559,901) (5,335,393) (4,403,911)
------------------- -------------- --------------
(Continued)
</TABLE>

- 5 -

<PAGE> 21

<TABLE>
<S> <C> <C> <C>
BERTHEL FISHER & COMPANY LEASING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONCLUDED)
1996 1995 1994
FINANCING ACTIVITIES:
Organization and financing costs incurred $(500,365) $(87,123) $(318,649)
Proceeds from line-of-credit agreement 18,323,060 16,928,589 7,300,000
Repayments of line-of-credit agreement (17,622,529) (10,263,089) (6,905,000)
Proceeds from issuance of subordinated notes
payable and related warrants 3,001,524 - -
Proceeds from issuance of other borrowings 1,365,413 2,317,241 5,182,793
Repayments of other borrowings (2,290,129) (3,057,300) (1,466,513)
Redemption of redeemable preferred stock of subsidiary - (129,543) -
Redemption of Class B stock - (172,730) (45,000)
Cash dividends paid on Class B stock - (114,600) (120,000)
------------------- ----------------- --------------
Net cash from financing activities 2,276,974 5,421,445 3,627,631
------------------- ----------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 188,877 (220,977) (175,273)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 153,849 374,826 550,099
------------------- ----------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $342,726 $153,849 $374,826
=================== ================= ==============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $1,656,418 $1,082,229 $606,936
Income taxes - - 182,700
Noncash investing and financing activities:
Parent note receivable offset against subordinated
note payable to parent - 415,000 -
Gain on redemption of redeemable preferred stock
of subsidiary recorded directly to retained earnings - 20,457 -
Gain on redemption of Class B stock recorded
directly to retained earnings - 27,270 -
Equipment reclassified from direct financing
leases to operating leases 328,481 - -
Equipment acquired under capital lease - - 5,316
Issuance of notes receivable in exchange for direct
financing leases - - 237,150
Conversion of a note receivable to an equity security - - 30,000
Conversion of a note payable to preferred stock 264,980 - -
Contribution of a not readily marketable security
for preferred stock 220,477 - -
Increase (decrease) in trade accounts payable
attributed to equipment purchase costs (300,000) 300,000 (465,800)
Amortization of Class B stock issuance costs 8,024 8,023 8,023
See notes to consolidated financial statements.
</TABLE>

- 6 -

<PAGE> 22

BERTHEL FISHER & COMPANY LEASING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF OPERATIONS- Berthel Fisher & Company Leasing,
Inc. (the "Company") is a wholly-owned subsidiary of Berthel Fisher &
Company, Inc. The Company finances, through direct financing leases or
notes receivables, telecommunications, agricultural, and general equipment
throughout the United States. The financing agreements with individual
customers can be large in relation to the portfolio as a whole and certain
agreements exceed 10% of the Company's direct financing lease and note
receivable portfolio (see Note 2). The leases may be sold to other entities
or retained by the Company for its own portfolio.

During 1993, the Company formed a wholly-owned subsidiary, Security Finance
Corporation. Security Finance Corporation was established to provide
financing services to the home security industry. During 1995, as discussed
below, all assets and liabilities of Security Finance Corporation were
assumed by the Company and the subsidiary was dissolved. During 1994, the
Company formed a wholly-owned subsidiary, Communications Finance
Corporation. All of the assets and liabilities of Communications Finance
Corporation have been assumed by the Company. The Company intends to keep
Communications Finance Corporation as a shell for use in future financing
transactions.

BASIS OF PRESENTATION - The accompanying financial statements have been
prepared on the basis that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do
not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern.

As shown in the financial statements, during the years ended December 31,
1995 and 1996, the Company incurred net losses of $393,720 and $836,556,
respectively. Also, the Company's line of credit agreement is cancelable
upon 90 day notice from the lender. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to obtain refinancing as may be
required, and ultimately to attain profitable operations. The Company
anticipates that existing capital resources, cash flows from operations, and
financing from the Company's parent, will be adequate to satisfy the
Company's minimum capital requirements for the next twelve months.

The Company's plans and forecasts for future growth and profitability,
however, anticipate the need for additional capital through a preferred
equity financing and the sponsorship of another public limited partnership
from which the Company will generate fee income. See Note 14 as to the
Company's current preferred stock offering. No assurance can be provided
that such offerings will be completed as planned.

DISSOLUTION OF SUBSIDIARY - On April 21, 1995, Security Finance Corporation
sold its alarm monitoring contracts (the "Contracts") to Monitronics
International, Inc. ("Monitronics") and recognized a gain on the sale of
$65,585. This sale terminated the former agreement between Security Finance
Corporation and Monitronics and released each other from liability for
performance thereunder. Furthermore, Security Finance Corporation fully
relinquished the monitoring responsibilities and maintenance and servicing
responsibilities to Monitronics.

The Contracts served as collateral for Security Finance Corporation's
collateral trust bonds which were redeemed on May 19, 1995.

- 7 -

<PAGE> 23

On July 1, 1995, Security Finance Corporation transferred its remaining
assets and liabilities to the Company, and the Company subsequently
dissolved Security Finance Corporation. In conjunction with the
dissolution, the Company redeemed the convertible preferred stock of
Security Finance Corporation and recognized a gain of $20,457 directly to
retained earnings.

CONSOLIDATION - The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.

USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
significantly from those estimated. Material estimates that are
particularly susceptible to significant change in the near-term relate to
the determination of the allowance for possible loan and lease losses and
the estimated unguaranteed residual values of the Company's leased
equipment.

Most of the Company's leases and finance contracts are with customers that
are in the entrepreneurial stage and, therefore, are highly leveraged and
require lease or other financing in place of or to supplement financing from
banks. Although the Company attempts to mitigate its credit risk through
the use of a variety of commercial credit reporting agencies when processing
the applications of its customers, failure of the Company's customers to
make scheduled payments under their equipment leases and finance contracts
could have a material near-term impact on the allowance for possible lease
and loan losses.

Realization of residual values depends on many factors, several of which are
not within the Company's control, including general market conditions at the
time of the original lease contract's expiration, whether there has been
unusual wear and tear on, or use of, the equipment, the cost of comparable
new equipment, the extent, if any, to which the equipment has become
technologically or economically obsolete during the contract term and the
effects of any additional or amended government regulations. These factors,
among others, could have a material near-term impact on the estimated
unguaranteed residual values.

CERTAIN RISK CONCENTRATIONS - The Company's direct financing leases and
notes receivables are concentrated in the telecommunications industry,
primarily pay telephones, representing approximately 42% and 56% of the
Company's direct finance lease and notes receivable portfolio at December
31, 1996 and 1995, respectively. During 1996, the Company also
significantly expanded its financing in the ATM industry which represents
approximately 22% of the Company's direct finance lease and notes receivable
portfolio at December 31, 1996.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents.

NOTES RECEIVABLE - Notes receivable are carried at the principal balance
outstanding. Interest income on notes receivable is accrued based on
principal amounts outstanding.

NET INVESTMENT IN DIRECT FINANCING LEASES - The Company's primary activity
consists of leasing telecommunications and other types of equipment, under
direct financing leases, generally over a period of three to five years. At
the time of closing a direct financing lease, the Company records the gross
lease contract receivable, an estimated unguaranteed residual value and
unearned lease income. The unearned lease income represents the excess of
the gross lease receivable plus the estimated unguaranteed residual value
over the carrying value of the equipment leased. In addition, the Company
capitalizes all initial direct costs associated with originating the direct
financing lease. The unearned income and initial direct costs are amortized
to income over the lease term so as to produce a constant periodic rate of
return on the net investment in the lease. Lessees are responsible for all
taxes, insurance and maintenance costs.

- 8 -

<PAGE> 24

The realization of the estimated unguaranteed residual value of leased
equipment depends on the value of the leased equipment at the end of the
lease term and is not a part of the contractual agreement with the lessee.
Estimated unguaranteed residual values are based on estimates of amounts
historically realized by the Company for similar equipment and are
periodically reviewed by management for possible impairment.

Certain of the Company's leases are accounted for as operating leases for
income tax purposes.

ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES - The Company performs credit
evaluations prior to approval of a lease or finance contract. As with all
direct financing leases, the Company continues to own the equipment under
lease. The Company will generally obtain a security interest in future
revenues generated from each site in which the equipment is physically
located and in the equipment under a finance contract. Subsequently, the
creditworthiness of the customer and the value of the underlying assets are
monitored on an ongoing basis. The Company maintains an allowance for
possible loan and lease losses which could arise should customers become
unable to discharge their obligations under the agreements. The allowance
for possible loan and lease losses is maintained at a level deemed
appropriate by management to provide for known and inherent risks in the
portfolio. The allowance is based upon a continuing review of past loan and
lease loss experience, current economic conditions, and the underlying asset
value. The consideration of such future potential losses also includes an
evaluation for other than temporary declines in value of the underlying
leased assets. Leases and notes receivable which are deemed uncollectible
are charged off and deducted from the allowance. The provision for possible
loan and lease losses and recoveries are added to the allowance.

EQUIPMENT UNDER OPERATING LEASES - Equipment leased under operating leases
is stated at cost less accumulated depreciation. The equipment is
depreciated using the straight-line method over the estimated useful lives
of the assets (five years) to the estimated residual value of the equipment
at the end of the lease term. Estimated residual values are based on
estimates of amounts historically realized by the Company for similar
equipment and are periodically reviewed by management for possible
impairment.

INVESTMENTS - The Company accounts for its general partnership interests in
Telecommunications Income Fund IX, L.P. ("TIF IX") and Telecommunications
Income Fund X, L.P. ("TIF X") under the equity method of accounting. Under
the equity method of accounting, the Company initially records its
investment at cost and subsequently adjusts the carrying value of its
investments for its pro rata share of earnings or losses.

The Company also owns equity interests in two entities over which it does
not have the ability to exert significant influence over the operations of
such entities; therefore, such investments are accounted for at cost.

Should these investments experience a decline in value that is other than
temporary, the Company will recognize a loss in its consolidated statements
of operations to reflect such a decline. As these investments are not
readily marketable, no market value can be readily determined.

FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost less
accumulated depreciation. For financial reporting purposes, depreciation is
computed by the straight-line method over the estimated useful lives of the
assets (generally five to ten years). The Company uses accelerated methods
in computing depreciation for income tax purposes.

DEFERRED INCOME TAXES - The provision for deferred income taxes is based on
an asset and liability approach. Deferred tax assets or liabilities are
computed based on the difference between the financial statement and income
tax bases of assets and liabilities using the enacted marginal tax rate.
Deferred income tax expense or credit is based on the changes in the asset
or liability from period to period including the effect of enacted tax rate
changes.

- 9 -

<PAGE> 25

DEFERRED COSTS - Deferred costs consist of organization costs incurred with
the formation of Security Finance Corporation and financing costs incurred
in connection with the issuance of subordinated debentures and notes payable
and certain other long-term debt. Deferred organization costs were
amortized over a five-year period. Deferred financing costs are being
amortized over the life of the related obligation, which ranges from three
to eight years.

STOCK ISSUANCE COSTS - The costs incurred in connection with the issuance of
redeemable Class B nonvoting convertible stock have been deducted from the
proceeds. Such amounts are being amortized by a charge to retained earnings
over a period of ten years, at which time the carrying value of stock will
be equal to its cash redemption value (see Note 7).

SALE OF DIRECT FINANCE LEASES - The Company at times sells future direct
financing lease payments, on a limited recourse basis, to lenders in return
for a cash payment. In the case of default by the lessee, the lender has a
first lien on the underlying leased equipment. In the event the sale or
re-lease proceeds from the underlying equipment do not satisfy the remaining
lessee's obligation to the lender, the Company is responsible for a
predetermined amount of that obligation. When the sale of direct finance
leases occurs, proceeds from the sale, less the net book value of direct
finance leases sold and an estimated loss allowance, are recorded as a
component of gain on early termination of leases.

NET INCOME (LOSS) PER COMMON SHARE - Primary net income (loss) per common
share is based on the weighted average number of shares of Class A common
stock outstanding during the year which was 400,000 shares for each of the
three years in the period ended December 31, 1996. Fully diluted net income
(loss) per common share is the same as primary net income per share due to
the antidilutive effect on net income (loss) per share of any assumed
conversion of the Class B nonvoting convertible stock and the common stock
warrants.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS -In 1996 the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" related to Berthel Fisher & Company, Inc.'s
stock option plans. This standard establishes a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company adopted the disclosure option under this standard
and continues to recognize stock-based compensation to employees under the
intrinsic value method. The pro forma net loss and loss per share amounts
assuming the fair value method was adopted are immaterial and, therefore,
not disclosed. The adoption of this standard did not impact results of
operations, financial position or cash flows.

The Company will adopt SFAS No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996. SFAS No. 125 provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings based on whether control has been transferred. The adoption of
this standard is not expected to have a material impact on results of
operations, financial position, or cash flows.

RECLASSIFICATIONS - Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform to the 1996
presentation.

2. NOTES RECEIVABLE AND DIRECT FINANCING LEASES

Notes receivable are comprised of the following:

<TABLE>
<S> <C> <C>
DECEMBER 31,
1996 1995
Notes receivable, collateralized primarily by telephone
equipment and related site agreements, 13.9% to 16.5%,
maturing through December 2000 $6,530,354 $7,318,579
============ ============
</TABLE>

- 10 -

<PAGE> 26

The Company's net investment in direct financing leases consists of the
following:

<TABLE>
<S> <C> <C>
DECEMBER 31,
1996 1995
Minimum lease payments receivable $11,526,828 $8,857,562
Estimated unguaranteed residual values 954,502 981,969
Unamortized initial direct costs 236,910 116,435
Unearned income (2,867,880) (1,983,666)
-------------- ------------
Net investment in direct financing leases $9,850,360 $7,972,300
============== ============
</TABLE>

The balance of direct financing leases sold with recourse that remain
uncollected at December 31, 1996 and 1995 was $4,269,468 and $2,215,287,
respectively.

At December 31, 1996, future minimum lease payments to be received under the
direct financing leases and the estimated unguaranteed residuals to be
realized at the expiration of the direct financing leases are as follows:

<TABLE>
<S> <C> <C>
MINIMUM ESTIMATED
LEASE PAYMENTS UNGUARANTEED
RECEIVABLE RESIDUAL VALUES
Year ending December 31:
1997 $3,887,957 $36,354
1998 2,702,486 240,887
1999 2,150,673 76,055
2000 1,828,501 167,010
2001 957,211 434,196
-------------- ---------------
$11,526,828 $954,502
============== ===============
</TABLE>

The Company and certain affiliates purchase a substantial portion of
telecommunications equipment for lease from Intellicall, Inc., a
publicly-held company. The Company's parent is an investor in a limited
partnership which owns approximately 7% of the outstanding common stock of
Intellicall, Inc. In addition, a principal stockholder of the Company's
parent is also an investor in this limited partnership.

The Company leases equipment to certain companies for which Berthel Fisher &
Company Financial Services, Inc., an affiliate, provides financing and
investment advisory services or for which the Company or its affiliates have
an ownership interest. The Company also leases equipment to certain
companies in which certain directors own a controlling interest. The
Company's net investment in direct financing leases with these companies
approximated $1,253,000 and $2,241,000 at December 31, 1996 and 1995,
respectively.

Two customers each account for 10% or more of the amount of income from
direct financing leases during one or more of the periods presented, as
follows:

<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1996 1995 1994
Customer A 6 % 7 % 13 %
Customer B 2 10 -
</TABLE>

- 11 -
<PAGE> 27

3. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES

The changes in the allowance for possible loan and lease losses are as
follows:

<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996 1995 1994
Balance at beginning of year $291,605 $169,260 $236,717
Provision 592,874 175,139 67,457
Charge-offs (471,563) (52,794) (134,914)
---------- ---------- ----------
Balance at end of year $412,916 $291,605 $169,260
========== ========== ==========
</TABLE>

The allowance for loan and lease losses consisted of a specific allowance
for a lease of $100,000 at December 31, 1996 and a general unallocated
allowance of $312,916, $291,605, and $169,260 at December 31, 1996, 1995 and
1994, respectively.

On October 10, 1995, a lessee of the Company, Value-Added Communications
("VAC"), filed a petition under Chapter 11 of the Bankruptcy Act. At the
time VAC's petition for bankruptcy was filed, VAC had several leases with
the Company. At December 31, 1995, VAC's leases had a net investment
balance of $927,731, which represented approximately 6.2% of the Company's
total net investment in leases and financing contracts. As a result of the
Company's collateralized position with respect to its VAC leases and because
the leases had been guaranteed by a strong guarantor, the Company was able
to negotiate a settlement with VAC that resulted in the equipment being
re-leased to MCI Telecommunications Corporation at no loss to the Company.

On May 6, 1996, a lessee of the Company, United Tele-Systems of Virginia,
Inc. ("UTS") filed a Voluntary Petition for Relief under Chapter 11 of the
Bankruptcy Code. This bankruptcy petition was dismissed on May 22, 1996
and, in connection therewith, the Company exercised its right to manage the
assets leased to UTS. The net investment in the leases at the time the
assets were repossessed was approximately $432,000. This equipment is
currently being operated for the Company under a short-term management
agreement. The Company, TIF IX, TIF X and UTS have also been named in a
lawsuit, filed by another creditor of UTS. The creditor is claiming
$360,000 in compensatory damages and $350,000 in punitive damages.
Management believes the lawsuit is without merit and intends to vigorously
defend it. Based on offers to purchase the pay telephone equipment and an
expected settlement offer related to the lawsuit to avoid protracted
litigation costs, the Company expects to incur a loss upon the sale or
re-lease of this equipment. Management has charged $324,000 to the
provision for possible loan and lease losses for the expected loss. Due to
the uncertainty of the fair market value of the equipment and the outcome of
the litigation, there can be no assurances that the ultimate loss will not
exceed $324,000. The Company's net investment in the equipment, net of the
specific allowance, has been reclassified to equipment under operating
leases pending its ultimate sale or re-lease under a direct finance lease.

On October 31, 1996, a lessee of the Company, Soil Recovery Services, Inc.
("SRS"), had an involuntary Petition for Relief under Chapter 7 of the U.S.
Bankruptcy Code filed against it. This was converted to a voluntary Chapter
11 on November 25, 1996. At the time the first petition was filed, SRS had
various leases with the Company that had a net investment totaling $256,500
and represented 1.4% of the Company's total net investment in leases and
finance contracts. A specific allowance for losses of $100,000 has been
established through a charge to the provision for possible loan and lease
losses based on estimates of the fair value of the equipment under lease.

- 12 -

<PAGE> 28

During the fourth quarter of 1996, management of the Company provided a
specific allowance for a lease with a certain customer for which the Company
had not been receiving lease payments. Management is actively working with
such customer to arrange for a sale of the assets under lease. A charge of
$50,000 was recorded to the provision for possible loan and lease losses
representing management's best estimate of the loss on the expected sale of
the equipment. Also, due to the uncertainty as to the timing and amount of
future payments from such customer and as to the sale of the assets under
lease, the Company reclassified its net investment in the lease at December
31, 1996 of $144,972, net of the specific allowance, to equipment leased
under operating leases.

4. INVESTMENTS IN LIMITED PARTNERSHIPS

The Company is the general partner of Telecommunications Income Fund IX,
L.P. ("TIF IX"). TIF IX is a limited partnership which raised approximately
$17 million through a best-efforts public offering of its limited
partnership units. At December 31, 1996 and 1995, the Company's investment
in TIF IX consisted of its allocated general partnership interest,
unreimbursed costs incurred by the Company in connection with the public
offering and temporary loans made to the partnership. Pursuant to the
partnership agreement, TIF IX reimbursed the Company for offering and
promotional expenses incurred up to 4% of the capital raised. The
unreimbursed costs are being amortized on a straight-line basis over a
55-month period which approximates the period of anticipated future revenues
from TIF IX. As of December 31, 1996 and 1995, the unamortized balance of
these unreimbursed costs aggregated $33,482 and $81,681, respectively.

The Company is the general partner of Telecommunications Income Fund X, L.P.
("TIF X"). TIF X is a limited partnership which raised approximately $22.6
million through a best-efforts public offering of its limited partnership
units. At December 31, 1996 and 1995, the Company's investment in TIF X
consisted of its allocated general partnership interest, unreimbursed costs
incurred by the Company in connection with the public offering and temporary
loans made to the partnership. Pursuant to the partnership agreement, TIF X
will reimburse the Company for offering and promotional expenses incurred up
to 4% of the capital raised. During the years ended December 31, 1996 and
1995, the Company received $13,604 and $14,536, respectively, for
reimbursement of such expenses. As of December 31, 1996 and 1995, these
unreimbursed costs aggregated $0 and $13,604, respectively.

Combined summarized financial information for TIF IX and TIF X is as
follows:

<TABLE>
<S> <C> <C>
DECEMBER 31,
1996 1995
Assets:
Net investment in direct financing leases $33,330,000 $43,164,000
Other assets 3,573,000 4,964,000
----------------- -----------------------
Total assets $36,903,000 $48,128,000
================= =======================
Liabilities and partners' equity
Liabilities:
Notes payable, guaranteed by the Company (Note 12) $5,900,000 $13,149,000
Other liabilities 1,485,000 2,079,000
----------------- -----------------------
Total liabilities 7,385,000 15,228,000
----------------- -----------------------
Partners' equity:
General partner 22,000 24,000
Limited partners 29,559,000 32,876,000
Other equity (63,000) -
----------------- -----------------------
Total partners' equity 29,518,000 32,900,000
----------------- -----------------------
Total liabilities and partners' equity $36,903,000 $48,128,000
================= =======================

</TABLE>

- 13 -

<PAGE> 29

<TABLE>

YEAR ENDED DECEMBER 31
1996 1995 1994
<S> <C> <C> <C>
Income from direct financing leases $6,070,000 $6,585,000 $5,177,000
Other revenue 924,000 200,000 81,000
Provision for possible losses (1,671,000) (923,000) (630,000)
Impairment loss on equipment (971,000) - -
Expenses (3,148,000) (2,661,000) (1,548,000)
----------------------------------- ---------------- --------------
Net income $1,204,000 $3,201,000 $3,080,000
=================================== ================ ==============
Income allowable to the Company $680 $1,657 $2,280
=================================== ================ ==============
Net income per partnership unit:
TIF IX $14.83 $24.26 $26.23
TIF X $2.17 $17.15 $21.22
</TABLE>

The Company receives a management fee equal to 5% of the amount of gross
rental payments received by TIF IX and TIF X. During the years ended
December 31, 1996, 1995 and 1994, gross fees aggregated $702,266, $864,838
and $657,486, respectively. The Company, in turn, pays 50% of these fees to
its parent. In addition, the Company is reimbursed for certain other costs
under administrative services agreements. Amounts received by the Company
pursuant to these agreements amounted to $147,000, $168,107 and $167,907 for
the years ended December 31, 1996, 1995 and 1994, respectively.

The Company receives 4% of all leases acquired by TIF IX and TIF X during
the initial funding period, which the Company reports as an acquisition fee.
Amounts reported by the Company as acquisition fees were $0, $123,687 and
$857,797 for the years ended December 31, 1996, 1995 and 1994, respectively.
The initial funding period ended during 1995.

TIF IX leases equipment to certain companies for which Berthel Fisher &
Company Financial Services, Inc., an affiliate of the Company, provides
financing and investment advisory services. TIF IX's net investment in
direct financing leases with these companies approximated $447,000 and
$4,262,000 at December 31, 1996 and 1995, respectively.

TIF X leases equipment to certain companies for which Berthel Fisher &
Company Financial Services, Inc., an affiliate of the Company, provides
financing and investment advisory services. TIF X's net investment in
direct financing leases with these companies approximated $2,815,000 and
$7,077,000 at December 31, 1996 and 1995, respectively.

The Company, through Security Finance Corporation, was also a general
partner in CFS Security Financing, L.P., a limited partnership organized to
raise capital to finance the operations of Monitronics, a distributor and
servicer of home alarm systems throughout the United States. During the
year ended December 31, 1994, the Company sold its investment in CFS
Security Financing, L.P. for $53,848, recognizing a gain of $50,584.

5. CREDIT ARRANGEMENTS
The Company obtains a portion of its financing under a line-of-credit
agreement with a bank. The amount available to borrow under the
line-of-credit is limited to 75% of its qualified accounts, as defined in
the agreement (primarily leases and notes receivable), but, in no case, can
exceed $11 million. The line-of-credit bears interest at prime plus 1.7%
and is collateralized by substantially all of the Company's assets. The
line-of-credit agreement is guaranteed by the Company's parent and a major
stockholder of the Company's parent. The agreement expires on November 30,
1997 and management expects, based on discussions with the lender, to renew
the agreement. The agreement is also cancellable by the lender after giving
a 90-day notice. The average interest rate on amounts outstanding at
December 31, 1996 and 1995 under the line-of-credit agreement was 9.95% and
10.2%, respectively.

- 14 -

<PAGE> 30

The loan agreement contains various restrictive covenants which, among
others, restrict dividend payments except to Class B shareholders and Series
A preferred shareholders and requires the Company to maintain certain
financial ratios including a total liabilities to tangible net worth ratio
of not greater than 3.0, a minimum tangible net worth of $650,000 and an
interest coverage ratio of 1.1. As of December 31, 1996 the Company was in
violation of its minimum tangible net worth and interest coverage ratio.
The Company has obtained amendments to such covenants from the lender for
1996 which permits compliance. The covenants for 1997 are a leverage ratio
of not greater than 2.5, a minimum stockholders' equity (including
redeemable stock) of $450,000 plus the net proceeds of any equity offering
and an interest coverage ratio of 1.2. As discussed in Note 14, the Company
plans to sell up to $2 million of preferred stock in 1997 through an exempt
offering. The Company also has plans to sponsor another limited partnership
in 1997 which is expected to generate fee income to the Company. As such,
the Company expects to be in compliance with the covenants throughout 1997.
The Company does not anticipate any problems with the sale of these
securities in 1997, however, an alternative plan is in place should any
problems occur with respect to the sale of these securities. The alternative
plan is to reduce the management fees paid to the parent to maintain
compliance with the Company's covenants.

Notes payable consists of the following at December 31, 1996 and 1995:

<TABLE>
<S> <C> <C>
DECEMBER 31,
1996 1995
Collateral trust bonds issued by Berthel Fisher & Company
Leasing, Inc., 9% to 12%, due through 1997 $20,017 $128,505
Installment loan agreements with banks, 7.75% to 11%,
maturing through 2000 with subjective acceleration clauses,
collateralized by net investment in certain direct financing
leases, certain agreements are also guaranteed by the
Company's parent 2,273,632 3,104,117
Capital lease obligations, 5.37%, due through 2000 17,156 2,899
------------- -------------
Notes payable $2,310,805 $3,235,521
============= =============
</TABLE>

Subordinated debt consists of the following:

<TABLE>
<S> <C> <C>
DECEMBER 31,
1996 1995
Uncollateralized subordinated debenture payable to
parent, floating interest rate, maturing in 2005 $2,000,000 $2,000,000
Uncollateralized subordinated note payable to parent, floating
interest rate, converted to Series A preferred stock during 1996 - 264,980
Uncollateralized subordinated notes payable, 9.5% to 10%,
maturing in 2001 and 2004 2,995,522 -
Uncollateralized subordinated debentures, 11% to 12%,
maturing through 1998 725,000 725,000
------------ ------------
Total subordinated debt $5,720,522 $2,989,980
============ ============
</TABLE>

- 15 -

<PAGE> 31

Interest expense summarized by category is as follows:

<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996 1995 1994
Line-of-credit agreement $953,912 $392,946 $104,085
Uncollateralized subordinated note payable to parent 31,802 24,792 4,923
Collateral trust bonds issued by Berther Fisher &
Company Leasing, Inc. 11,729 55,032 88,793
Collateral trust bonds issued by Security
Finance Corporation - 32,349 30,739
Installment loan agreements with banks 254,731 281,055 199,814
Capital lease obligations 1,532 227 67
Uncollateralized subordinated debentures 125,374 140,735 131,807
Uncollateralized subordinated debenture to parent 228,277 298,420 162,194
Uncollateralized subordinated notes payable 183,016 - -
Other 747 1,974 -
------------- ------------- ----------
$1,791,120 $1,227,530 $722,422
============= ============= ==========
</TABLE>

The collateral trust bonds issued by Berthel Fisher & Company Leasing, Inc.
are collateralized by certain equipment leases and are redeemable by the
bond holder at any time after one year from the date of issuance subject to
certain limitations as defined in the agreements, including a maximum
redemption in any one year of 5% of the total principal balance outstanding.

The subordinated note payable and debenture to parent bear interest at prime
plus 3% (11.5% at December 31, 1996 and 1995), adjusted semi-annually, with
a minimum interest rate of 6% and a maximum rate of 12%. In October 1995,
the Company and its parent restructured $2,000,000 of the subordinated note
payable to the Company's parent into a subordinated debenture. Under the
restructured debenture, the maturity date was extended to December 31, 2005;
the debenture was contractually subordinated to the subordinated notes
payable and to collateralized debt; and the Company's parent was issued
warrants for the purchase of 118,875 shares of common stock of the Company
at $16.82 per share, exercisable through October 5, 2000. No value was
attributed to the warrant by the Company since the warrant's exercise price
was equal to the estimated fair value of the Company's common stock at date
of issuance.

The annual maturities of notes payable and subordinated debt at December 31,
1996 are as follows:

<TABLE>
<S> <C>
Year ending December 31:
1997 $1,089,509
1998 1,206,943
1999 338,019
2000 330,088
2001 2,111,246
Thereafter 2,955,522
------------
Total $8,031,327
============
</TABLE>

- 16 -

<PAGE> 32

6. INCOME TAXES

The results of the Company's operations are included in the consolidated tax
returns of Berthel Fisher & Company, Inc. The entities included in the
consolidated returns have adopted the policy of allocating income tax
expense or benefit based upon the pro rata contribution of taxable operating
income or losses. Generally, this allocation results in profitable
companies recognizing a tax provision as if the individual company filed a
separate return and loss companies recognizing benefits to the extent their
losses contribute to reduce consolidated taxes. Deferred income taxes have
been established by each member of the consolidated group based upon the
temporary differences within the entity. In certain states, the Company
files separate income tax returns. Based on the parent's consolidated tax
position, management believes it is more likely than not that the Company's
deferred income tax asset will be recoverable.

Income tax expense (benefit) consisted of the following:

<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1996 1995 1994
Current $4,151 $20,000 $122,700
Deferred (457,871) (211,200) 74,700
------------- ------------ ----------
Income taxes $(453,720) $(191,200) $197,400
============= ============ ==========
</TABLE>

The effective tax rate on income (loss) before income taxes and dividends on
redeemable preferred stock of subsidiary is different from the prevailing
federal income tax rate as follows:

<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1996 1995 1994
Income tax at federal statutory rates (34%) $(438,700) $(198,900) $181,800
Tax effect (decrease) of:
State income taxes, net of federal effect (25,800) 2,600 20,500
Other items 10,780 5,100 (4,900)
------------ ------------ ----------
Income taxes $(453,720) $(191,200) $197,400
============ ============ ==========
</TABLE>

The tax effect of temporary differences giving rise to the Company's net
deferred income tax asset are as follows:

<TABLE>
<S> <C> <C>
1996 1995
Gross deferred income tax liabilities:
Direct financing leases $(500,000) $(347,000)
Unamortized costs associated with limited partnerships (25,000) (29,000)
Furniture and equipment - (12,000)
------------ ------------
Total (525,000) (388,000)
------------ ------------
Gross deferred income tax assets:
Alternative minimum tax carryforward 84,000 84,000
Allowance for possible loan and lease losses 149,000 113,000
Net operating loss carryforward 800,000 264,500
Other 7,911 -
------------ ------------
Total 1,040,911 461,500
------------ ------------
Net deferred income tax asset $515,911 $73,500
============ ============
</TABLE>

At December 31, 1996, the Company's net operating loss carryforward
aggregates $2,250,000 and expires in 2010.

- 17 -

<PAGE> 33

7. REDEEMABLE CLASS B NONVOTING CONVERTIBLE STOCK

The Company's Class B nonvoting convertible stock carries a 12%
noncumulative dividend limited to 25% of the Company's income before taxes
each year, up to a maximum of $1.20 per share. The Class B nonvoting
convertible stock is convertible on a one-for-one basis up to a maximum of
20% of the Class A common stock of the Company after conversion. The stock
is redeemable at $10 per share for a 30-day period after the tenth
anniversary of the issuance date (April, 1990 to September, 1991) at the
option of the holder. Shares which are not redeemed during that time are
automatically converted to Class A common stock on a one-for-one basis. The
following summarizes the amounts pertaining to the Class B nonvoting
convertible stock:

<TABLE>
<S> <C> <C>
DECEMBER 31,
1996 1995
Redeemable Class B nonvoting convertible stock (no par
value-authorized 100,000 shares, issued and outstanding 75,500
shares), at redemption or liquidation value $755,000 $755,000
Unamortized stock issuance costs (32,095) (40,119)
---------- ----------
Class B nonvoting convertible stock $722,905 $714,881
========== ==========
</TABLE>

During the years ended December 31, 1995 and 1994, the Company allowed
redemptions aggregating $200,000 and $45,000, respectively, outside the
standard terms of the stock agreement. The 1995 redemption resulted in a
gain of $27,270 which has been recorded directly to retained earnings.

8. PREFERRED STOCK

Each share of the Series A preferred stock is entitled to cumulative annual
dividends of 8% payable, if as and when declared by the Board of Directors,
quarterly. Unpaid dividends will accumulate and be payable prior to the
payment of dividends on the Company's Class A common stock. The preferred
stock is redeemable at any time at the option of the Company, on not less
than 30 days written notice to registered holders. The redemption price
shall be $14.70 per share if redeemed during 1997, $14.56 per share if
redeemed during 1998, $14.42 per share if redeemed during 1999, $14.28 per
share if redeemed during 2000, $14.14 per share if redeemed during 2001, and
$14.00 per share if redeemed thereafter, plus, in each case, accumulated
unpaid dividends. Unless previously redeemed by the Company, the holders of
the preferred stock are entitled at any time to convert each share into .875
shares of Class A common stock. The preferred stock is not entitled to vote
on any matter except where the Iowa Corporation Act requires voting as a
class, in which case each share of stock shall be entitled to one vote per
share on those matters where the preferred stock is voting as a class. The
preferred stock is entitled to a preference on liquidation equal to $14.00
per share, plus accumulated unpaid dividends.

- 18 -

<PAGE> 34

9. COMMON STOCK WARRANTS

The Company's common stock warrant activity is summarized as follows:

<TABLE>
<S> <C> <C> <C>
EXPIRATION EXERCISE NUMBER
DATE PRICE OUTSTANDING
Issued to the parent in 1995 in connection
with the subordinated note payable
restructuring 2000 $16.82 118,875
Issued in 1996 in connection with the subordinated
notes payable offering 2001-2004 16.00 33,011
Issued in 1996 in connection with the preferred
stock/warrant offering:
A Warrant 1998 12.00 30,341
B Warrant 1999 14.00 30,341
-----------
Balance at December 31, 1996 212,568
===========
</TABLE>

10. PROFIT SHARING PLAN

The Company participates in a qualified profit sharing plan under Internal
Revenue Code Section 401(a), including a qualified cash or deferred
arrangement under Section 401(k), sponsored by Berthel Fisher & Company
Financial Services, Inc. Under the terms of the plan, each participant may
elect to defer compensation from 2% to 15%. A matching contribution equal
to 50% of the deferred compensation of all eligible participants will be
made by the employer up to 4% of each participant's total compensation. The
employee contributions to the plan are fully vested and employer
contributions vest over five years. The Company's contribution for the
years ended December 31, 1996, 1995 and 1994 aggregated $14,927, $11,217 and
$7,736, respectively.

11. MANAGEMENT AND SERVICES AGREEMENTS

In addition to the agreements described in Note 4, the Company also has an
unwritten, month-to-month agreement with its parent in which the Company's
parent provides management services at a monthly rate of $17,500, $20,000
and $15,400 during 1996, 1995 and 1994, respectively. In addition, during
1993, the Company paid its parent $50,000 to provide consulting services
relating to TIF X for such items as lease documentation, lease approvals,
debt structuring and portfolio liquidation. This payment is being amortized
to expense over five years, the estimated life of the operating phase of TIF
X.

The Company, from time to time, will engage the services of Berthel Fisher &
Company Financial Services, Inc., a broker-dealer wholly owned by the
Company's parent. In addition, the Company reimburses Berthel Fisher &
Company Financial Services, Inc. for operating expenses incurred on its
behalf, including certain expenses related to the administrative services
agreements discussed in Note 4. The Company also enters into other
arrangements with the parent or its affiliates. Following are the amounts
paid by the Company to Berthel Fisher & Company or its affiliates related to
these arrangements:

<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1996 1995 1994
Issuance costs paid (and capitalized) in connection with
the subordinated notes payable offering $223,070 $ - $ -
Commissions paid on various other transactions - 3,935 3,177
TIF IX and TIF X administrative services
expense reimbursements - 46,444 66,867
Operating expense reimbursements 50,173 77,063 29,214
Office rent - 28,240 19,200
</TABLE>

- 19 -

<PAGE> 35

During the year ended December 31, 1994, the Company purchased equipment for
$318,331, and residuals for $119,027 from certain limited partnerships for
whom an affiliate acts as general partner.

12. COMMITMENTS AND CONTINGENCIES

The Company is contingently liable for all debts of TIF IX and X as the
general partner.

The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF IX. The line-of-credit agreement allows TIF IX
to borrow the lesser of $6.25 million, or 32% of its qualified accounts, as
defined in the agreement. The balance outstanding under this line-of-credit
was $1,060,490 and $4,113,504 at December 31, 1996 and 1995, respectively.
The agreement matures on November 30, 1997, is cancellable by the lender
after giving a 90-day notice and is collateralized by substantially all
assets of TIF IX. The note is also guaranteed by the Company's parent and a
principal stockholder of the Company's parent.

The Company also has guaranteed amounts outstanding under a line-of-credit
agreement with a bank of TIF X. The line-of-credit agreement allows TIF X
to borrow the lesser of $7.25 million, or 32% (40% as of November 1996) of
its qualified accounts, as defined in the agreement. The balance
outstanding under this line-of-credit was $2,607,911 at December 31, 1996
and $5,685,953 at December 31, 1995. The agreement matures on November 30,
1997, is cancellable by the lender after giving a 90-day notice and is
collateralized by substantially all assets of TIF X. The note is also
guaranteed by the Company's parent and a principal stockholder of the
Company's parent.

The Company also has guaranteed amounts outstanding under installment loan
agreements of TIF IX and TIF X totaling $2,231,510 and $3,349,294 at
December 31, 1996 and 1995, respectively. The agreements are collateralized
by certain direct financing leases and a second interest in all assets of
TIF IX and TIF X.

In December 1995 the Company entered into a lease agreement for office
space. The lease term began January 1, 1996 and expires December 30, 2000.
Rent is $58,368 per year under the agreement.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value amounts disclosed below are based on estimates prepared by
the Company based on valuation methods appropriate in the circumstances.
Generally accepted accounting principles do not require disclosure for lease
contracts. The carrying amount for financial instruments included among
cash and cash equivalents, due from affiliates, line-of-credit agreement,
and other short-term payables approximates their fair value because of the
short maturity of those instruments or the variable interest rate feature of
the instruments. The estimated fair value of other significant financial
instruments are based principally on discounted future cash flows at rates
commensurate with the credit, interest rate and prepayment risk involved.

The estimated fair values of the Company's other significant financial
instruments are as follows:

<TABLE>
<S> <C> <C> <C> <C>
DECEMBER 31, DECEMBER 31,
1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Notes receivable $6,530,354 $6,489,812 $7,318,579 $7,410,066
Notes payable 2,310,805 2,284,873 3,235,521 3,142,587
Subordinated debt 5,720,522 5,945,762 2,989,980 2,989,980
</TABLE>

- 20 -

<PAGE> 36

14. CURRENT OFFERING

The Company has a private placement best efforts offering in process at
December 31, 1996 for the issuance of $2 million of Class A preferred stock
and warrants. The Company issued $424,774 of preferred stock and $60,682 of
warrants to its parent at December 31, 1996 in exchange for the conversion
of the subordinated note payable to parent of $264,980 and the contribution
of restricted stock of a public company with an estimated fair value of
$220,477. There can be no assurance that the Company will complete the sale
of these securities.

* * * * *

- 21 -
<PAGE> 37

<TABLE>
<S> <C>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT'S ON ACCOUNTING AND FINANCIAL DISCLOSURE
---------------------------------------------------------------------------------------

None
</TABLE>

PART III

<TABLE>
<S> <C> <C>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------------------------------------------------------------

The Company's executive officers and directors and their ages and position with the Company are as follows:
Name Age Positions with Company
- ------------------------------------ ------------------------------------ ----------------------------------------------------

Thomas J. Berthel 45 President, Chief Executive Officer, Director
Nancy L. Lowenberg 37 Vice President, Chief Operating Officer, Director
Greg Pugh 39 Executive Vice President, Director
Ronald O. Brendengen 43 Treasurer, Chief Financial Officer, Director
Leslie D. Smith 50 Secretary
Steven J. Hogan 51 Director
Emmett J. Scherrman 64 Director
Von L. Elbert 58 Director
</TABLE>

Thomas J. Berthel, Age 45, Chief Executive Officer (1994-present) of the
Company, served as president from the Company's inception to 1994, and was
elected President in October, 1996. He also serves as Director (inception to
present) of the Company. Mr. Berthel served as President of Berthel Fisher &
Company Financial Services, Inc. from its inception to 1993, and since 1993 has
served as Chief Executive Officer and a Director of Berthel Fisher & Company
Financial Services, Inc. Mr. Berthel also serves as President and Chairman of
the Board of Berthel Fisher & Company, the parent company of both the Company
and Berthel Fisher & Company Financial Services, Inc. Mr. Berthel serves as
the Chairman of the Board and Chief Executive Officer of Berthel Fisher &
Company Planning, Inc., the trust advisor of Berthel Growth & Income Trust I, a
company required to file reports pursuant to the Securities Exchange Act of
1934. Mr. Berthel also serves in various offices and as a Director of various
other subsidiaries of Berthel Fisher & Company. In November, 1995, Mr. Berthel
was elected a director of Intellicall, Inc., a publicly traded company. He
also serves as the Chairman of the Board of Amana Colonies Golf Course, Inc.
Mr. Berthel holds a Financial and Operation Principal license issued by the
National Association of Securities Dealers, Inc. He is also a Certified Life
Placement Agent. Mr. Berthel has also served as an individual general partner
of eight private leasing programs. Mr. Berthel holds a bachelor's degree from
St. Ambrose College, Davenport, Iowa (1974). He also holds a Master's degree
in Business Administration from the University of Iowa, Iowa City, Iowa (1993).

Nancy L. Lowenberg, age 37, has been elected Vice President and Chief
Operating Officer of the Company beginning January 2, 1997. From September
1986 to December, 1996, Ms. Lowenberg has been employed by Firstar Bank Iowa,
N.A., in Cedar Rapids as Vice President Commercial Loans for Iowa. As Vice
President Commercial Loans, she has been relationship manager of 62 accounts
with approximately $70,000,000 of committed credit, with responsibility for
annual review and maintenance of existing accounts and business development.
From 1981 to 1986, Ms. Lowenberg was employed by First Bank Systems. Ms.
Lowenberg received her Bachelor of Science Agricultural Business with a minor
in Finance in 1981 from Iowa State University, Ames, Iowa.

Gregory Pugh, age 39, was appointed Executive Vice President of the
Company in 1995. He has served as Vice President since October, 1990. Mr.
Pugh was elected to serve as a Director of the Company in August, 1995. Prior
to joining the Company, Mr. Pugh was employed by Norwest Mortgage from 1989 to
1990 as Branch Facilities Specialist in Des Moines, Iowa. Mr. Pugh was
employed by the Principal Financial Group from 1983 to 1988 in various
capacities. His last position with Principal Financial

<PAGE> 38

Group was as a Mortgage Loan Officer. Mr. Pugh was awarded a Bachelor of
Science degree in Industrial Administration/Business Management in 1981 from
Iowa State University and a Masters of Business Administration degree from
Drake University in Des Moines, Iowa in 1990.

Ronald O. Brendengen, age 43, is the Treasurer, Chief Financial Officer
and a Director (1988-present) of the Company. He was elected to his current
offices in October, 1996. He has served as Secretary (1994-March, 1995),
Treasurer, (1998-August, 1995), and Chief Financial Officer (1994-August, 1995)
of the Company. He served as Controller (1985-1993), Treasurer (1987-present,
Chief Financial Officer, Secretary and a Director (1987-present) of Berthel
Fisher & Company, the parent company of the Company. Mr. Brendengen also
serves as the Treasurer, Chief Financial Officer and a Director of Berthel
Fisher & Company Planning, Inc., the trust advisor of Berthel Growth & Income
Trust I, a company required to file reports pursuant to the Securities Exchange
Act of 1934. He also serves in various offices and as a Director of each
subsidiary of Berthel Fisher & Company. Mr. Brendengen holds a certified
public accounting certificate and worked in public accounting during 1984 and
1985. From 1979 to 1984, Mr. Brendengen worked in various capacities for
Morris Plan and MorAmerica Financial Corp., Cedar Rapids, Iowa. Mr. Brendengen
attended the University of Iowa before receiving a bachelor's degree in
Accounting and Business Administration with a minor in Economics from Mt. Mercy
College, Cedar Rapids, Iowa, in 1978.

Leslie D. Smith, age 50, is the Secretary (March, 1995-present) of the
Company. Mr. Smith serves as the Secretary and a Director of Berthel Fisher &
Company Planning, Inc., the trust advisor of Berthel Growth & Income Trust I, a
reporting company. In 1994, Mr. Smith was named General Counsel of Berthel
Fisher & Company, parent company of the Company. Mr. Smith was awarded his
B.A. in Economics in 1976 from Iowa Wesleyan College, Mount Pleasant, Iowa, and
his J.D. in 1980 from the University of Dayton School of Law, Dayton, Ohio.
Mr. Smith was employed as an Associate Attorney and as a Senior Attorney for
Life Investors, Inc., Cedar Rapids, Iowa, from 1981 through 1985 where he was
responsible for managing mortgage and real estate transactions. From 1985 to
1990, Mr. Smith was General Counsel for LeaseAmerica Corporation, Cedar Rapids,
Iowa. From 1990 to 1992, Mr. Smith was Operations Counsel for General Electric
Capital Corporation, where he was responsible for managing the legal department
of a GATCH division located in Cedar Rapids, Iowa. From 1993 to 1994, Mr.
Smith was employed as Associate General Counsel for Gateway 2000, Inc., in
North Sioux City, South Dakota.

Steven J. Hogan, age 51, was elected a Director of the Company in August,
1995. In May, 1995, Mr. Hogan was elected Chairman and Chief Executive Office
of Electronic Exchange & Transfer Corporation. In 1991, Mr. Hogan founded
LinkUSA Corporation, a wholesale-only provider of calling card services and
other enhanced services to local and interexchange carriers. He served as
President and CEO of LinkUSA from its inception until 1994. From 1987 to
1991, Mr. Hogan was Vice President of Communications Research at Telecom*USA
Company. From 1985 to 1987, Mr. Hogan was General Manager of the Communication
Products Division of Teleconnect Company. Mr. Hogan is Principal Member of
Plans and Concepts, L.P., an industry consulting organization offering
technical and business planning with particular expertise in
telecommunications and transaction processing. Mr. Hogan graduated from the
Illinois Institute of Technology with a BS degree in 1968.

Emmett J. Scherrman, age 65, was elected a Director of the Company in
August, 1995. Mr. Scherrman graduated in 1953 from Loras College with a B.A.
in accounting , and attended the U.S. Army Finance School, Ft. Benjamin
Harrison, from 1953 to 1955. Mr. Scherrman served as President (1997 to 1987)
and Chairman of the Board and Chief Executive Officer (1987-1990) of
LeaseAmerica Corporation, Cedar Rapids, Iowa. Since his retirement from
LeaseAmerica in 1990, Mr. Scherrman has served as a consultant to Brenton Bank
and Trust Company, Cedar Rapids, Iowa from 1992 to present. Mr. Scherrman
currently serves as a Director of Brenton Bank and Trust Company; Treasurer and
Director of Oak Hill Engineering, Inc.; Chairman, Board of Trustees, Mount
Mercy College; and Treasurer and Member of the Board of Trustees, Mercy Medical
Center.
Von L. Elbert, age 58, was elected Director of the Company in October,
1996. He has served as a Director of Berthel Fisher & Company, the parent of
the Company, since May, 1991. From 1978 to 1988, Mr. Elbert was the President
of TLS, Co., a data processing company. from 1988 to 1996, he served as

<PAGE> 39

the Vice President, Treasurer and Chief Financial Officer of Galt Sand Company,
a manufacturer of wearing apparel. Mr. Elbert also serves as a director of
Mercantile Bank of Eastern Iowa. Mr. Elbert received his BBA degree from the
University of Iowa in 1962.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid or accrued by the
Company for services rendered during 1994, 1995 and 1996 with respect to the
Chief Executive Officer and the President of the Company:

SUMMARY OF COMPENSATION TABLE

ANNUAL COMPENSATION

<TABLE>
<S> <C> <C> <C> <C> <C>
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation(1)
- ----------------------- ---- ---- ------ ------ ------ ------------ ---------------

Thomas J. Berthel
Chief Executive Officer 1994 $-0- $-0- $-0- $128,683 (2)
1995 $-0- $-0- $-0- $169,712 (2)
1996 $-0- $-0- $-0- $128,705 (2)
</TABLE>

(1) Beginning with meetings held after August 1, 1995, directors of the
Company who are also employees of the Company or affiliates of the Company
are paid meeting fees of $150 per meeting; directors of the Company who
are not also employees of the Company or affiliates of the Company are
paid meeting fees of $250 per meeting.

(2) Includes fees received from the parent of the Company for services
provided by Mr. Berthel to Telecommunications Income Fund IX, L.P. and
Telecommunications Income Fund X, L.P., two limited partnerships for which
the Company serves as general partner. The fees received by Mr. Berthel
are equal to twenty percent of the management fee received by the Company
from the limited partnerships.

During 1996 the Company paid management fees of $20,000 per month to
Berthel Fisher & Company ("BFC") for providing administrative and consulting
services of the Company. The terms of this arrangement are set forth in a
written contract that expires on December 31, 1996. The contract also provided
that BFC would receive 1% of revenues, not to exceed 20% of net profits before
taxes for 1995 and 1996, if the Company had before tax profit of $250,000 for
those years. After December 31, 1996, the Board of Directors of the Company
will extend the contract on such terms as it negotiates with BFC. See
"Outlook" under Item 6. Some of the consulting fees paid were for providing
the services of Mr. Berthel, Mr. Brendengen and Mr. Smith, each of whom
received compensation from BFC for such services. Mr. Berthel, Mr. Brendengen
and Mr. Smith also received compensation for services provided to BFC and to
other companies affiliated with BFC.

<PAGE> 40

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

All of the common voting stock of the Company is owned by Berthel Fisher &
Company, Inc. The following table sets forth, as of December 31, 1996, the
number of shares of the common stock of Berthel Fisher & Company (the parent of
the Company) beneficially owned by (i) each director of the Company, (ii) each
executive officer of the Company named in the Summary Compensation Table, (iii)
each person known by the Company to beneficially own more than five percent of
the outstanding shares of the common stock of Berthel Fisher & Company, and
(iv) all executive officers and directors of the Company as a group.

<TABLE>
<S> <C> <C> <C>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF OUT-
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED(1) STANDING SHARES (2)
- -------------- --------------------------------------------------- --------------------- -------------------

Common Thomas J. Berthel (3)
100 Second Street SE 450,000 42.98%
Cedar Rapids. IA 52401

Common Ronald O. Brendengen
100 Second Street SE 29,555 2.82%
Cedar Rapids, IA 52401

Common Greg Pugh
425 Second Street SE, Ste. 600 1,000 .10%
Cedar Rapids, IA 52401

Common Lynn Whiteman (4)
425 Second Street SE, Ste. 600 1,298 .12%
Cedar Rapids, IA 52401

Common Fred P. Fisher (5)
10875 Benson Drive, Ste. 130 121,666 11.62%
Overland Park, KS 66210

Common Gary L. Rickels
Rural Route #1 101,333 9.68%
Center Junction, IA 52212

Common Von L. Elbert
315 Andover Lane SE 50,000 4.78%
Cedar Rapids, IA 52403

Common All executive officers and directors
as a group (five persons) 532,073 50.82%
</TABLE>

(1) Unless otherwise indicated, each person has sole voting and dispositive
power over such shares.

(2) Based on 1,046,899 shares of the common stock of Berthel Fisher & Company
outstanding at December 31, 1996.

(3) Does not include 500 shares of Class B Nonvoting Convertible Stock of the
Company owned by Mr. Berthel's wife. The 500 shares are convertible into
less than one tenth of one percent of the Company's common stock. Does
not include an option to purchase 15,000 shares of common stock of Berthel
Fisher & Company.

(4) Ms. Whiteman resigned her position with the Company effective February
21, 1997.

(5) Includes 104,333 shares owned by Mr. Fisher's individual retirement
account.

<PAGE> 41

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION

The Company serves as the general partner of two publicly held limited
partnerships, Telecommunications Income Fund IX, L.P. ("TIFIX) and
Telecommunications Income Fund X, L.P. ("TIFX"). The Company receives
management fees from TIFIX and TIFX in its capacity as general partner. The
Company has entered into a consulting contract with Mr. Thomas J. Berthel that
provides for twenty percent of the management fee from TIFIX to be paid to Mr.
Berthel for consulting services provided to the Company in connection with its
obligations as the general partner of TIFIX. This contract will continue
during the duration of TIFIX. The consulting fees paid to Mr. Berthel on
account of services provided to TIFIX were $82,563 and $88,573, and $64,532 in
1995, 1995 and 1996, respectively. Mr. Berthel also provides consulting
services to the Company in connection with the Company's obligations as general
partner of TIFX. In connection with these services, Mr. Berthel was paid
$48,935, $84,573, and $135,091 in 1994, 1995 and 1996, respectively.

Certain administrative, managerial, consulting and operational services
are provided to the Company by its parent Berthel Fisher & Company ("BFC").
Prior to October, 1995, these services were provided on a month to month basis
pursuant to terms established from time to time by the Board of Directors of
the Company and the Board of Directors of BFC. The amount of fees were
determined on an annual basis by the Boards of Directors of the Company and
BFC. In October, 1995, the Company and BFC entered into a written agreement
whereby BFC would continue to provide these services for the period ending
December 31, 1996, and thereafter on an annual basis subject to the approval of
the Boards of Directors of both companies. The written agreement specifies the
services to be provided and fixes the monthly fee at $20,000.

T. J. Berthel Enterprises, Inc., a company owned one-half by the Company's
parent and one-half by Thomas J. Berthel, is the general partner of a limited
partnership that owns approximately 7% of the outstanding common stock of
Intellicall, Inc. An individual who owns approximately 4.8% of the Company's
parent also owns approximately 9.5% of this limited partnership. In November,
1995, Mr. Berthel was elected to serve on the Board of Directors of
Intellicall, Inc.

The Company has entered into lease transactions with VLE Co and Internet
Navigator, Inc., having a net investment of approximately $205,000 and
$143,000, respectively. Mr. Von L. Elbert, who has guaranteed the leases with
both companies, owns controlling interest in VLE Co. and 20% of Internet
Navigator, Inc. The Company has also entered into lease transactions having a
net investment of approximately $290,000 with Electronic Exchange & Transfer
Corporation. Mr. Steven J. Hogan, who serves as the Chairman and Chief
Executive Officer of Electronic Exchange & Transfer Corporation, has guaranteed
those leases.

<PAGE> 42

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 Articles of Incorporation of the Company, as amended, filed
as Exhibit 3.1 to Registration Statement No. 33-98346C are hereby
incorporated by reference.
3.2 Bylaws of the Company, as amended, filed as Exhibit 3.2 to
Registration Statement No. 33-98346C are hereby incorporated by
reference.
4.1 Form of Note filed as Exhibit 4.1 to Registration Statement
No. 33-98346C is hereby incorporated by reference.
4.2 Form of Indenture by and between the Company and Firstar
Trust Co., as Trustee filed as Exhibit 4.2 to Registration Statement
No. 33-98346C is hereby incorporated by reference.
4.3 Form of Warrant Certificates filed as Exhibit 4.3 to
Registration Statement No. 33-98346C is hereby incorporated by
reference.
4.4 Terms of Warrant filed as Exhibit 4.4 to Registration
Statement No. 33-98346C is hereby incorporated by reference.

Material Contracts

10.1 Revolving Loan and Security Agreement filed as Exhibit 10.1
to Registration Statement No. 33-98346C is hereby incorporated by
reference.
10.2 Management Agreement with Berthel Fisher & Company as Exhibit
10.2 to Registration Statement No. 33-98346C is hereby incorporated
by reference.
10.3 Incentive Stock Option Plan filed as Exhibit 10.3 to
Registration Statement No. 33-98346C is hereby incorporated by
reference.
10.4 Incentive Bonus Plan filed as Exhibit 10.4 to Registration
Statement No. 33-98346C is hereby incorporated by reference.
10.5 Line of Credit with The National Bank of Waterloo filed as
Exhibit 10.7 to Registration Statement No. 33-98346C is hereby
incorporated by reference.
10.6 Berthel Fisher & Company Subordinated Debenture and Warrant
filed as Exhibit 10.8 to Registration Statement No. 33-98346C is
hereby incorporated by reference.
10.7 Lease - Business Property (office space) filed as Exhibit
10.13 to Registration Statement No. 33-98346C is hereby incorporated
by reference.
10.8 Agreement between Southwest Merchant Group and the Company
filed as Exhibit 10.14 to Registration Statement No. 33-98346C is
hereby incorporated by reference.
10.9 Consulting agreement with Thomas J. Berthel filed as Exhibit
10.16 to Registration Statement No. 33-98346C is hereby incorporated
by reference.
10.10 Amendment to Revolving Loan and Security Agreement filed as
Exhibit 10.16 to Registration Statement No. 33-98346C is hereby
incorporated by reference.
10.11 Agreement between Nutmeg Securities Ltd. and the Company
filed as Exhibit 10.17 to Registration Statement No. 33-98346C is
hereby incorporated by reference.
10.12 Amendment to Revolving Loan and Security Agreement filed as
Exhibit 10.16 to Registration Statement No. 33-98346C is hereby
incorporated by reference.
11 Statement re computation of per share earnings
16 Letter on Change in Certifying Accountant filed as Exhibit 16
to Registration Statement No. 33-98346C is hereby incorporated by
reference.
21 Subsidiaries of the Registrant
27 Financial Data Schedule - filed electronically

(b) Reports on Form 8-K

1. Form 8-K filed October 30, 1996, covering Item 5 "Other Events"

<PAGE> 43

SIGNATURES

Pursuant tot he 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.

BERTHEL FISHER & COMPANY LEASING, INC.
(REGISTRANT)

By Berthel Fisher & Company Leasing, Inc.

<TABLE>
<S> <C>
By: Date: March 27, 1997
--------------------- ---------------------
Thomas J. Berthel
President

By Berthel Fisher & Company Leasing, Inc.

By: Date: March 27, 1997
--------------------- ---------------------
</TABLE>

Ronald O. Brendengen
Chief Financial Officer, Treasurer

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
Registrant and in the capacities and on the dates indicated.

Date: March 27, 1997
Thomas J. Berthel/s/
Chief Executive Officer
President, Director
Berthel Fisher & Company Leasing, Inc.

Date: March 27, 1997
Nancy L. Lowenberg/s/
Chief Operating Officer, Director
Berthel Fisher & Company Leasing, Inc.

Date: March 27, 1997
Ronald O. Brendengen/s/
Treasurer, Director
Berthel Fisher & Company Leasing, Inc.

Date: March 27, 1997
Gregory G. Pugh/s/
Executive Vice-President, Director
Berthel Fisher & Company Leasing, Inc.

Date: March 27, 1997
Daniel P. Wegmann/s/
Controller
Berthel Fisher & Company Leasing, Inc.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED BALANCE SHEET AS OF DECEMBER 31, 1996 AND AUDITED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 FOR BERTHEL FISHER & COMPANY
LEASING, INC., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 342,726
<SECURITIES> 250,477
<RECEIVABLES> 16,411,644
<ALLOWANCES> (412,916)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,467,036
<DEPRECIATION> (329,641)
<TOTAL-ASSETS> 18,729,326
<CURRENT-LIABILITIES> 0
<BONDS> 17,307,358
0
422,835
<COMMON> 67,684
<OTHER-SE> (654,611)
<TOTAL-LIABILITY-AND-EQUITY> 18,729,326
<SALES> 3,571,952
<TOTAL-REVENUES> 3,571,952
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,478,234
<LOSS-PROVISION> 592,874
<INTEREST-EXPENSE> 1,791,120
<INCOME-PRETAX> 1,290,276
<INCOME-TAX> (453,720)
<INCOME-CONTINUING> (836,556)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (836,556)
<EPS-PRIMARY> (2.09)
<EPS-DILUTED> (2.09)

</TABLE>