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

                                    FORM 10-K

(Mark One)
[ X ] ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ____________ to _____________.

                         Commission file number 0-28152

                         Affinity Technology Group, Inc.
             (Exact name of registrant as specified in its charter)

                                    Delaware
         (State or other jurisdiction of incorporation or organization)

                                   57-0991269
                      (I.R.S. Employer Identification No.)

                          1201 Main Street, Suite 2080
                             Columbia, SC 29201-3201
                    (Address of principal executive offices)
                                   (Zip code)

                                 (803) 758-2511
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, par value $.0001 per share
                                (Title of class)

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


         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         The  aggregate  market value of the  Registrant's  Common Stock held by
non-affiliates of the Registrant was  approximately  $16,136,102 as of March 17,
1998. For purposes of such  calculation,  shares of Common Stock held by persons
who hold more than 10% of the outstanding shares of Common Stock and shares held
by directors and officers of the Registrant and their  immediate  family members
have been  included  because such persons may be deemed to be  affiliates.  This
determination is not necessarily conclusive.

         There were 30,155,673  shares of Registrant's  Common Stock outstanding
as of March 17, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain  portions of the  Registrant's  proxy statement with respect to the 1998
Annual Meeting of  Stockholders  of the  Registrant  have been  incorporated  by
reference herein.



<PAGE>



         Item 1 of this Form 10-K  entitled  "Business"  and Item 7 of this Form
10-K entitled  "Management's  Discussion and Analysis of Financial Condition and
Results of Operations" contain forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934.  Forward-looking  statements are inherently  uncertain and
actual results could differ  materially  from those  expressed or implied by the
forward-looking   statements.   These   forward-looking   statements  should  be
considered  in the  context of the  business  risks set forth below in Item 1 of
this report under the caption "Business Risks."

Part I
Item 1  Business

General

         The Company was formed to develop and market  technologies  that enable
financial  institutions  and other  businesses  to  provide  consumer  financial
services  electronically with reduced or no human  intervention.  For the period
from inception  (January 12, 1994) through  December 31, 1994, the Company was a
development stage company, and its activities  principally related to developing
its Decision  Support  System/Real  Time  ("DeciSys/RT"  Service Mark) (formerly
known  as the DSS  system)  and  the  Affinity  Automated  Loan  Machine  ("ALM"
Registered Trademark), raising capital and recruiting personnel.

         Prior to  early  1997  the  Company's  primary  products  and  services
consisted of the ALM system and a call center  decisioning system which provided
financial  institutions the ability to originate  unsecured  consumer loans with
little or no human  intervention.  During  this period the  Company's  customers
primarily   utilized  the  ALM  delivery  channel  which  captured   origination
information  for  unsecured  consumer  loan  applications  and then  routed this
information to DeciSys/RT for an automated decision.

         Even  though the  Company  believes  the market  for its  products  and
services are vast,  in 1997 the Company  continued to  experience  disappointing
revenue  growth and an extremely  lengthy sales cycle for its products.  Average
consumer use of ALMs in service and average rates for loan  approvals  have been
lower than most customer  expectations.  While certain  customers  have deployed
their ALMs in a manner that has resulted in acceptable loan approval rates,  the
Company  believes  that  the  economic  viability  of the  ALM as an  acceptable
alternative to traditional and new lending methods has not yet been established,
which has resulted in the  termination of the Company's  relationships  with one
significant  ALM  customer,  another  potentially  significant  ALM customer and
certain other ALM customers.  The terminations have not  significantly  affected
the Company's operating results.

         During 1997 the Company  continued its channel and product  development
to enable the automated  decisioning,  processing  and  fulfillment of financial
product  transactions by DeciSys/RT  originating through not only ALMs, but also
other  non-ALM  channels,  including  call  centers,  branches,  and  automobile
dealerships.  The Company's system includes  inherent  architecture that enables
integration of origination,  processing and  fulfillment  across a wide range of
interface channels with the consumer. A significant new channel system developed
in 1997 is e-xpertLender  ("e-xpertLender"  Service Mark).  e-xpertLender is the
Company's  system  that  establishes  connectivity  among  all  of  a  financial
institution's  delivery channels, its automated decisioning system, and its risk
management group. e-xpertLender also, upon approval, gives the consumer a choice
of closing methods that include  branches,  ALMs,  mail, and third party closing
agents. The system enables call center agents and branch personnel to inquire as
to the status of applications anytime and electronically  notifies loan officers
with respect to exceptions and the reason for referral.  e-xpertLender  replaced
the Company's call center  decisioning  system  (Assets3)  previously  developed
under a joint venture agreement with Union Planters Corporation.  The Company no
longer markets the Assets3 system. Additionally, the joint venture agreement was
terminated in 1997 (see Note 2 of "Notes to Consolidated  Financial Statements -
Summary of Significant Accounting Policies - Minority Interest").

         The   Company's   expanded   product   capabilities   for  the  ALM  or
e-xpertLender include auto loan vouchers, the ability to open checking accounts,
overdraft protection, the ability to apply for lines of credit and credit cards,
unsecured  personal  loans,  direct and  indirect  auto  loans,  mortgages,  and
insurance, as well as counter offers to applicants who qualify for a loan amount
higher or lower than the loan amount  originally  requested.  Financial  product
origination  capabilities  currently under development include home equity loans
and the ability to apply for home equity lines of credit.

         Substantially all the Company's revenues to date have been derived from
fees charged for the installation of the Company's products and services,  sales
and rental of ALMs and performance of professional  services in conjunction with
the installation of the Company's  technology.  To a lesser extent,  the Company
has derived recurring revenues from transactions  processed through  DeciSys/RT.
The  Company's   strategy  is  to  generate  a  recurring  revenue  stream  from
transaction  fees  while  recovering  its  cost of  assembling,  installing  and
maintaining products and services through revenue generated by set-up, ALM sales
and rental and other fees.

         In May 1997 the Company  acquired the assets of Buy American,  Inc. and
Project  Freedom,  Inc. ("Buy American") for $300,000 in cash and 259,460 shares
of common stock, plus additional consideration of up to $6,000,000 (no less than
80% of which  would be payable in stock)  depending  on the  performance  of the
business  acquired during the five year period  following the  acquisition.  The
principal  assets  purchased in conjunction  with the  acquisition  consisted of
technology designed to originate  automobile  insurance policies through a kiosk
("the automobile  insurance system") and a patent on the process utilized by the
automobile  insurance system.  Buy American was in an early stage of development
at the time of the acquisition, and the Company has continued development of the
automobile  insurance system. The automobile insurance system is very similar to
the ALM System in its appearance,  functions and interaction with consumers (see
Note 7 of "Notes to Consolidated Financial Statements - Acquisition").

         Except  for  the  loans  originated   through  Surety  Mortgage,   Inc.
("Surety"), a wholly-owned subsidiary of the Company formed in January 1998, the
Company does not make or guarantee  loans,  does not receive any interest income
or other fees directly from  borrowers and does not offer,  endorse or guarantee
any other products or services  offered by its financial  institution  customers
(see "Products and Services - Mortgage Brokerage Business").  Under the terms of
the  contractual  relationships  with its customers,  the Company is entitled to
payment  without  regard  to  whether  consumer  loans  made  through  an ALM or
e-xpertLender are repaid.

Products and Services

         The  Company's   DeciSys/RT   system   automates  the   processing  and
consummation  of  financial  products  and  services.  Based  on  the  Company's
proprietary   object-oriented   software,   DeciSys/RT   uses   a   multi-tiered
client/server  architecture to provide a stable,  scalable  platform  capable of
processing  large numbers of  transactions  in a reliable,  efficient and timely
fashion.  DeciSys/RT  can  simultaneously  interact  with  consumers  to capture
personal  information  (such as through  touch-screen  terminals) and with third
parties (such as credit bureaus) that supply additional information necessary to
consummate  the  transaction  efficiently.  A  central  server  located  at  the
Company's Network Operations Center ("NOC") coordinates the flow and analysis of
information and evaluates,  based on each customer's underwriting model, whether
and on what terms the transaction can be consummated.

         The Company has focused its product  development  efforts on exploiting
its DeciSys/RT  technology to enhance  transaction  origination,  processing and
fulfillment systems. The Company believes its DeciSys/RT technology is useful to
businesses, such as consumer lending institutions,  engaged in transactions that
require collecting information from consumers and third parties,  analyzing such
information and providing transaction  fulfillment.  For such transactions,  the
channel   integration   in   conjunction   with  the  speed  and  efficiency  of
DeciSys/RT-based systems have the potential to offer significant advantages when
compared to more labor  intensive  and less  technically  advanced  origination,
processing and fulfillment systems.

         The Affinity ALM

         General.  The ALM and  DeciSys/RT  (together,  the "ALM System")  fully
automate the consumer lending process,  enabling  consumers to apply for and, if
approved, receive a personal loan (including loan documentation and proceeds) in
as little as 10  minutes  without  involving  loan  officers,  customer  service
representatives  or  other  lending  personnel.  Similar  in  appearance  to  an
automated  teller  machine  ("ATM"),  the ALM is a fully  automated  system that
utilizes the Company's  proprietary  DeciSys/RT  technology  to process  certain
financial  service  transactions,  generate  the  underlying  documentation  and
distribute proceeds from loan transactions.  The Company believes the deployment
of ALMs in retail centers,  the workplace,  leisure and travel  destinations and
other  non-traditional  banking locations will enable the Company's customers to
reduce their costs of processing certain consumer financial service transactions
and maintain or increase  their  revenues and assets.  The Company also believes
its  customers  can use the ALM as a  substitute  for  traditional  branch-based
consumer transactions,  which involves significant personnel costs and typically
takes substantially more time to complete.

         Design and Features.  The ALM looks and interacts  with  consumers much
like an ATM and can be operated as a free standing kiosk. The Company's existing
customers have located ALMs in traditional branch offices,  malls, retail stores
and other retail environments.

         The ALM System  contains a magnetic  strip card reader used to identify
loan  applicants  by  credit  card,  charge  card,  or debit  card,  a  personal
identification  number  ("PIN")  pad which can be used in  conjunction  with the
magnetic  strip card  reader to capture PIN codes used by debit and ATM cards as
an alternative or additional method to identify loan applicants,  a touch-screen
monitor  used to  elicit  information  from  applications,  a  magnetic  pen and
signature capture unit used to electronically execute loan documents, a magnetic
ink  character  reference  ("MICR")  reader used to verify  savings and checking
account  information,  a digital camera system used to photograph  applicants as
they sign loan  documents,  video  cameras  used to take  pictures at  intervals
during all hours of ALM operations, a laser printer used to print loan documents
and checks on site and a modem  connecting  the ALM to the  Company's  NOC.  The
software  supporting  each ALM  System is  modified  by the  Company to meet the
marketing and underwriting requirements of each financial institution customer.

         The ALM Systems in service  during 1995,  1996 and early 1997 primarily
permitted  consumers  to  apply  for and  receive  unsecured  consumer  loans in
amounts,  and on terms and conditions,  specified by the particular ALM sponsor.
Also during this period the Company  continued to develop  additional  financial
products which could be originated at an ALM and processed  through  DeciSys/RT.
The products and services currently available through an ALM System include auto
loan vouchers, the ability to open checking accounts,  overdraft protection, the
ability to apply for lines of credit and credit cards, unsecured personal loans,
direct and indirect auto loans,  mortgages,  and  insurance.  The ALM system can
also make counter  offers to applicants  who qualify for a loan amount higher or
lower than the loan  amount  originally  requested.  The ALM System also has the
ability to cross-sell  other  products and services  offered by the  institution
during the time the  applicant is waiting for a decision on a loan  application.
Financial product origination  capabilities  currently under development include
home equity loans and the ability to apply for home equity  lines of credit.  In
addition,  financial  product  fulfillment  capabilities  using  the  ALM  as  a
fulfillment device are available for all of the Company's products offered using
DeciSys/RT.  The  Company's  developmental  activities  are subject to the risks
inherent in the  development  of new products and  applications,  including  the
development of unforeseen design or engineering problems.  See "Business Risks -
Early Stage Products and Services."

         Fraud Detection. The ALM System employs a number of methods intended to
detect and prevent fraudulent loan applications,  some of which are standard for
all ALMs and some of which are  customized to fit each  customer's  underwriting
model and  specifications.  Certain  information,  such as credit card data,  is
verified by  contacting  third-party  verification  services.  In addition,  the
DeciSys/RT    system   contains   fraud   analysis   software   that   evaluates
consumer-supplied data, such as social security numbers and addresses, against a
number of format and consistency tests.  Moreover,  additional fraud analysis is
performed  through the use of on-line fraud detection  service  providers.  As a
further deterrent,  each ALM imprints a digital photograph of the loan applicant
on all checks and other loan documents  generated in a transaction.  The Company
periodically refines its fraud detection programs to include other forms of data
verification  to aid in the  identification  of fraud.  Although  the Company is
unaware  of  any  significant  instances  of  fraud  in  connection  with  loans
consummated  through  the use of ALMs,  the rate of  fraudulent  activity  could
increase. See "Business Risks - Risk of Fraud in Consumer Lending."

         Deployment.  The  Company  currently  is able to design,  assemble  and
install an ALM System for a new customer in 45 to 90 days from the time an order
is accepted.  The Company  generally is able to assemble and install  additional
ALMs for a customer's existing ALM System in approximately 45 days.

         The Company  subcontracts with unaffiliated  third parties to construct
the  ALM  enclosure,  assemble  certain  ALM  components  and  provide  periodic
maintenance for ALMs placed in service.  Otherwise,  all aspects of assembly and
installation,   including  purchasing  of  components,  ALM  final  testing  and
transportation,  currently are  performed by employees of the Company.  Once the
systems have been  designed and  assembled,  the Company  tests the  operational
readiness of each ALM.  During this stage,  customers are required to review the
appearance of the ALM and to run test  transactions  in order to check adherence
to the customer's underwriting model. Prior to installation,  each customer must
certify in writing that its ALM System meets its lending and other standards.

         After an initial  order is  received,  the  Company  consults  with the
customer to prepare any necessary  specialized  software  applications  and loan
documentation  and to design the  exterior  graphics of the ALM and the computer
screens.  The Company  works  closely with its  customers to develop the program
design and  consumer  interface  and assists its  customers  in  complying  with
regulatory  requirements by providing,  among other things,  forms prepared by a
third-party  provider of  standardized  documents  for financial  services.  The
Company, through its demographic and underwriting consulting staff, periodically
consults with its customers regarding ALM performance.

         The Company has established  relationships with vendors of the hardware
components of the ALM. The Company  purchases  ALM  components as needed to meet
firm and expected  orders.  The Company  believes  that all ALM  components  are
available from a wide variety of sources.

         The Company generally is not obligated to retrofit ALMs in service with
new  hardware,  software or other  product  enhancements.  However,  the Company
believes  that it is  often  advantageous  to do so in  order  to  reduce  costs
associated   with   maintaining   multiple   production   versions  in  service.
Accordingly,  the Company's ALM  agreements  generally  require ALM customers to
accept  enhancements  and  generally  require  those who do not desire to accept
operational upgrades to ALMs in service to pay a special maintenance fee. Due to
cost savings often  associated with upgrades and the Company's goal of expanding
consumer  acceptance  and usage of ALMs, the Company  historically  has upgraded
ALMs in service.  The net costs of such  upgrades have not been  significant  to
date and are not expected to be material in the future.  With respect to product
enhancements  allowing  ALMs to offer  new  products,  the  Company  may  charge
additional fees to incorporate such products into ALMs in service.

         e-xpertLender

         During  1997,   the  Company   developed   its   e-xpertLender   System
("e-xpertLender"), which enables automated decisioning and processing of certain
financial  products  by  DeciSys/RT  through  ALMs and other  non-ALM  channels,
including  call centers,  branches,  and automobile  dealerships.  e-xpertLender
establishes  connectivity  among  all  of  a  financial  institution's  delivery
channels,  its automated  decisioning system, and its risk management group. The
system  enables  call center  agents and branch  personnel  to inquire as to the
status  of any  transaction  anytime  and for loan  transactions  electronically
notifies  loan  officers  with  respect  to any  exceptions  and the  reason for
referral.  e-xpertLender supports the ability to open, process and track through
closing checking accounts,  overdraft protection, the ability to apply for lines
of credit and credit cards,  unsecured personal loans,  direct and indirect auto
loans and home equity loans and lines of credit. Using the e-xpertLender inquiry
capabilities,  a lender can review online the status of a transaction  and, when
appropriate,  make counter  offers to  applicants  who qualify for a loan amount
higher or lower than the loan amount originally  requested.  e-xpertLender also,
upon  approval,  gives the consumer a choice of closing  methods  that  includes
branches,  ALMs, mail and third party closing  agents.  The Company is currently
enhancing e-xpertLender so the products and services currently available through
the ALM and DeciSys/RT will also be available  through other channels  including
call centers,  branches, the Internet, and automobile  dealerships.  The Company
currently has one customer utilizing its e-xpertLender system.

         In addition to the origination  capabilities  enabled by e-xpertLender,
the Company has developed interfaces with other existing third-party origination
channels  used by  potential  and current  clients.  Inherent  in the  Company's
channel  architecture  is the ability of the  technology  to integrate  channels
through  the  exchange  of  message  sets or an  Application  Program  Interface
("API").  The  ability of the  Company's  technology  to  exchange  information,
whether it is between  the  Company's  channels or other  third-party  channels,
allows  integration  of  transaction  origination,  processing  and  fulfillment
activities across a wide range of channels with the consumer.

         Deployment.  Upon an order of e-xpertLender,  the Company enters into a
contract  with the  customer  pursuant  to  which  the  customer  is  granted  a
non-exclusive license to use certain software supporting the system. The Company
is  responsible  for  the  installation  of  the   e-xpertLender   software  and
integration of the system with  DeciSys/RT.  The Company  currently has only one
customer  utilizing  e-xpertLender  system and such system has been  deployed in
phases as the  functionality  of the system  has been  developed  and  completed
components accepted by the customer.  The Company believes  e-xpertLender system
for a new  customer  can be installed in 60 to 90 days from the time an order is
accepted. However, due to the limited history of e-xpertLender installations and
the nature of the initial  installation  process, no assurance can be given that
the Company  will be able to meet  installation  estimates  contemplated  by the
Company.

         Revenues - ALMs and e-xpertLender

         Revenue  Sources.  The Company  derives  both  recurring  and  one-time
revenues  from the ALM and  e-xpertLender  systems as described below.

         Transaction,  Software and Hardware  Maintenance Fees. Upon order of an
ALM and/or  e-xpertLender the Company enters into an agreement with the customer
pursuant  to  which  the  customer  agrees  to pay a  transaction  fee for  each
application and each loan transaction  consummated  based on a percentage of the
principal  amount of the loan on a  completed  unit  basis.  The  amount of such
transaction fees will depend on a variety of factors, including the type of loan
and the number of ALMs and e-xpertLender workstations operated by the particular
customer.  During  1997,  the  Company  revised the ALS  Agreement,  so that the
customer  agrees to pay  monthly  ALM  hardware  maintenance  fees and  software
maintenance fees associated with the software supporting the system.

         Set-Up Fees. The Company's agreements provide for the payment of set-up
fees to cover the  installation  of the ALM hardware and system  software and/or
the e-xpertLender system as well as the non-exclusive right to use the software,
both of  which  are  generally  determined  based  on the  number  of  ALMs  and
e-xpertLender  workstations operated by the customer.  Generally,  such fees are
paid by  customers  when the systems  are  ordered.  Set-up  fees are  initially
recorded as deferred  revenue.  Upon  acceptance of an ALM and/or  e-xpertLender
system,  the  Company  generally  recognizes  as revenue (i) the portion of such
set-up fee associated with the installation in an amount  approximately equal to
the cost of set-up and  installation,  and (ii) an  additional  component of the
set-up fees related to non-refundable license fees. The remainder of such set-up
fees is  recognized as deferred  revenue and amortized  ratably over the term of
the agreement.  Certain of the Company's ALS Agreements entered into during 1995
and 1996 provide that the customer may apply a portion of the initial set-up fee
to future  transaction  and other fees.  The Company  capitalizes  the  unearned
portion of such set-up fee as deferred  revenue,  which is amortized  ratably as
revenue over the term of the related agreement.

         ALM Sales and Rental Fees.  The Company  enters into a lease  agreement
with its customers  under which the customer  agrees to pay a monthly rental fee
for the hardware  components  of the ALM. The amount of the rental fee typically
is based on the number of ALMs  operated  by the  customer,  and the rental term
generally  is 48 months.  The Company  recognizes  revenue  associated  with ALM
leases  pursuant to Statement of Financial  Accounting  Standards  No. 13 ("SFAS
13"),  "Accounting  for Leases."  Under SFAS 13, the  Company's  ALMs are either
sales-type  or operating  leases.  If the ALMs meet the criteria for  sales-type
leases under SFAS 13, the present value of the future  minimum lease payments is
recognized  as sales  revenue  in the  period in which the sale  occurs.  Rental
revenue  associated  with operating  leases is recognized as rental revenue over
the term of the ALM lease.

         Professional Services Fees. In conjunction with the installation of the
Company's technology,  additional  customer-specific  technology  development is
performed from time to time by the Company.  The Company generally enters into a
contract  with  the  customer  for  the  performance  of  these  services.  Upon
completion  of  its  contractual  obligations  and  acceptance  of  professional
services by the customer,  the Company  generally  recognizes the  corresponding
revenue associated with such services.

         Integrated  Performance  Management  Services.  In conjunction with the
installation  of an ALM and  e-xpertLender  system,  the  Company  may  agree to
perform  services  designed  to refine the system to aid in  targeting  customer
market  initiatives.  These services  include ALM site selection and evaluation,
integration  and  evaluation  of current  processing  capabilities,  focus group
results and  marketing  research  studies,  education,  incentive  training  and
marketing and promotional services. The Company generally enters into a contract
with the customer for the performance of these services,  and upon completion of
its contractual obligations,  the Company generally recognizes the corresponding
revenue associated with these services.



<PAGE>



         Mortgage Brokerage Business

         In  January  1998 the  Company  formed  Surety to engage in  activities
incidental to the mortgage brokerage business, including marketing, originating,
closing and selling mortgage loans to permanent  investors.  Surety offers first
mortgage  loans  directly  to  consumers  and  immediately  sells  such loans to
wholesale  mortgage  bankers  ("wholesalers")  that  sponsor  the loan  programs
offered by Surety.  Surety only offers  consumers loans that will be acquired by
wholesalers  under such  programs.  Moreover,  upon making loan  commitments  to
consumers, Surety immediately receives a commitment from a wholesaler to acquire
the loan upon closing,  thereby  reducing the risk of loss.  Prior to the time a
loan is  closed,  the  loan  is  submitted  to a  wholesaler  for  underwriting.
Accordingly,  when the loans are closed they are  immediately  transferred  to a
wholesaler,   thereby   minimizing  any  credit  risk  associated  with  lending
activities.

         The Company formed Surety for the primary purpose of directly deploying
technology  developed by the Company  (primarily  ALMs) in a manner in which the
Company  believes  will  facilitate  future  deployment  of  its  mortgage  loan
products.  Surety's mission is to find the best deployment locations and develop
deployment and business  strategies which provide actual market data that can be
used to market the Company's mortgage loan products to the Company's prospective
customers. The Company believes that the formation of Surety will provide a cost
effective  means to gather and test  market  data which may  shorten the lengthy
sales cycle often  encountered  by the Company.  See  "Business  Risks - Lengthy
Sales Cycle."

         Surety  will earn  revenues  from fees  charged  to  consumers  for the
origination  services  it performs  and from  premiums on loan sales paid by the
wholesaler. Revenues from interest associated with such loans is not expected to
be  significant  since  Surety  does not  contemplate  holding any loans for any
significant period of time prior to the sale of the loan.

         Second Look Program

         The Company has  developed a program  (the  "Second  Look"  program) to
provide a means through which loan applications that are rejected by the primary
ALM  sponsor  can be  reviewed  and  funded at the ALM by one or more  secondary
lenders during a single application process. The Second Look program is designed
to enable the ALM System to serve two  traditionally  distinct  consumer finance
markets: the "prime" market, consisting of consumers with more attractive credit
profiles who are often served by banks, and the "sub-prime"  market,  consisting
of  consumers  with less  attractive  credit  profiles who are more likely to be
served by consumer finance companies.  Under the Second Look program, a consumer
applying for a loan through an ALM would first be considered by the  institution
that operates the ALM. If the consumer  does not meet the primary  institution's
lending  requirements,  he or she may be  considered  by one or  more  secondary
lenders serving the sub-prime market. If the consumer  qualifies for a loan from
a secondary lender, the loan could be consummated at the ALM. In such event, the
primary ALM sponsor  would  receive a fee, the  secondary  lender would book the
loan and the  consumer  would  obtain the loan from the  secondary  lender.  The
Company  believes that the Second Look function can be performed  without adding
significant time to the application  process.  Under the Second Look program, if
such program is  successfully  implemented,  the Company would enter  agreements
with second look lenders  whereby the Company  would earn  transaction  fees for
loans  processed.  The  Company  would  receive  a  transaction  fee  equal to a
percentage of the  aggregate  principal  amount of all loans funded  through the
Second Look program.

         Certain regulatory issues,  including in particular,  state and federal
regulation of consumer finance companies as well as the underperformance of ALMs
in relation to current and prospective customer expectations, have prevented the
Company from  implementing  the Second Look  program.  No assurance can be given
that the Company will ever earn any revenues from its Second Look  program.  See
"Business  Risks  -  Governmental   Regulation"  and  "Uncertainties  of  Future
Regulation-Unproven  Market,  Unproven  Acceptance of the Company's Products and
Services."

Sales and Marketing

         The Company  has  concentrated  its sales and  marketing  resources  on
participation in  well-recognized  and widely attended  industry trade shows and
regional  presentations  at which  attendees  are  offered  the  opportunity  to
participate in a live and interactive  demonstration of the ALM,  e-xpertLender,
DeciSys/RT and corresponding  processing capabilities of the Company's financial
products and services.  The Company also utilizes  direct  mailing of literature
and videos,  advertisements in trade magazines and other targeted materials. The
Company has an internal  marketing  group that  coordinates the marketing of the
Company's  technology and its products and services  nationwide through customer
meetings,  trade  shows and the use of public  relations  firms and  advertising
agencies.  Additionally, this group has designed marketing support materials for
use by the  Company's  customers  to  educate  their  personnel  and  assist  in
educating  consumers  and  creating  product  awareness.  The  Company  has also
developed and administers incentive-based transaction improvement programs.

         The Company's  marketing group has established an in-house  demographic
and  underwriting  consulting  staff to consult with  existing  and  prospective
customers to identify suitable locations for ALMs and refine underwriting models
to  achieve  desired  rates of return  and risk  tolerance,  through  market and
process research.  The Company also provides after-sale support to its customers
with respect to improving the performance of ALM operations.

         The Company's  direct sales force is functionally  segregated to target
five distinct industry groups:  large regional commercial banks,  savings banks,
credit unions, mortgage banks and other financial service providers. To leverage
the Company's  direct  marketing group and sales force,  the Company has entered
into  strategic  alliances  with  certain  vendors  that  presently  service the
technology needs of financial  institutions and other potential customers of the
Company.  Such vendors sell products or services that are  complementary  to the
ALM,  e-xpertLender  and/or the  DeciSys/RT  system and have  established  sales
organizations which have formed existing  relationships with potential customers
of the Company.  Under such  agreements,  such vendors will receive a commission
for their sales  efforts.  The Company also has entered into an agreement with a
certain  hardware  vendor,  under  which such vendor will market and sell kiosks
that contain and access the software applications  developed by the Company in a
manner  comparable to the Company's ALM. Under such  agreements,  such vendor is
able to manufacture and sell their own kiosks,  directly interact with customers
with respect to ALM and e-xpertLender  design,  certification and implementation
and receive a portion of the transaction fees generated by system usage.

Competition

         The market for products and services that enable electronic commerce is
highly competitive and is subject to rapid innovation and technological  change,
shifting   consumer   preferences,   frequent  new  product   introductions  and
competition  from  traditional  products and services  having all or some of the
same features as products and services enabling electronic commerce. Competitors
in this market have  frequently  taken different  strategic  approaches and have
launched  substantially  different  products or services in order to exploit the
same  perceived  market  opportunity.  Until the  market  actually  validates  a
strategy through widespread  acceptance of a product or service, it is difficult
to identify all current or potential market participants or gauge their relative
competitive position. There can be no assurance that the ALM, e-xpertLender,  or
DeciSys/RT will be competitive  technologically or otherwise,  or that any other
products  and services  currently  available or developed by the Company will be
competitive  technologically or otherwise. The ability of the Company to compete
in the market will depend upon,  among other  things,  broad  acceptance  of the
Company's  products  and services and on the  Company's  ability to  continually
improve and expand the ALM,  e-xpertLender,  DeciSys/RT  and other  products and
services the Company may develop to meet changing customer requirements.

         Electronic  commerce  technologies  in general,  including  the ALM and
e-xpertLender,  compete with traditional  consumer  lending  methods,  including
in-person loan applications at branch offices of financial institutions and cash
advances on credit cards, home equity lines of credit and other revolving credit
facilities,  some or all of which are  employed by the  Company's  existing  and
potential customers. The ability of the ALM, e-xpertLender and DeciSys/RT and of
any other electronic commerce products and services the Company currently offers
or may develop to compete with traditional  lending methods will be dependent in
part on consumer  acceptance  of  electronic  commerce  in general and  industry
acceptance of the Company's products and services in particular.

         The  Company  also  faces  competition  from  companies  engaged in the
business  of  producing  automated  lending  systems and other  alternatives  to
conventional consumer lending,  including software and data processing companies
and technology  and service  companies.  In particular,  the Company is aware of
several  companies,  including Dyad  Corporation  ("Dyad"),  that have developed
video and other kiosk  technology  for the  delivery of financial  services.  In
addition,  the Company is aware of certain  companies that have designed and are
marketing  software  that  enables  loan  applications  to  be  taken  over  the
telephone.  The Company  also is aware that many banks have begun using  on-line
services, such as America-On-Line,  Inc.  ("America-On-Line"),  CompuServe, Inc.
("CompuServe")  and  Prodigy  Services  Co.  ("Prodigy"),   to  provide  certain
financial services  electronically,  and is aware of several companies that have
already made  substantial  investments in software  products that enable various
other  home  banking  services,   including   International   Business  Machines
Corporation ("IBM"),  Microsoft Corp. ("Microsoft"),  Intuit Inc. ("Intuit") and
Meca Software,  Inc. ("Meca").  Further,  the Company understands that ULTRADATA
Corporation  ("ULTRADATA") has developed certain on-line  processing systems for
the credit union  market that may be in direct  competition  with the  Company's
products and  services.  The Company  will also  compete with Credit  Management
Solutions,  Inc. ("CMSI") in connection with its e-xpertLender  based automobile
loan system. See "Business Risks Competition, Future Price Erosion."

         The Company expects competition to increase in the future from existing
and new competitors that produce  automated loan systems and other  alternatives
to traditional consumer lending methods.  Such competitors may include actual or
potential  customers  of the  Company  that may develop  competitive  technology
internally.  Most of the  Company's  current and  potential  competitors  in the
market for its products  have  substantially  greater  financial,  marketing and
technical resources than the Company.  Accordingly,  the Company may not be able
to  compete  successfully  against  new or  existing  competitors.  Furthermore,
competition may reduce the prices the Company is able to charge for its products
and services,  thereby  potentially  lowering revenues and margins,  which would
have a material adverse effect on the Company's business,  operating results and
financial condition.  See "Business Risks - Rapid Technological Changes" and " -
Competition; Future Price Erosion."

Technology

         The DeciSys/RT system employs a multi-tiered client/server architecture
that  integrates  the  consumer  interface,  application  analysis  function and
multiple  data  sources  together  in  a  seamless  operating  environment.  The
DeciSys/RT  architecture enables true multi-tasking,  which permits an expedient
loan  decision.  The  DeciSys/RT  uses  standard  C++ code  and  object-oriented
programming  which permits the decoupling of functional  development from system
deployment,  greatly  reducing  the time and cost of  maintenance.  The  Company
anticipates  easy platform  portability  by using  standards  such as the TCP/IP
communications   protocol  and  C++  programming  language,   while  maintaining
compatibility with widely accepted  third-party  database programs and operating
systems.

         The Company's NOC, located in Columbia, South Carolina, connects to the
various  ALMs and  e-xpertLender  workstations  in  service  through  a  private
network.  The NOC is  connected  to the  network via  dedicated  56.6 Kbps lines
(upgradable  to T-1) while the ALMs use dial-up  connections  and  e-xpertLender
systems utilize T-1 or dial-up  connectivity.  The Company also maintains leased
line  connections to TRW Inc., Trans Union  Corporation,  Equifax Inc. and other
providers  of  information  for  validation  of a  consumer's  identity and loan
underwriting.  The combination of data-encryption techniques and the closed loop
nature of the system provide for a secure environment.

         The  Company's  operations  are dependent on its ability to protect its
central  computer  system  against  damage  from fire,  earthquake,  power loss,
telecommunications  failure or similar  events.  All of the  Company's  computer
equipment  constituting its central  computer  system,  including its processing
operations,  is located at the Company's NOC in Columbia,  South  Carolina.  The
Company has adopted a formal  disaster  recovery plan and has contracted  with a
major disaster recovery company for back-up, off-site processing systems capable
of  supporting  its  DeciSys/RT  operations  in the  event of  system  and other
failure.

Intellectual Property

         The Company has applied  with the United  States  Patent and  Trademark
Office  ("PTO") for patents to protect the closed loop lending  system  utilized
by, and the other essential  features of, the ALM System.  Such applications and
all  amendments  thereto  to date have been  rejected  by the PTO.  The  Company
nevertheless  intends  to  continue  prosecution  of its  applications  and,  if
necessary,  appeal the PTO's rejection of such patent applications.  "Affinity,"
"DeciSys/RT,"  and  "e-xpertLender"  are registered  service marks and "ALM" and
"More Assets, Less Infrastructure" are registered trademarks of the Company.

         During 1997,  the Company  acquired the assets of Buy  American,  which
includes a patent  covering the processing of insurance  products  automatically
through a kiosk.

         The Company's  success and ability to compete is heavily dependent upon
its  proprietary  technology.  The  Company  also  relies  on trade  secret  and
copyright  law and  employee,  customer  and  business  partner  confidentiality
agreements to protect its technology. However, the Company believes that factors
such  as  technological  and  creative  skills  of its  personnel,  new  product
developments,  frequent  product  enhancements,  name  recognition  and reliable
product   maintenance   are  essential  to   establishing   and   maintaining  a
state-of-the-art  technological  system.  There  can be no  assurance  that  the
Company will be able to protect its  technology  from  disclosure or that others
will not develop  technologies  that are  similar or  superior to the  Company's
technology. See "Business Risks - Limited Protection of Technology."

Research and Development

         The Company's  software and financial product  origination  development
activities  include  home equity  loans and the ability to apply for home equity
lines of credit and the enhancement of the technological capabilities associated
with the current products and services available through the ALM, e-xpertLender,
and DeciSys/RT.

         The Company's ability to attract and retain highly skilled research and
development  personnel is important to the  Company's  success.  During 1997 and
1996, the Company spent approximately  $3,526,257 and $2,905,232,  respectively,
on research and development  activities or approximately 85.0% and 57.2% of 1997
and 1996 revenues,  respectively.  The Company anticipates that it will continue
to commit substantial  resources to research and development  activities for the
future.

Government Regulation

         The  financial  services  industry is subject to extensive  and complex
federal and state regulation.  The Company's current and prospective  customers,
which consist of state and federally chartered banks,  savings and loans, credit
unions,  consumer  finance  companies  and other  consumer  lenders,  as well as
customers in the  insurance  industry that the Company may target in the future,
operate in markets that are subject to extensive  and complex  federal and state
banking and insurance  regulation.  The Company's  products and services must be
designed  to work  within  the  regulatory  environment  in which its  customers
operate.

         Federal  and state  laws and  regulations  also  regulate  the  lending
practices  of  financial  institutions.  These laws  include  federal  and state
truth-in-lending   disclosure   rules,   state  usury  laws,  the  Equal  Credit
Opportunity  Act,  which  prohibits  discrimination  in lending  practices,  the
Electronic Funds Transfer Act, which regulates  electronic funds transfers,  the
Fair Credit  Reports Act,  which  regulates  access to and use of credit records
maintained by credit bureaus, and the Community Reinvestment Act, which requires
financial  institutions  to serve the credit  needs of the entire  community  in
which they operate,  including low and middle income neighborhoods.  While these
regulations  must be taken into account in the design of the Company's  products
and services,  the Company itself is not directly  subject to these  regulations
and the Company's  standard ALS Agreement  with its customers  provides that the
customer will be responsible for compliance with these laws.

         Some consumer groups have expressed  concern  regarding the privacy and
security of ALMs and  whether  electronic  lending is a desirable  technological
development  in light of the current level of consumer  debt.  While the Company
believes these concerns are  unfounded,  it is possible that consumer  groups or
others could take actions to cause one or more states  eventually  to promulgate
specific  regulations  applicable to the  deployment  and operation of ALMs. The
Company cannot predict, however, when such regulations might be implemented,  if
ever, or the effects of any such regulation on the Company's business, operating
results or financial condition.  See "Business Risks - Government Regulation and
Uncertainties of Future Regulation."



<PAGE>



Employees

         At December 31, 1997, the Company employed  approximately 152 full-time
employees and 1 part-time  employee.  The Company has no collective bargaining
agreements.

Backlog

     At March  31, 1998, the  Company had contracts for  professional  services,
technology  set-up and  delivery  of other  product  software,  under  which the
Company is obligated to perform services that will result in approximately  $1.9
million of  revenues.  At March 31,  1997,  the  Company had  contracts  for the
delivery of products and services  with revenues of  approximately $1.3 million.

Business Risks

         In addition to the other  information  in this report,  readers  should
carefully consider the following  important factors,  among others, that in some
cases have  affected,  and in the future  could  affect,  the  Company's  actual
results and could cause the Company's actual consolidated  results of operations
to differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company.

         Limited Operating History; Significant Losses; Accumulated Deficit;
         Future Losses

         The  Company was  incorporated  in January of 1994 and placed its first
ALM in service in January 1995. Accordingly, the Company has a limited operating
history upon which an  evaluation of the Company and its prospects can be based.
To date,  the Company has generated  minimal  operating  revenues,  has incurred
significant  losses  and has  experienced  substantial  negative  cash flow from
operations.  The Company had an  accumulated  deficit as of December 31, 1997 of
$28,105,547,  with  operating  losses of $705,971 for the period from  inception
(January 12, 1994) through  December 31, 1994,  and  $2,308,029,  $9,692,195 and
$15,399,352 for the years ended December 31, 1995, 1996 and 1997,  respectively.
The  Company  expects to incur  substantial  additional  costs to  complete  its
products  and  services  in   development,   to  enhance  and  market  the  ALM,
e-xpertLender  and DeciSys/RT and to complete any new products and services that
may be developed by the Company. There can be no assurance that the Company will
ever achieve profitability or, if achieved, sustain such profitability.

         The  Company's  prospects  must be  considered  in light of the  risks,
expenses,  and difficulties  frequently  encountered by companies in their early
stage of  development,  particularly  technology  based  companies  operating in
unproven  markets with unproven  products.  To address these risks,  the Company
must,  among other  things,  respond to  competitive  developments,  attract and
motivate  qualified  personnel,   establish  effective   distribution  channels,
effectively  manage  any  growth  that may occur and  continue  to  upgrade  its
technologies and successfully  commercialize products and services incorporating
such technologies.

         Potential for Fluctuation in Quarterly Results

         Because the Company has a limited  operating  history,  management  has
very little data upon which to base estimated  operating  revenues and expenses.
In  addition,  the Company has rapidly  expanded its  technology,  installation,
sales  and  marketing  and  other  resources  in order  to  support  its  growth
objectives. The levels of these expenditures, which are to a large extent fixed,
are  based  in  part on the  Company's  goals  as to its  future  revenues.  The
Company's  revenues  are  affected  by many  factors,  including  demand for the
Company's  technology  and  demand  for  any  additional  products  or  services
developed by the Company,  introduction and enhancement of products and services
by the Company and its  competitors,  market  acceptance  of such  technology in
existence or developed in the future, mix of distribution channels through which
products are sold and general economic conditions (particularly those conditions
affecting  financial  products and services  supply and  demand).  Further,  the
Company's  current customer base is highly  concentrated and such  concentration
may have a  significant  effect on revenues  due to the  uncertainty  of new and
additional  sales  of  the  Company's   technology.   See  "-  Lack  of  Product
Diversification; Dependence on Consumer Retail Lending Industry; Cyclical Nature
of Consumer  Lending."  Shortfalls  in demand for the  Company's  technology  in
relation to the  Company's  expectations,  and the  occurrence  of other factors
which have caused revenues to fall short of the Company's expectations, have had
and may continue to have an adverse effect on the Company's business,  operating
results and financial condition.

         The  uncertainty  regarding the extent and timing of any revenue growth
coupled with the Company's  substantial  operating  expenses  (many of which the
Company  is unable to adjust in a timely  manner)  means that the  Company  will
likely  continue  to  experience   substantial  quarterly  fluctuations  in  its
operating results. In addition,  the Company will continue to commit significant
resources to further fund  research and  development,  develop new  distribution
channels  and broaden its  customer  support  capabilities.  To the extent these
expenses are not preceded or followed by substantially  increased revenues,  the
Company's business, operating results and financial condition will be materially
adversely affected.

         In accordance with Statement of Financial  Accounting  Standards No. 13
"Accounting  for Leases," the Company treats certain of its leases for which the
present value of future  minimum lease  payments  exceeds 90% of the cost of the
related ALM as  sales-type  leases and all other leases are treated as operating
leases. For sales-type leases, the Company recognizes as revenue, generally upon
ALM  installation  and  acceptance,  the present value of the  aggregate  future
minimum  lease  payments  to be received  during the term of the related  rental
agreement  using the  Company's  incremental  borrowing  rate for  lease-secured
transactions as the discount rate. For operating leases,  the Company recognizes
lease payments as revenue ratably over the term of the applicable  agreement.  A
default by any significant  customer of its obligation to make lease payments or
a termination of an ALM agreement  could have an adverse effect on the Company's
quarterly  operating  results,  particularly with regard to ALMs that are leased
under agreements treated as sales-type leases.

         As a result of all the foregoing  factors and other  factors  discussed
under "Business Risks," the Company believes that  period-to-period  comparisons
of its results of operations  are not  necessarily  meaningful and should not be
relied upon as an indication of future performance.  Moreover, it is likely that
in some  future  quarter  the  Company's  operating  results  will be below  the
expectation of public market analysts and investors. In such event, the price of
the Company's common stock could be materially adversely affected.

         Unproven Market; Unproven Acceptance of the Company's Products and
         Services

         The market for products and services that enable electronic commerce is
new,  developing and  uncertain.  As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced products
and services are subject to a high level of  uncertainty.  The Company's  future
growth and  financial  performance  will  depend  upon  consumer  acceptance  of
electronic  commerce  as an  attractive  means of  conducting  certain  consumer
financial  transactions and also upon institutional  acceptance of the Company's
products  as  a  preferred  means  for  serving  consumers.  Such  institutional
acceptance  will in part depend on continued and growing use of  relatively  new
quantitative  credit scoring  methodologies that are amenable to automation.  If
the  electronic  commerce  market  fails  to  grow or  grows  more  slowly  than
anticipated,  or if lenders  reduce  their use of  quantitative  credit  scoring
tools, the Company's  business,  operating results and financial condition would
be  materially  adversely  affected.  Furthermore,  even  if  this  market  does
experience  substantial  growth,  there can be no assurance  that the  Company's
products  and  services  will be  commercially  successful  or benefit from such
growth.  Failure of either the providers of consumer  financial  services or the
consumers of such services to quickly accept  electronic  commerce  distribution
channels in general, and the Company's electronic commerce enabling technologies
in  particular,  or the  inability  of the  Company's  products  and services to
satisfy its customers' or consumers' expectations,  have had and may continue to
have  an  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

         Because  the market for the  Company's  products  and  services is new,
evolving and  uncertain,  it is difficult to determine  the size and predict the
future  growth  rate,  if any,  of this  market.  The market  for the  Company's
products,  including  the ALM and  e-xpertLender,  and its planned  products and
services may never be developed,  or may develop at a slower pace than expected,
or such products and services may not be adopted by  participants in this market
or may be adopted by only a limited number of participants.  If the market fails
to develop or develops more slowly than expected,  or if the Company's  products
and  services  do not  achieve  significant  market  acceptance,  the  Company's
business,   operating  results  and  financial  condition  would  be  materially
adversely affected.

         None of the Company's ALM  customers  has, to the Company's  knowledge,
made any  determination  with respect to making ALMs a significant  component of
its long-term retail delivery strategy.  Accordingly,  there can be no assurance
when or if any  additional  orders  will be  forthcoming.  Further,  even if the
Company does succeed in generating  substantial  additional orders from existing
customers,  uncertainty as to the timing and  implementation  of any such orders
adds to the unpredictability of the Company's quarterly operating results.

         As of March 31,  1998,  there were 121 ALMs  deployed or  accepted  and
awaiting deployment. Agreements with one customer covering 50 ALMs, entered into
in 1996, provided that if, after two years in service,  the ALMs covered by such
agreements  did not  meet  certain  performance  criteria,  the  customer  could
terminate  the  agreements  with respect to the ALMs subject to payment of a fee
based on the number of months  remaining  under the contract.  In February 1998,
the Company and such  customer  agreed to terminate  their  relationship,  which
includes  the  return  of all 50 ALMs.  Further,  agreements  with one  customer
covering  eight ALMs in service  provided that if such ALMs did not achieve loan
volumes averaging one loan per day over a one month period in the second quarter
of 1997, the customer  could  terminate the agreement with respect to such ALMs.
The ALMs did not  achieve  loan  volumes  averaging  one loan per day during the
applicable period and the agreement was terminated. In addition, agreements with
one customer  covering 30 ALMs deployed or awaiting  deployment  provide for the
waiver of the  monthly  rental fee for any month  during  which such ALMs do not
process  a  certain  volume of  loans,  which  volume of loans is  substantially
greater than the volume of loans  processed by ALMs  currently  deployed by such
customer.

         Lengthy Sales Cycle

         The Company has to date  experienced  a lengthy sales cycle for the ALM
and  e-xpertLender.  In most cases,  the time  between  initial  customer  order
contact and the execution of a final contract has exceeded six months. While the
Company  believes  that the length of the sales cycle may compress  over time if
the Company's  technology gains  acceptance in the marketplace,  there can be no
assurance such compression will take place in the future.

         Early Stage Products and Services

         The Company's ALM, e-xpertLender,  DeciSys/RT, and planned products and
services  are in the early  stages of  development  and are subject to the risks
inherent  in the  development  and  marketing  of  new  products  including  the
development  of  unforeseen  design or  engineering  problems with the Company's
products and  applications.  There can be no assurance that these or other risks
associated with new product development will not occur. The occurrence of one or
more of these  risks  could  have a  material  adverse  effect on the  Company's
business, operating results and financial condition.

         Rapid Technological Changes

         The market for products and services that enable electronic commerce is
highly  competitive and subject to rapid  innovation and  technological  change,
shifting   consumer   preferences,   frequent  new  product   introductions  and
competition  from  traditional  products and services  having all or some of the
same features as products and services enabling electronic commerce. Competitors
in this market have  frequently  taken different  strategic  approaches and have
launched  substantially  different  products or services in order to exploit the
same perceived market opportunity. Until the market validates a strategy through
widespread  acceptance of a product or service,  it is difficult to identify all
current or potential  market  participants  or gauge their relative  competitive
position.  There  can  be no  assurance  that  the  ALM,  e-xpertLender  or  the
DeciSys/RT system will be competitive  technologically  or otherwise or that any
other  products  and  services  available  or  developed  by the Company will be
competitive  technologically or otherwise. The ability of the Company to compete
in this market will depend upon,  among other  things,  broad  acceptance of the
Company's  products and services and on the  Company's  ability  continually  to
improve the ALM,  e-xpertLender and the DeciSys/RT system and other products and
services  the Company has  available  or may develop to meet  changing  customer
requirements.  There can be no  assurance  that the  Company  will  successfully
identify  new  product and  service  opportunities  and develop and bring to the
market new and  enhanced  services and  products in a timely  manner;  that such
products,  services and technologies will be commercially  successful;  that the
Company will  benefit  from such  development;  or that  products,  services and
technologies  developed  by  others  will not  render  the  Company's  products,
services and technologies  noncompetitive or obsolete.  If the Company is unable
to  penetrate  new markets in a timely  manner in  response  to changing  market
conditions  or  customer  requirements  or if new or  enhanced  products  do not
achieve a  significant  degree of market  acceptance,  the  Company's  business,
operating  results and financial  condition  would be  materially  and adversely
affected.



<PAGE>



         Competition, Future Price Erosion

         Electronic  commerce  technologies  in general,  including  the ALM and
e-xpertLender,  compete with traditional  consumer  lending  methods,  including
in-person loan applications at branch offices of financial institutions and cash
advances on credit cards and other revolving credit  facilities,  some or all of
which are  employed by the  Company's  existing  and  potential  customers.  The
ability  of the ALM  and  e-xpertLender  and of any  other  electronic  commerce
products  and  services  the  Company may  develop to compete  with  traditional
lending  methods will be dependent in part on consumer  acceptance of electronic
commerce  in general and  industry  acceptance  of the  Company's  products  and
services in particular.

         The  Company  also  faces  competition  from  companies  engaged in the
business  of  producing  automated  lending  systems and other  alternatives  to
conventional consumer lending,  including software and data processing companies
and technology  and service  companies.  In particular,  the Company is aware of
several  companies,  including  Dyad,  that have developed video and other kiosk
technology for the delivery of financial services.  In addition,  the Company is
aware of certain  companies  that have designed and are marketing  software that
enables loan  applications  to be taken over the telephone.  The Company also is
aware   that  many   banks  have  begun   using   on-line   services,   such  as
America-On-Line,  CompuServe and Prodigy,  to provide certain financial services
electronically,  and is  aware of  several  companies  that  have  already  made
substantial  investments  in software  products  that enable  various other home
banking services,  including IBM, Microsoft, Intuit, and Meca. Moreover, IBM and
The Chase Manhattan Bank have announced a system for processing automobile loans
over the Internet. Further, the Company understands that ULTRADATA has developed
certain  on-line  processing  systems for the credit union market that may be in
direct  competition with the Company's  products and services.  The Company will
also compete with CMSI in  connection  with its  e-xpertLender  automobile  loan
system, which is in development. See "Business - Products and Services."

         The Company expects competition to increase in the future from existing
and new competitors that produce  automated loan systems and other  alternatives
to traditional consumer lending methods.  Such competitors may include actual or
potential  customers  of the  Company  that may develop  competitive  technology
internally.  Most of the  Company's  current and  potential  competitors  in the
market for its products  and  services  have  substantially  greater  financial,
marketing and technical resources than the Company. Accordingly, the Company may
not be  able  to  compete  successfully  against  new or  existing  competitors.
Furthermore,  competition  may  reduce the  prices  that the  Company is able to
charge for its products and services thereby  potentially  lowering revenues and
margins,  which would have a material adverse effect on the Company's  business,
operating results and financial condition. See "Business Competition."

         Lack of Product Diversification; Dependence on Consumer Retail Lending
         Industry; Cyclical Nature of Consumer Lending

         For the year ended December 31, 1997, the Company derived a substantial
portion  of  its  recurring  revenues  from  its  ALM  operations.   Further,  a
substantial  portion of the Company's  revenues in the future are expected to be
derived  from  fees  associated  with  the  ALM,  e-xpertLender  and  DeciSys/RT
technologies.  Accordingly,  the  Company  will be heavily  dependent  on market
acceptance of these technologies and, in particular, its acceptance as a vehicle
for   executing   transactions   historically   executed   through   traditional
distribution channels. The failure of the Company to generate demand for the ALM
and  e-xpertLender or the occurrence of any significant  technological  problems
with the ALM,  e-xpertLender and DeciSys/RT would have a material adverse effect
on the Company's business, operating results and financial condition.

         The  Company's  business  is  currently  concentrated  on the  consumer
lending  industry  and is expected  to be so  concentrated  for the  foreseeable
future,  thereby making the Company  susceptible to a downturn in that industry.
For example,  a decrease in consumer  lending  could  result in smaller  overall
market for the Company's  products and  services.  Furthermore,  U.S.  banks are
continuing to consolidate, decreasing the overall potential number of buyers for
the Company's  products and services.  Moreover,  three customers  accounted for
approximately 68% of the Company's revenue in 1997. The Company expects that its
operating revenues will continue to be attributable to a relatively small number
of  customers.  See  "--Unproven  Market;  Unproven  Acceptance of the Company's
Products and Services."  These factors as well as others  affecting the consumer
lending industry could have a material adverse effect on the Company's business,
operating results and financial condition.

         The Company's  business  currently  depends upon the volume of consumer
loans made through  ALMs and  e-xpertLender.  Historically,  demand for consumer
loans has been cyclical,  in large part based on general economic conditions and
cycles in overall  consumer  indebtedness  levels.  Changes in general  economic
conditions  that  adversely   affect  the  demand  for  consumer  loans  or  the
willingness of financial  institutions to provide funds for such loans,  such as
changes in interest rates and the overall  consumer  indebtedness  level,  could
have a material adverse effect on the Company's business,  operating results and
financial condition.

         Limited Protection of Technology

The Company is heavily dependent upon its technology,  but holds no patents with
respect to such  technology  except the patent  related to issuance of insurance
products at a kiosk which was acquired in accordance with the acquisition of Buy
American. The Company has applied with the PTO for patents to protect the closed
loop lending system  utilized by, and the other  essential  features of, the ALM
System.  Such applications and all amendments thereto to date have been rejected
by the PTO.  The Company  nevertheless  intends to continue  prosecution  of its
applications  and,  if  necessary,  appeal the PTO's  rejection  of such  patent
applications.
         The  Company  regards  certain of its  technology  as  critical  to its
business and  attempts to protect  such  technology  under  copyright  and trade
secret laws and through  the use of  employee,  customer  and  business  partner
confidentiality   agreements.   Such  measures,  however,  afford  only  limited
protection,  and the Company may not be able to maintain the  confidentiality of
its technology.

     As result of the foregoing factors, existing and potential competitors may
be able to develop products and services that are competitive with or superior
to the Company's products and services, and such competition could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business- Intellectual Property."

         New Management; Management of Growth

         The  Company's  rapid  growth has placed  and may  continue  to place a
significant  strain  on the  Company's  managerial,  operational  and  financial
resources.  As of December 31, 1997, the Company had grown to approximately  153
employees from 135 and 55 employees at December 31, 1996 and 1995, respectively,
and six employees at December 31, 1994. The inability of management and recently
hired employees of the Company to adjust quickly to, and perform as expected in,
their  respective  roles within the Company could have a material adverse effect
on the Company's business, operating results and financial condition.

         To manage  growth,  the Company must  continue to implement and improve
its  operational  and  financial  systems  and to  expand,  train and manage its
employee   base.   The  Company  also  will  be  required  to  manage   multiple
relationships with various customers, business partners and other third parties.
Moreover,  the Company has incurred  significant  expenses  associated  with its
rapid  growth  and  may  incur  additional  unexpected  costs  relating  to  its
anticipated expansion. The Company's systems,  procedures or controls may not be
adequate to support the Company's  operations and Company  management may not be
able to  achieve  the rapid  expansion  necessary  to exploit  potential  market
opportunities  for the  Company's  products and services.  The Company's  future
operating  results  may also  depend  on its  ability  to  expand  its sales and
marketing and research and development  organizations,  implement and manage new
distribution  channels to penetrate markets and expand its support organization.
If the Company is unable to manage growth  effectively,  the Company's business,
operating results and financial condition will be materially adversely affected.

         Risk of Fraud in Consumer Lending

         Consumer  credit  transactions,  such as  those  processed  by the ALM,
involve  the  risk  of  consumer  fraud.  The  customer  operating  the  ALM  is
responsible for the selection and use of the loan  origination and  underwriting
parameters  incorporated  in the  software  supporting  the  ALM.  In  addition,
pursuant to the Company's standard ALS agreement,  the Company disclaims (i) the
responsibility  for the collection of any payments due from loan  applicants and
(ii)  liability  or  responsibility  to  customers  or others  with  respect  to
liability  caused or alleged to be caused  directly or indirectly by an ALM. The
Company is unaware of any significant  instances of fraud in connection with the
funding of loans  through the use of its ALM.  However,  the rate of  fraudulent
activity could increase,  especially if the number of transactions  processed by
ALMs increase.  Moreover,  in light of the limited  operating  experience of the
Company, there can be no assurance that the Company's experience with respect to
fraud to date is  indicative  of  future  performance  for the ALM or any  other
product or service  that the Company may develop.  While the Company  shifts the
risk of collection in any given  transaction to its customers under the terms of
the ALS agreement,  the Company may  nevertheless be held responsible for losses
associated with fraudulent transactions if such transactions are attributable to
the Company's malfeasance. The Company has not attempted to procure insurance to
cover  losses  it may  incur in  connection  with  such  fraud and does not know
whether such  insurance is  available.  Furthermore,  even if the Company is not
directly liable or contractually liable for fraudulent transactions processed by
its ALMs,  an  increase in fraud to levels  greater  than those  experienced  in
traditional and other emerging consumer credit  processing  systems would likely
have a material and adverse  impact on the ability of the Company to attract and
retain  financial  institution  customers  and thus on the  Company's  business,
operating results and financial condition.  In addition,  the Company may not be
able to control  adequately the occurrence of fraud in the future or may only be
able to do so at  considerable  cost,  either  of  which  would  materially  and
adversely  affect  the  Company's  business,  operating  results  and  financial
condition.

         Risk of Third-Party Network Failure

         The ALM relies on third parties for certain fraud detection systems and
for  obtaining  credit  information  about loan  applicants.  Additionally,  the
Company uses an  Affinity-dedicated  private  data  network  provided by a third
party to gain access to the networks maintained by such third parties. Prolonged
or  repeated  failure  of (i) a network  that  provides  access  to  information
necessary to complete a loan transaction  through the Company's ALMs or (ii) the
Company's  network access provider to provide access to such networks or to ALMs
in  service  would  materially  and  adversely  affect the  Company's  business,
operating results and financial condition.

         Dependence on Third Parties

         The  expected  rapid  growth of the market  for  products  that  enable
electronic  commerce,  together  with the number and  resources  of  competitors
seeking to serve that market and the limited resources of the Company,  make the
success of the Company and its business  dependent on, among other  things,  its
ability  to  identify  and reach  agreements  and work  successfully  with third
parties.  In particular,  the Company relies or expects to rely on third parties
in connection with its customer  relationships,  strategic alliance arrangements
(see "-  Undeveloped  Distribution  Channels"),  assembly of products  and other
areas.  There  can be no  assurance  that  the  Company  will be  successful  in
identifying  such  third  parties,  that  it will  be  able  to  reach  suitable
agreements  with  such  third  parties  or that it will be able to  successfully
implement  any such  agreements  that are or have been  reached.  Failure by the
Company to accomplish  any of the above could have a material  adverse effect on
the Company's business, operating results and financial condition.

         The Company's success depends  particularly on the ability of customers
and third parties to market  successfully  the Company's  products and services.
For  example,  the ability of the  Company to realize  recurring  revenues  from
transactions is dependent on the success of its customers in generating consumer
demand for transactions  using the Company's  products and services.  Failure of
ALM  customers  to generate  and sustain  consumer  demand for the ALM and other
products  and  services  that may be  developed  by the  Company has had and may
continue to have an adverse effect on the Company's business,  operating results
and  financial  condition.  Although the Company  views its  strategic and other
alliances  with third  parties as an  important  factor in the  development  and
commercialization  of its products and services,  there can be no assurance that
such third  parties view their  alliances  with the Company as  significant  for
their own  businesses  or that they will not reassess  their  commitment  to the
Company at a time in the future.  Currently,  the Company's  agreements with ALM
customers   generally  do  not  require   them  to  meet   minimum   performance
requirements.  Instead,  the  Company  relies on the  voluntary  efforts of such
customers to promote consumer  acceptance and use of ALMs. The Company's ability
to maintain  relationships  with its customers and third parties will depend, in
part, on its ability to successfully  enhance  products and services and develop
new products and  services.  The Company's  inability to meet such  requirements
could result in its customers and third parties seeking alternative providers of
the Company's  products and services,  which would have an adverse effect on the
Company's business, operating results and financial condition.



<PAGE>



         Undeveloped Distribution Channels

         The Company  currently sells its products and services directly through
its  own  sales  force,   marketing   agreements  with  strategic  partners  and
distribution  agreements with other  entities.  For the Company to achieve broad
distribution  of the ALM or any other  products or services it may  develop,  it
must implement  effective  marketing and  distribution  arrangements  with third
parties. The inability of the Company to enter into favorable  arrangements with
strategic  partners and other entities  could have a material  adverse effect on
the Company's business, operating results and financial condition.  Furthermore,
the Company could incur significant  costs and expend  substantial time to train
and educate strategic partners about the Company's products and services. If the
Company is unable to successfully  and efficiently  train and educate  strategic
partners or other third  parties,  the Company may not achieve,  or achieve in a
timely fashion,  broad distribution of its products and services.  To the extent
broad distribution of the Company's products and services is not achieved, there
would be a material adverse effect on the Company's business,  operating results
and financial condition.

         Dependence on Key Employees

         The Company is highly  dependent on certain key executive  officers and
technical  employees.  The Company is also  dependent on its ability to recruit,
retain and motivate high quality  personnel.  Competition  for such personnel is
intense, and the inability to attract and retain qualified employees or the loss
of current key employees  could  materially  and adversely  affect the Company's
business, operating results and financial condition.  Additionally,  the Company
does not maintain "key man"  insurance  policies on any of its  employees  other
than Jeff A. Norris,  its President and Chief  Executive  Officer  (which policy
provides  coverage of only $1.5 million),  nor does the Company intend to secure
such  insurance.  The loss of the  services  of any of the  Company's  executive
officers  could have a material  adverse  effect  upon the  Company's  business,
operating results and financial condition.

Shares Eligible for Future Sale; Possible Adverse Effect on Market Price

         Sales of  substantial  amounts of Common Stock in the public  market or
the  prospect  of such sales  could  adversely  affect the market  price for the
Company's Common Stock and the ability of the Company to raise equity capital in
the future.  As of March 17, 1998,  the Company had  outstanding an aggregate of
30,155,673 shares of Common Stock. Of such shares, an aggregate of approximately
12,430,240  shares of Common Stock are freely tradeable  without  restriction or
further  registration  under the Securities Act of 1933 (the "Securities  Act"),
except for any of such shares acquired by  "affiliates" of the Company,  as that
term is defined in Rule 144 under the Securities Act ("Affiliates"). The Company
believes that the holders of the remaining 17,725,433 shares are "Affiliates" of
the Company and, accordingly,  that such shares may be sold without registration
only in compliance with the Securities Act (including Rule 144). At December 31,
1997,  approximately  44,600 and 315,110 options were exercisable under the 1996
and 1995 Option Plans,  respectively.  Weighted average exercise price was $6.09
and $0.44 and the weighted  average  remaining  contractual life was 9.3 and 7.8
years under the 1996 and 1995 Option Plans, respectively,  at December 31, 1997.
There were warrants  exercisable into an aggregate of 3,471,340 shares of common
stock at a weighted average  exercise price of approximately  $0.0001 per share.
The  issuance  of shares of  capital  stock to  address  liquidity  needs of the
Company or for other business  purposes  could also adversely  affect the market
price of the Company's Common Stock.

Volatility of Stock Price and Risk of Litigation

         The Company's  Common Stock price has been  extremely  volatile and has
experienced  substantial and sudden fluctuations.  In addition, the stock market
has experienced  significant price and volume  fluctuations that have especially
affected  the  market  prices  of  equity  securities  of many  high  technology
companies,  and that often have been  unrelated to the operating  performance of
such companies.  These broad market fluctuations have adversely affected and may
continue to adversely  affect the market price of the Company's Common Stock. In
the past,  following  periods of  volatility  in the market price of a company's
securities, securities class action litigation has often been instituted against
such a  company.  Such  litigation  could  result  in  substantial  costs  and a
diversion of management's  attention and resources,  which would have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.



<PAGE>



Control by Principal Stockholders

         The  directors  and  executive  officers  of the  Company  collectively
beneficially own approximately 45.5% of the Common Stock and Jeff A. Norris, the
Company's President and Chief Executive Officer,  individually beneficially owns
35.3% of the Common Stock of the  Company.  As a result,  these  persons will be
able to exercise control over matters requiring stockholder approval,  including
the election of directors and approval of  significant  corporate  transactions.
Such  concentration of ownership may have the effect of delaying or preventing a
change in control of the Company and could have an adverse  effect on the market
price of the Common Stock.

Government Regulation and Uncertainties of Future Regulation

         The  financial  services  industry is subject to extensive  and complex
federal and state regulation.  The Company's current and prospective  customers,
which consist of state and federally chartered banks,  savings and loans, credit
unions,  consumer  finance  companies  and other  consumer  lenders,  as well as
customers in the  insurance  industry that the Company may target in the future,
operate in markets that are subject to extensive  and complex  federal and state
banking and insurance  regulation.  The Company's  products and services must be
designed to work within the extensive  and evolving  regulatory  constraints  in
which  its  customers  operate.  These  constraints  include  federal  and state
truth-in-lending   disclosure   rules,   state  usury  laws,  the  Equal  Credit
Opportunity  Act, the Electronic  Funds Transfer Act, the Fair Credit  Reporting
Act, the Community  Reinvestment  Act, and  restrictions  on the  establishment,
number and location of branch offices and remote electronic  banking  facilities
such as  automated  teller  machines.  Because  many of these  regulations  were
promulgated  before the development of products that enable electronic  commerce
(such as the ALM),  the  application  of such  regulations  to any  products and
services  developed by the Company must be determined on a  case-by-case  basis.
Affinity  has not  attempted  to review  the laws of each  state  that  might be
applicable to the deployment of ALMs or e-xpertLender. It is possible that other
states may have or will in the future adopt specific  regulations  applicable to
the deployment  and operation of ALMs.  Furthermore,  some consumer  groups have
expressed  concern  regarding  the  privacy  and  security  of ALMs,  the use of
automated credit scoring tools in underwriting and whether electronic lending is
a desirable technological  development in light of the current level of consumer
debt. It is possible that consumer  groups or others could take actions to cause
one or more states eventually to promulgate specific  regulations  applicable to
the deployment and operation of ALMs and/or e-xpertLender. Regulations currently
existing or promulgated in the future that significantly restrict the ability of
a financial  institution  to install ALMs at multiple  locations  outside branch
offices or otherwise  adversely  affect the use of ALMs or any other products or
services the Company has or may develop could have a material  adverse effect on
the Company's business, operating results and financial condition.

Anti-Takeover Provisions

         Certain  provisions  of Delaware law and the Company's  Certificate  of
Incorporation  and by-laws could have the effect of making it more difficult for
a third party to acquire,  or of  discouraging a third party from  attempting to
acquire,  control of the  Company.  Such  provisions  could limit the price that
certain  investors  might be  willing  to pay in the  future  for  shares of the
Company's  Common  Stock.  These  provisions  of Delaware law and the  Company's
Certificate  of   Incorporation   and  by-laws  may  also  have  the  effect  of
discouraging or preventing certain types of transactions  involving an actual or
threatened  change of control of the  Company  (including  unsolicited  takeover
attempts),  even though such a transaction may offer the Company's  stockholders
the  opportunity  to sell their  stock at a price  above the  prevailing  market
price.  Certain of these  provisions  allow the Company to issue Preferred Stock
with  rights  senior to those of the Common  Stock and other  rights  that could
adversely  affect the  interest of holders of Common  Stock  without any further
vote or action  by the  stockholders.  The  issuance  of  Preferred  Stock,  for
example,  could  decrease  the  amount  of  earnings  or  assets  available  for
distribution to the holders of Common Stock or could adversely affect the rights
and powers,  including  voting  rights,  of the holders of the Common Stock.  In
certain  circumstances,  such issuance  could have the effect of decreasing  the
market price of the Common Stock,  as well as having the  anti-takeover  effects
discussed above.



<PAGE>



Item 2.  Properties

         The  Company's  principal  executive  offices  are located at 1201 Main
Street in Columbia, South Carolina. Such office space encompasses  approximately
33,000  square feet and is  currently  under lease  which  expires in 2001.  The
Company  also leases  approximately  2,800  square feet of office  space at 1500
Hampton Street,  Suite 130 in Columbia,  South Carolina,  under a lease which is
due to expire in 2001.  The  Company's  primary  assembly and quality  assurance
facilities are located at 2500 Leaphart Road in West Columbia,  South  Carolina,
which encompasses  approximately 19,000 square feet and is currently under lease
which expires in 2001. The Company also  sub-leases  approximately  1,000 square
feet of  sales  office  space in New  York,  New York  from  Columbia  Financial
Partners,  L.P., an affiliate of Alan H.  Fishman,  who is Chairman of the Board
and a director of the Company.

Item 3.  Legal Proceedings

         Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders

         Not Applicable

                      Executive Officers of the Registrant
Name                           Age       Position with the Company
Jeff A. Norris                 37        President and Chief Executive
                                          Officer and Director
Joseph A. Boyle                44        Senior Vice President, Chief
                                          Financial Officer, Secretary
                                          and Treasurer
Clement D. Lamarre             65        Senior Vice President - Operations and
                                          Sales
Terrence J. Sabol, Sr.         52        Senior Vice President - Technology
John D. Rogers                 54        Senior Vice President

Jeff A.  Norris,  founder  of the  Company,  has served as the  Company's  Chief
Executive  Officer and as a director  since March 1994 and served as Chairman of
the Board  from March  1994 to April  1996 and as  Treasurer  from March 1994 to
February  1996. Mr. Norris held the position of President from March 1994 to May
1994 and reassumed that position in October 1995. Prior to founding the Company,
Mr. Norris was employed as a salesman by Digital Equipment Corporation for nine
years.

Joseph A. Boyle became Senior Vice President and Chief Financial  Officer of the
Company in September  1996 and  Secretary  and  treasurer in May 1997.  Prior to
joining the Company, Mr. Boyle served as Price Waterhouse LLP engagement partner
for all of its Kansas City,  Missouri financial services clients and as a member
of the firm's Mortgage Banking Group. Mr. Boyle was employed by Price Waterhouse
LLP from September 1982 to August 1996.

Clement D. Lamarre,  Senior Vice  President of Sales and  Operations,  became an
employee of the Company in May 1997.  From June 1996 until May 1997, Mr. Lamarre
provided consulting services to the Company.  Prior to joining the Company, from
1991 to 1997,  Mr.  Lamarre owned and operated his own  consulting  business and
prior to 1991,  Mr.  Lamarre was  employed as Director of  Wholesale  and Retail
Distribution by Digital Equipment Corporation.

Terrence J. Sabol, Sr., Senior Vice President of Technology,  joined the Company
in October 1995.  From July 1990 to October 1995, he served as Products  Manager
for Policy Management Systems  Corporation,  a Columbia,  South Carolina company
that provides and supports computer systems for insurance companies.

John D. Rogers became Senior Vice  President of the Company in January 1997. Mr.
Rogers served as President of Affinity Processing Corporation,  a majority owned
subsidiary  of the Company,  from May 1996 until May 1997.  Prior to joining the
Company,  Mr.  Rogers  served as Executive  Vice  President  of the  Information
Services Group of BISYS Group, Inc., from 1989-1996.


<PAGE>



Part II

Item 5.  Market for Registrants' Common Equity and Related Stockholder Matters
         (a)   Not applicable.

         (b)   Not applicable.

         (c)   Not applicable.

         (d)  The  Company's  registration  statement  on  Form  S-1  (File  No.
              333-1170) with regard to an initial  public  offering of 5,060,000
              shares of common stock, par value $.0001 per share, of the Company
              was declared  effective by the Securities and Exchange  Commission
              on April 24, 1996. As set forth in the  Company's  Form SR, Report
              of Sales of Securities and Use of Proceeds  Therefrom,  Montgomery
              Securities and Donaldson, Lufkin & Jenrette Securities Corporation
              acted  as  the  managing  underwriters  for  the  offering,  which
              commenced April 25, 1996. As of December 31, 1997, the Company has
              used net proceeds of $60,078,000 from the offering as follows:

<TABLE>
<CAPTION>
                                                         Direct   or    indirect
                                                         payments to  directors,
                                                         officers,       general
                                                         partners  of the issuer
                                                         or their associates; to
                                                         persons    owning   ten
                                                         percent  or more of any
                                                         class     of     equity
                                                         securities
                                                         of   the    issuer;    and   to      Direct   or    indirect
                                                         affiliates of the issuer.            payments to others
                                                         --------------------------------     ------------------------
<S>                                                             <C>                                <C>
Construction of plant, building and facilities                                                     $            -
Purchase and installation of machinery and equipment                                                     4,691,000
Purchase of real estate                                                                                          -
Acquisition of other business(es)                                                                          300,000
Repayment of indebtness                                         $       771,000 1                        1,000,000
Working capital                                                                                         17,717,000
Temporary investments:
     US Treasury obligations                                                                            20,545,000
     Commercial paper                                                                                    1,521,000
     Money market / cash                                                                                 1,540,000
Other purposes:
     Marketing                                                                                           3,747,000
     Research & development                                                                              6,016,000
     Purchase of software                                                                                2,230,000
<FN>

1  Reflects  the  repayment  of debt  owed to  Carolina  First  Corporation,  as
described under the caption "Use of Proceeds" in the Company's Prospectus, dated
April 25, 1996.

</FN>
</TABLE>



<PAGE>





         The  Company's  common  stock is traded on The Nasdaq  National  Market
under the symbol  "AFFI." The  following  table  presents the high and low sales
prices of the Company's  common stock for the periods  indicated during 1996 and
1997,  as reported by The Nasdaq  National  Market.  The Company  completed  its
initial  public  offering in the second quarter of 1996 at a price of $13.00 per
share. As of March 17, 1997, there were 199 stockholders of record of the common
stock.

                              Sales Price Per Share
                                                        High             Low
1996:
April 25, 1996 to June 30, 1996                        $24.25           $7.63
Third Quarter 1996                                      14.25            6.00
Fourth Quarter 1996                                     10.75            6.25
1997:
First Quarter 1997                                       8.13            4.75
Second Quarter 1997                                      5.13            3.50
Third Quarter 1997                                       4.13            2.81
Fourth Quarter 1997                                      3.75            2.25

         The Company has never paid dividends on its capital stock.  The Company
intends  to  retain  earnings,  if any,  for use in its  business  and  does not
anticipate paying any cash dividends in the foreseeable future.



<PAGE>



Item 6.  Selected Financial Data

         The following table presents selected financial data of the Company for
the  periods  indicated.   The  following  financial  data  should  be  read  in
conjunction  with the information set forth under  "Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations,"  the  Company's
Consolidated  Financial  Statements  and Notes  thereto  and  other  information
included elsewhere in this report.
<TABLE>
<CAPTION>

                                                                                                              Period from
                                                                                                               Inception
                                                                                                              (January 12,
                                                                        Year ended                              1994) to
                                                                       December 31,                           December 31,
                                                       1997               1996                1995                1994
                                                 ------------------ ------------------ ------------------- -------------------
<S>                                               <C>                <C>                <C>                 <C>
Statements of Operations Data:
Revenues                                          $    4,146,899     $    5,081,818     $    1,524,911      $            -
Costs and expenses:
Cost of revenues                                       2,125,646          3,088,321          1,101,330                   -
Research and development                               3,526,257          2,905,232            368,452             264,600
Selling, general and administrative expenses          15,892,560         10,819,381          2,305,653             428,896
                                                 ------------------ ------------------ ------------------- -------------------
Total costs and expenses                              21,455,463         16,812,934          3,775,435             693,496
                                                 ------------------ ------------------ ------------------- -------------------
Operating loss                                       (17,397,564)       (11,731,116)        (2,250,524)           (693,496)
Interest income                                        2,033,571          2,099,004             48,476                   -
Interest expense                                         (35,359)           (60,083)          (105,981)            (12,475)
                                                 ------------------ ------------------ ------------------- -------------------
Net loss                                          $  (15,399,352)    $   (9,692,195)    $   (2,308,029)     $     (705,971)
                                                 ================== ================== =================== ===================
                                                 ================== ================== =================== ===================
Net loss per share - basic and diluted            $       (0.54)     $       (0.40)     $       (0.15)      $       (0.08)
                                                 ================== ================== =================== ===================
                                                 ================== ================== =================== ===================
Shares used in computing net loss per share           28,477,880         24,136,480         15,044,286           9,185,078
                                                 ================== ================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>

                                                                                 December 31,
                                                       1997               1996                1995               1994
                                                 ------------------ ------------------ ------------------- -------------------
<S>                                               <C>                <C>                <C>                 <C>
Balance Sheet Data:
Cash and cash equivalents                         $    4,470,185     $   31,563,950     $    1,235,983      $       29,985
Short-term investments                                19,135,415         10,583,997                  -                   -
Working capital (deficit)                             28,599,560         43,672,679         (1,134,465)           (431,547)
Net investment in sales-type leases,
   less current portion                                1,328,741          2,386,010            860,295                   -
Total assets                                          42,209,570         56,098,857          4,591,168             338,172
Notes payable, less current portion                            -                  -            222,399             200,000
Capital lease obligations to related party,
   less current portion                                        -             66,245            148,119             199,508
Capital stock of subsidiary held by
   Minority investor                                           -            200,000            137,500                   -
Stockholders' equity                                  39,230,570         52,134,639            617,412            (679,463)

</TABLE>


<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Overview

         The Company was formed to develop and market  technologies  that enable
financial  institutions  and other  businesses  to  provide  consumer  financial
services  electronically with reduced or no human intervention.  From the period
of inception  (January 12, 1994)  through  December 31, 1994,  the Company was a
development stage company, and its activities  principally related to developing
its DeciSys/RT  technology (formerly known as the "DSS System") and the Affinity
Automated Loan Machine ("ALM"), raising capital and recruiting personnel.

         During 1995,  1996 and early 1997 the  Company's  primary  products and
services consisted of the ALM and a call center decisioning system that provided
financial  institutions the ability to originate  unsecured  consumer loans with
little or no human  intervention.  During this period,  the Company's  customers
primarily   utilized  the  ALM  delivery  channel  which  captures   origination
information  for  unsecured  consumer  loan  applications  and then  routes this
information to the Company's  proprietary  DeciSys/RT for an automated decision.
Also during this period the Company  continued to develop  additional  financial
products which could be originated at an ALM and processed  through  DeciSys/RT.
These  products  included  loans secured by cash  collateral,  and the functions
necessary to open checking  accounts,  renew  existing  loans,  cross sell other
products and make  counter  offers to  applicants  who qualify for a loan amount
higher or lower than the loan originally requested.

         During 1997 the Company  continued its channel and product  development
to enable the automated  decisioning,  processing  and  fulfillment of financial
product  transactions by DeciSys/RT  originating through not only ALMs, but also
other  non-ALM  channels,  including  call  centers,  branches,  and  automobile
dealerships.  The Company's system includes  inherent  architecture that enables
integration of origination,  processing and  fulfillment  across a wide range of
interface channels with the consumer. A significant new channel system developed
in 1997 is e-xpertLender. e-xpertLender is the Company's system that establishes
connectivity  among all of a  financial  institution's  delivery  channels,  its
automated decisioning system, and its risk management group. e-xpertLender also,
upon  approval,  gives the  consumer a choice of closing  methods  that  include
branches,  ALMs,  mail, and third party closing agents.  The system enables call
center agents and branch  personnel to inquire as to the status of  applications
at anytime and electronically  notifies loan officers with respect to exceptions
and the reason for referral.  e-xpertLender  replaced the Company's  call center
decisioning  system  (Assets3)   previously  developed  under  a  joint  venture
agreement  with Union  Planters  Corporation.  The Company no longer markets the
Assets3 system. Additionally, the joint venture agreement was terminated in 1997
(see  Note 2 of  "Notes  to  Consolidated  Financial  Statements  -  Summary  of
Significant Accounting Policies - Minority Interest").

         To date,  the Company has generated  minimal  operating  revenues,  has
incurred  significant losses and has experienced  substantial negative cash flow
from  operations.  The  Company's  prospects  must be considered in light of the
risks,  expenses and difficulties  frequently  encountered by companies in their
early stage of development, particularly technology-based companies operating in
unproven markets with unproven products.  The Company had an accumulated deficit
as of December 31, 1997 of  $28,105,547,  with operating  losses of $15,399,352,
$9,692,195, and $2,308,029 for the years ended December 31, 1997, 1996 and 1995,
respectively.  The  Company  expects to incur  substantial  additional  costs to
develop its financial product  origination  capabilities,  to enhance and market
the ALM,  e-xpertLender  and  Decisys/RT  and to complete  any new  products and
services that may be developed.  Accordingly, there can be no assurance that the
Company will ever be able to achieve profitability or, if achieved, sustain such
profitability.

         The market for the Company's products and services is new, evolving and
uncertain,  and it is  difficult  to  determine  the size and predict the future
growth rate,  if any, of this market.  In addition,  the market for products and
services that enable electronic commerce is highly competitive and is subject to
rapid innovation and competition  from traditional  products and services having
all or some of the same  features as products and services  enabling  electronic
commerce.  Competitors in this market have frequently taken different  strategic
approaches  and have launched  substantially  different  products or services in
order to exploit the same  perceived  market  opportunity.  Until the market has
validated a strategy through widespread  acceptance of a product or service,  it
is difficult to identify all current or potential  market  participants or gauge
their relative competitive position.



<PAGE>



Revenue and Expense Recognition

         The Company's ALM pricing  structure is designed to recapture a portion
of the Company's  costs  through  set-up and lease fees and to generate over the
long term a greater portion of revenues through recurring  transaction fees. The
Company's  ALM lease  pricing  generally  is tiered  based on the number of ALMs
ordered  and  operated by each  customer.  However,  the terms of each  contract
reflect negotiations between the Company and the customer.  Depending on whether
certain  criteria  are met, ALM leases may be reported as  sales-type  leases or
operating leases.

         Pursuant to the Company's  standard ALM Automated Loan System Agreement
(the  "ALS   Agreement"),   (i)  the  Company  (a)  grants  to  the  customer  a
non-exclusive  right to use the software  supported by the Company's  Decisys/RT
system and (b) agrees to provide technical assistance to the customer during the
term of such  agreement and (ii) the customer  agrees to pay the initial  set-up
fee, a  non-refundable  fee for the  non-exclusive  right to use the software as
well as fees for each application and each loan transaction consummated based on
a percentage of the principal amount of the loan. At the time an order is placed
by a customer,  the Company  typically  collects a non-refundable  set-up fee as
well as a non-refundable  fee for the  non-exclusive  right to use the software,
all of which  are  initially  recorded  as  deferred  revenue.  Generally,  upon
installation of an ALM, the Company recognizes as revenue the non-refundable fee
for the non-exclusive  right to use the software and a portion of the set-up fee
in an amount  approximately equal to the cost of set-up and installation of such
ALM, with the  remainder of such set-up fee  amortized  ratably over the term of
the ALS Agreement.  Additionally,  under the ALS Agreement, the Company collects
other  miscellaneous  processing  fees  that are  designed  to help the  Company
recapture a portion of its processing  costs. The Company  recognizes these fees
as revenue when earned under the terms of the ALS Agreement.

         The Company  generally  leases ALM  hardware to its  customers  under a
standard rental agreement that typically is non-cancelable  and has a term of 48
months,  although  certain  of  the  Company's  agreements  allow  customers  to
terminate  such   agreements   prior  to  the  end  of  their  term  in  certain
circumstances.  In accordance with Statement of Financial  Accounting  Standards
No. 13 ("SFAS 13"),  "Accounting  for Leases," the Company treats certain leases
as sales-type  leases, and other leases are treated as operating leases. For its
sales-type leases,  under SFAS 13, the Company recognizes as revenue,  generally
upon ALM  installation,  the present value of the aggregate future minimum lease
payments to be received  during the term of the related rental  agreement  using
the  Company's   estimated   incremental   borrowing   rate  for   lease-secured
transactions as the discount rate. The difference  between the aggregate  future
minimum  lease  payments  and the  present  value  of  such  lease  payments  is
capitalized as unearned interest income and amortized into revenue over the term
of the rental  agreement.  For operating  leases,  the Company  recognizes lease
payments  as  revenue  ratably  over  the  term  of  the  applicable  agreement.
Significant  fluctuations in quarterly  revenue and operating results may result
depending  on  whether  leases  consummated  during a period are  sales-type  or
operating leases.

         Prior to May 31, 1995,  the Company  generally  used an agreement  that
provided for (i) an initial fee,  substantially all of which is credited against
future  licensing fees at a  predetermined  rate over the term of the agreement,
and (ii) monthly or quarterly  licensing  fees equal to the greater of a minimum
amount and a fee  calculated  based upon the  principal  amount of loans funded.
Such agreements have terms of 12, 24 or 48 months.  The Company has recorded the
prepaid portion of the initial fee as deferred revenue,  which is amortized over
the term of the  particular  agreement.  The Company  treats such  agreements as
operating leases. Accordingly,  monthly and quarterly fees under such agreements
are  recognized  as  revenue  over the term of the  applicable  agreements.  The
Company  depreciates  the cost of ALMs leased  under such  agreements  over five
years using the  straight-line  method. At December 31, 1997, there were 48 ALMs
in service under such agreements.

         In conjunction with the installation of the Company's  technology,  the
Company may agree to perform additional customer specific technology development
for the customer. The Company generally enters into a contract with the customer
for the  performance  of these services which  typically  defines  deliverables,
specific  delivery and  acceptance  dates and specified  fees for such services.
Upon completion and acceptance of the deliverables by the customer,  the Company
recognizes the corresponding revenue as professional services.

         The Company  accounts for research and  development  costs as operating
costs and  expenses  such  costs in the  period  incurred.  In  accordance  with
Statement  of  Financial  Accounting  Standards  No. 86 ("SFAS  86"),  "Computer
Software to be Sold,  Leased or  Otherwise  Marketed,"  the Company  capitalizes
software costs incurred in the development of a software  application  after the
technological feasibility of the application has been established. Technological
feasibility is established when an application design and a working model of the
application  have been completed and the  completeness  of the working model and
its consistency with the application design have been confirmed by testing. From
the time  technological  feasibility is established  until the time the relevant
application is available for general release to customers,  software development
costs incurred are  capitalized  at the lower of cost or net  realizable  value.
Thereafter,  costs related to the  application  are again  expensed as incurred.
Capitalized  software  development  costs are amortized using the greater of the
revenue curve or  straight-line  method over the estimated  economic life of the
application.  Software  costs  capitalized  include  direct  labor,  other costs
directly  associated  with the  development  of the related  application  and an
allocation  of  indirect  costs,   primarily  facility  costs  and  other  costs
associated with the Company's software development staff. The Company bases such
allocation on the percentage of the Company's  total labor costs  represented by
the software development labor costs.

Results of Operations

         Revenues

         The Company's  revenues were  $4,146,899,  $5,081,818 and  $1,524,911
for the years ended  December 31, 1997,  1996 and 1995, respectively.

         Sales and rental fees of  $1,590,620,  initial set-up fees of $638,687,
professional  services  of $792,734  and  transaction  fees and other  income of
$1,124,858   represented   approximately   38.4%,   15.4%,   19.1%  and   27.1%,
respectively,  of the  Company's  revenues for 1997.  During 1996 the  Company's
revenues consisted of sales and rental fees of $2,552,158, non-recurring license
revenue of $1,800,000, initial set-up fees of $426,848 and transaction and other
fees of $302,812 which accounted for approximately  50.2%, 35.4%, 8.4% and 6.0%,
respectively,  of the  Company's  revenues  for 1996.  Sales and rental  fees of
$1,275,101,  initial set-up fees of $128,715 and  transaction  and other fees of
$121,095 accounted for approximately 83.6%, 8.4% and 7.9%, respectively,  of the
Company's revenues for 1995.

         The  decrease in sales and rental fees for the year ended  December 31,
1997 as  compared  to 1996 is due to an overall  decrease  in the number of ALMs
deployed under  sales-type  leases during 1997. The increase in sales and rental
fees for the year ended  December  31,  1996 as  compared  to 1995 is  primarily
attributable  to an  overall  increase  in the  number  of ALMs  deployed  under
sales-type  and  operating   leases  during  1996.   During  1997,  the  Company
consummated  sales-type  leases for 28 ALMs compared to 74 and 30 ALM sales-type
leases in 1996 and 1995, respectively.

         The  increase in initial  set-up fees for the year ended  December  31,
1997 as compared to 1996 is attributable to a general  increase in the amount of
set-up fees charged as well as set-up fees which were  recognized in association
with the deployment of ALMs in conjunction with a short-term pilot program.  The
increase in initial set-up fees for the year ended December 31, 1996 as compared
to 1995  is  essentially  attributable  to an  increase  in the  number  of ALMs
deployed during 1996 under both sales-type and operating leases. At December 31,
1997, 1996 and 1995,  there were a total of 171, 164 and 51 ALMs,  respectively,
under both sales-type and operating leases. Subsequent to December 31, 1997, the
Company and a  significant  ALM  customer  terminated  their  relationship  with
respect to 50 ALMs under sales-type and operating  leases.  The Company does not
believe  that such  action had or will have a material  effect on the  Company's
financial condition or operating results.

         The  increase in  transaction  fees and other income for the year ended
December 31, 1997 as compared to 1996 is primarily  attributable  to transaction
revenue earned from financial  service  applications  processed using DeciSys/RT
and from processing credit card and other debit card transactions.  In addition,
during 1997 the Company  experienced an increase in revenue  associated with the
accretion  of deferred  fees due to an  increase  in the overall  number of ALMs
under both sales-type and operating leases  throughout 1997 as compared to 1996.
The increase in  transaction  fees and other income for the year ended  December
31, 1996 as compared to 1995 is primarily due to an increase in transaction fees
and revenue  associated  with the accretion of deferred fees,  both of which are
associated  with an increase in the overall number of ALMs under both sales-type
and operating leases throughout 1996 as compared to 1995.

         Non-recurring license fees of $1.8 million during 1996 reflect one-time
license  fees  paid  by  Union  Planters   Corporation  to  Affinity  Processing
Corporation ("APC"), a subsidiary of the Company, for a perpetual,  royalty-free
license to use the Company's call center  decisioning  system (formerly known as
"Assets(3)") in North America. Pursuant to an arrangement among the Company, APC
and Union  Planters,  all amounts paid by Union  Planters to APC as license fees
were paid by APC to the Company as license fees.

         During 1997 the Company recognized revenue associated with contracts to
perform  professional  services,  primarily  for one  customer.  Generally  such
services  involve  customizing  the Company's  products to operate in accordance
with a customer's specifications. Prior to 1997 the Company had not entered into
any significant agreements of this type.

         Total ALM sales and professional services for 1997 were to 5 customers.
All  ALM  sales  represented  new  customer  relationships,  while  professional
services were performed for 4 of the 5 new customers. One customer accounted for
60.2% and 91.3% of ALM sales and rental and professional services revenue, while
two customers accounted for 48% and 13%,  respectively,  of total revenue during
1997. For information relating to customer revenue  concentrations for 1996, see
Note 10 of "Notes to Consolidated  Financial Statements - Segment  Information."
The loss of any one of these customers may have a material adverse effect on the
Company's  financial  condition or results of operations  due to the  developing
nature of the Company's  customer base and revenue streams.  The Company expects
that a substantial portion of the Company's operating revenues in the future may
continue  to  be  attributable  to  relatively  few  customers.   Such  customer
concentration may cause significant  fluctuations in the Company's quarterly and
annual  revenues  due to the  uncertainty  of the  timing of new and  additional
orders for ALMs.

         In 1997,  the Company  continued to  experience  disappointing  revenue
growth and an extremely  lengthy sales cycle for its products.  Average consumer
use of ALMs in service and average rates for loan approvals have been lower than
most customers'  expectations.  While certain customers have deployed their ALMs
in a manner that has resulted in  acceptable  loan approval  rates,  the Company
believes that the economic viability of the ALM as an acceptable  alternative to
traditional  and new  lending  methods has not yet been  established,  which has
resulted in the terminations of the Company's  relationship with one significant
ALM customer, another potentially significant ALM customer and certain other ALM
customers. Such activities did not significantly affect the Company's historical
operating results.

         Costs and Expenses

         Cost of  Revenues.  Cost of revenues  for the years ended  December 31,
1997, 1996 and 1995 were  $2,125,646,  $3,088,321 and $1,101,330,  respectively.
Cost of revenues  primarily  reflects  (i) set-up  costs  including  the cost of
preparing  ALMs for  installation,  (ii) the cost of ALM  components  and  (iii)
salaries and overhead allocated to cost of revenues.  Approximately  $493,143 or
23% of the Company's cost of revenues for 1997 was  attributable  to the cost of
materials  used in the  assembly of ALMs,  compared to  $1,353,334  or 43.8% and
$698,604 or 63.4% during 1996 and 1995,  respectively.  The cost of ALM hardware
sold under capital leases, depreciation expense for hardware leased to customers
under operating leases and other direct and indirect costs associated with sales
and rental revenues  totaled  $1,041,455,  $2,426,476 and $891,040 for the years
ended December 31, 1997, 1996 and 1995, respectively. Labor and other direct and
indirect costs  associated with initial set-up fees totaled  $232,077,  $426,848
and $122,404 for the years ended December 31, 1997, 1996 and 1995, respectively.
Labor and other direct and indirect costs associated with transactions and other
revenue totaled  $328,067,  $91,063 and $87,886 for the years ended December 31,
1997,  1996 and 1995,  respectively.  Labor and other direct and indirect  costs
associated  with  professional  services  revenue during 1997 totaled  $524,047.
Direct and indirect  costs  associated  with license  revenue in 1996  consisted
primarily of allocated salaries and overhead and totaled $143,934.

         The  decrease in the cost of revenues  for the year ended  December 31,
1997 as compared  to 1996,  excluding  the costs  associated  with  professional
services in 1997 and license  revenue in 1996, is primarily  attributable  to an
overall  decrease in the number of ALMs  deployed  during the period  under both
sales-type and operating  leases offset by an increase in  depreciation  expense
associated  with an  increase in the number of ALMs in service  under  operating
lease  arrangements  during  1997.  The increase in the cost of revenues for the
year ended  December 31, 1996 as compared to the same period in 1995,  excluding
the costs associated with license revenue in 1996, is attributable to an overall
increase in the number of ALMs deployed  during the period under both sales-type
and operating  leases offset by cost  efficiencies  in 1996  associated with the
redesign and standardization of the installation process, as discussed below.

         The  cost of  designing,  assembling  and  installing  individual  ALMs
fluctuated  significantly  during  1995.  Prior to September  1995,  the Company
incurred significant costs in customizing ALM designs for customers.  Since that
time, the Company has  standardized the base operating system and redesigned the
cabinet  structure,  graphics  and  component  installation  to reduce the cost,
assembly time and ALM size. Further, during 1997 and 1996 the Company outsourced
certain aspects of ALM cabinet  construction,  hardware assembly and delivery to
reduce costs.

         Research and  Development.  Research and  development  expenses for the
year ended  December  31,  1997 were  $3,526,257,  compared  to  $2,905,232  and
$368,452  for the years  ended  December  31, 1996 and 1995,  respectively.  The
increase in research and development  expenses is primarily  attributable to the
Company's  enhancement  of its  DeciSys/RT  technology  and the  development  of
additional  financial  product  origination  capabilities  during 1997 and 1996.
During  1997  and  1996,   the  Company   capitalized   $451,304  and  $214,820,
respectively, of software development costs related primarily to the development
of certain loan applications.  During 1995, the Company capitalized  $216,587 of
software  development costs related to the ALM. Capitalized software development
costs are being amortized over 48 months.  The Company  anticipates that it will
continue to commit substantial resources to research and development  activities
for the foreseeable future.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  ("SG&A")  expenses  for the year ended  December  31,  1997 were
$15,892,560, compared to $10,819,381 and $2,305,653 for the years ended December
31, 1996 and 1995,  respectively.  SG&A expenses during 1997 consisted primarily
of personnel costs of $9,672,691;  professional  fees of $1,891,751,  consisting
primarily of legal, accounting,  recruiting and relocation fees; advertising and
marketing costs of $1,488,147;  deferred  compensation  expense  amortization of
$480,534;  and travel costs of $935,270.  SG&A  expenses  during 1996  consisted
primarily of personnel  costs of  $5,375,856;  professional  fees of  $2,290,017
consisting  primarily of legal,  accounting,  recruiting  and  relocation  fees;
advertising and marketing  costs of $1,661,508;  deferred  compensation  expense
amortization of $1,028,489;  and travel costs of $791,693.  SG&A expenses during
1995 consisted  primarily of personnel costs of $585,421;  professional  fees of
$372,076   consisting   principally  of  legal  fees   associated  with  capital
financings,  the Company's patent  applications and general  corporate  matters;
deferred  compensation  expense  amortization  of $524,248;  and travel costs of
$114,823.

         The increase in personnel costs for the year ended December 31, 1997 as
compared to 1996,  and the year ended  December 31, 1996 as compared to 1995, is
attributable  to an  increase  in the  number of  employees  and  timing of such
increases  during  1997 and 1996  associated  with  expansion  of the  Company's
operating activities. The decrease in deferred compensation expense for the year
ended  December 31, 1997 as compared to 1996, is due to the  forfeiture of stock
options  granted  under the  Company's  1995 Stock Option Plan.  The increase in
deferred  compensation  expense for the year ended December 31, 1996 as compared
to 1995,  is due to an increase  in the  amortization  of deferred  compensation
associated  with the  issuance  of  additional  stock  options in 1996 under the
Company's 1995 Stock Option Plan.

Interest Income

         Interest  income of  $2,033,571  and  $2,099,004  during 1997 and 1996,
respectively,  primarily reflects interest income attributable to the short-term
investment  of the proceeds from the Company's  initial  public  offering in May
1996. Interest income also reflects the amortization of deferred interest income
attributable   to  ALM  sales-type   leases.   The  amount  of  interest  income
attributable to short-term investments and the amortization of deferred interest
was  substantially  unchanged  in 1997 as compared to 1996.  Interest  income of
$48,476  for the year ended  December  31, 1995  reflects  the  amortization  of
deferred interest income attributable to ALM sales-type leases.

Interest Expense

         Interest  expense for the year ended  December  31,  1997 was  $35,359,
compared to $60,083 and $105,981 for the years ended December 31, 1996 and 1995,
respectively.  The decrease for the year ended  December 31, 1997 as compared to
1996,  is due  primarily  to  payments  made  under the terms of  capital  lease
obligations and other charges. The decrease for the year ended December 31, 1996
as compared to the same period in 1995,  is due  primarily  to the  repayment of
outstanding debt with the proceeds from the Company's initial public offering.

Income Taxes

         The Company has recorded a valuation  allowance  for the full amount of
its deferred income tax assets as of December 31, 1997, 1996 and 1995,  based on
management's evaluation of the recognition criteria as set forth in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."

Liquidity and Capital Resources

         The Company has generated  operating  losses of  $28,105,547  since its
inception and has financed its  operations  primarily  through net proceeds from
its initial public offering in May 1996.  Prior to the Company's  initial public
offering,  the Company's  operations  were financed  through the private sale of
debt and equity securities, capital lease obligations, bank financing, factoring
of ALM  rental  contracts,  and loans from  affiliates.  Net  proceeds  from the
Company's initial public offering were $60,088,516.

         Net cash used in 1997 to fund operations was $15,394,559.  During 1997,
net  proceeds  from the  offering  and other  sources  of cash were used to fund
operations and capital  expenditures of $1,683,755.  At December 31, 1997, cash,
cash equivalents and short-term investments were $23,605,600 and working capital
was  $28,599,560.  At December 31, 1996,  cash, cash  equivalents and short-term
investments were $42,147,947 and working capital was $43,672,679.

         The Company  continues  to use a  substantial  amount of existing  cash
resources to fund its operations. If the Company continues to use cash resources
at the rate used in 1997,  the Company will deplete its existing cash  resources
in  the  latter  part  of  1999.  The  Company  believes   existing  cash,  cash
equivalents,  internally  generated  funds  and  available  borrowings  will  be
sufficient to meet the Company's  currently  anticipated  operating  expenditure
requirements  during 1998. During 1998, the Company expects to continue to use a
significant  amount of existing cash, cash equivalents and internally  generated
funds to fund research and  development,  marketing  efforts designed to promote
consumer   awareness   and  use  of  its   products  and  services  and  capital
expenditures.  In order to fund more rapid expansion, to develop new or enhanced
products or to address  liquidity  needs caused by shortfalls  in revenues,  the
Company may need to raise additional  capital in the future. If additional funds
are raised through the issuance of equity securities,  the percentage  ownership
of the stockholders of the Company will be reduced,  stockholders may experience
additional dilution,  or such equity securities may have rights,  preferences or
privileges  senior to common stock.  There can be no assurance  that  additional
financing will be available when needed on terms acceptable to the Company or at
all. If adequate  funds are not available or not available on acceptable  terms,
the  Company  may be unable to  develop,  enhance  and market  products,  retain
qualified  personnel,  take  advantage  of future  opportunities,  or respond to
competitive pressures,  any of which could have a material adverse effect on the
Company's business, operating results and financial condition.

         In July 1997, the Company  adopted a share  repurchase plan under which
the Company was authorized to use up to $2 million of general corporate funds to
acquire from time to time in the open market  shares of the  outstanding  common
stock of the Company.  As of December 31, 1997,  the Company had  repurchased  a
total of 336,000  shares at an average price of $2.58 per share for an aggregate
cost of $867,438 under the share repurchase  plan. In addition,  during 1997 the
Company has  repurchased an aggregate of 643,066 shares of its common stock from
former  employees of the Company at an aggregate  cost of $484 pursuant to stock
purchase agreements with such former employees.

         Implications of Year 2000 Issues

         The Company has evaluated its existing applications and systems against
anticipated Year 2000 issues and has modified its software to address identified
issues.  All current and future technology  initiatives are being developed with
Year 2000 issues in mind and will also be tested and  modified  accordingly,  if
necessary,  to  eliminate  known  issues.  The  Company has  determined  that no
significant  modifications  or  replacement  of  portions  of its  software  are
necessary  to assure that its  computer  systems  will  function  properly  with
respect to dates in the year 2000 and beyond.

         The Company  has  initiated  discussions  with  significant  suppliers,
customers and financial  institutions  to ensure those parties have  appropriate
plans to  remediate  Year 2000 issues  where their  systems  interface  with the
Company's systems or otherwise impact  operations.  The Company is assessing the
extent  its  operations  are  vulnerable  should  those  organizations  fail  to
remediate properly their computer systems.

Item 7.(a)  Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.



<PAGE>



Item 8.  Financial Statements and Supplemental Data

The report of independent auditors and consolidated financial statements are set
forth below (see item  14(a)(1) for list of financial  statements  and financial
statement schedules):

REPORT OF INDEPENDENT AUDITORS



Board of Directors and Shareholders
Affinity Technology Group, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  Affinity
Technology  Group,  Inc. and  subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended  December 31, 1997.  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,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  consolidated   financial  position  of  Affinity
Technology  Group,  Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity  with generally
accepted accounting principles.




                                                       /s/  ERNST & YOUNG LLP

Greenville, South Carolina
March 11, 1998


<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                       1997                  1996
                                                               ---------------------- --------------------
<S>                                                              <C>                    <C>
Assets
Current assets:
  Cash and cash equivalents                                      $    4,470,185         $   31,563,950
  Investments                                                        19,135,415             10,583,997
  Accounts  receivable,  less  allowance  for doubtful
   accounts of $400,120 and $198,987 at December 31, 1997
   and 1996,respectively                                              1,944,947                327,895
  Net investment in sales-type leases - current:
    Third parties                                                     1,537,902                620,270
    Related party                                                       195,026                245,110
  Inventories                                                         2,960,038              2,804,978
  Other current assets                                                  799,628                820,987
                                                               ---------------------- --------------------
Total current assets                                                 31,043,141             46,967,187
Net investment in sales-type leases - non-current:
  Third parties                                                       1,317,753              2,159,832
  Related party                                                          10,988                226,178
Property and equipment, net                                           6,028,980              6,073,303
Software development costs, less accumulated
  amortization of $117,807 and $67,686 at December
  31, 1997 and 1996, respectively                                       750,323                363,721
Other assets                                                          3,058,385                308,636
                                                               ====================== ====================
Total assets                                                     $   42,209,570         $   56,098,857
                                                               ====================== ====================
</TABLE>

See accompanying notes.


<PAGE>


<TABLE>
<CAPTION>
                                                                               December 31,
                                                                       1997                   1996
                                                               ---------------------- ----------------------
<S>                                                              <C>                    <C>
Liabilities and stockholders' equity Current liabilities:
  Current portion of capital lease obligations to related        $       64,222         $       69,987
party
  Accounts payable                                                      666,824              1,442,662
  Accrued expenses                                                      390,584                802,534
  Accrued compensation and related benefits                             561,391                455,405
  Current portion of deferred revenue - related party                    40,463                 81,259
  Current portion of deferred revenue - third parties                   720,097                442,661
                                                               ---------------------- ----------------------
Total current liabilities                                             2,443,581              3,294,508
Capital lease obligations to related party, less current
  portion                                                                     -                 66,245
Deferred revenue - related party                                              -                 39,805
Deferred revenue - third parties                                        535,419                363,660
Capital stock of subsidiary held by minority investor                         -                200,000
Commitments and contingent liabilities
Stockholders' equity:
  Common  stock,  par  value  $0.0001; authorized
   60,000,000  shares, issued 31,550,199 in 1997
   and 27,879,680 shares in 1996                                          3,155                  2,788
  Additional paid-in capital                                         69,858,571             68,777,090
  Deferred compensation                                              (1,558,574)            (3,939,044)
  Treasury stock, at cost (992,207 shares at
     December 31, 1997)                                                (967,035)                     -
  Accumulated deficit                                               (28,105,547)           (12,706,195)
                                                               ---------------------- ----------------------
Total stockholders' equity                                           39,230,570             52,134,639
                                                               ====================== ======================
Total liabilities and stockholders' equity                       $   42,209,570         $   56,098,857
                                                               ====================== ======================
</TABLE>

See accompanying notes.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                                 1997                   1996                   1995
                                                         ---------------------- ---------------------- ----------------------
<S>                                                        <C>                    <C>                    <C>
Revenues:
   Transactions and other                                  $     1,124,858        $       302,812        $       121,095
   Initial set-up                                                  638,687                426,848                128,715
   Sales and rental (including $286,413 and $400,591
     from related party for 1996 and 1995,                       1,590,620              2,552,158              1,275,101
respectively)
   Professional services                                           792,734                      -                      -
   License revenue                                                       -              1,800,000                      -

                                                         ---------------------- ---------------------- ----------------------
                                                                 4,146,899              5,081,818              1,524,911
Costs and expenses:
   Cost of revenues                                              2,125,646              3,088,321              1,101,330
   Research and development                                      3,526,257              2,905,232                368,452
   Selling, general and administrative expenses                 15,892,560             10,819,381              2,305,653
                                                         ---------------------- ---------------------- ----------------------
Total costs and expenses                                        21,544,463             16,812,934              3,775,435
                                                         ---------------------- ---------------------- ----------------------
Operating loss                                                 (17,397,564)           (11,731,116)            (2,250,524)
Interest income                                                  2,033,571              2,099,004                 48,476
Interest expense - third parties                                         -                      -                (23,325)
Interest expense - related parties                                 (35,359)               (60,083)               (82,656)
                                                         ---------------------- ---------------------- ----------------------
Net loss                                                   $   (15,399,352)       $    (9,692,195)       $    (2,308,029)
                                                         ====================== ====================== ======================
Net loss per share - basic and diluted                     $        (0.54)        $        (0.40)        $        (0.15)
                                                         ====================== ====================== ======================
Shares used in computing net loss per share                     28,477,880             24,136,480             15,044,286
                                                         ====================== ====================== ======================
</TABLE>

See accompanying notes.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                             Preferred  Preferred             Additional                                                   Total
                              Stock,      Stock,    Common      Paid-in       Deferred     Treasury     Accumulated    Stockholders'
                             Series A    Series B   Stock       Capital     Compensation    Stock         Deficit          Equity
                             ---------- ----------- -------- ------------ --------------- ------------- --------------- ------------
<S>                           <C>        <C>        <C>       <C>           <C>           <C>          <C>             <C>
Balance at December 31, 1994  $      -   $       -  $ 1,508   $   25,000    $        -    $      -     $  (705,971)    $   (679,463)
  Issuance of preferred
   stock,Series A              250,000           -        -            -             -           -               -          250,000
  Issuance of preferred
   stock, Series B                   -   2,732,356        -            -             -           -               -        2,732,356
  Issuance of common stock           -           -      162       98,138             -           -               -           98,300
  Deferred compensation
   related to grant of stock
   options                           -           -        -    4,114,822    (4,114,822)          -               -                -
  Amortization of deferred
   compensation                      -           -        -            -       524,248           -               -          524,248
  Net loss                           -           -        -            -             -           -      (2,308,029)      (2,308,029)
                             ---------- ----------- --------- ----------- ------------- ----------- --------------- ----------------
Balance at December 31, 1995   250,000   2,732,356    1,670    4,237,960    (3,590,574)          -      (3,014,000)         617,412
  Exercise of warrants               -      45,417        -            -             -           -               -           45,417
  Conversion of preferred
   stock                      (250,000) (2,777,773)     602    3,027,171             -           -               -                -
  Initial public offering            -           -      506   60,088,010             -           -               -       60,088,516
   proceeds
  Exercise of stock options          -           -       10       46,990             -           -               -           47,000
  Deferred compensation
   related to grant of stock
   options                           -           -        -    1,376,959    (1,376,959)          -               -                -
  Amortization of deferred
   compensation                      -           -        -            -     1,028,489           -               -        1,028,489
  Net loss                           -           -        -            -             -           -      (9,692,195)      (9,692,195)
                             ---------- ----------- -------- ------------ ------------- ----------- --------------- ----------------
Balance at December 31, 1996         -           -    2,788   68,777,090    (3,939,044)          -     (12,706,195)      52,134,639
  Exercise of warrants               -           -        4       37,473             -           -               -           37,477
  Exercise of warrants by
     related party                   -           -      240            -             -           -               -              240
  Exercise of stock options          -           -       30      144,034             -           -               -          144,064
  Amortization of deferred
   compensation                      -           -        -            -       480,534           -               -          480,534
  Forfeiture of stock
   options                           -           -        -   (1,899,936)    1,899,936           -               -                -
  Purchase of treasury stock                              -            -             -    (967,035)              -         (967,035)
  Issuance of common stock
   in exchange for capital
   stock of subsidiary held by
   minority investor                 -           -       67    1,599,933             -           -               -        1,600,000
  Issuance of common stock
   for acquisition                   -           -       26    1,199,977             -           -               -        1,200,003
  Net loss                           -           -        -            -             -           -     (15,399,352)     (15,399,352)
                             ========== =========== ======== ===========  ============= ============= =============   ==============
Balance at December 31, 1997   $     -    $      -  $ 3,155  $69,858,571   $(1,558,574)  $(967,035)   $(28,105,547)     $39,230,570
                             ========== =========== ======== ============ ============= =========== =============== ================

</TABLE>

See accompanying notes.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                             Years ended December 31,
                                                                1997                   1996                   1995
                                                        ---------------------- ---------------------- ---------------------
<S>                                                       <C>                    <C>                    <C>
Operating activities
Net loss                                                  $   (15,399,352)       $   (9,692,195)        $   (2,308,029)
Adjustments to reconcile net loss to net cash used in
  operating activities:
    Depreciation and amortization                               2,066,270               902,846                145,248
    Amortization of deferred compensation                         480,534             1,028,489                524,248
    Provision for doubtful accounts                               456,841               170,000                  3,667
    Inventory valuation allowance                                 230,000                20,000                 46,000
    Deferred revenue                                              368,594            (1,098,072)               754,227
    Deferred license revenue                                            -                     -              1,237,500
    Other                                                         195,505                59,243                 22,931
    Changes in current assets and liabilities:
       Accounts receivable                                     (2,073,893)             (261,531)              (146,962)
       Net investment in sales-type leases                        189,721            (2,093,519)            (1,157,871)
       Inventories                                               (755,248)           (2,420,946)              (257,317)
       Other assets                                                (6,633)             (784,976)               (28,232)
       Accounts payable                                          (775,838)              702,449                486,309
       Accrued expenses                                          (477,046)              508,361                281,313
       Accrued compensation and related benefits                  105,986               233,331                187,478
                                                        ---------------------- ---------------------- ---------------------
Net cash used in operating activities                         (15,394,559)          (12,726,520)              (209,490)
Investing activities
Purchases of property and equipment                            (1,683,755)           (5,558,806)            (1,350,702)
Proceeds from sale of property and equipment                      144,535                     -                      -
Software development costs                                       (451,304)             (214,820)              (216,587)
Purchases of short-term investments                           (34,345,695)          (10,583,997)                     -
Sales of short-term investments                                25,794,277                     -                      -
Other                                                            (300,000)             (349,618)                (5,954)
                                                        ---------------------- ---------------------- ---------------------
Net cash used in investing activities                         (10,841,942)          (16,707,241)            (1,573,243)
Financing activities
Proceeds from notes payable to related parties                          -               450,000                769,269
Proceeds from notes payable to third parties                            -             1,000,000                250,000
Principal payments on capital leases                              (72,010)             (156,289)               (53,075)
Payments on notes payable to related parties                            -              (775,416)              (170,427)
Payments on notes payable to third parties                              -            (1,000,000)              (300,536)
Proceeds from sale of capital stock of subsidiary to
  minority interest                                                     -                62,500                137,500
Purchase of treasury stock                                       (871,775)                    -                      -
Exercise of warrants                                               37,717                45,417                      -
Exercise of options                                                48,804                47,000                      -
Proceeds from issuance of common stock                                  -            60,088,516                  1,000
Proceeds from issuance of preferred stock                               -                     -              2,355,000
                                                        ---------------------- ---------------------- ---------------------
Net cash (used in) provided by financing activities              (857,264)           59,761,728              2,988,731
                                                        ---------------------- ---------------------- ---------------------
Net (decrease) increase in cash                               (27,093,765)           30,327,967              1,205,998
Cash and cash equivalents at beginning of year                 31,563,950             1,235,983                 29,985
                                                        ====================== ====================== =====================
Cash and cash equivalents at end of year                  $     4,470,185        $   31,563,950         $    1,235,983
                                                        ====================== ====================== =====================

Cash paid during the year for:
    Interest                                              $             -        $       85,287         $       67,377
</TABLE>

See accompanying notes.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                December 31, 1997

1.       The Company

Affinity  Technology Group, Inc. (the "Company") was incorporated on January 12,
1994.  On May 1, 1996,  the  Company  completed a public  offering of  5,060,000
shares of $0.0001 par value Common Stock (the "Initial  Public  Offering").  The
Initial  Public  Offering  price was $13 per  Common  Share  resulting  in gross
offering proceeds of $65,780,000.  Proceeds to the Company, net of underwriters'
discount and total offering expenses, were $60,088,516.

Simultaneously with the offering the preferred stock of the Company,  consisting
of 23,810  shares  of Series A  Preferred  Stock and  32,967  shares of Series B
Preferred Stock  (including 3,702 shares of Series B Preferred Stock issued upon
the exercise of  outstanding  warrants),  was  automatically  converted  into an
aggregate of 6,018,362 shares of Common Stock.

Since its formation the Company has concentrated its product development efforts
primarily on a "closed loop" electronic  commerce system that enables  financial
institutions  to automate the processing and  consummation of consumer loans and
other  financial  services at the point of sale.  This technology is designed to
enable  financial  institutions  to open new  distribution  channels  for  their
products and services,  thereby  increasing  assets and revenues and  broadening
customer relationships while reducing their operating and infrastructure costs.

The primary  platform  currently  offered by the Company is the  Automated  Loan
Machine ("ALM"),  which permits a consumer to apply for and, if determined to be
a suitable credit risk,  receive a loan without human  intervention in as little
as 10 minutes. Similar in appearance to an automated teller machine ("ATM"), the
Affinity ALM is a fully automated system that utilizes the Company's proprietary
DeciSys/RT  technology to process  consumer loans,  generate the underlying loan
documentation  and  distribute  loan  proceeds.  In  addition,  the  ALM  can be
programmed  to  process  other  financial  services  transactions  such  as  the
establishment of savings and checking accounts, the consummation of joint loans,
certain secured loans and credit  consolidation loans and the issuance of credit
cards.

Similar  to the ALM  platform,  the  Company  has  developed  the  e-xpertLender
platform.  This  platform  permits a  financial  institution  to input  consumer
applicant  information  resembling  information  captured by the ALM,  and using
DeciSys/RT  to process all of the  financial  services  available via the ALM in
considerably  less time than the ALM.  In  addition  to the  financial  services
processing capabilities  e-xpertLender  integrates with the subscriber financial
institution's   legacy   system   providing   inquiry,   routing  and   tracking
functionality.



<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.       Summary of Significant Accounting Policies

Principles of Consolidation

The  consolidated  financial  statements  include the accounts of Affinity
Technology  Group,  Inc. and its  subsidiaries,  Affinity  Bank Technology
Corporation,  Affinity Clearinghouse Corporation, Affinity Credit Corporation,
Affinity  Processing  Corporation  ("APC"), Affinity  Mortgage  Technology, Inc.
and Multi  Financial  Services,  Inc.  and its wholly  owned  subsidiary  Surety
Mortgage,  Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.

Segment Information

In June of 1997,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise  and Related  Information"  ("SFAS  131"),  effective for years
beginning  after  December  15, 1997.  SFAS 131  establishes  standards  for the
disclosure  of  financial   and   descriptive   information   pertaining  to  an
enterprise's  reportable  operating  segments  in annual and  interim  financial
statements.  The  Company  does not expect the  adoption of SFAS 131 will have a
material  impact on the  presentation  of the  Company's  financial  results  or
financial position.

Software Revenue Recognition

In October of 1997,  the  American  Institute of  Certified  Public  Accountants
issued Statement of Position 97-2 "Software Revenue  Recognition"  ("SOP 97-2"),
effective for transactions entered into in fiscal years beginning after December
15, 1997. SOP 97-2 provides guidance on software revenue recognition  associated
with the licensing and selling of computer  software.  The Company  continues to
assess the effects that the  adoption of SOP 97-2 will have on the  presentation
of the Company's financial statements.

Minority Investor

An  unrelated  third  party  exchanged  240,570  shares of APC common  stock for
666,667  shares of ATG common stock on May 21,1997.  The exchange was  accounted
for as a purchase of minority interest in a majority owned subsidiary.  The fair
market  value  of  the  ATG  common  stock  at the  time  of  the  exchange  was
approximately $1,600,000.  The unrelated third party had previously acquired the
shares of APC common stock for aggregate  consideration of $125,000,  and 90,988
shares of APC  convertible  preferred  stock,  which was acquired for  aggregate
consideration  of  $75,000  ("capital  stock  of  subsidiary  held  by  minority
investor"  as captioned  in the  Company's  1996  financial  statements).  These
holdings represented a 24.9% minority interest in APC at December 31, 1996.

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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Concentrations of Credit Risk

The Company markets its products to financial institutions throughout the United
States. The Company performs ongoing credit evaluations of customers and retains
a security interest in leased equipment.



<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.    Summary of Significant Accounting Policies (continued)

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.

Investments

The Company has adopted  Statement of  Financial  Accounting  Standards  No. 115
("SFAS  115"),   "Accounting   for  Certain   Investments  in  Debt  and  Equity
Securities." In accordance with SFAS 115, the Company classifies its investments
as held to maturity or available for sale.  Prior to 1997,  all of the Company's
investments were being held to maturity and were classified accordingly.  During
1997, the Company  acquired  certain  investments  which have been classified as
available  for  sale.  At  December  31,  1997  approximately   $12,700,000  and
$6,400,000  were  classified  as  available  for  sale  and  held  to  maturity,
respectively.  Investments  consist of investments in  certificates  of deposit,
corporate bonds and U.S.  Government  securities  with  maturities  greater than
three months.  Such  investments  are reported at amortized cost at December 31,
1997,  which  approximates  fair  value.  The  Company  did  not  recognize  any
unrealized  holding gains or losses  associated with  investments  classified as
available for sale during the year ended December 31, 1997.

Inventories

Inventories  at  December  31,  1997 and 1996 are stated at the lower of cost or
market.  Cost is  determined  using the first-in,  first-out  ("FIFO") cost flow
assumption.

Property and Equipment

Property and equipment are recorded at cost.  Depreciation  and amortization are
computed using the  straight-line  method over the estimated useful lives of the
assets. Estimated useful lives range from five to ten years for office furniture
and  fixtures  and  three  to five  years  for  all  other  depreciable  assets.
Depreciation  expense (including  amortization of equipment leased under capital
leases) was  $1,799,259,  $848,699  and  $109,918  during  1997,  1996 and 1995,
respectively.

Software Development Costs

Costs incurred in the development of software,  which is incorporated as part of
the Company's  products or sold  separately,  are capitalized  after a product's
technological feasibility has been established.  Capitalization of such costs is
discontinued  when a product is  available  for  general  release to  customers.
Software  development  costs  are  capitalized  at  the  lower  of  cost  or net
realizable  value and amortized using the greater of the revenue curve method or
the  straight-line  method  over  the  estimated  economic  life of the  related
product.  Amortization  begins  when a product is ready for  general  release to
customers.

Amortization  of  capitalized  software  development  was  $64,702,  $54,147 and
$13,539 during 1997, 1996 and 1995, respectively.



<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.    Summary of Significant Accounting Policies (continued)

Intangible Assets

Intangible  assets arising from the excess of cost over acquired assets is being
amortized by the straight  line method over their  estimated  useful life of ten
years. Intangible assets, primarily goodwill,  consisted of $1,470,000 which was
recorded in conjunction  with the acquisition of Buy American,  Inc. and Project
Freedom,  Inc. (see Note 7), and approximately  $1,400,000 which was recorded in
conjunction  with the  exchange of APC common  stock for ATG common  stock.  See
"Minority  Investor"  above.  Accumulated  amortization  associated  with  these
intangible assets approximated $86,000 at December 31, 1997.

The  carrying  value of  intangible  assets  are  assessed  if  information  and
circumstances  suggest  impairment.  If the assessment  identifies that carrying
values  are not  recoverable,  the  Company  would  reduce  carrying  values  by
estimated  deficiencies  based upon  discounted  cash  flows over the  remaining
amortization period.

Revenue Recognition

Initial set-up - The Company leases ALMs to customers  utilizing both sales-type
and operating  lease  arrangements  and  concurrently  enters into a service and
processing  agreement (the "ALS Agreement")  with the customer.  Pursuant to the
ALS  Agreement,  the  customer  pays an initial  set-up  fee which is  initially
recognized  as deferred  revenue.  Generally  upon  installation  of an ALM, the
Company recognizes as revenue the portion of the initial set-up fee attributable
to the related  costs of set-up and  installation.  The remainder of the initial
fee is deferred and amortized ratably over the term of the ALS Agreement.

Transaction  fees -  Transaction  fee  revenue  is  recognized  as  the  related
transactions  are  processed.  Transaction  processing  fees and other  revenues
represented  approximately 26%, 4% and 4% of total revenue during 1997, 1996 and
1995, respectively.

Professional  services - In conjunction  with the  installation of the Company's
technology,  periodically additional customer specific technology development is
performed  by the  Company in the form of  professional  services.  The  Company
generally  enters into a contract with the customer for the performance of these
services.  Upon  completion  and  acceptance  of  professional  services  by the
customer, the Company recognizes the corresponding revenue.

Sales and  rental - Revenue  and costs  related to leases of ALM  equipment  are
recognized in accordance  with Statement of Financial  Accounting  Standards No.
13,  "Accounting  for Leases" (see Note 3).  Revenue from  sales-type  leases is
generally  recognized  when the  equipment  is  installed  and  accepted  by the
customer. Operating lease revenue is recognized ratably over the lease term.

Software  licensing  - The  Company  recognizes  revenue  from sales of software
licenses upon delivery of the software product to a customer, unless the Company
has significant  related  obligations  remaining.  When significant  obligations
remain after the software product has been delivered,  revenue is not recognized
until such  obligations  have been completed or are no longer  significant.  The
costs of any remaining  insignificant  obligations  are accrued when the related
revenue is recognized.




<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.    Summary of Significant Accounting Policies (continued)

Deferred  revenues - Deferred revenues relate to unearned revenue on ALM leases.
Deferred  license  revenue at  December  31,  1995  related to a  non-exclusive,
perpetual,  royalty-free license, to be granted to a financial  institution,  to
use one of the Company's software products, Assets(3). The financial institution
is the  unaffiliated  third  party who held the  minority  interest in APC - see
"Minority  Investor" above. At December 31, 1995, the financial  institution had
paid the Company  $1,237,500  as a license fee for use of an initial  version of
Assets(3)  in the United  States,  which was  deferred  pending  delivery of the
product. The Company delivered the product to the financial institution in 1996,
and  accordingly  recognized the deferred  revenue in income.  In addition,  the
financial  institution  exercised an option to purchase for $562,500 a perpetual
royalty-free  license to use  Assets(3) in North  America,  which option  became
exercisable upon the Company's enhancement of such system. The Company delivered
such enhancement  during 1996 and recorded the additional license fee as revenue
upon delivery and acceptance by the financial institution.

Cost of Revenues

Cost of revenues  consists of costs associated with initial set-up,  transaction
fees, sales and rental revenues and professional services. Costs associated with
initial  set-up fees include  labor,  other direct  costs and an  allocation  of
related  indirect  costs.  Labor and other direct costs  associated with initial
set-up fees totaled $232,077, $426,848 and $122,404 for the years ended December
31, 1997, 1996 and 1995,  respectively.  Costs  associated with sales and rental
revenues include the cost of the leased ALM hardware,  other direct costs and an
allocation  of  related  indirect  costs.  Costs  of  ALM  hardware  sold  under
sales-type leases,  depreciation  expense for hardware leased to customers under
operating  leases  and other  direct  costs  associated  with  sales and  rental
revenues  totaled  $1,041,455,  $2,426,476  and  $746,820  for the  years  ended
December  31,  1997,  1996  and  1995,   respectively.   Costs  associated  with
professional  services  include  labor,  other direct costs and an allocation of
related indirect costs.  Labor and other direct and allocation of indirect costs
associated  with  professional  services  totaled  $524,047  for the year  ended
December 31, 1997.

Net Loss Per Share of Common Stock

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards  No. 128,  "Earnings  per Share"  ("SFAS  128")
effective  for fiscal  years ending after  December 15, 1997,  which  supersedes
Accounting Principles Board Opinion No. 15 "Earnings Per Share" ("APB 15"). SFAS
128 changes the method used to compute earnings per share and requires companies
to restate all prior periods where  applicable.  Under the new  requirements for
calculating  basic earnings per share,  the dilutive effect of stock options and
warrants are to be  excluded.  The Company has adopted SFAS 128 and all net loss
per share of Common Stock  amounts  presented  have been  computed  based on the
weighted average number of shares of Common Stock outstanding in accordance with
SFAS 128.

Income Taxes

Deferred income taxes are calculated  using the liability  method  prescribed by
Statement of Financial  Accounting  Standards  No. 109,  "Accounting  for Income
Taxes" ("SFAS 109").




<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.    Summary of Significant Accounting Policies (continued)

Stock Based Compensation

The Company  accounts for stock  options in accordance  with APB Opinion  No.25,
"Accounting  for  Stock  Issued  to  Employees"  ("APB  25").  Under  APB 25, no
compensation  expense is recognized  for stock or stock  options  issued at fair
value.  For stock options  granted at exercise  prices below the estimated  fair
value,  the Company  records  deferred  compensation  expense for the difference
between the  exercise  price of the shares and the  estimated  fair  value.  The
deferred  compensation  expense is amortized  ratably over the vesting period of
the individual options. For performance based stock options, the Company records
compensation expense related to these options over the performance period.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"),  provides an alternative to APB 25 in accounting for
stock based compensation issued to employees. SFAS 123 provides for a fair value
based  method of  accounting  for  employee  stock  options and  similar  equity
instruments.  However,  for  companies  that continue to account for stock based
compensation  arrangements under APB 25, SFAS 123 requires disclosure of the pro
forma  effect on net income and  earnings  per share as if the fair value  based
method prescribed by SFAS 123 had been applied.  The Company intends to continue
to account for stock based  compensation  arrangements  under APB No. 25 and has
adopted the pro forma disclosure requirements of SFAS 123.

Advertising Expense

The cost of  advertising  is expensed as  incurred.  Advertising  and  marketing
expense was approximately $1,488,147,  $1,662,000 and $154,000 during 1997, 1996
and 1995, respectively.

Reclassification

Certain  amounts  in 1996 and 1995 have been  reclassified  to  conform  to 1997
presentations  for  comparability.  These  reclassifications  have no  effect on
previously reported stockholders' equity or net loss.

3.       Sales-Type and Operating Leases

The components of the net investment in sales-type leases are as follows:

<TABLE>
<CAPTION>

                                                                          December 31,
                                                                    1997                 1996
                                                             -------------------- --------------------
<S>                                                            <C>                  <C>
Total minimum lease payments receivable                        $    3,124,181       $    3,271,650
Residual values                                                       360,000              360,000
                                                             -------------------- --------------------
                                                                    3,484,181            3,631,650
Less unearned interest income                                        (422,512)            (380,260)
                                                             ==================== ====================
Net investment in sales-type leases                                 3,061,669            3,251,390
                                                             ==================== ====================
Net investment is classified as:
   Current                                                          1,732,928              865,380
   Non-current                                                      1,328,741            2,386,010
                                                             ==================== ====================
                                                               $    3,061,669       $    3,251,390
                                                             ==================== ====================
</TABLE>



<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Future minimum lease payments to be received on sales-type and operating  leases
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>

                                                                 Sales-Type            Operating
                                                             -------------------- --------------------
<S>                                                            <C>                  <C>
1998                                                           $    1,644,639       $      108,000
1999                                                                  801,998              108,000
2000                                                                  429,261                    -
2001                                                                  248,283                    -
                                                             -------------------- --------------------
                                                               $    3,124,181       $      216,000
                                                             ==================== ====================
</TABLE>


4.       Inventories

Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                          December 31,
                                                                    1997                 1996
                                                             -------------------- -------------------
<S>                                                            <C>                  <C>
Electronic parts and other components                          $    1,396,826       $    1,166,277
Work in process                                                       829,269              213,646
Finished goods                                                        906,950            1,445,055
                                                             -------------------- -------------------
                                                                    3,133,045            2,824,978
Reserve for obsolescence                                             (173,007)             (20,000)
                                                             ==================== ===================
                                                               $    2,960,038       $    2,804,978
                                                             ==================== ===================
</TABLE>


5.       Property and Equipment

Property and equipment consists of the following:
<TABLE>
<CAPTION>
                                                                          December 31,
                                                                    1997                 1996
                                                             -------------------- -------------------
<S>                                                            <C>                  <C>
ALM equipment leased to others under operating leases          $      935,521       $    1,473,569
Data processing equipment                                           2,326,651            2,219,525
Demonstration equipment                                               582,857              433,727
Office furniture and fixtures                                       2,338,381            1,347,182
Automobiles                                                            72,003               72,003
Purchased software                                                  2,229,955            1,469,605
                                                             -------------------- -------------------
                                                                    8,485,368            7,015,611
Less accumulated depreciation and amortization                     (2,456,388)            (942,308)
                                                             --------------------
                                                                                  ===================
                                                               $    6,028,980       $    6,073,303
                                                             ==================== ===================
</TABLE>

Accumulated  depreciation  of ALM  equipment  leased to others was  $424,141 and
$328,433 at December 31, 1997 and 1996, respectively.



<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

6.    Stockholders' Equity

Convertible Preferred Stock

Pursuant to the Company's  Certificate of Incorporation,  the Board of Directors
has the authority,  without further action by the  stockholders,  to issue up to
5,000,000  shares  of  preferred  stock  in one or  more  series  and to fix the
designations,  powers,  preferences,  privileges,  and  relative  participating,
optional or special rights and the  qualifications,  limitations or restrictions
thereof,  including dividend rights, conversions rights, voting rights, terms of
redemption and liquidation preferences,  any or all of which may be greater than
the rights of the Common  Stock.  At  December  31,  1997 there are no shares of
preferred stock issued or outstanding.

Stock Split

During April 1996, the Company's Board of Directors  approved a 106-for-1 common
stock split and an increase  in the common  stock par value to $.0001  effective
immediately  upon completion of the Initial Public  Offering.  All common share,
option and warrant data have been restated to reflect the split.

Stock Option Plans

During  1995,  the Company  adopted  the 1995 Option Plan under which  incentive
stock  options  and  nonqualified  stock  options  may be granted to  employees,
directors,  consultants  or independent  contractors.  At December 31, 1997, the
weighted  average  exercise price was $0.44 and the weighted  average  remaining
contractual life was 7.8 years. This plan closed during April 1996.

In April 1996,  the Company  adopted the 1996 Stock Option and  Incentive  Plan.
Under the terms of both  plans,  incentive  options may be issued at an exercise
price  not less  than the  estimated  fair  market  value on the date of  grant.
Generally,  options granted vest ratably over a 60 month term. However,  options
granted in 1995 to certain officers vest over a shorter period.  At December 31,
1997,  approximately  44,600 and 315,110 options are exercisable  under the 1996
and 1995 Option  Plans,  respectively.  At December 31, 1997,  weighted  average
exercise price was $6.09 and the weighted average remaining contractual life was
9.3 years.



<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

6.       Stockholder's Equity (continued)

A summary of activity under the 1996 and 1995 Option Plans is as follows:
<TABLE>
<CAPTION>

                                                     Shares                  Options Outstanding
                                                                   ----------------------------------------
                                                   Available             Number               Price
                                                   for Grant            Of Shares           Per Share
                                               ------------------- -------------------- -------------------
<S>                                                   <C>                  <C>             <C>
1995 Stock Option Plan
Shares reserved                                        2,173,000                   -            -
Options granted                                       (1,645,120)          1,645,120          $0.44
Options canceled/forfeited                                 5,300              (5,300)           -
                                               ------------------- -------------------- -------------------
Balance at December 31, 1995                             533,180           1,639,820          $0.44
Options granted                                         (178,080)            178,080          $0.44
Options canceled/forfeited                                78,758             (78,758)         $0.44
Options exercised                                              -            (106,000)         $0.44
Plan closed                                             (433,858)                  -            -
                                               ------------------- -------------------- -------------------
Balance at December 31, 1996                                   -           1,633,142          $0.44
Options canceled/forfeited                                     -            (426,544)         $0.44
Options exercised                                              -            (319,202)         $0.44
                                               =================== ==================== ===================
Balance at December 31, 1997                                   -             887,396          $0.44
                                               =================== ==================== ===================
1996 Stock Option Plan
Shares reserved                                        1,900,000                   -            -
Options granted                                          (97,500)             97,500          $11.88
                                               ------------------- -------------------- -------------------
Balance at December 31, 1996                           1,802,500              97,500          $11.88
Options granted                                         (744,225)            744,225      $2.63 - $7.38
Options canceled/forfeited                               125,525            (125,525)     $4.25 - $11.88
                                               ------------------- -------------------- -------------------
Balance at December 31, 1997                           1,183,800             716,200      $2.63 - $11.88
                                               =================== ==================== ===================
</TABLE>

The Company has recorded in 1996 and 1995 deferred compensation expense totaling
$5,491,781 for the difference  between the grant price and the deemed fair value
of certain of the Company's  common stock  options  granted under the 1995 Plan.
During 1997 the Company  adjusted the deferred  compensation  expense to reflect
actual  compensation  expense  earned  by  terminated  employees.   The  Company
continues to amortize the deferred  compensation  of the  remaining  individuals
still employed by the Company over the vesting period of the individual options.
The vesting  periods for options  granted to one of the Company's  officers are:
(a) 90 days from employment date for a portion of the options and (b) a 48 month
period  following  such 90 day  period for the  remainder  of the  options.  The
vesting  period  for other  options is  generally  60  months.  Amortization  of
deferred  compensation in 1997, 1996 and 1995 totaled  $480,534,  $1,028,489 and
$524,248, respectively.

During 1994 and 1995, in connection with the execution of employment  agreements
with two executive officers and a consulting agreement with one of the Company's
directors,  the Company sold 4,155,200 shares of restricted  common stock to the
officers  and  directors  for  nominal  consideration.  Under  the  terms of the
agreements,  up to 764,048  of the shares  were  subject  to  repurchase  by the
Company  based on cost at a sliding  scale over a 60 month term  (resulting in a
reduced  number of shares  subject  to  repurchase)  if the  related  employment
arrangements terminate. During 1997 the two officers terminated their employment
and the Company  repurchased  643,066  shares  pursuant to the provisions of the
employment agreements.


<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

6.       Stockholder's Equity (continued)

During 1996,  40,000  performance based stock options were awarded in connection
with  an  employment  agreement  of a key  employee.  Under  the  terms  of this
agreement,  these options lapsed based upon the Company not meeting certain 1997
operating results. In addition, of the total options granted during 1997 131,100
were  performance  based stock  options  awarded in connection  with  employment
agreements  with key  employees.  Under  the  terms of these  agreements,  these
options may lapse if certain  performance  measures are not met. Under the terms
of these  agreements,  84,000 of these  options  lapsed  based upon the required
performance  measures  not being  met.  If the  remaining  required  performance
measures are met these options generally vest over a 60 month period.

The pro forma  disclosures  required by SFAS 123 regarding net loss and loss per
share are stated as if the  Company  has  accounted  for stock  options  granted
subsequent  to December  31,  1994 using fair  values.  Using the  Black-Scholes
option  pricing  model the fair value at the date of grant for these options was
estimated using the following assumptions: risk-free interest rates ranging from
5.4% to 6.7%  for  1997,  5.8% to 6.8%  for  1996  and  5.3% to 6.8%  for  1995,
volatility  factor of the expected market price of the Company's common stock of
0.75 for 1997 and 0.69 for 1996 and 1995,  and an expected  option life  ranging
from 1 to 5 years.

The  Black-Scholes  and other option  pricing  models were  developed for use in
estimating fair value of traded options which have no vesting  restrictions  and
are fully transferable.  In addition, option pricing models require the input of
highly  subjective  assumptions.  The  Company's  employee  stock  options  have
characteristics  significantly  different  than  those of  traded  options,  and
changes  in the  subjective  assumptions  can  materially  affect the fair value
estimate.  Accordingly,  in management's opinion,  these existing models may not
necessarily  provide a reliable  single  measure  of the fair value of  employee
stock options.

For purposes of pro forma disclosures,  the estimated fair values of the options
are  amortized to expense over the expected  life of the options.  The Company's
pro forma information follows:

<TABLE>
<CAPTION>
                                                          1997              1996               1995
                                                    ----------------- ----------------- -------------------
<S>                                                  <C>               <C>                 <C>
Pro forma net loss                                   $(16,258,811)     $(10,662,080)       $(2,279,981)
Pro forma net loss per share - basic and diluted        $(0.57)           $(0.44)            $(0.15)
</TABLE>


Stock Warrants

In 1995, the Company  formalized an agreement  with a related  party,  resulting
from certain financing  arrangements  preceding the Initial Public Offering, for
the issuance of a stock  warrant under which the party had the right to purchase
up to an aggregate of  6,666,340  shares of common stock at a purchase  price of
approximately  $.0001 per share.  The agreement  also specified that the warrant
could be  exercised  in whole or in part at any time prior to December  31, 2015
only if, absent prior written regulatory  approval,  after giving effect of such
exercise,  the party  beneficially own less than five percent of the outstanding
shares of the Company's  common stock.  During 1997 the party  obtained  written
regulatory approval to exercise the warrant in its entirety.  The warrant is not
transferable without regulatory approval.  On December 31, 1997 and December 28,
1995,  the party  exercised  portions of the warrant and acquired  2,400,000 and
795,000 shares of Common Stock, respectively.



<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

6.       Stockholder's Equity (continued)

Pursuant  to an  agreement  reached in 1994,  the  Company  issued  warrants  to
purchase  certain  equity  securities  as might be  determined  by a  subsequent
financing for an aggregate  purchase  price of $7,500.  Pursuant to the terms of
the  agreements,  and in  conjunction  with the  Company's  issuance of Series B
Preferred  Stock in 1995,  the  holders of these  warrants  became  entitled  to
purchase an aggregate  of 79 shares of Series B Preferred  Stock at the price of
$93.366  per  share.  These  warrants  were  exercised   concurrently  with  the
completion of the Initial Public Offering and were automatically  converted into
8,374 shares of Common Stock.  The warrants had negligible  value at the time of
issuance.

In 1995, the Company issued  warrants to purchase  shares of Common Stock for an
aggregate  purchase price of $37,500.  Pursuant to the terms of the  agreements,
and in conjunction  with the Company's  issuance of Series B Preferred  Stock in
October 1995,  the per share exercise  price was  established  at  approximately
$0.88,  and  accordingly,  the warrants  represented  rights to purchase  42,571
shares  of  Common  Stock.  During  1997 all of these  warrants  were  exercised
pursuant to the terms of the  agreements.  The warrants had negligible  value at
the time of issuance.

The Company  agreed,  in connection  with the issuance of a convertible  note in
1995,  to issue a warrant to a director  of the  Company.  In 1995,  the Company
issued the warrant to the  director  for the right to purchase  3,623  shares of
Series B Preferred  Stock at an exercise price of $10.50 per share.  The warrant
was exercised concurrently with the completion of the Initial Public Offering in
1996 and  automatically  converted  into  384,038  shares of common  stock.  The
warrant had negligible value at the time of issuance.

Convertible Notes

During 1995, the Company  issued 707,868 shares of Common Stock upon  conversion
of $75,000  notes  payable  to  individuals  plus  accrued  interest  of $5,944.
Accordingly,  the Company transferred $80,944 to stockholders'  equity to record
the conversion.

During 1995, the Company issued  convertible notes payable for proceeds totaling
$640,000.  Subsequently in 1995,  these notes and the accrued  interest  thereon
were  converted by the holders  into  136,210  shares of Common Stock and 27,854
shares of Preferred  Stock.  Accordingly,  the Company  transferred  $649,656 to
stockholders' equity to record the conversion.

7.       Acquisition

On May 7, 1997 the Company acquired the assets of Buy American, Inc. and Project
Freedom, Inc., two related companies,  for aggregate consideration consisting of
$300,000 in cash and issuance of 259,460 shares of restricted  common stock. The
acquisition  was accounted  for as a purchase.  The results of operations of Buy
American,  Inc.  and Project  Freedom,  Inc.  are  included in the  consolidated
financial  statements from the date of acquisition.  The consolidated results of
operations  for the period  ended  December  31,  1997  would not be  materially
different had the acquisition taken place at the beginning of the year.

The  restricted  common  stock issued in  association  with the  acquisition  is
subject  to a call  option by the  Company  and put option by the  sellers.  The
Company has a single option to repurchase any or all shares of restricted common
stock at a price of $5.78 per share.  The  sellers  of Buy  American,  Inc.  and
Project  Freedom,  Inc.  have a single  option to sell any or all the  shares of
restricted  common  stock to the  Company at a price of $3.47 per  share.  These
options are exerciseable for a 30 day period ending May 31, 1999.


<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

7.       Acquisition (continued)

Additionally, performance consideration in the form of future issuances of
common stock and cash payments are contingent upon specified performance
objectives and continued employment of a principal officer of Buy American, Inc.
and Project Freedom, Inc. by the Company. The contingent performance
consideration encompasses the five year period following the date of acquisition
of the assets of Buy American, Inc. and Project Freedom, Inc.  Future issuance
of common stock and disbursement of cash will result in an additional element
of the purchase price.

8.       Leases

Future  minimum lease  payments  under capital  leases in effect at December 31,
1997 are as follows:

         1998                                                   $      69,558
                                                            -------------------
         Total                                                         69,558
         Less amounts representing interest                            (5,336)
                                                            ===================
         Capital lease obligation to related party              $      64,222
                                                            ===================

The Company has noncancellable operating leases for the rental of its office and
ALM assembly  operations.  Future  minimum lease  payments under these leases at
December 31, 1997 are as follows:

         1998                                                         578,341
         1999                                                         632,501
         2000                                                         638,001
         2001                                                         351,834
                                                            -------------------
         Total                                                  $   2,200,677
                                                            ===================

In 1997,  1996 and  1995 the  Company  incurred  rent  expense,  including  rent
associated with cancelable rental agreements, of $798,930, $445,954 and $74,773,
respectively.

9.       Income Taxes

As of December 31, 1997,  the Company had federal and state net  operating  loss
carryforwards of approximately $27,356,100. The net operating loss carryforwards
will begin to expire in 2009 if not utilized.



<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

9.       Income Taxes (continued)

Deferred  income  taxes  reflect  the net tax  effect of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities consisted of the following at:
<TABLE>
<CAPTION>

                                  December 31,
                                    1997 1996
                                            --------------------- ---------------------
<S>                                             <C>                   <C>
Deferred tax assets:
   Net operating loss carryforwards             $   10,384,400        $    4,351,700
   Other                                               306,700               110,500
                                            --------------------- ---------------------
Total deferred tax assets                           10,691,100             4,462,200
                                            --------------------- ---------------------
Deferred tax liabilities:
   Capitalized software costs                         (284,800)             (121,200)
   Capital leases                                     (158,100)              (92,500)
   Depreciation                                       (318,800)             (266,000)
   Other                                                     -                (1,700)
                                            --------------------- ---------------------
Total deferred tax liabilities                        (761,700)             (481,400)
                                            --------------------- ---------------------
Less:
   Valuation allowance                              (9,929,400)           (3,980,800)
                                            ===================== =====================
Total net deferred taxes                        $            -        $            -
                                            ===================== =====================
</TABLE>

The  Company  has  recorded a  valuation  allowance  for the full  amount of its
deferred  income  tax  assets  as of  December  31,  1997  and  1996,  based  on
management's  evaluation of the evidential  recognition  requirements  under the
criteria  of  SFAS  109.  The  main  component  of  the  evidential  recognition
requirements was the Company's cumulative pretax losses since inception.

10.      Segment Information

The Company  conducts its business  within one industry  segment.  To date,  all
revenues  generated have been from transactions  with North American  customers.
Three  customers  accounted  for  68% of  revenues  in 1997  which  individually
represented  48%, 13% and 7% of revenues.  Two  customers  accounted  for 58% of
revenues in 1996 which  individually  represented  37% and 21% of  revenues,  of
which $1.8  million  or 34% of total  revenues,  related  to the  non-exclusive,
perpetual, royalty-free license for the call center decisioning system; see Note
2  "Summary  of  Significant  Accounting  Policies  -  Deferred  Revenue."  Four
customers  accounted for 83% of revenues in 1995 which individually  represented
26%, 26%, 17% and 14% of revenues.

11.      Other Related Party Transactions

The Company  leases  ALMs to a bank which  holds a warrant to acquire  shares of
common stock of the Company. See Note 6. The Company has installed and otherwise
delivered  a number  of ALMs on  behalf of the bank  during  1996 and 1995.  The
Company had a net investment of approximately  $216,000 in sales-type leases and
trade accounts receivable of approximately $264,000 with the bank as of December
31, 1997.  The bank also  provided  financing  for the Company in the form of an
unsecured  loan  preceding  the  Initial  Public  Offering  and  provided  lease
financing for a small portion of ALM hardware.


<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

12.      Commitments and Contingencies

The Company is subject to legal  actions  from time to time which have arisen in
the  ordinary  course of  business.  Certain  claims  have  also  been  filed by
plaintiffs  who claim  certain  rights,  damages or interests  incidental to the
Company's  formation and development.  The Company intends to vigorously contest
all such actions and, in the opinion of management,  the Company has meritorious
defenses  and the  resolution  of such actions  will not  materially  affect the
financial position of the Company.

<PAGE>

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

         Not applicable.

Part III

Item 10. Directors and Executive Officers of the Registrant

Information  required  by  this  Item  will  be  contained  in the  Registrant's
definitive proxy statement  relating to its Annual Meeting of Stockholders to be
held on May 28, 1998 under the captions  "Board of Directors" and "Section 16(a)
Beneficial  Ownership  Reporting  Compiance" which are incorporated by reference
herein.

Item 11. Executive Compensation

Information  required  by  this  Item  will  be  contained  in the  Registrant's
definitive proxy statement  relating to its Annual Meeting of Stockholders to be
held on May 28,  1998  under  the  caption  "Executive  Compensation",  which is
incorporated by reference herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information  required  by  this  Item  will  be  contained  in the  Registrant's
definitive proxy statement  relating to its Annual Meeting of Stockholders to be
held on May 28, 1998 under the caption  "Security  Ownership of  Management  and
Certain Beneficial Owners," which is incorporated by reference herein.

Item 13. Certain Relationships and Related Transactions

Information  required  by  this  Item  will  be  contained  in the  Registrant's
definitive proxy statement  relating to its Annual Meeting of Stockholders to be
held  on May  28,  1998  under  the  caption  "Certain  Transactions"  which  is
incorporated by reference herein.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)      (1)      The following  consolidated  financial  statements of Affinity
                  Technology Group, Inc. and subsidiaries  included in this
                  Annual Report on Form 10-K are included in Item 8.
         i.       Consolidated Balance Sheets as of December 31, 1997 and 1996.
         ii.      Consolidated Statement of Operations for the years ended
                   December 31, 1997, 1996 and 1995.
         iii.     Consolidated Statements of Stockholders' Equity for the yearS
                   ended December 31, 1997, 1996 and 1995.
         iv.      Consolidated Statements of Cash Flows for the years ended
                   December 31, 1997, 1996 and 1995.
         v.       Notes to the Consolidated Financial Statements for the years
                   ended December 31, 1997, 1996, and 1995.

         (2)       Schedule II - see additional section of this Report.
                  No other  financial  statement  schedules are to be filed with
         this Annual  Report on Form 10-K due to the  absence of the  conditions
         under which they are  required or because the required  information  is
         included  within the  consolidated  financial  statements  or the notes
         thereto included herein.

         (3)      Exhibits:

  Exhibit Number     Description
-------------------- ----------------------------------------------------------
        3.1          Certificate of Incorporation of Affinity Technology Group,
                       Inc. which is hereby incorporated by reference to Exhibit
                       3.1 to the Registration Statement on Form S-1 of Affinity
                       Technology Group, Inc. (File No. 333-1170).
        3.2          By-laws of Affinity Technology Group, Inc. which is hereby
                       incorporated by reference to Exhibit 3.2 to the
                       Registration Statement on Form S-1 of Affinity Technology
                       Group,  Inc. (File No. 333-1170).
        4.1          Specimen  Certificate of Common Stock which is hereby
                       incorporated by reference to Exhibit 4.1 to the
                       Registration Statement on Form S-1 of Affinity Technology
                       Group, Inc. (File No. 333-1170).
        4.2          Warrant to Purchase Common Stock of Affinity Technology
                       Group, Inc. date November 8, 1995, for the purchase,
                       subject to certain conditions, up to 6,666,340 shares of
                       Common Stock which is hereby incorporated by reference to
                       Exhibit 4.7 to the Registration  Statement on Form S-1 of
                       Affinity Technology Group, Inc. (File No. 333-1170).
        4.3          Sections 4, 7 and 8 of the  Certificate of  Incorporation
                       of Affinity  Technology  Group,  Inc.,  as  amended,  and
                       Article  II,  Sections  3, 9,  and 10 of the  By-laws  of
                       Affinity  Technology  Group,  Inc.,  as amended which are
                       incorporated  by  reference  to  Exhibits  3.1  and  3.2,
                       respectively.
       10.1*         Employment Agreement, dated October 1, 1995, between
                       Affinity Technology Group, Inc. and Carl M. Donnelly
                       which is hereby incorporated by reference to Exhibit 10.3
                       to the  Registration Statement on Form S-1 of Affinity
                       Technology Group, Inc. (File No. 333-1170).
       10.2          Letter  Agreement,  dated March 13, 1995, between Affinity
                       Technology Group, Inc. and Alan H. Fishman which is
                       hereby  incorporated  by  reference  to  Exhibit  10.6 to
                       the Registration Statement on Form S-1 of Affinity
                       Technology Group, Inc. (File No. 333-1170).
       10.3*         Form of Stock  Option  Agreement  (1995  Stock  Option
                       Plan) which is hereby incorporated by reference to
                       Exhibit 10.7 to the  Registration  Statement on Form S-1
                       of Affinity  Technology Group, Inc. (File No. 333-1170).
       10.4*         Form of Stock  Option  Agreement (1996 Stock Option Plan)
                       which is hereby incorporated by reference to Exhibit 10.8
                       to the  Registration  Statement on Form S-1 of Affinity
                       Technology Group, Inc. (File No. 333-1170).
       10.5*         Form of Stock Option Agreement  (Directors'Stock Option
                       Plan) which is hereby  incorporated by reference to
                       Exhibit 10.9 to the  Registration  Statement on Form S-1
                       of Affinity Technology Group, Inc. (File No. 333-1170).
      10.6*          1995 Stock Option Plan of Affinity  Technology Group, Inc.
                       which is hereby incorporated by reference to Exhibit
                       10.10 to the Registration Statement on Form S-1 of
                       Affinity Technology Group, Inc. (File No. 333-1170).
      10.7*          1996 Stock Option Plan of Affinity Technology Group, Inc.
                       which is hereby incorporated by reference to Exhibit
                       10.11 to the Registration Statement on Form S-1 of
                       Affinity Technology Group, Inc. (File No. 333-1170).
      10.8*          Non-Employee Directors' Stock Option Plan of Affinity
                       Technology Group, Inc. which is hereby incorporated  by
                       reference to Exhibit 10.12 to the Registration Statement
                       on Form S-1 of Affinity Technology Group, Inc.
                       (File No. 333-1170).
      10.9          Stock Rights Agreement, dated October 20, 1995, between
                       Affinity Technology Group, Inc. and certain  investors
                       which  is  hereby  incorporated  by reference to Exhibit
                       10.15 to the Registration Statement on Form S-1 of
                       Affinity Technology Group, Inc. (File No. 333-1170).
        21           Subsidiaries of Affinity Technology Group, Inc. which is
                       hereby incorporated by reference to Exhibit 21 to the
                       Registration Statement on Form S-1 of Affinity Technology
                       Group,  Inc. (File No. 333-1170).
       23.1          Consent of Independent Auditors.
        27           Financial Data Schedule.


*        Denotes a management contract or compensatory plan or arrangement.


(b)      Reports on Form 8-K filed in the 4th quarter of 1996:

The  Registrant  did not file any  Current  Reports  on Form 8-K during the last
fiscal quarter of the period covered by this report.

(c)      Exhibits

The  exhibits  required by Item 601 of  Regulation  S-K are filed  herewith  and
incorporated  by  reference  herein.  The response to this portion of Item 14 is
submitted under Item 14(a) (3).

(d)      Financial Statement Schedules.

The response to this portion of Item 14 is submitted under Item 14(a)(2).



<PAGE>


Signatures

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

Affinity Technology Group, Inc.

Date:    March 31, 1998          By: /s/ Jeff A. Norris
                                 Jeff A. Norris
                                 President and Chief Executive Officer

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

<TABLE>
<CAPTION>

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

<S>                                     <C>                                                 <C>
/s/  Jeff A. Norris                                                                         March 31, 1998
---------------------------------------
Jeff A. Norris                          President, Chief Executive Officer and Director
                                        (principal executive officer)


/s/ Alan H. Fishman                                                                         March 31, 1998
---------------------------------------
Alan H. Fishman                         Chairman and Director


/s/ Robert M. Price, Jr.                                                                    March 31, 1998
---------------------------------------
Robert M. Price, Jr.                    Director


/s/ Edward J. Sebastian                                                                     March 31, 1998
---------------------------------------
Edward J. Sebastian                     Director


/s/ Peter R. Wilson                                                                         March 31, 1998
---------------------------------------
Peter R. Wilson, Ph.D.                  Director


/s/ Joseph A. Boyle                                                                         March 31, 1998
---------------------------------------
Joseph A. Boyle                         Senior Vice President and Chief Financial Officer
                                        (principal financial officer)


/s/ Richard R. Butcher                                                                      March 31, 1998
---------------------------------------
Richard R. Butcher                      Controller
                                        (principal accounting officer)

</TABLE>




<PAGE>


Schedule II - Valuation and Qualifying Accounts
              Affinity Technology Group, Inc.

<TABLE>
<CAPTION>


               COL.A                        COL. B.                      COL. C                        COL. D             COL. E


                                                                         Additions
                                                           --------------------------------------
                                                                               Charged to Other
                                          Balance at       Charged to Costs      Accounts -
                                         Beginning of        and Expenses         Describe       Deductions-Describe  Balance at End
            Description                     Period                                                                       of Period
--------------------------------------- ------------------ ------------------- ------------------ ------------------- --------------
<S>                                       <C>                <C>                 <C>                <C>                 <C>
YEAR ENDED DECEMBER 31,
    1997
Reserves and allowances deducted from asset accounts:
    Allowance for doubtful                $  198,987         $  456,841                             $   255,708  (1)    $  400,120
       accounts
    Reserve for inventory                     20,000            230,000                                  76,993  (2)       173,007
       obsolescence

YEAR ENDED DECEMBER 31,
    1996
Reserves and allowances deducted from asset accounts:
    Allowance for doubtful                $    3,667         $  170,000          $   25,320  (3)    $         -         $  198,987
       accounts
    Reserve for inventory                     46,000             20,000                   -              46,000  (2)        20,000
       obsolescence

YEAR ENDED DECEMBER 31,
    1995
Reserves and allowances deducted from asset accounts:
    Allowance for doubtful                $        -         $    3,667                             $         -         $    3,667
       accounts
    Reserve for inventory                          -             46,000                                       -             46,000
       obsolescence
<FN>

(1)   Uncollectible accounts written off, net of recoveries.
(2)   Obsolete parts written off.
(3)   Immaterial other charges.
</FN>
</TABLE>

<PAGE>
Exhibit Index

Exhibit Number                          Description
--------------------------------------- ----------------------------------
23.1                                    Consent of Ernst & Young LLP
27                                      Financial Data Schedule

<PAGE>

Exhibit 23.1 - Consent of Independent Auditors


We consent to the use of our report dated March 11, 1998 included in this Annual
Report (Form 10-K) of Affinity Technology Group, Inc.

Our audits also included the financial statement schedule of Affinity Technology
Group.  Inc. listed in Item 14(a).  This schedule is the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion  on the
financial statement schedule based on our audits. In our opinion,  the financial
statement  schedule  referred to above, when considered in relation to the basic
financial statements taken as a whole,  presents fairly in all material respects
the information set forth therein.

We also consent to the incorporation by reference in the Registration  Statement
(Form S-8 No. 333-10435)  pertaining to the Affinity Technology Group, Inc. 1995
Stock  Option  Plan,  1996 Stock Option and the  Non-Employee  Directors'  Stock
Option  Plan,  of  our  report  dated  March  11,  1998,  with  respect  to  the
consolidated  financial  statements of Affinity  Technology Group, Inc., and our
report  included  in the  preceding  paragraph  with  respect  to the  financial
statement schedule included in this Annual Report (Form 10-K) for the year ended
December 31, 1997.





                                                 /s/ ERNST & YOUNG LLP


Greenville, South Carolina
March 31, 1998




<PAGE>

Exhibit 27 - Financial Data Schedule
This  schedule  contains  summary  financial   information  extracted  from  the
consolidated  financial  statements  for the year ended December 31, 1997 and is
qualified in its entirety by reference to such statements.