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, 1998

[ ] 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 [ ]


<PAGE>


         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  $16,653,000 as of March 19,
1999. 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 29,499,673 shares of the Registrant's Common Stock 
outstanding as of March 19, 1999.

                       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 in 1994 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.

         To date the  Company has  generated  substantial  operating  losses and
experienced an extremely lengthy sales cycle for its products.  Average consumer
use of ALMs in service and average rates of loan  approvals have been lower than
most customer expectations.  The Company believes that the economic viability of
the ALM as an  alternative to  traditional  and new lending  methods has not yet
been  established,  and several of the Company's ALM customers  have  terminated
their relationship with the Company. At December 31, 1998, there were 82 ALMs in
operation.  Although the Company has developed and is developing  other products
and services to exploit its  DeciSys/RT  technology,  to date such  products and
services  have not  generated  substantial  revenues,  and the  Company has been
required to use a  substantial  amount of existing  cash  resources  to fund its
operations.  Although the Company  believes that existing cash, cash equivalents
and  internally  generated  funds will be sufficient to fund operations through
1999,  such  resources,  together with  projected  revenues that may be received
under existing contracts,  will be insufficient to fund the Company's operations
in 2000 and beyond. To remain viable after 1999, the Company must  substantially
increase  revenues,  raise additional  capital and/or  substantially  reduce its
operations. No assurances can be given that the Company will be able to increase
its revenues, raise additional capital or reduce its operations in a manner that
would allow it to continue operations in 2000 and beyond.

         During 1995,  1996 and early 1997 the  Company's  primary  products and
services  consisted  of the ALM,  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,  and a call center
decisioning  system that  provided  financial  institutions  with the ability to
originate unsecured consumer loans with reduced or no human intervention. During
this  period,  the  Company's  customers  primarily  utilized  the ALM  delivery
channel.  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
ability  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 amount 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 enables integration of origination, processing
and  fulfillment  through  a  wide  range  of  channels  with  the  consumer.  A
significant  new  channel  system  developed  in  1997 is  e-xpertLender,  which
establishes  connectivity between the Company's automated decisioning system and
a financial  institution's  delivery  channels  and its risk  management  group.
e-xpertLender  also,  upon  approval,  gives the consumer a choice of closing or
fulfillment  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 any time and  electronically  notifies  loan
officers with respect to exceptions  and the reason for referral.  e-xpertLender
replaced the Company's previously developed call center decisioning system.

         During 1998 the Company's  principal  activities  were directed  toward
enhancing its  e-xpertLender  product  delivery  capabilities  and designing and
developing  a system to  process  automobile  loans  pursuant  to a  development
contract with Citibank. The Company currently is developing a generic automobile
loan  processing  system to be sold,  under the  brand  name of iDEAL,  to other
financial institutions.

         During 1998, the Company  committed  significant  development and other
internal resources to fulfilling its obligations under the Citibank contract and
developing  the iDEAL  system.  As a result,  the Company was unable to, and did
not, devote significant resources to the development,  sales or marketing of any
of its other  products and  services.  The Company  deployed only one ALM during
1998.

         In the latter  part of 1998 the  Company  renewed its efforts to design
additional products available through its ALM. Such products include software to
capture consumer application information to originate a mortgage loan ("Mortgage
ALM") and an automobile  insurance policy  ("automobile  insurance kiosk").  The
Company believes that significant  development  efforts will be necessary during
1999 to complete  the Mortgage ALM and  automobile  insurance  kiosk for sale to
potential  customers.  The Company has formed a wholly owned subsidiary,  Surety
Mortgage,  Inc.  ("Surety"),   to  deploy  Mortgage  ALMs  for  the  purpose  of
originating  mortgage  loans  and to gain an  understanding  of the  market  and
consumer  response to the Mortgage ALM, prior to marketing  Mortgage ALMs to the
financial  services  industry.  The Company does not anticipate any  significant
sales of Mortgage  ALMs or  automobile  insurance  kiosks will occur  before the
latter part of 1999.

         In February  1999, the U.S.  Patent and Trademark  Office issued to the
Company a patent that covers certain  automated  lending  processes and methods.
The Company  believes the patent  provides it with  proprietary  rights covering
fully  automated  loan  processing  which is initiated  by a consumer  through a
remote computer  interface,  which the Company  believes  includes the Internet,
wide area networks,  local area networks, and any other communications  network.
Kiosk lending systems, including ALMs, are also included within the scope of the
patent.

     During  February  1999,  the  Company  formed  a wholly  owned  subsidiary,
decisioning.com,  Inc.,  which will hold certain rights to the Company's  patent
and will  develop and  implement  strategies  to  commercialize  and license the
Company's rights under the patent.  Through  decisioning.com the Company intends
to deliver a real time decisioning  service ("rtDS") to financial  institutions.
rtDS, which is based on the Company's previously developed  technology,  will be
an  outsourced  service  enabling  lenders to deliver  credit  decisions to loan
applicants using the Internet. decisioning.com and rtDS are in an early stage of
development,  and the Company does not expect any significant licensing or sales
opportunities before the latter part of 1999. 

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  accept and capture consumer  personal  information  through
remote  input  devices  (such as through  touch-screen  terminals  or  terminals
operated by loan officers) and through automated  interaction with third parties
(such as credit bureaus) that supply additional information necessary to process
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 to reach a credit  decision 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.



<PAGE>


         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.

     Design and Features.  The ALM looks and interacts  with consumers much like
an ATM and can be operated as a free standing kiosk. The ALM 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 applicants, 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  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 and
unsecured  personal  loans.  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.

         New ALM  Products.  The Company is also  developing  the Mortgage  ALM.
Similar to the ALM, the Mortgage ALM is a kiosk  designed to allow  consumers to
pre-qualify  for a mortgage  loan,  determine  the payments for  specified  loan
amounts and apply for a mortgage loan.

         The Company is also developing an automobile  insurance kiosk that will
allow  a  consumer  to  consummate  an  insurance   transaction   without  human
intervention. The insurance kiosk provides consumers with the ability to compare
rates and coverages  available  from several  insurance  carriers and select the
carrier and coverage appropriate for the consumer's situation. Once the consumer
selects a carrier and the desired coverage, the kiosk will allow the consumer to
bind the  insurance  coverage  at the kiosk,  in  real-time  and  without  human
intervention.

     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  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 has the ability to imprint 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  Electronic   Commerce
Transactions."

         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
System.  During this stage,  customers are required to review the  appearance of
the ALM and to run  test  transactions  in  order  to  verify  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 System 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, 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  between  the
Company's automated  decisioning system and a financial  institution's  delivery
channels and its risk  management  group.  The system enables call center agents
and branch  personnel to inquire as to the status of any transaction at any time
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,  applications  for  lines of  credit  and  credit  cards,  unsecured
personal  loans and direct and  indirect  auto  loans.  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 include
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 only one customer utilizing the e-xpertLender
system.  Such  system has been  deployed in phases as the  functionality  of the
system has been developed and completed.  The Company  believes an 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 such installation estimates.

         iDEAL

     The Company is developing an Indirect Electronic  Automobile Lending system
("iDEAL"),  which will enable automated decisioning and processing of automobile
loan applications  originating at an automobile dealer. iDEAL is an expansion of
the core  technology of  e-xpertLender,  enhanced  specifically  for  supporting
lending  activities  associated  with  obtaining  automobile  loan  applications
through  an  automobile  dealer.  Upon  receipt  of the  loan  application,  the
loan-processing  personnel input the loan applicant's information into the iDEAL
system through a standard set of input screens.  The applicant's  information is
immediately  transmitted to the Company's  proprietary  DeciSys/RT system and an
automated  lending decision is transmitted to the  loan-processing  center.  The
iDEAL system enables financial institution personnel to inquire as to the status
of any  transaction  at any time and notifies  the  financial  institution  with
respect to exceptions.  In situations  where an exception exists or an automated
decision  cannot be rendered due to credit  attributes of the loan  applicant or
collateral  values,  iDEAL enables the financial  institution to  electronically
refer the loan application to a credit analyst so additional  evaluations can be
made. The iDEAL system allows the credit analyst to input additional information
received  from the loan  applicant or the dealer and render a new  decision.  In
addition,  iDEAL  provides  support for auditing and dealer  funding of approved
loans when the loan package is completed.

         Mortgage Brokerage Business

         In January  1998,  the Company  formed Surety to engage in the mortgage
brokerage  business,  including  marketing,  originating,  closing  and  selling
mortgage loans to permanent investors. The Company formed Surety for the primary
purpose of  directly  deploying  Mortgage  ALMs in a manner in which the Company
believes will  facilitate  future  marketing and deployment of its mortgage loan
processing  products.  Surety's mission is to locate viable deployment locations
and develop deployment and business  strategies which provide actual market data
that can be used to market the Company's  mortgage loan  processing  products to
prospective  customers.  During January 1999, Surety deployed its first Mortgage
ALM in a pilot program with a real estate agency.

         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 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
due to changes in interest rates.  Prior to the time a loan is closed,  the loan
is usually  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.

Sales and Marketing

         The Company  currently  maintains a sales force consisting of two sales
people.  Currently,  the  primary  focus  of the  sales  people  is to sell  the
Company's  iDEAL product.  The Company does not have a dedicated sales force for
its ALMs, insurance or mortgage products and services.

         The Company has an internal marketing group that coordinates  marketing
efforts nationwide through customer meetings,  trade shows and the use of public
relations firms. The Company participates in well-recognized and widely attended
industry trade shows and regional  presentations  at which attendees are offered
the  opportunity  to participate in  demonstrations  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  consults  with  existing  and  prospective  customers  to
identify  instances where the Company's  technologies are a suitable solution to
core  business  issues  confronting  such  customers.  Using  market and process
research,  the Company also consults  with  existing and potential  customers to
identify suitable locations for ALMs and other Company  technologies and refines
underwriting  models to achieve desired rates of return and risk tolerance.  The
Company  also  provides  after-sale  support to its  customers  with  respect to
improving the performance of the ALM operations.

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 Company's products and
services 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 such  products  and services the Company may
develop to meet changing customer requirements.

         Electronic  commerce  technologies  in  general,   including  the  ALM,
e-xpertLender  and iDEAL,  compete with  traditional  consumer  lending methods,
including in-person 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 Company's products and services 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 and processing systems and other alternatives to
conventional  consumer  transactions,  including  software  and data  processing
companies  and  technology  and  service  companies.   In  particular,   several
companies, including Dyad Corporation ("Dyad"), Alltell Corporation ("Alltell"),
FiData,  Inc.  ("FiData") and AnyTime  Access,  Inc.  ("Anytime  Access"),  have
developed  video  and other  kiosk  technology  for the  delivery  of  financial
services.  In  addition,  certain  companies  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  and
Internet service providers 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.  Several
companies,  including ARC Systems ("ARC") and Island Mortgage  Network  ("Island
Mortgage"),  have developed certain on-line  processing  systems to automate the
mortgage   application  and  underwriting   processes.   Further,   the  Company
understands that ULTRADATA Corporation ("ULTRADATA"), Anytime Access, and FiData
have 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"),
Corporate Solutions  International,  Inc. ("CSI"), APPRO Systems, Inc. ("APPRO")
and  American  Management  Systems  ("AMS")  in  connection  with the  Company's
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 if not all of the Company's current and potential  competitors
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".



<PAGE>


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 expedited
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 through a
private network to the various ALMs and  e-xpertLender  workstations in service.
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 the  e-xpertLender  system
utilizes  T-1 or dial-up  connections.  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
NOC 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 and off-site processing systems capable of supporting its DeciSys/RT
operations in the event of system and other failure.

Intellectual Property

     On  February  9, 1999,  the  Company was issued a patent for its system and
method for  real-time  loan  approval  over a  computer  network  without  human
intervention ("System and Method for Real Time Loan Approval",  U. S. Patent No.
5,870,721). The Company also holds a patent covering the processing of insurance
products  automatically  through a kiosk  ("Method  and  Apparatus  for  Issuing
Insurance  from  Kiosk",  U.S.  Patent  No.  5,537,315).   Further,  "Affinity",
"DeciSys/RT"  and  "e-xpertLender"  are registered  service marks, and "ALM" and
"More Assets, Less Infrastructure" are registered trademarks of the Company.
        
      The Company has applied  with the United  States  Patent and  Trademark
Office  ("PTO")  for  additional  patents to  protect  certain  features  of the
Company's  technology,  including  additional aspects of its closed loop lending
system, its automated  insurance product,  and its Internet related products and
services. Certain of such applications and amendments thereto have been rejected
by the PTO and others are at a preliminary stage. There can be no assurance that
any of the Company's patent applications will be allowed by the PTO.

     The Company's  success and ability to compete is heavily dependent upon its
proprietary  technology.  The Company  also relies on patent,  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 ability to attract and retain highly skilled research and
development  personnel is important to the Company's success.  During 1998, 1997
and 1996, the Company spent approximately $2,560,000, $3,526,000 and $2,905,000,
respectively,   on  research  and  development   activities  which   represented
approximately   96.4%,  85.0%  and  57.2%  of  1998,  1997  and  1996  revenues,
respectively.  During 1998, the Company capitalized  approximately $1,041,000 of
software development costs.

         During 1998 the Company  substantially  reduced the number of employees
on its research  and  development  staff.  While the Company  believes  that its
current  research  and  development  staff  is  sufficient  to  support  ongoing
developmental  projects,  the Company  does not  currently  have the capacity to
initiate any significant  new projects.  Further,  additional  reductions to the
Company's  research and development  staff may be necessary to conserve existing
cash resources during 1999. Such reductions may prevent or delay current product
development efforts.

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 real estate development, real estate sales and insurance industries
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 Reporting 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  (with the  exception  of its  mortgage  subsidiary)  is not
directly subject to these regulations, and the Company's standard 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 electronic  commerce 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."

Employees

         At December 31, 1998, the Company  employed  approximately 87 full-time
employees  and 1 part-time  employee,  compared to 152 full-time and 1 part-time
employee  at  December  31,  1997.  During the second  half of 1998 the  Company
reduced its work force significantly.  The Company has no collective  bargaining
agreements.

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 Capital Resources; Operating Losses

         The Company has generated  operating  losses of  $42,978,548  since its
inception and has financed its  operations  primarily  through net proceeds from
its initial public offering in May 1996. Net proceeds from the Company's initial
public  offering  were  $60,088,516.  At  December  31,  1998,  cash and  liquid
investments were  $10,095,242.  Net cash used during the year ended December 31,
1998 to fund operations was approximately $9,498,000. Proceeds from the offering
and other sources of cash were used to fund current period operations,  research
and   development  of   approximately   $2,560,000,   software   development  of
approximately $1,041,000, capital expenditures of approximately $696,000 and the
repurchase of outstanding  shares of the Company's common stock of approximately
$2,404,000.

     The  Company  continues  to  use a  substantial  amount  of  existing  cash
resources to fund its operations. If the Company continued to use cash resources
at the rate used in 1997 and 1998,  the Company  would deplete its existing cash
resources  in the latter part of 1999;  however,  the Company has taken  certain
measures to reduce its cash depletion  rate,  including  decreasing its employee
base.  Currently,  the Company's employee base is approximately 42% less than it
was at December 31, 1997. The Company  believes  existing cash, cash equivalents
and  internally  generated  funds  will  be  sufficient  to meet  the  Company's
currently  anticipated cash requirements through 1999. However no assurances can
be given that the Company's  existing cash  resources will be sufficient to fund
the Company's cash requirements for 1999. Moreover,  existing cash resources and
projected  revenues  that  may be  received  under  existing  contracts  will be
insufficient to fund the Company's  operations in 2000 and beyond.  Accordingly,
to remain viable after 1999, the Company must  substantially  increase revenues,
raise  additional  capital  and/or  substantially  reduce  its  operations.   No
assurance  can be given that the Company will be able to increase its  revenues,
raise  additional  capital or reduce its operations in a manner that would allow
it to continue operations through 2000. In order to fund operations, the Company
may need to raise additional funds through the issuance of equity securities, in
which case 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.
Further,  there can be no assurance that additional  financing will be available
when needed on terms  favorable to the Company or at all. If adequate  funds are
not available or not available on acceptable terms, the Company may be unable to
continue  operations,  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.

         Significant Losses; Accumulated Deficit; Future Losses

         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, 1998
of $42,978,548  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,
$15,399,352 and  $14,873,001  for the years ended December 31, 1995,  1996, 1997
and 1998,  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,  iDEAL 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, motivate
and retain  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

         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,  types 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  "Dependence on
Consumer  Retail  Lending  Industry;   Cyclical  Nature  of  Consumer  Lending."
Shortfalls  in revenues in relation to 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 revenues  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 may 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 ALM leases for which
the present value of future  minimum lease  payments  exceeds 90% of the cost of
the related ALM as sales-type  leases. 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.



<PAGE>


         Lengthy Sales Cycle

         The  Company  has to date  experienced  a lengthy  sales  cycle for its
products.  In most cases,  the time  between  initial  customer  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  technologies  gain  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  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  Company's  products and services
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 to continually
improve its products and services 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.

         Competition; Future Price Erosion

         Electronic  commerce  technologies in general,  including the Company's
products  and  services,  compete with  traditional  consumer  lending  methods,
including in-person  applications at branch offices of financial institutions or
at automobile  dealerships 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 Company's products and services 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,  several companies,  including
Dyad, Alltell,  FiData, and AnyTime Access, have developed video and other kiosk
technology  for  the  delivery  of  financial  services.  In  addition,  certain
companies   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 online services and Internet service providers 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. Several companies, including ARC and Island
Mortgage,  have developed  certain  on-line  processing  systems to automate the
mortgage   application  and  underwriting   processes.   Further,   the  Company
understands that ULTRADATA,  Anytime Access,  and FiData have 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,  CSI,  APPRO  and  AMS in  connection  with  the  Company's
automobile loan system.

         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  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.

         Dependence on Consumer Retail Lending Industry; Cyclical Nature of 
         Consumer Lending

         The  Company's  business  is  currently  concentrated  in 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 a 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,  one customer  accounted  for
approximately 49% of the Company's revenue in 1998. 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 its products and services. 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  regards  certain of its  technology  as  critical  to its
business and attempts to protect such  technology  under  patent,  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 a result,  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".

         Risk of Fraud in Electronic Consumer Transactions

     Electronic  consumer  transactions  involve the risk of consumer fraud. The
customers using the Company's products are responsible for the selection and use
of the  origination  and  underwriting  parameters  incorporated in the software
supporting  the Company's  products and services.  The Company is unaware of any
significant  instances of fraud in connection  with the funding of loans through
the use of the Company's products and services.  However, the rate of fraudulent
activity could increase,  especially if the number of transactions  processed by
the Company's products and services 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 Company's  products and services.  While the Company shifts
the risk of collection in any given transaction to its customers under the terms
of its 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
the Company's products and services, 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 Company relies on third parties for certain fraud detection systems
and for obtaining credit  information about loan applicants.  Additionally,  the
Company uses a 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 system or (ii) the Company's
network  access  provider  to provide  access to such  networks  or  products 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 may rely on third  parties in
connection with its customer  relationships,  strategic  alliance  arrangements,
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
customers to generate and sustain consumer demand for the Company's products and
services  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 in the future.  Currently,  the  Company's  agreements
with  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 the Company's  products and
services. 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.

         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.   To  date,  such  strategic
partnerships and distribution  agreements have not resulted in substantial sales
of the Company's  products and  services.  For the Company to ever achieve broad
distribution  of the  products  or  services  it may  develop,  it will  have to
implement  effective marketing and distribution  programs.  The inability of the
Company to develop  and  implement  effective  marketing  programs  could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.  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 key employees 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 19,  1999,  the Company had  outstanding  an  aggregate  of
29,499,673 shares of Common Stock. Of such shares, an aggregate of approximately
12,683,000  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  approximately  16,817,000 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). In
this regard,  Jeff A. Norris,  the Company's  founder and a director,  has filed
notice to sell up to 2,040,800  shares over a three month period under Rule 144,
and Mr. Norris may decide to sell additional  shares in the future.  At December
31, 1998,  approximately  39,000 and 623,000 options are  exercisable  under the
1996 and 1995  Option  Plans,  respectively,  and at weighted  average  exercise
prices of $1.55 and  $0.44,  respectively,  with a  weighted  average  remaining
contractual  life of 9.38  years and 7.83  years,  respectively.  There also are
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;  Possible  
         Delisting of  Securities  from NASDAQ Stock Market

     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  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.

         During  September,  1998,  the Company was notified by the Nasdaq Stock
Market,  Inc.  ("Nasdaq")  that the  Company was not in  compliance  with Nasdaq
listing  standards  that require the  Company's  stock to maintain a minimum bid
price of $1.00 or more. As a result,  the Company was provided until December 2,
1998 to regain  compliance  with such standards  (which would require the common
stock to have a closing bid price of $1.00 or more for at least ten  consecutive
business days). The Company's common stock did not regain compliance by December
2, 1998, and the Company  requested a review by Nasdaq,  which stayed  delisting
into 1999.  During the period in which the delisting  was stayed,  the Company's
common stock closed at or above $1.00 for the necessary 10  consecutive  trading
days,  and  Nasdaq  thereafter  notified  the  Company  that  it  had  evidenced
compliance with all  requirements  for continued  listing on the Nasdaq National
Market.  The Company's  common stock continues to trade at or above the Nasdaq's
minimum  price of $1.00  per  share;  however,  there can be no  assurances  the
Company will be able to maintain compliance with Nasdaq listing standards in the
future.

         Control by Principal Stockholders

         The  directors  and  executive  officers  of the  Company  collectively
beneficially own  approximately  48.4% of the Common Stock and Jeff A. Norris, a
director  of the  Company,  individually  beneficially  owns 35.6% of the Common
Stock of the  Company.  As a  result,  these  persons  will be able to  exercise
substantial influence 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 real  estate  development,  real  estate  sales and  insurance
industries  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,  the  application of such  regulations to any
products  and  services  developed  by  the  Company  must  be  determined  on a
case-by-case  basis.  The Company has not  attempted  to review the laws of each
state that might be applicable  to the  deployment of its products and services.
It is possible  that other states may have or will in the future adopt  specific
regulations applicable to the deployment and operation of the Company's products
and services. Furthermore, some consumer groups have expressed concern regarding
the privacy and security of the ALM, 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 the Company's products and services. 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.


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 that 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
R. Murray Smith              54               President and Chief Executive 
                                              Officer and Director
Joseph A. Boyle              45               Senior Vice President, Chief 
                                              Financial Officer and Treasurer
Paul E. Adams                47               Senior Vice President - Sales
Terrence J. Sabol, Sr.       53               Senior Vice President - Technology
John D. Rogers               55               Senior Vice President

     R.  Murray  Smith,  became  President  and Chief  Executive  Officer of the
Company in May 1998 and a director of the Company in July 1998.  Before  joining
the Company,  Mr. Smith was  President and Chief  Executive  Officer of Adaptive
Decision Systems, a firm he established in 1987 that develops custom systems for
credit scoring, behavior scoring, target marketing, and fraud detection.  Before
founding Adaptive Decision Systems,  Mr. Smith was Senior Vice President of Avco
Financial  Services in Irvine,  California.  He was previously an executive with
The St. Paul Companies in St. Paul, Minnesota.

Joseph A. Boyle became Senior Vice President and Chief Financial  Officer of the
Company in September 1996 and Treasurer in May 1997. From May 1997 to July 1998,
Mr. Boyle also served as Secretary of the Company. Prior to joining the Company,
Mr.  Boyle served as Price  Waterhouse  LLP  engagement  partner for most 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 June
1982 to August 1996.

Paul E. Adams  became  Senior  Vice  President  of Sales in July 1998.  Prior to
joining the Company, Mr. Adams served as Vice President,  Strategic Alliances in
the Finance Industry Group of American  Management Systems from November 1987 to
December 1997. Prior to joining American  Management  Systems in 1987, Mr. Adams
was an Account Executive at The Fair, Isaac Companies from 1978 to 1987.

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 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 to 1996.


<PAGE>


Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         (a)  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 1997 and 1998, as reported by The Nasdaq National
              Market.  As of March 19,  1999,  there  were 266  stockholders  of
              record of the common stock.

                                                    Sales Price Per Share
                                                     High            Low
      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
      1998
      First Quarter 1998                             3.03           2.25
      Second Quarter 1998                            2.25           0.69
      Third Quarter 1998                             1.09           0.50
      Fourth Quarter 1998                            0.97           0.22

              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>



         (b)  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, 1998, 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                                                     5,482,000
Purchase of real estate                                                                                          -
Acquisition of other business(es)                                                                          300,000
Repayment of indebtness                                         $       771,000 1                        1,000,000
Working capital                                                                                         27,169,000
Temporary investments:
     US Treasury obligations                                                                             7,691,000
     Commercial paper                                                                                    1,521,000
     Money market / cash                                                                                   883,000
Other purposes:
     Marketing                                                                                           4,454,000
     Research & development                                                                              8,575,000
     Purchase of software                                                                                2,232,000
<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>


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,
                                            1998             1997             1996            1995             1994
                                      ----------------- ---------------- --------------- ---------------- ---------------
<S>                                    <C>               <C>              <C>             <C>              <C>
Statements of Operations Data:
Revenues                               $    2,656,259    $    4,146,899   $   5,081,818   $    1,524,911   $           -
Costs and expenses:
Cost of revenues                            1,165,293         2,125,646       3,088,321        1,101,330               -
Research and development                    2,559,600         3,526,257       2,905,232          368,452         264,600
Selling, general and
     Administrative expenses               14,837,695        15,892,560      10,819,381        2,305,653         428,896
                                      ----------------- ---------------- --------------- ---------------- ---------------
Total costs and expenses                   18,562,588        21,544,463      16,812,934        3,775,435         693,496
                                      ----------------- ---------------- --------------- ---------------- ---------------
Operating loss                            (15,906,329)      (17,397,564)    (11,731,116)      (2,250,524)       (693,496)
Interest income                             1,044,251         2,033,571       2,099,004           48,476               -
Interest expense                              (10,923)          (35,359)        (60,083)        (105,981)        (12,475)
                                      ----------------- ---------------- --------------- ---------------- ---------------
Net loss                               $  (14,873,001)   $  (15,399,352)  $  (9,692,195)  $   (2,308,029)  $    (705,971)
                                                        ================ =============== ================ ===============
                                      ================= ================ =============== ================ ===============
Net loss per share -
     basic and diluted                 $       (0.50)    $       (0.54)   $       (0.40)  $       (0.15)   $       (0.08)
                                      ================= ================ =============== ================ ===============
                                                        ================ =============== ================ ===============
Shares used in computing
     net loss per share                    29,755,034        28,477,880      24,136,480       15,044,286       9,185,078
                                      ================= ================ =============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
                                                                        December 31,
                                           1998             1997             1996            1995             1994
                                      ---------------- ---------------- --------------- ---------------- ---------------
<S>                                    <C>              <C>              <C>             <C>              <C>
Balance Sheet Data:
Cash and cash equivalents              $    2,026,932   $    4,470,185   $  31,563,950   $    1,235,983   $    29,985
Short-term investments                      8,068,310       19,135,415      10,583,997                -             -
Working capital (deficit)                  13,543,782       28,599,560      43,672,679       (1,134,465)     (431,547)
Net investment in sales-type
      Leases, less current portion            574,347        1,328,741       2,386,010          860,295             -
Total assets                               24,196,875       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                                             -                -          66,245          148,119       199,508
     party, less current portion
Capital stock of subsidiary held
     by minority investor                           -                -         200,000          137,500             -
Stockholders' equity                       22,556,201       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 in 1994 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
ALM, raising capital and recruiting personnel.

     Until early 1997 the Company's  primary products and services  consisted of
the ALM,  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,  and a call center decisioning system that
provided financial institutions with the ability to originate unsecured consumer
loans with reduced or no human intervention.  During 1997, the Company developed
e-xpertLender,  which connects the Company's automated decisioning system with a
financial  institution's  delivery  channels,  and its risk management group and
gives the  consumer a choice of closing  methods that  include  branches,  ALMs,
mail, and third party closing agents.  During 1998, the Company began developing
a system to process  automobile  loans  pursuant to a development  contract with
Citibank.  The  Company  is  currently  developing  a  generic  automobile  loan
processing  system to be sold, under the brand name of iDEAL, to other financial
institutions.

         During 1998, the Company  committed  significant  development and other
internal  resources to enhancing its  e-xpertLender  product and  fulfilling its
obligations under its Citibank contract. As a result, the Company was unable to,
and  did  not,  devote  significant  resources  to the  development,  sales  and
marketing of any of its other products and services.  The Company  deployed only
one ALM during 1998,  and ALMs deployed  before 1998 have  generally not met the
expectations of the Company's customers.

         To date,  the Company has generated  substantial  operating  losses and
experienced an extremely lengthy sales cycle for its products.  Average consumer
use of ALMs in service and average rates of loan  approvals have been lower than
most customer expectations.  The Company believes that the economic viability of
the ALM as an  alternative to  traditional  and new lending  methods has not yet
been  established,  and several of the Company's ALM customers  have  terminated
their relationship with the Company. At December 31, 1998, there were 82 ALMs in
operation.  Although the Company has developed and is developing  other products
and services to exploit its  DeciSys/RT  technology,  to date such  products and
services  have not  generated  substantial  revenues,  and the  Company has been
required to use a  substantial  amount of existing  cash  resources  to fund its
operations.  Although the Company  believes that existing cash, cash equivalents
and  internally  generated  funds will be sufficient to fund  operations through
1999,  such  resources,  together with  projected  revenues that may be received
under existing contracts,  will be insufficient to fund the Company's operations
in 2000 and beyond. To remain viable after 1999, the Company must  substantially
increase  revenues,  raise additional  capital and/or  substantially  reduce its
operations. No assurances can be given that the Company will be able to increase
its revenues, raise additional capital or reduce its operations in a manner that
allows it to continue operations in 2000 and beyond.

         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, 1998 of  $42,978,548,  with operating  losses of $14,873,001,
$15,399,352 and $9,692,195 for the years ended December 31, 1998, 1997 and 1996,
respectively.  The  Company  expects to incur  substantial  additional  costs to
develop its financial product  origination  capabilities,  to enhance and market
iDEAL,  e-xpertLender,  the ALM 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.



<PAGE>


         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.

Results of Operations

         Revenues.  The  Company's  revenues  were  $2,656,259,  $4,146,899  and
$5,081,818 for the years ended December 31, 1998,  1997 and 1996,  respectively.
The types of revenue  recognized by the Company in the years ended  December 31,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
                                                            Years ended December 31,
                                ---------------------------------------------------------------------------------
                                         1998                         1997                        1996
                                ------------------------ --- ------------------------ -- ------------------------
                                                  % of                        % of                         % of
                                    Amount       Total           Amount       Total          Amount        Total
                                ---------------- -------     --------------- --------    ---------------- --------
<S>                              <C>              <C>         <C>              <C>        <C>               <C>  
Transaction fees                 $    750,936      28.3       $   545,551       13.2      $   172,569         3.4
Mortgage processing fees              453,657      17.1                 -          -                -           -
Initial set-up fees                    91,000       3.4           638,687       15.4          426,848         8.4
Sales and rental fees                  66,369       2.5         1,590,620       38.4        2,552,158        50.2
Professional services fees            797,301      30.0           792,734       19.1                -           -
Other income                          496,996      18.7           579,307       13.9          130,243         2.6
License revenue                             -         -                 -          -        1,800,000        35.4
                                ================ =======     =============== ========    ================ ========
                                 $  2,656,259     100.0       $ 4,146,899      100.0      $ 5,081,818       100.0
                                ================ =======     =============== ========    ================ ========
</TABLE>

     The  nature  and  types of  revenues  earned  by the  Company  has  changed
significantly in the three-year period ended December 31, 1998. During 1996, the
primary  source of revenue  was from the  deployment  of ALMs  under  sales-type
leases.  Additionally,  in 1996 the Company  recognized  $1.8 million of license
revenue associated with the development,  deployment and licensing of a specific
call center  decisioning  system. In 1997 the Company entered into a contract to
provide  professional  services  to a specific  customer to  customize  its core
technology to accommodate  an  enterprise-wide  loan  processing  system,  which
became  the  basis  of the  Company's  e-xpertLender  system.  The  delivery  of
professional  services under the contract continued into 1998. In addition,  the
Company  began  processing  mortgage  loans  through a wholly owned  subsidiary,
Surety Mortgage,  Inc. ("Surety") in 1998. For 1998, a substantial percentage of
the  Company's  revenues  were  attributable  to  professional   services  fees,
transaction revenues and mortgage processing fees.

         In 1998,  the  Company  experienced  an overall  decline in revenue and
continues to face an extremely lengthy sales cycle for its products. The Company
generated  substantially  less revenue in 1998 from ALMs than in prior  periods.
Average  consumer  use of ALMs in service and average  rates for loan  approvals
continue to be lower than most customers' expectations. The Company continues to
believe that the economic  viability of the ALM as an acceptable  alternative to
traditional and new lending methods has not been established.

         The Company's revenue plan for 1999 is primarily to sell and deploy its
products and services into environments  which are able to generate  significant
transaction   volume  and  transaction  fees  over  extended  periods  of  time.
Accordingly,  the Company may elect to forego significant upfront revenue in the
form of set-up and licensing  fees if it believes  that the potential  exists to
recover upfront costs in the form of transaction fees in a reasonable  period of
time.

         Transaction  fees. The increase in transaction fees in 1998 compared to
1997 is  attributable  primarily to the  deployment in mid-1997 of the Company's
first e-xpertLender system.  Transaction fees processed through such system were
generated  for the entire  year of 1998  compared  to a shorter  period in 1997.
Transaction fees associated with processing  credit and debit card  transactions
through the Company's Transaction Processing Division ("TPS") decreased slightly
from  approximately  $245,000 in 1997 to  approximately  $218,000  in 1998.  The
increase  in  transaction  fees in 1997  compared  to 1996 is also  attributable
primarily to the  deployment  in mid-1997 of the Company's  first  e-xpertLender
system and to a full year of TPS  operations in 1997 compared to only two months
of operations in 1996. In December 1998, the Company sold TPS to a third party.

     Mortgage  Processing fees. Surety engages in mortgage brokerage  activities
which includes  originating,  processing  and selling  mortgage loan products to
outside investors.  Surety originates and processes mortgage loans directly with
consumers or on behalf of  correspondents,  and immediately  sells such loans to
institutions  that  sponsor  the loan  programs  offered by Surety.  Surety only
offers  loans that will be acquired by such  institutions  under such  programs.
Upon making the loan commitment to the borrower,  Surety immediately  receives a
commitment  from an  institution  to  acquire  the loan upon  closing.  Mortgage
processing  fees include gains on sales of mortgage  loans to  institutions  and
loan fees received for  originating  and processing the loan.  Loan  origination
fees and all other direct costs associated with originating loans are recognized
at the time the loans are sold.  The  Company  did not  generate  revenues  from
mortgage processing services prior to 1998.

         Initial  Set-up fees.  Set-up fees  recognized in 1998,  1997, and 1996
were   associated  with  the  deployment  of  1  ALM,  53  ALMs,  and  79  ALMs,
respectively.  Set-up fees in 1998 also  reflected  fees deferred in conjunction
with  services  rendered to one customer in 1997 which were  recognized  in 1998
upon the decision of the customer not to deploy the Company's ALMs. The increase
in  set-up  fees  recognized  in 1997  compared  to 1996 is  attributable  to an
increase in the amount of set-up fees charged and the  short-term  deployment of
25 ALMs in early 1997 in a pilot program. The pilot program was terminated after
a short period and, accordingly,  the set-up fees paid by the customer were then
recognized.

         Sales and Rental fees. The decrease in sales and rental revenue in 1998
compared to 1997 is attributable to a substantial decrease in ALM deployments in
1998.  Amounts  recognized in 1998 also consisted of rental payments received on
ALMs  deployed  under  operating  leases  in prior  years.  In 1997 the  Company
recognized  sales  revenue  associated  with  the  deployment  of 28 ALMs  under
sales-type leases as well as rental revenue  associated with ALMs deployed under
operating leases.  The decrease in sales and rental revenues in 1997 as compared
to 1996 is attributable to a decrease in the deployment of ALMs under sales-type
leases in 1997  compared  to 1996.  In 1997 the  Company  deployed 28 ALMs under
sales-type leases compared to 74 in 1996.

         Professional   services  fees.  When  the  Company  agrees  to  provide
professional  services to customize its core technology to conform to a specific
customer request, 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 specific deliverables by the customer, the
Company recognizes the corresponding  revenue as professional  services revenue.
The level of professional  services revenue remained consistent in 1998 compared
to 1997. In both years,  professional  services revenue related primarily to the
customization  of  the  Company's   e-xpertLender  system  to  meet  a  specific
customer's   requirements.   Such  customer   represented  97.1%  and  91.3%  of
professional services revenue in 1998 and 1997, respectively.  Prior to 1997 the
Company did not generate professional services revenues.


         License Revenue. 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
between 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.  The
Company has not engaged in similar licensing arrangements subsequent to 1996.

         One customer  accounted for 97.1% of professional  services revenue for
1998 and  60.2% and 91.3% of ALM sales  and  rental  and  professional  services
revenue,  respectively,  during 1997. This same customer accounted for 48.8% and
48.0% of total  revenue  for 1998 and 1997,  respectively.  One  other  customer
accounted  for 13% of total revenue  during 1997.  For  information  relating to
customer revenue  concentrations for 1996, see Note 11 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 the Company's
products and services.

Costs and Expenses

         Costs of Revenues.  Costs of revenues for the years ended  December 31,
1998, 1997 and 1996 were  $1,165,293,  $2,125,646 and $3,088,321,  respectively.
Cost of revenues  includes the direct costs  associated  with the  generation of
specific types of revenue and the allocation of certain indirect costs when such
costs  are  specifically   identifiable  and  allocable  to  revenue   producing
activities. During the two years ended December 31, 1998, the nature and amounts
of costs,  as well as gross profit  margins,  associated  with  certain  revenue
producing  activities  varied  significantly due to changes in the nature of the
services offered by the Company and due to different pricing  structures offered
to certain customers.

         Costs of revenues and the  percentage of the costs of revenues to total
costs of revenues for the years ended  December  31, 1998,  1997 and 1996 are as
follows:
<TABLE>
<CAPTION>

                                                            Years ended December 31,
                                ---------------------------------------------------------------------------------
                                         1998                         1997                        1996
                                ------------------------ --- ------------------------ -- ------------------------
                                                  % of                        % of                         % of
                                    Amount       Total           Amount       Total          Amount        Total
                                ---------------- -------     --------------- --------    ---------------- --------
<S>                              <C>              <C>         <C>              <C>        <C>               <C>  
Transaction fees                 $   388,734       33.4       $   328,067       15.4      $    91,063         2.9
Mortgage processing fees             192,726       16.5                 -          -                -           -
Initial set-up fees                        -          -           232,077       10.9          426,848        13.8
Sales and rental fees                379,775       32.6         1,041,455       49.0        2,426,476        78.6
Professional services fees           204,058       17.5           524,047       24.7                -           -
License revenue                            -          -                 -          -          143,934         4.7
                                ================ =======     =============== ========    ================ ========
                                 $ 1,165,293      100.0       $ 2,125,646      100.0      $ 3,088,321       100.0
                                ================ =======     =============== ========    ================ ========
</TABLE>

     Costs of transaction  fees. The costs of transaction fees consist primarily
of the direct  costs  incurred by the Company to process loan  applications  and
debit and credit card  transactions  through its systems.  Such direct costs are
associated  with  services  provided  by third  parties and include the costs of
credit reports, fraud reports and communications networks used by the Company.

         The costs of transaction fees increased in 1998 compared to 1997 and in
1997 compared to 1996 due to an increase in volume of  transactions  the Company
processed through its systems.

         Costs of mortgage  processing  fees.  The costs of mortgage  processing
fees  consist  of the  direct  cost  incurred  by  Surety  associated  with  the
underwriting,  processing  and closing of  mortgage  loans.  Such costs  include
credit reports,  appraisal reports, flood certifications and administration fees
charged by the purchasers of loans originated by Surety.

         Costs of initial  set-up  fees.  The costs of initial  set-up  fees are
related to the initial  costs  incurred to deploy and install  ALMs.  Such costs
include the  allocation of direct and indirect  labor and certain other indirect
costs  associated  with the initial  preparation  and deployment of ALMs for the
Company's  customers.  Additionally,  the costs include direct costs incurred by
the Company, including shipping costs and amounts paid to third parties.

         The Company's  deployment  of ALMs was  insignificant  in 1998,  and no
costs  were  incurred  in  1998  in  association  with  initial  set-up  revenue
recognized.  The decrease in the costs of set-up fee revenue in 1997 as compared
to 1996 is due  primarily to the  deployment  of fewer ALMs in 1997. In 1997 the
Company  deployed  53 ALMs  compared  to 79 in 1996  under both  sales-type  and
operating leases. Additionally, the Company improved its deployment processes in
1997 which  resulted in greater cost  efficiencies  being  realized  compared to
1996.

     Costs  of sales  and  rental  fees.  Costs of  sales  and  rental  fees are
primarily related to the costs of ALM hardware  components  associated with ALMs
deployed under sales-type leases, maintenance of installed ALMs and depreciation
associated with ALMs deployed under operating leases. In 1998 the costs of sales
and rental revenue of $379,775  consisted  primarily of depreciation  related to
ALMs deployed under operating  leases and the costs  associated with maintaining
the Company's  installed  base of ALMs.  Costs of sales and rental  revenues was
significantly  lower in 1998  compared  to 1997  primarily  as a  result  of the
deployment  in 1997 of 28 ALMs under  sales-type  leases  compared to only 1 ALM
deployed  under a sales-type  lease in 1998.  The decrease in the costs of sales
and rental  revenues  in 1997 as compared  to 1996 was  primarily  the result of
fewer ALM deployments in 1997 compared to 1996 when the Company deployed 71 ALMs
under sales-type leases.

     Under the terms of an  agreement  with one customer  covering 30 ALMs,  the
customer's payment obligation to the Company is based on ALM performance,  which
has  resulted  in  revenues  insufficient  to  cover  the  depreciation  expense
recognized by the Company.  Accordingly,  the costs of sales and rental revenues
exceeded  the sales and  rental  revenues  recognized  by the  Company  for such
contract.

         Costs of professional services fees. The costs of professional services
fees  consist of the costs of the  direct  labor and the  allocation  of certain
indirect costs  associated  with  performing  software and system  customization
services  for  customers.  The  decrease  in 1998  compared to 1997 was due to a
decrease in the amount of work necessary to complete  specific  projects in 1998
compared to 1997.

         Costs of license  revenue.  The costs of license revenue  recognized in
1996 consist  primarily of allocated  salaries and overhead  associated with the
licensing of the Assets3 system to Union Planters Bank.

         Research  and  Development.  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.

         Research and development  expenses for the year ended December 31, 1998
were  $2,559,600,  compared  to  $3,526,257  and  $2,905,232  for 1997 and 1996,
respectively.  The  decrease in research  and  development  expense is due to an
overall decrease in the number of employees  involved in development  activities
and the progression of certain development activities to a point where the costs
of such activities are capitalized pursuant to applicable  accounting guidelines
during 1998. The increase in research and development expense for the year ended
December 31, 1997 as compared to 1996, is primarily  attributable to an increase
in the average number of employees  involved in  development  activities in 1997
and to the Company's continued  enhancement of its DeciSys/RT technology and the
development of additional financial product origination capabilities in 1997.

         During  1998,  1997 and 1996,  the  Company  capitalized  approximately
$1,041,000,  $451,000 and $215,000,  respectively, of software development costs
related primarily to the development of certain  financial service  applications
processed using  DeciSys/RT.  When a product is available for general release to
customers,  capitalization of such costs is discontinued and amounts capitalized
are generally  amortized over a 48 month period. 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,  1998 were
$14,837,695,  compared  to  $15,892,560  and  $10,819,381  for the  years  ended
December 31, 1997 and 1996, respectively.

         SG&A expenses  during 1998  consisted  primarily of personnel  costs of
approximately   $6,283,000;   professional  fees  of  approximately  $1,722,000,
consisting  primarily of legal,  accounting,  recruiting  and  relocation  fees;
advertising and marketing costs of approximately $193,000; deferred compensation
expense   amortization  of   approximately   $599,000;   and,  travel  costs  of
approximately  $437,000.  SG&A  expenses  during  1997  consisted  primarily  of
personnel costs of approximately $7,207,000;  professional fees of approximately
$1,892,000, consisting primarily of legal, accounting, recruiting and relocation
fees;  advertising and marketing  costs of  approximately  $1,488,000;  deferred
compensation expense amortization of approximately  $481,000;  and, travel costs
of  approximately  $935,000.  SG&A expenses  during 1996 consisted  primarily of
personnel costs of approximately $3,842,000;  professional fees of approximately
$2,290,000, consisting primarily of legal, accounting, recruiting and relocation
fees;  advertising and marketing  costs of  approximately  $1,662,000;  deferred
compensation expense amortization of approximately $1,028,000; and, travel costs
of approximately $792,000.

     The  decrease in SG&A  expense for the year ended  December  31,  1998,  as
compared to 1997 is primarily  attributable  to a decrease  in: (i.)  employment
costs,  primarily wage and recruiting costs associated with an overall reduction
in the Company's  employee base; (ii.)  advertising and marketing costs;  (iii.)
professional  fees  consisting  primarily of legal,  accounting,  recruiting and
relocation  fees;  and,  (iv.) travel  costs.  The decrease in SG&A expenses was
partially offset by an increase in: (i.)  depreciation and amortization  expense
associated with an overall increase in the Company's  depreciable assets;  (ii.)
an  increase in  inventory  valuation  allowances  associated  with  potentially
obsolete  ALM shells due to  planned  design  improvements;  and,  (iii.)  costs
associated  with benefits  including  severance  benefits for certain  employees
terminated during 1998.

         The increase in SG&A expense for the year ended  December 31, 1997,  as
compared to 1996, is primarily attributable to an increase in the average number
of employees and timing of such increases  during 1997 associated with expansion
of the  Company's  operating  activities  and an  increase in  depreciation  and
amortization  expense  associated with an increase in the Company's  depreciable
assets.  The  increase  in SG&A  expenses  was offset by a decrease  in deferred
compensation  expense for the year ended  December 31, 1997 as compared to 1996,
due to the  forfeiture of stock options  granted under the Company's  1995 Stock
Option Plan.

Interest Income

         Interest income of $1,044,251,  $2,033,571 and $2,099,004  during 1998,
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 decrease in interest
income for the year ended  December  31, 1998 as  compared to 1997,  is due to a
decrease in cash and cash  equivalents and  investments  balances as compared to
the same  period  of 1997 and to a lesser  extent a  decrease  in the  amount of
amortization of deferred  interest income  associated with ALMs under sales-type
lease  agreements.  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 Expense

         Interest  expense for the year ended  December  31,  1998 was  $10,923,
compared to $35,359 and $60,083 for 1997 and 1996,  respectively.  The  decrease
for the year ended December 31, 1998 as compared to 1997, and for the year ended
December 31, 1997 as compared to 1996,  is due  primarily to payments made under
the terms of capital lease obligations.  In addition,  the Company incurred debt
in 1996 to fund its operations prior to its initial public offering.

<PAGE>


Income Taxes

         The Company has recorded a valuation  allowance  for the full amount of
its net  deferred  income tax assets as of December 31,  1998,  1997,  and 1996,
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  $42,978,548  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.

     The  Company  continues  to  use a  substantial  amount  of  existing  cash
resources to fund its operations. If the Company continued to use cash resources
at the rate used in 1997 and 1998,  the Company  would deplete its existing cash
resources  in the latter part of 1999;  however,  the Company has taken  certain
measures to reduce its cash depletion  rate,  including  decreasing its employee
base.  Currently,  the Company's employee base is approximately 42% less than it
was at December 31, 1997. The Company  believes  existing cash, cash equivalents
and  internally  generated  funds  will  be  sufficient  to meet  the  Company's
currently  anticipated cash requirements through 1999. However no assurances can
be given that the Company's  existing cash  resources will be sufficient to fund
the Company's cash requirements for 1999. Moreover,  existing cash resources and
projected  revenues  that  may be  received  under  existing  contracts  will be
insufficient  to  fund  the  Company's   operations  for  2000  and  thereafter.
Accordingly,  to remain  viable  after  1999,  the  Company  must  substantially
increase  revenues,  raise additional  capital and/or  substantially  reduce its
operations. No assurances can be given that the Company will be able to increase
its revenues, raise additional capital or reduce its operations in a manner that
would  allow it to  continue  operations  in 2000 and  beyond.  In order to fund
operations,  the Company may need to raise additional funds through the issuance
of equity securities, in which case 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  favorable to the Company or at all. If adequate
funds are not available or not available on acceptable terms, the Company may be
unable to continue  operations;  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.

     Net cash used during the year ended  December 31, 1998, to fund  operations
was  approximately   $9,498,000   compared  to  approximately   $15,395,000  and
$12,727,000 for the same periods in 1997 and 1996,  respectively.  Proceeds from
the  offering  and  other  sources  of cash  were  used to fund  current  period
operations,  research and  development  of  approximately  $2,560,000,  software
development of approximately  $1,041,000,  capital expenditures of approximately
$696,000 and the repurchase of outstanding  shares of the Company's common stock
of  approximately  $2,404,000.  During 1997,  net proceeds from the offering and
other sources of cash were used to fund operations,  research and development of
approximately  $3,526,000,  capital  expenditures of  approximately  $1,566,000,
repurchase of outstanding  shares of the Company's common stock of approximately
$967,000 and software  development of approximately  $569,000.  During 1996, net
proceeds  from  the  offering  and  other  sources  of  cash  were  used to fund
operations,  capital  expenditures  of  approximately  $5,559,000,  research and
development   of   approximately   $2,905,000   and  software   development   of
approximately  $215,000.  At December 31, 1998,  1997 and 1996,  cash and liquid
investments were $10,095,242,  $23,605,600 and $42,147,947,  and working capital
was $13,543,782, $28,599,560 and $43,672,679, respectively.

         During 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. During the first quarter of 1998, the Company expanded its
share  repurchase  plan by  authorizing  the use of an  additional $2 million of
general corporate funds under the plan. As of December 31, 1998, the Company had
repurchased  a total of 1,417,000  shares at an average price of $2.31 per share
for an  aggregate  cost of  $3,271,700  under  the  share  repurchase  plan.  In
addition,  during 1997 the Company 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 repurchase agreements with such former employees.

         During June 1998,  Surety  entered into an  agreement  with a lender to
establish  a credit  facility  with a maximum  borrowing  amount of  $2,000,000.
Pursuant  to the terms of the  agreement,  Surety may obtain  advances  from the
lender for funding of mortgage  loans made by Surety  during the interim  period
between the funding and sale of the loans to permanent  investors.  All advances
made pursuant to the agreement are secured by a security  interest in the rights
and benefits due Surety in conjunction  with the making of the underlying  loan.
The credit  facility  bears  interest at the  lender's  prime rate plus 50 basis
points  and  expires  on  June 1,  1999.  Surety  had  $141,480  in  outstanding
borrowings  under the Loan  Warehousing  Agreement  bearing an interest  rate of
8.25% as of December 31, 1998.

         During 1997 in connection  with its  acquisition of Buy American,  Inc.
and Project Freedom, Inc., the Company issued restricted common stock subject to
a put option by the sellers. Under such agreement, the sellers have an option to
sell  any or all the  shares  of  restricted  common  stock  held by them to the
Company at a price of $3.47 per share.  These options are  exercisable  for a 30
day period  ending May 31, 1999.  The Company  expects that the former owners of
Buy American, Inc. and Project Freedom, Inc. will elect to exercise their option
to sell their  stock to the  Company for an  aggregate  amount of  approximately
$900,000.

         Implications of Year 2000 Issues

     Year 2000 issues  generally  involve the  potential  impact on a company if
computer  systems fail to  accurately  interpret  data after  December 31, 1999.
Since  many  computer  programs  have  historically  been  designed  to read and
interpret years in a two-digit  format, a computer program or system that is not
redesigned or otherwise updated may be incapable of  distinguishing  between the
year  2000 and the year  1900,  which  may  result  in  systems  failure  or the
generation of inaccurate  data. The risks  associated  with Year 2000 issues are
significant due to the reliance of most companies on interaction  with automated
information  or services  provided by third  parties that may be subject to Year
2000 issues.  Moreover,  it is  frequently  difficult to assess a third  party's
ability,  diligence,  and success in addressing Year 2000 issues. In many cases,
reliance must be placed on representations received from third parties regarding
the  existence of Year 2000 issues that may affect the  continuity or quality of
critical services they provide.

         The Company's business  primarily involves the automated  processing of
financial service  transactions through both internally developed and externally
purchased computer software and hardware systems.  Additionally,  the Company is
dependent on third parties to deliver certain  automated  services  essential to
support the Company's  internal  operations and its ability to process financial
services  transactions  for its  customers.  The  computer  systems  used by the
Company to process financial services transactions are generally interfaced with
its  customers'  systems  and,  accordingly,  the  Company's  ability to deliver
uninterrupted  service  may be  adversely  affected  if its  customers  have not
adequately addressed Year 2000 issues.

         The Company has undertaken various  initiatives to date to address Year
2000 issues.  Such  initiatives  have included an evaluation of its  information
technology  ("IT"),  which  consists  of computer  hardware  and  software,  and
non-information  technology  ("Non-IT"),  which generally  includes systems that
rely on imbedded chip  technology.  The Company  anticipates  that its Year 2000
assessment, remediation, testing and implementation efforts will be completed by
September  30,  1999.  The  Company  does  not  anticipate   that  any  material
modification  or  refinement  of its IT or Non-IT  systems  will be necessary to
adequately address and resolve Year 2000 issues;  however,  failure to identify,
assess, remediate, test and implement solutions to Year 2000 issues could result
in a system  failure or the use of  inaccurate  data,  which  could  disrupt the
Company's  operations and adversely affect its ability to provide  uninterrupted
services to its customers.

         The Company  divided its activities into two categories for purposes of
evaluating and tracking issues related to the Year 2000.  "Services Systems" are
those computer  software and hardware  systems,  including third party services,
used to provide  processing  services for the Company's  customers.  "Operations
Systems" are those computer software and hardware systems, including third party
services,  utilized by the Company for  internal  operating  and  administrative
purposes.

     Services Systems

         The Company's  processing  services are  delivered  through ALMs or web
server-based  systems,  both of which are  connected  to the  Company's  Network
Operating  Center ("NOC").  The NOC uses multiple  servers to process  financial
services  transactions  and is  connected  to various  third party  systems that
provide essential  information required for the processing of financial services
transactions.  Such third party services include, but are not limited to, credit
bureaus,  credit scoring  agencies,  consumer  identification  sources and other
fraud  detection  service  providers.  Moreover,  the  Company's  ALMs  and  web
server-based  systems are connected to the NOC through  communications  networks
and links  provided by third  parties.  The  Company's  ALMs,  web  server-based
systems and the NOC consist of both IT and Non-IT systems.

     ALM  Systems.  ALMs are  freestanding  kiosks  that  consist  of  hardware,
software and communications  systems. The Company's customers have deployed ALMs
to serve as a point of entry  for  consumer  information  as well as a  delivery
vehicle to fulfill  financial  services  transactions.  ALM  systems,  including
software  applications,   hardware  and  component  devices  and  communications
connection to the NOC have been tested using certain date testing  parameters as
follows:  December 31, 1999;  January 3, 2000;  February 28, 2000;  February 29,
2000;  and, March 1, 2000. The Company has requested that third party  providers
of IT and Non-IT  components and systems used in or in conjunction  with the ALM
systems provide evidence of their system's  compliance with Year 2000 issues. To
date,  the Company has received no  communication  that any third party  service
providers  are  non-compliant  with  Year  2000  issues.   Evidence   supporting
compliance  has been  received  from most third  parties that  provide  critical
systems or service used in the ALM system.  During the course of its  evaluation
of Year 2000 issues  pertaining to the ALM system,  the Company  identified  one
operating  software  system that will require an upgrade to remediate  Year 2000
issues.  The Company  expects  that the required  upgrades  will be completed by
September 1, 1999.

         Certain of the Company's services are accessed and utilized by external
systems of its  customers.  The Company has published an interface  standard for
access to its services by these external systems,  and the data elements of this
interface  are Year 2000  compliant.  This  includes  the  interface to customer
created and maintained web pages for providing the Company's  services using the
Internet.

     Web  Server-based  Systems.  The  Company  also  provides  service  to  its
customers using web  server-based  systems.  These systems provide access to the
Company's  services through customer  maintained  computer networks such as call
centers and indirect lending operations  systems.  The web server-based  systems
access  the  Company's  NOC  through  browser  based   applications   which  are
independent of the operating systems and hardware  environments  utilized by the
Company's  customers.  As a result,  customers must ensure that these  operating
system  and  hardware  environments  are Year 2000  compliant.  Testing of these
systems is in process and is expected to be completed  along with all  necessary
remediation  by  September  1,  1999.  Completion  of the  Company's  Year  2000
initiatives  with  respect to its web  server-based  systems is  dependent  upon
completion of Year 2000 initiatives  surrounding  testing and  implementation of
certain third party systems and services. Additionally, web server-based systems
are connected to the Company's NOC through dedicated third party  communications
systems,  and the Company has  received  statements  from the  provider of these
communications  systems  that such  systems  will  operate  in the Year 2000 and
beyond.

     NOC Systems.  The Company's NOC uses  multiple  servers to enable  services
provided  by  its  ALM  and  web   server-based   systems.   These  servers  are
interconnected   using  standard   Ethernet  network   facilities  using  TCP/IP
protocols.  The Company is conducting tests on these servers and their operating
systems.  All  testing is  expected  to be  completed  along with all  necessary
remediation by September 1, 1999. In addition,  the Company is in the process of
soliciting and receiving  statements  from the various third party  providers of
the IT and Non-IT components of these server systems  regarding  compliance with
Year 2000 issues.

         The  Company is  dependent  on services  and systems  provided by third
parties to  maintain  continuous  and  uninterrupted  service to its  customers.
Moreover,  the Company's  ability to fully certify its systems is dependent upon
successful  implementation of Year 2000 compliant systems by third party service
providers.  The Company anticipates that it will complete its assessment of Year
2000 issues related to third parties by September 1, 1999. The Company  believes
that if certain third parties that provide essential services to the Company are
unable to demonstrate  compliance with Year 2000 issues,  the Company can switch
to alternative third party service providers and obtain substantially comparable
services at substantially the same cost.

     Operations Systems

      Operations  Systems are those  computer  hardware and software  systems
utilized by the Company for  internal  operating  and  administrative  purposes.
Certain  systems  utilized  by the  Company  for  operating  purposes  are  also
dependent on third party  service  providers,  however,  to a much lesser extent
than the systems  utilized by the Company to provide  services to its customers.
Operations  systems  include,  but are not limited to,  those  systems  used for
accounting,  billing,  human resources,  payroll,  internal  communications  and
management of software resources. Additionally, Operations Systems include other
devices used for ongoing operations such as telephone and PBX systems,  personal
and  network  computers  and fax  machines.  Third  party  services  used in the
Company's internal  operations include Internet and telephone services and other
communications services.

         The Company is completing its remediation,  testing and  implementation
activities  with  respect to its  Operations  Systems.  During the course of its
assessment the Company  identified one Operations  System that was not year 2000
compliant.  The  Company  anticipates  that  remediation  will be  completed  by
September 1, 1999.

     Operations  Non-IT  systems may contain  imbedded  chip  technology,  which
complicates the Company's Year 2000 identification,  assessment, remediation and
testing efforts.  Based upon its  identification and assessment efforts to date,
the Company  believes  that no  replacement  of critical  computer  equipment or
software will be  necessary.  In addition,  in the ordinary  course of replacing
computer  equipment and software,  the Company  attempts to obtain  replacements
that are Year 2000 compliant.

         The Company is completing its assessment regarding certain non-critical
Operations  Systems and services  provided by third  parties.  The assessment of
critical  Operations  Systems and services by third  parties has been  completed
which generally included obtaining  representations  that such systems were Year
2000  compliant.  The  Company is in the  process of  soliciting  and  obtaining
representations  regarding  all other  systems  and  services  provided by third
parties with respect to Year 2000 issues.  The Company  currently  does not have
sufficient  information to ascertain  whether all third party system and service
providers will be Year 2000 compliant by September 1, 1999.

     Costs of Addressing Year 2000 Issues

         The  automated  systems  developed  by the Company and upon which it is
primarily  dependent  to deliver  services to its  customers  were  designed and
developed in  consideration  of Year 2000 issues.  Accordingly,  the incremental
cost  associated  with  addressing  Year 2000 issues in the  initial  design and
development  of the Company's  systems has been  insignificant.  Similarly,  the
Company's internally developed operating systems have been developed since 1994,
and  the  incremental   costs   associated  with  Year  2000  issues  have  been
insignificant.   The  costs   associated   with  Year  2000  issue   assessment,
identification,  remediation  and  testing  have not been  significant,  and the
Company  does not  believe  that  significant  future  costs will be incurred to
complete its assessment and remediation of Year 2000 issues.

     Risks Associated with Year 2000 Issues

         The  Company is still  evaluating  Year 2000 issues and there can be no
assurance  that the  Company  will be  completely  successful  in its efforts to
assess,  identify,  remediate  and test all Year 2000 issues  including the Year
2000 issues which may affect critical services supplied by third parties. If the
Company is unable to complete its assessment or otherwise improperly assesses or
fails to  adequately  remediate  Year 2000 issues,  the Company may be unable to
provide continuous and uninterrupted services to its customers. Accordingly, the
Company could suffer the loss of revenue,  customers and future sales as well as
expose  itself to  litigation.  Similarly,  the  Company  may be  exposed to the
disruption  of its business  activities  and  diversion of resources  that could
materially  and adversely  affect the  operations and activities of the Company.
Any amount of potential  lost  revenue or liability  related to year 2000 issues
cannot be reasonably estimated at this time.

         To address the uncertainty and risks  associated with Year 2000 issues,
the Company is developing  contingency and recovery plans.  Such plans are being
developed based on an assessment of possible scenarios that may result from Year
2000 issues and include the possible failure of the Company's  systems and third
party systems and services.  The Company  anticipates  that its planning efforts
and development of contingency plans will be complete by September 30, 1999.


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

     The  Company's  market risk  exposure is the  potential  loss  arising from
changes  in  interest  rates and its  impact on  investments  and the  Company's
mortgage brokerage business. The Company does not believe such risk is material.
The Company's  cash and cash  equivalents  consist of highly liquid  investments
with  maturities  of three  months or less.  At December  31,  1998,  short term
investments consist of approximately $1,500,000 in a certificate of deposit with
a  maturity  of less than  three  months and  approximately  $6,500,000  in U.S.
Government  securities with maturities greater than three months when purchased,
which are  currently  held as  available  for sale.  Further,  when the  Company
receives  a  commitment  to  originate  a  mortgage  loan  from  a  consumer  or
correspondent, the Company immediately receives a commitment from an investor to
buy such mortgage loan. The Company does not believe that its mortgage brokerage
business exposes it to significant market risk for changes in interest rates.

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, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended  December 31, 1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  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, 1998 and 1997, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted accounting principles.


                                               /s/  ERNST & YOUNG LLP

Greenville, South Carolina
March 12, 1999


<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

                           Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                       1998                   1997
                                                               ---------------------- ---------------------
<S>                                                              <C>                    <C>
Assets
Current assets:
  Cash and cash equivalents                                      $    2,026,932         $    4,470,185
  Investments                                                         8,068,310             19,135,415
  Accounts  receivable,  less  allowance  for  
   doubtful  accounts of $45,513 and
   $400,120 at December 31, 1998 and 1997,
   respectively                                                        727,999              1,944,947
  Net investment in sales-type leases - current:
    Third parties                                                       534,302              1,537,902
    Related party                                                             -                195,026
  Inventories                                                         2,054,542              2,960,038
  Other current assets                                                1,349,995                799,628
                                                               ---------------------- ---------------------
Total current assets                                                 14,762,080             31,043,141
Net investment in sales-type leases - non-current:
  Third parties                                                         574,437              1,317,753
  Related party                                                               -                 10,988
Property and equipment, net                                           4,511,924              5,911,540
Software development costs, less accumulated amortization of
    $111,211 and $117,807 at December 31, 1998 and 1997,
    respectively                                                      1,773,057                867,763
Other assets                                                          2,575,377              3,058,385
                                                               ====================== =====================
Total assets                                                     $   24,196,875         $   42,209,570

</TABLE>
                         
<PAGE>
<TABLE>
<CAPTION>

                                                                              December 31,
                                                                       1998                   1997
                                                               ---------------------- ---------------------
<S>                                                              <C>                    <C>
Liabilities and stockholders' equity Current liabilities:
  Current portion of capital lease obligations to related        $            -         $       64,222
party
  Accounts payable                                                      184,619                666,824
  Accrued expenses                                                      388,466                390,584
  Accrued compensation and related benefits                             359,670                561,391
  Notes payable                                                         141,480                      -
  Current portion of deferred revenue - related party                         -                 40,463
  Current portion of deferred revenue - third parties                   144,063                720,097
                                                               ---------------------- ---------------------
Total current liabilities                                             1,218,298              2,443,581
Deferred revenue                                                        422,376                535,419
Commitments and contingent liabilities
Stockholders' equity:
  Common  stock,  par  value  $0.0001;   authorized  
   60,000,000  shares,  issued
   31,572,880 shares in 1998 and 31,550,199
   shares in 1997                                                        3,157                  3,155
  Additional paid-in capital                                         69,392,545             69,858,571
  Deferred compensation                                                (489,656)            (1,558,574)
  Treasury stock, at cost (2,073,207 and 992,207 shares at
    December 31, 1998 and 1997, respectively)                        (3,371,297)              (967,035)
  Accumulated deficit                                               (42,978,548)           (28,105,547)
                                                               ---------------------- ---------------------
Total stockholders' equity                                           22,556,201             39,230,570
                                                               ====================== =====================
Total liabilities and stockholders' equity                       $   24,196,875         $   42,209,570
                                                               ====================== =====================
</TABLE>
See accompanying notes.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

                      Consolidated Statements of Operations
<TABLE>
<CAPTION>

                                                                           Years ended December 31,
                                                              1998                   1997                   1996
                                                      ---------------------- ---------------------- ----------------------
<S>                                                     <C>                    <C>                    <C>
Revenues:
  Transactions                                          $       750,936        $       545,551        $       172,569
  Mortgage processing services                                  453,657                      -                      -
  Initial set-up                                                 91,000                638,687                426,848
  Sales and rental (including $286,413 from related
    party during 1996)                                           66,369              1,590,620              2,552,158
  Professional services                                         797,301                792,734                      -
  Other income                                                  496,996                579,307                130,243
  License revenue                                                     -                      -              1,800,000
                                                      ---------------------- ---------------------- ----------------------
                                                              2,656,259              4,146,899              5,081,818
Costs and expenses:
  Cost of revenues                                            1,165,293              2,125,646              3,088,321
  Research and development                                    2,559,600              3,526,257              2,905,232
  Selling, general and administrative expenses               14,837,695             15,892,560             10,819,381
                                                      ---------------------- ---------------------- ----------------------
Total costs and expenses                                     18,562,588             21,544,463             16,812,934
                                                      ---------------------- ---------------------- ----------------------
Operating loss                                              (15,906,329)           (17,397,564)           (11,731,116)
Interest income                                               1,044,251              2,033,571              2,099,004
Interest expense                                                (10,923)               (35,359)               (60,083)
                                                      ---------------------- ---------------------- ----------------------
Net loss                                                $   (14,873,001)       $   (15,399,352)       $    (9,692,195)
                                                      ====================== ====================== ======================
Net loss per share - basic and diluted                  $        (0.50)        $        (0.54)        $        (0.40)
                                                      ====================== ====================== ======================
Shares used in computing net loss per share                  29,755,034             28,477,880             24,136,480
                                                      ====================== ====================== ======================

</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,    $250,000   $2,732,356   $  1,670   $4,237,960    $(3,590,574)   $       -     $(3,014,000) $   617,412
 1995                                                                                                                     
  Exercise of warrants            -      45,417           -            -             -             -               -       45,417
  Conversion of            (250,000)  (2,777,773)       602    3,027,171             -             -               -            -
  preferred stock
 Initial public
    offering proceeds             -           -         506   60,088,010             -             -               -   60,088,516
  Exercise of stock               -           -          10       46,990             -             -               -       47,000
     options
 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,           -           -       2,788   68,777,090    (3,939,044)            -     (12,706,195)  52,134,639
 1996
  Exercise of warrants            -           -           4       37,473             -             -               -       37,477
  Exercise of warrants
    by related party              -           -         240            -             -             -               -          240
  Exercise of stock               -           -          30      144,034             -             -               -      144,064
    options
  Amortization of
    deferred compensation         -           -           -            -       480,534             -               -      480,534
  Forfeiture of stock             -           -           -   (1,899,936)    1,899,936             -               -            -
    options
  Purchase of treasury                                    -            -             -      (967,035)              -     (967,035)
    stock
  Issuance of common
    stock in exchange
    for capital stock of
    subsidiary held by            -           -          67    1,599,933             -             -               -    1,600,000
    minority investor
  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,           -           -       3,155     69,858,571                  (967,035)    (28,105,547)  39,230,570
 1997                                                                        (1,558,574)
  Exercise of stock               -           -           2        4,228             -             -               -        4,230
    options
  Amortization of
    deferred compensation         -           -           -            -       598,664             -               -      598,664
  Forfeiture of stock             -           -           -     (470,254)      470,254             -               -            -
    options
  Purchase of treasury            -           -           -            -             -    (2,404,262)              -   (2,404,262)
    stock
  Net loss                        -           -           -            -             -             -     (14,873,001) (14,873,001)
                        ---------- ----------- ---------- ------------- -------------- ------------- ------------- -------------
Balance at December 31,     $     -    $      -    $  3,157   $69,392,545   $ (489,656)   $(3,371,297)  $(42,978,548) $22,556,201
 1998
                        ========== =========== ========== ============= ============== ============= ============= =============

</TABLE>


See accompanying notes.


<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                             Years ended December 31,
                                                                1998                   1997                   1996
                                                        ---------------------- ---------------------- ----------------------
<S>                                                       <C>                    <C>                    <C>
Operating activities
Net loss                                                  $   (14,873,001)       $   (15,399,352)       $   (9,692,195)
Adjustments to reconcile net loss to net cash used in
    operating activities:
  Depreciation and amortization                                 2,369,220              2,066,270               902,846
  Amortization of deferred compensation                           598,664                480,534             1,028,489
  Provision for doubtful accounts                                 370,000                456,841               170,000
  Inventory valuation allowance                                 1,060,000                230,000                20,000
  Deferred revenue                                                187,175                368,594            (1,098,072)
  Other                                                            94,808                195,505                59,243
  Changes in current assets and liabilities:
     Accounts receivable                                          543,906             (2,073,893)             (261,531)
     Net investment in sales-type leases                          937,388                189,721            (2,093,519)
     Inventories                                                  450,258               (755,248)           (2,420,946)
     Other assets                                                (550,367)                (6,633)             (784,976)
     Accounts payable                                            (482,205)              (775,838)              702,449
     Accrued expenses                                              (2,118)              (477,046)              508,361
     Accrued compensation and related benefits                   (201,721)               105,986               233,331
                                                        ---------------------- ---------------------- ----------------------
Net cash used in operating activities                          (9,497,993)           (15,394,559)          (12,726,520)
Investing activities
Purchases of property and equipment                              (696,122)            (1,566,315)           (5,558,806)
Proceeds from sale of property and equipment                       47,622                144,535                     -
Software development costs                                     (1,041,091)              (568,744)             (214,820)
Purchases of short-term investments                            (9,436,211)           (34,345,695)          (10,583,997)
Sales of short-term investments                                20,503,316             25,794,277                     -
Other                                                                   -               (300,000)             (349,618)
                                                        ---------------------- ---------------------- ----------------------
Net cash provided by (used in) investing activities             9,377,514            (10,841,942)          (16,707,241)
Financing activities
Proceeds from notes payable to related parties                          -                      -               450,000
Proceeds from notes payable to third parties                      141,480                      -             1,000,000
Principal payments on capital leases                              (64,222)               (72,010)             (156,289)
Payments on notes payable to related parties                            -                      -              (775,416)
Payments on notes payable to third parties                              -                      -            (1,000,000)
Proceeds from sale of capital stock of subsidiary to
    minority interest                                                   -                      -                62,500
Purchase of treasury stock                                     (2,404,262)              (871,775)                    -
Exercise of warrants                                                    -                 37,717                45,417
Exercise of options                                                 4,230                 48,804                47,000
Proceeds from issuance of common stock                                  -                      -            60,088,516
Proceeds from issuance of preferred stock                               -                      -                     -
                                                        ---------------------- ---------------------- ----------------------
Net cash (used in) provided by financing activities            (2,322,774)              (857,264)           59,761,728
                                                        ---------------------- ---------------------- ----------------------
Net (decrease) increase in cash                                (2,443,253)           (27,093,765)           30,327,967
Cash and cash equivalents at beginning of year                  4,470,185             31,563,950             1,235,983
                                                        ----------------------
                                                                               ====================== ======================
Cash and cash equivalents at end of year                  $     2,026,932        $     4,470,185        $   31,563,950
                                                        ====================== ====================== ======================

Cash paid during the year for:
  Interest                                                $             -        $             -        $       85,287

</TABLE>

See accompanying notes.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                December 31, 1998

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 approximately $60,089,000.

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.

One of the  platforms  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 deposit  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.

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
Corporation and Multi Financial  Services,  Inc. and its wholly owned subsidiary
Surety Mortgage,  Inc., ("Surety").  All significant  inter-company balances and
transactions have been eliminated in consolidation.

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.



<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.       Summary of Significant Accounting Policies

Investments

The Company  classifies  its  investments  as held to maturity or available  for
sale.  At  December  31,  1998  approximately   $6,500,000  and  $1,500,000  was
classified as available for sale and held to maturity, respectively. Investments
consist of investments in certificates of deposit and U.S. Government securities
with maturities  greater than three months when purchased.  Such investments are
reported at amortized cost,  which  approximates  fair value. The Company had no
unrealized  holding gains or losses  associated with  investments  classified as
available for sale during the years ended December 31, 1998, 1997 and 1996.

Fair Value of Financial Instruments

The  carrying   amounts  reported  in  the  balance  sheet  for  cash  and  cash
equivalents,  investments,  accounts  receivable,  net  investment in sales-type
leases,  accounts payable and notes payable  approximate their fair values. Fair
values of investments are based on quoted market prices.

Inventories

Inventories  at  December  31,  1998 and 1997 are stated at the lower of cost or
market.  Cost is  determined  using the first-in,  first-out  ("FIFO") cost flow
assumption.

Other Current Assets

Other current assets at December 31, 1998  consisted of deferred  contract costs
of $810,457,  prepaid expenses of $418,781 and interest  receivable of $120,757.
At December 31, 1997, other current assets consisted of deferred  contract costs
of $170,945, prepaid expenses of $255,870 and interest receivable of $372,813.

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 approximately $1,893,000,  $1,799,000 and $849,000 during 1998, 1997
and 1996, 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  approximately  $82,000,
$65,000 and $54,000 during 1998, 1997 and 1996, respectively.



<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.    Summary of Significant Accounting Policies (continued)

Valuation of Long-Lived Assets

In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"),  the Company  periodically  evaluates the carrying
value of long-lived assets to be held and used, including property and equipment
and goodwill,  when events and circumstances warrant such a review. The carrying
value  of a  long-lived  asset  is  considered  impaired  when  the  anticipated
undiscounted  cash flow from such asset is separately  identifiable  and is less
than its carrying value. In the event of such, a loss is recognized based on the
amount  by  which  the  carrying  value  exceeds  the fair  market  value of the
long-lived  asset.   Fair  market  value  is  determined   primarily  using  the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Based on the anticipated cash flows from the Company's business plan, management
believes that no impairment  writedown is required for long-lived assets for the
year ended December 31, 1998.

Intangible Assets

Intangible  assets  arising  from the  excess of cost over  acquired  assets are
amortized by the straight  line method over their  estimated  useful life of ten
years.  Intangible  assets,  primarily  goodwill,   consisted  of  approximately
$1,470,000  which  was  recorded  in  conjunction  with the  acquisition  of Buy
American,  Inc.  and  Project  Freedom,  Inc.  (see Note 8),  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  $373,000 and
$86,000 at December 31, 1998 and 1997, respectively.

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.  These holdings  represented a 24.9% minority interest
in APC at December 31, 1996.

Software Revenue Recognition

The Company has adopted the American  Institute of Certified Public  Accountants
("AICPA")  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 did
not recognize any revenue during 1998 associated  with contracts  subject to SOP
97-2 guidance.

During  1998,  the AICPA  issued  Statement  of Position  98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2,  Software Revenue  Recognition" ("SOP
98-4"),  effective as of March 31, 1998.  SOP 98-4  postponed  the adoption of a
provision of SOP 97-2 for one year.

Also during 1998, the AICPA issued  Statement of Position 98-9, "Modification of
SOP 97-2,  Software Revenue  Recognition  with Respect to Certain  Transactions"
("SOP 98-9").  Effective  December 15, 1998, SOP 98-9 amends SOP 98-4 to further
postpone the adoption of certain provisions of SOP 97-2 as provided by SOP 98-4,
for fiscal years beginning on or before March 15, 1999. All other  provisions of
SOP  98-9,  which  amend  certain  passages  of  SOP  97-2,  are  effective  for
transactions entered into in fiscal years beginning after March 15, 1999.

The Company  continues to assess the effects  that the adoption of SOP 97-2,  as
amended by SOP 98-4 and SOP 98-9, will have on the presentation of the Company's
financial statements.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.       Summary of Significant Accounting Policies (continued)

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
standard  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 revenue  represented
approximately  28%,  13% and 3% of total  revenue  during  1998,  1997 and 1996,
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.

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.

Mortgage processing  services - Surety engages in mortgage brokerage  activities
which  generally  involve  originating,  processing,  and selling  mortgage loan
products to outside  investors.  Surety originates and/or process mortgage loans
directly with consumers or on behalf of  correspondents  and  immediately  sells
such loans to investors that sponsor the loan programs offered by Surety. Surety
only offers loans that will be acquired by the  investors  under such  programs.
Upon making the loan commitment to the borrower,  Surety immediately  receives a
commitment from an investor to acquire the loan upon closing.  Loan  origination
fees include gains on sales of mortgage loans to investors and loan  origination
fees received for originating and processing the loan. Loan origination fees and
all direct costs  associated with  originating  loans are recognized at the time
the loans are sold.



<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.       Summary of Significant Accounting Policies (continued)

Cost of Revenues

Cost of revenues  consists of costs associated with initial set-up,  transaction
fees, sales and rental revenues,  professional  services and mortgage processing
services.  Costs associated with initial set-up fees include labor, other direct
costs and an allocation of related indirect costs.  The Company's  deployment of
ALMs was insignificant in 1998 and no costs were incurred in 1998 in association
with initial set-up revenue recognized.  Labor and other direct costs associated
with  initial  set-up fees totaled  approximately  $232,000 and $427,000 for the
years ended  December 31, 1997 and 1996,  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  approximately  $380,000,  $1,041,000 and $2,426,000
for the years  ended  December  31,  1998,  1997 and 1996,  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  approximately
$204,000  and  $524,000  for  the  years  ended  December  31,  1998  and  1997,
respectively.  Costs associated with mortgage processing services include direct
costs  associated  with  originating  and processing  mortgage loans and totaled
approximately  $193,000 for the year ended December 31, 1998.  Prior to 1998 the
Company did not perform services of this nature.

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 $193,000,  $1,488,000 and $1,662,000 during 1998, 1997
and 1996, respectively.

Net Loss Per Share of Common Stock

In 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  superseded  Accounting
Principles  Board  Opinion No. 15, "Earnings  Per Share"  ("APB  15").  SFAS 128
changed 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  adopted SFAS 128 in 1997 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. Stock warrants and stock options were not included in the  calculation
of dilutive loss per common share because the Company has experienced  operating
losses  in  all  periods   presented  and,   therefore,   the  effect  would  be
antidilutive.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2.       Summary of Significant Accounting Policies (continued)

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").

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 related to sales-type leases.

Segment Information

The Company has adopted the  reporting  requirements  of  Statement of Financial
Accounting  Standards No. 131,  "Disclosures about Segments of an Enterprise and
Related Information"("SFAS 131"), in its financial statements for the year ended
December 31, 1998. SFAS No. 131 establishes standards for the way that companies
report information about operating segments in annual financial  statements.  It
also establishes  standards for related disclosures about products and services,
geographic  areas,  and major  customers  as well as the  reporting  of selected
information   about  operating   segments  in  interim   financial   reports  to
stockholders.  In  accordance  with  management's  oversight  of  the  Company's
operations,  the Company  conducts  its business  within one industry  segment -
financial services technology.

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.


Reclassification

Certain  amounts  in 1997 and 1996 have been  reclassified  to  conform  to 1998
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,
                                                                    1998                 1997
                                                             -------------------- --------------------
<S>                                                            <C>                  <C>
Total minimum lease payments receivable                        $    1,244,355       $    3,124,181
Residual values                                                             -              360,000
                                                             -------------------- --------------------
                                                                    1,244,355            3,484,181
Less unearned interest income                                        (135,616)            (422,512)
                                                             ==================== ====================
Net investment in sales-type leases                            $    1,108,739       $    3,061,669
                                                             ==================== ====================
Net investment in sales-type leases is classified as:
   Current                                                     $      534,302       $    1,732,928
   Non-current                                                        574,437            1,328,741
                                                             ==================== ====================
                                                               $    1,108,739       $    3,061,669
                                                             ==================== ====================
</TABLE>



<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

3.       Sales-Type and Operating Leases (continued)

Future  minimum lease  payments to be received on sales-type  leases at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
                                                            Sales-Type
                                                         --------------------
<S>                                                        <C>   
1999                                                       $      616,278
2000                                                              363,662
2001                                                              264,415
                                                         --------------------
                                                           $    1,244,355
                                                         ====================
</TABLE>


4.       Inventories

Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                          December 31,
                                                                    1998                 1997
                                                             -------------------- -------------------
<S>                                                            <C>                  <C>
Electronic parts and other components                          $    1,062,180       $    1,396,826
Work in process                                                     1,207,915              829,269
Finished goods                                                        880,145              906,950
                                                             -------------------- -------------------
                                                                    3,150,240            3,133,045
Reserve for obsolescence                                           (1,095,698)            (173,007)
                                                             ==================== ===================
                                                               $    2,054,542       $    2,960,038
                                                             ==================== ===================
</TABLE>


5.       Property and Equipment

Property and equipment consists of the following:
<TABLE>
<CAPTION>
                                                                          December 31,
                                                                    1998                 1997
                                                             -------------------- -------------------
<S>                                                            <C>                  <C>
ALM equipment leased to others under operating leases          $      676,326       $      935,521
Data processing equipment                                           2,622,410            2,326,651
Demonstration equipment                                               687,632              582,857
Office furniture and fixtures                                       2,359,147            2,338,381
Automobiles                                                            72,003               72,003
Purchased software                                                  2,164,463            2,112,515
                                                             -------------------- -------------------
                                                                    8,581,981            8,367,928
Less accumulated depreciation and amortization                     (4,070,057)          (2,456,388)
                                                             --------------------  ------------------
                                                                                  
                                                               $    4,511,924       $    5,911,540
                                                             ==================== ===================
</TABLE>


Accumulated  depreciation  of ALM equipment  leased to others was  approximately
$455,000 and $424,000 at December 31, 1998 and 1997, respectively.



<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

6.       Notes Payable

During June 1998,  Surety entered into an agreement with a lender to establish a
credit facility with a maximum  borrowing amount of $2,000,000.  Pursuant to the
terms of the agreement,  Surety may obtain  advances from the lender for funding
of mortgage  loans made by Surety during the interim  period between the funding
and sale of the loans to permanent investors.  All advances made pursuant to the
agreement  are  secured by a security  interest in the rights and  benefits  due
Surety  in  conjunction  with the  making of the  underlying  loan.  The  credit
facility  bears  interest at the  lender's  prime rate plus 50 basis  points and
expires  on June 1,  1999.  Outstanding  borrowings  under the Loan  Warehousing
Agreement  as of December  31, 1998 were  $141,480  bearing an interest  rate of
8.25%.

7.    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,  conversion 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,  1998 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,  1998,
approximately  623,000  options are  exercisable.  At  December  31,  1998,  the
weighted  average  exercise price was $0.44 and the weighted  average  remaining
contractual life was 7.83 years. This plan closed during April 1996.

In April 1996, the Company adopted the 1996 Incentive  Stock Option 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.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

7.       Stockholders' Equity (continued)

A summary of activity under the 1996 and 1995 Option Plans is as follows:

<TABLE>
<CAPTION>
                                                                      Options Outstanding
                                                             --------------------------------------
                                                                                       Weighted
                                           Shares                                      Average
                                          Available               Number                Price
                                          for Grant              Of Shares            Per Share
                                      ------------------     ------------------     ---------------
<S>                                          <C>                     <C>              <C> 
1995 Stock Option Plan
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
Options canceled/forfeited                            -               (175,642)         $0.44
Options exercised                                     -                 (9,540)         $0.44
                                      ==================     ==================     ===============
Balance at December 31, 1998                          -                702,214          $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          $ 6.07
Options canceled/forfeited                      125,525               (125,525)         $ 7.17
                                      ------------------     ------------------     ---------------
Balance at December 31, 1997                  1,183,800                716,200          $ 6.66
Options granted                              (1,544,255)             1,544,255          $ 1.03
Options canceled/forfeited                      636,805               (636,805)         $ 5.63
                                      ==================     ==================     ===============
Balance at December 31, 1998                    276,350              1,623,650          $ 1.55
                                      ==================     ==================     ===============
</TABLE>

A summary of stock options  exercisable and stock options  outstanding under the
1996 Option Plan is as follows:
<TABLE>
<CAPTION>

                                              1996 Stock Option Plan
-------------------------------------------------------------------------------------------------------------------
                             Options Exercisable                             Options Outstanding
                             at December 31, 1998                            At December 31, 1998
                        -------------------------------     -------------------------------------------------------
                                                                                                      Weighted
                                            Weighted                              Weighted             Average
     Range of                                Average                               Average            Remaining
     Exercise               Number            Price             Number              Price            Contractual
      Prices             Exercisable        Per Share        Outstanding          Per Share         Life (years)
--------------------    ---------------    ------------     ---------------    ----------------    ----------------
  <C>                           <C>         <C>                  <C>                <C>                        <C>
  $ 0.50 - $ 0.94                    -               $           1,345,875          $     0.90                 9.6
                                                     -
  $ 2.19 - $ 3.75               15,590      $     3.75             167,810          $     3.01                 8.9
  $ 6.75 - $ 7.38               23,105      $     7.30             109,965          $     7.32                 8.0
                        ===============                     ===============
  $ 0.50 - $ 7.38               38,695      $     5.87           1,623,650          $     1.55                 9.4
                        ===============                     ===============
</TABLE>



<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

7.       Stockholders' Equity (continued)

The Company has recorded in 1996 and 1995 deferred compensation expense totaling
approximately  $5,492,000  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.  Generally,  options  granted  vest ratably over a 60 month
term.  Amortization  of deferred  compensation  in 1998,  1997 and 1996  totaled
approximately $599,000, $481,000 and $1,028,000, respectively.


During July 1998, in connection  with the  employment of the President and Chief
Executive  Officer of the  Company,  the  Company  issued an option to  purchase
250,000  shares of common stock of the Company at an exercise price of $0.94 per
share. The exercise price equaled the estimated fair market value on the date of
grant.  This option  vests  ratably  over a 60 month term.  The issuance of this
option is independent of the 1995 and 1996 Incentive Stock Option Plans.


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 on 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.

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  because the Company did not meet 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  lapsed during 1997 and 47,100 lapsed during
1998 because the required performance measures were not met.

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
4.2% to 5.6%  for  1998,  5.4% to 6.7%  for  1997  and  5.8% to 6.8%  for  1996;
volatility  factor of the expected market price of the Company's common stock of
0.67, 0.75 and 0.69 for options issued during 1998, 1997 and 1996, respectively;
and an expected option life ranging from 1 to 5 years. The weighted average fair
value for options  granted  under the 1996 Plan during  1998,  1997 and 1996 was
$0.69, $2.97 and $5.82,  respectively.  The fair value of options granted during
1998 in connection  with the  employment  of the  President and Chief  Executive
Officer of the Company, was $0.44.

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.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

7.    Stockholders' Equity (continued)


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>

                                                          1998              1997               1996
                                                    ----------------- ----------------- -------------------
<S>                                                  <C>               <C>                <C>
Pro forma net loss                                   $ (14,811,559)    $ (16,258,811)     $ (10,662,080)
Pro forma net loss per share - basic and diluted     $       (0.50)    $       (0.57)     $       (0.44)

</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 owns 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.

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  agreement,   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  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.


<PAGE>


                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

8.       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 exercisable for a 30 day period ending May 31, 1999.

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.

9.       Leases

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, 1998 are as follows:
<TABLE>
<CAPTION>
         <S>                                                    <C> 
         1999                                                   $     632,501
         2000                                                         638,001
         2001                                                         351,834
                                                            -------------------
         Total                                                  $   1,622,336
                                                            ===================
</TABLE>

In 1998,  1997 and  1996 the  Company  incurred  rent  expense,  including  rent
associated  with  cancelable  rental  agreements,   of  approximately  $915,000,
$799,000 and $446,000, respectively.

10.      Income Taxes

As of December 31, 1998,  the Company had federal and state net  operating  loss
carryforwards of approximately $40,465,000. The net operating loss carryforwards
will begin to expire between 2009 and 2013 if not utilized.



<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

10.      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:
<TABLE>
<CAPTION>

                                                           December 31,
                                                     1998                 1997
                                            --------------------- ---------------------
<S>                                             <C>                   <C>
Deferred tax assets:
   Net operating loss carryforwards             $ 15,860,400          $ 10,384,400
   Inventory valuation reserve                       415,900                65,700
   Capital leases                                    343,800                     -
   Other                                             156,600               241,000
                                            --------------------- ---------------------
Total deferred tax assets                         16,276,700            10,691,100
                                            --------------------- ---------------------
Deferred tax liabilities:
   Capitalized software costs                       (673,000)             (284,800)
   Capital leases                                   (158,100)                    -
   Depreciation                                     (301,600)            (318,800)
                                            --------------------- ---------------------
Total deferred tax liabilities                      (974,600)            (761,700)
                                            --------------------- ---------------------
Less:
   Valuation allowance                           (15,302,100)          (9,929,400)
                                            ===================== =====================
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,  1998  and  1997,  based  on
management's  evaluation of the evidential  recognition  requirements  under the
criteria  of SFAS 109.  During  1998 and 1997,  the  total  valuation  allowance
increased  approximately  $5,372,700  and  $5,948,600,   repectively.  The  main
component  of  the  evidential   recognition   requirements  was  the  Company's
cumulative pretax losses since inception.

11.      Segment Information

The  Company  conducts  its  business  within one  industry  segment - financial
services technology. To date, all revenues generated have been from transactions
with North American customers.  One customer, the Dime Savings Bank of New York,
accounted for 49% and 48% of revenues in 1998 and 1997, respectively.  Two other
customers accounted for 20% of revenues in 1997, which individually  represented
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."  All  other  segment
disclosures  required  by SFAS 131 are  included in the  consolidated  financial
statements or in the notes to the consolidated financial statements.


<PAGE>



                Affinity Technology Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

12.      Other Related Party Transactions

The Company had leased ALMs to a bank which holds a warrant to acquire shares of
common stock of the Company. See Note 7. The Company has installed and otherwise
delivered a number of ALMs on behalf of the bank during 1996 and 1995.  Pursuant
to a contract  termination  agreement executed between the bank and the Company,
amounts  due  the  Company  totaling  approximately  $505,000  were  settled  in
consideration  of a $50,000  payment and the return of the ALMs to the  Company.
The amount due the Company was charged to the allowance for doubtful accounts as
of December 31, 1998.  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.

During February 1998, Surety entered into an agreement with Resource  Bancshares
Mortgage Group, Inc. ("RBMG"), pursuant to which the Company will underwrite and
process  mortgage  loans in accordance  with  guidelines  specified by RBMG. The
Company receives a fee from RBMG for the  underwriting  and processing  services
performed.  During 1998,  the Company  processed and sold to RBMG  approximately
$18,300,000 in mortgage loans resulting in approximately $330,000 in revenue for
the Company.  The Chairman of the Board and Chief Executive Officer of RBMG is a
member of the Company's Board of Directors.

13.      Commitments and Contingent Liabilities

As of December 31, 1998, Surety had $2,475,900  in  commitments  outstanding  to
originate and sell  mortgage  loans.  Commitments  to originate  mortgage  loans
represent  mortgage  loan  applications  where the  borrower  has  locked in the
interest  rate.  Commitments  to sell  mortgage  loans  to  investors  represent
optional  commitments to sell mortgage loans at a future date and at a specified
price.

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 claimed  certain rights,  damages or interests  incidental to the
Company's  formation and development.  During 1998, certain of these claims were
resolved  in a manner  that  did not have a  material  impact  on the  Company's
financial  condition or results of operations.  Additionally,  a former employee
has filed suit against the Company  alleging  breach of contract and non-payment
of wages. 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, 1999 under the captions  "Board of Directors" and "Section 16(a)
Beneficial Ownership Reporting  Compliance," 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,  1999  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, 1999 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,  1999  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, 1998 and 1997.
         ii.      Consolidated Statement of Operations for the years ended 
                  December 31, 1998, 1997 and 1996.
         iii.     Consolidated Statements of Stockholders' Equity for the years
                  ended December 31, 1998, 1997 and 1996.
         iv.      Consolidated Statements of Cash Flows for the years ended 
                  December 31, 1998, 1997 and 1996.
         v.       Notes to the Consolidated Financial Statements for the years 
                  ended December 31, 1998, 1997, and 1996.

         (2)       Schedule II - See additional sections 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.



<PAGE>


         (3)      Exhibits:
<TABLE>
<CAPTION>


  Exhibit Number     Description
-------------------- ------------------------------------------------------------------------------------------------
      <S>            <C>
        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. dated November 8, 1995,
                       for the purchase,  subject to certain conditions,  of 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          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).
       10.2*         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).
       10.3*         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).
       10.4*         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).
       10.5*         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).
       10.6*         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).
       10.7*         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).
       10.8          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).
       10.9*         Declaration of First Amendment to 1995 Stock Option Plan of Affinity Technology Group, Inc.
      10.11*         Declaration of First Amendment to 1996 Stock Option Plan of Affinity Technology Group, Inc.
      10.10*         Nonqualified  Stock Option Agreement,  dated as of July 29, 1998,  between Affinity  Technology
                       Group,   Inc  and  R.  Murray  Smith,   which  is  hereby
                       incorporated  by reference to Exhibit 10 of the Quarterly
                       Report on Form 10-Q of Affinity  Technology  Group,  Inc.
                       for the quarter ended September 30, 1998.
        21           Subsidiaries of Affinity Technology Group, Inc.
       23.1          Consent of Independent Auditors.
        27           Financial Data Schedule.
</TABLE>

*        Denotes a management contract or compensatory plan or arrangement.

(b)      Reports on Form 8-K filed in the 4th quarter of 1998:

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, 1999           By:      /s/  R. Murray Smith
                                           --------------------
                                           R. Murray Smith
                                           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/ R. Murray Smith                                                                         March 31, 1999
---------------------------------------
R. Murray Smith                         President, Chief Executive Officer and Director
                                        (principal executive officer)


/s/  Alan H. Fishman                                                                        March 31, 1999
---------------------------------------
Alan H. Fishman                         Director


/s/  Robert M. Price, Jr.                                                                   March 31, 1999
---------------------------------------
Robert M. Price, Jr.                    Director


/s/  Edward J. Sebastian                                                                    March 31, 1999
---------------------------------------
Edward J. Sebastian                     Director


/s/  Peter R. Wilson, Ph.D.                                                                 March 31, 1999
---------------------------------------
Peter R. Wilson, Ph.D.                  Director



---------------------------------------
Jeff A. Norris                          Director                                            March 31, 1999



/s/ Joseph A. Boyle                                                                         March 31, 1999
---------------------------------------
Joseph A. Boyle                         Senior Vice President, Chief Financial Officer
                                        and Treasurer (principal financial officer)


/s/  Richard R. Butcher                                                                     March 31, 1999
---------------------------------------
Richard R. Butcher                      Vice President and Controller
                                        (principal accounting officer)

</TABLE>


Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>

-------------------------------------- ---------------- ---------------------------------- ----------------- -----------------
                COL.A                      COL. B.                   COL. C                     COL. D            COL. E
                                                                                           -----------------
-------------------------------------- ---------------- ---------------------------------- ----------------- -----------------
                                                                    Additions
                                                        ----------------------------------
                                                        ----------------- ----------------
                                                                            Charged to
                                         Balance at        Charged to     Other Accounts
                                        Beginning of       Costs and        - Describe     Deductions-DescribeBalance at End
             Description                   Period           Expenses                                            of Period
-------------------------------------- ---------------- ----------------- ---------------- ----------------- -----------------
<S>                                     <C>              <C>               <C>              <C>               <C>
Year ended December 31, 1998
Reserves and allowances deducted
    from asset accounts:
  Allowance for doubtful accounts       $   400,120      $   370,000       $         -      $   724,607  (1)  $    45,513
  Reserve for inventory obsolescence
                                            173,007        1,060,000                 -      $   137,309  (2)    1,095,698

Year ended December 31, 1997
Reserves and allowances deducted
    from asset accounts:
  Allowance for doubtful accounts       $   198,987      $   456,841       $         -      $   255,708  (1)  $   400,120
  Reserve for inventory obsolescence
                                             20,000          230,000                 -           76,993  (2)      173,007

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

<FN>

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

<PAGE>


Exhibit Index
<TABLE>
<CAPTION>

Exhibit Number         Description
---------------------- ------------------------------------------------------------------------------------------------
<S>                    <C>
10.10                  Declaration of First Amendment to 1996 Stock Option Plan of Affinity Technology Group, Inc.
10.11                  Declaration of First Amendment to 1995 Stock Option Plan of Affinity Technology Group, Inc.
21                     Subsidiaries of Affinity Technology Group, Inc.
23.1                   Consent of Ernst & Young LLP
27                     Financial Data Schedule
</TABLE>




<PAGE>


Exhibit 10.10 - Declaration of First Amendment to 1996 Stock Option Plan of
                  Affinity Technology Group, Inc.

                         DECLARATION OF FIRST AMENDMENT
                                       TO
                            1996 STOCK OPTION PLAN OF
                         AFFINITY TECHNOLOGY GROUP, INC.

         THIS  DECLARATION  OF  FIRST  AMENDMENT,  made  as of the  12th  day of
October,  1998, by AFFINITY TECHNOLOGY GROUP, INC., a Delaware  corporation (the
"Company"), to the 1996 Stock Option Plan of Affinity Technology Group, Inc. (as
amended and restated effective October 31, 1996) (the "Plan");

                                R E C I T A L S:

         WHEREAS,  it is  deemed  advisable  to amend the Plan to  provide  that
options granted under the Plan shall vest and become  exercisable  upon a change
in control of the Company.

         NOW, THEREFORE,  BE IT RESOLVED, that effective as of October 12, 1998,
the Plan shall be amended by adding Section 7(f) to the Plan to read as follows:

                  (f)   Notwithstanding  any  provisions  of  the  plan  to  the
                  contrary,  in the event of a Change in Control of the  Company
                  (as hereinafter  defined),  all options  outstanding as of the
                  date of such Change of Control shall become fully exercisable,
                  whether or not then  otherwise  exercisable.  For  purposes of
                  this  Section  7(f),  a Change in  Control  shall be deemed to
                  occur as of: (i) the date on which any "person" or "group" (as
                  such  terms are used in  Sections  13(d) and 14(d) of the 1934
                  Act) becomes the  beneficial  owner (as defined in Rules 13d-3
                  and 13d-5 under the 1934 Act) of shares representing more than
                  50% of  the  combined  voting  power  of the  then-outstanding
                  securities   entitled  to  vote   generally  in  elections  of
                  directors of the Corporation  ("Voting Stock");  (ii) the date
                  on  which  the  stockholders  of  the  Corporation  approve  a
                  definitive   agreement  under  which  the   Corporation   will
                  consolidate  with or merge  into  any  other  corporation,  or
                  convey,  transfer  or lease  all or  substantially  all of its
                  assets to any person, or any other corporation will merge into
                  the Corporation, and, in the case of any such transaction, the
                  outstanding  common stock of the Corporation will be converted
                  into  cash,   securities   or  other   property,   unless  the
                  stockholders  of  the  Corporation   immediately  before  such
                  transaction own, directly or indirectly  immediately following
                  such transaction, at least 51% of the combined voting power of
                  the outstanding  securities of the corporation  resulting from
                  such transaction in substantially the same proportion as their
                  ownership  of  the  Voting  Stock   immediately   before  such
                  transaction;  or (iii) the date on which there shall have been
                  a  change  in a  majority  of the  Board of  Directors  of the
                  Corporation within a 12-month period unless the nomination for
                  election  of each new  director  was  approved  by the vote of
                  two-thirds of the  directors  then still in office who were in
                  office at the beginning of the 12-month period.

         IN WITNESS WHEREOF,  this Declaration of First Amendment is executed on
behalf of  Affinity  Technology  Group,  Inc. as of the day and year first above
written.

                         AFFINITY TECHNOLOGY GROUP, INC.


                                    By:      /s/  R. Murray Smith

                                             R. Murray Smith, President and
                                             Chief Executive Officer


<PAGE>


Exhibit 10.10 - Declaration of First Amendment to 1995 Stock Option Plan of
                  Affinity Technology Group, Inc.


                         DECLARATION OF FIRST AMENDMENT
                                       TO
                            1995 STOCK OPTION PLAN OF
                         AFFINITY TECHNOLOGY GROUP, INC.

         THIS  DECLARATION  OF  FIRST  AMENDMENT,  made  as of the  12th  day of
October,  1998, by AFFINITY TECHNOLOGY GROUP, INC., a Delaware  corporation (the
"Company"), to the 1995 Stock Option Plan of Affinity Technology Group, Inc. (as
amended and restated effective October 31, 1996) (the "Plan");

                                R E C I T A L S:

         WHEREAS,  it is  deemed  advisable  to amend the Plan to  provide  that
options granted under the Plan shall vest and become  exercisable  upon a change
in control of the Company.

         NOW, THEREFORE,  BE IT RESOLVED, that effective as of October 12, 1998,
the Plan shall be amended by adding Section 7(f) to the Plan to read as follows:

                  (f)   Notwithstanding  any  provisions  of  the  plan  to  the
                  contrary,  in the event of a Change in Control of the  Company
                  (as hereinafter  defined),  all options  outstanding as of the
                  date of such Change of Control shall become fully exercisable,
                  whether or not then  otherwise  exercisable.  For  purposes of
                  this  Section  7(f),  a Change in  Control  shall be deemed to
                  occur as of: (i) the date on which any "person" or "group" (as
                  such  terms are used in  Sections  13(d) and 14(d) of the 1934
                  Act) becomes the  beneficial  owner (as defined in Rules 13d-3
                  and 13d-5 under the 1934 Act) of shares representing more than
                  50% of  the  combined  voting  power  of the  then-outstanding
                  securities   entitled  to  vote   generally  in  elections  of
                  directors of the Corporation  ("Voting Stock");  (ii) the date
                  on  which  the  stockholders  of  the  Corporation  approve  a
                  definitive   agreement  under  which  the   Corporation   will
                  consolidate  with or merge  into  any  other  corporation,  or
                  convey,  transfer  or lease  all or  substantially  all of its
                  assets to any person, or any other corporation will merge into
                  the Corporation, and, in the case of any such transaction, the
                  outstanding  common stock of the Corporation will be converted
                  into  cash,   securities   or  other   property,   unless  the
                  stockholders  of  the  Corporation   immediately  before  such
                  transaction own, directly or indirectly  immediately following
                  such transaction, at least 51% of the combined voting power of
                  the outstanding  securities of the corporation  resulting from
                  such transaction in substantially the same proportion as their
                  ownership  of  the  Voting  Stock   immediately   before  such
                  transaction;  or (iii) the date on which there shall have been
                  a  change  in a  majority  of the  Board of  Directors  of the
                  Corporation within a 12-month period unless the nomination for
                  election  of each new  director  was  approved  by the vote of
                  two-thirds of the  directors  then still in office who were in
                  office at the beginning of the 12-month period.

         IN WITNESS WHEREOF,  this Declaration of First Amendment is executed on
behalf of  Affinity  Technology  Group,  Inc. as of the day and year first above
written.

                         AFFINITY TECHNOLOGY GROUP, INC.

                         By:      /s/  R. Murray Smith
                                 R. Murray Smith, President and
                                 Chief Executive Officer

<PAGE>


Exhibit 21 - Subsidiaries of Affinity Technology Group, Inc.
<TABLE>
<CAPTION>

                   Name                       Jurisdiction of Incorporation             Percent Owned
------------------------------------------- ----------------------------------- ------------------------------
<S>                                                   <C>                                   <C>
Affinity Bank Technology Corporation                  Delaware, USA                         100%

Affinity Clearinghouse Corporation                    Delaware, USA                         100%

Affinity Credit Corporation                           Delaware, USA                         100%

Affinity Processing Corporation                       Delaware, USA                         100%

Affinity Mortgage Technology Corporation              Delaware, USA                         100%

Multi Financial Services, Inc.                        Delaware, USA                         100%

Surety Mortgage, Inc.                                 Delaware, USA                         100%

decisioning.com, inc.                                 Delaware, USA                         100%

</TABLE>

Exhibit 23.1 - Consent of Independent Auditors

We consent  to the use of our  report  dated  March 12,  1999  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  12,  1999,  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, 1998.




                                                /s/  ERNST & YOUNG LLP


Greenville, South Carolina
March 31, 1999


<PAGE>



Exhibit 27 - Financial Data Schedule

This  schedule  contains  summary  financial   information  extracted  from  the
consolidated  financial  statements  for the year ended December 31, 1998 and is
qualified in its entirety by reference to such statements.