<PAGE>   1

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


                                   FORM 10-KSB


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

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

                         Commission file number 0-17771


                     FRANKLIN CREDIT MANAGEMENT CORPORATION
        (Exact name of small business issuer as specified in its charter)


                Delaware                                  75-2243266
(State or other jurisdiction of             (I.R.S. Employer identification No.)
 incorporation or organization)

                               Six Harrison Street
                            New York, New York 10013
                                 (212) 925-8745
          (Address of principal executive offices, including zip code,
                   and 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, $0.01
par value.

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

      Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

      Issuer's revenues for its most recent fiscal year: $ 14,284,198.

      As of May 12, 1998 the issuer had 5,516,527 of shares of Common Stock, par
value $0.01 per share, outstanding. On that date, the aggregate market value of
the voting stock held by persons other than those who may be deemed affiliates
of the issuer was $2,730,360 (based on the average of the reported closing bid
and ask price on such date).

      Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes |X| No |_|.

      Transitional Small Business Disclosure Format: Yes |_| No  |X|
<PAGE>   2

                                    PART I
Item 1.  Description of Business

      Business of Registrant. Franklin Credit Management Corporation ("FCMC,"
together with its wholly-owned subsidiaries, the "Company") is a specialty
consumer finance and asset management company that has been primarily engaged in
the acquisition and resolution of non-performing and sub-performing residential
mortgage loans and non-performing residential real estate. In January 1997, the
Company formed a wholly-owned subsidiary, Tribeca Lending Corp. ("Tribeca")
(formerly named Liberty Lending Corp.), to originate and purchase, primarily,
subprime residential mortgage loans to individuals whose borrowing needs are
generally not being served by traditional financial institutions due to their
credit histories and other factors. Management believes that lower credit
quality borrowers represent an inefficiently served segment in the financial
services market and present an opportunity for the Company to earn superior
returns for the risks assumed.

      Since commencing operations in 1990 the Company has purchased, in
aggregate, approximately 10,400 loans with a face value of $260.0 million.
Approximately $175 million, or 67.5%, of these loans were purchased from the
Resolution Trust Company ("RTC") and, since the RTC ceased to function, the
FDIC. The remaining $84.0 million of these loans were purchased from private
institutions. Since January 1, 1996 the Company has purchased loans with a face
value of over $85.0 million of which only approximately $4.9 million were
purchased from the FDIC. Although the FDIC and private institutions have sold a
significant number of loans at public and private auctions in the past, there
can be no assurance that loan portfolios will continue to be available from the
FDIC or other sources. The Company is pursuing relationships with mortgage
bankers, banks, and specialty finance companies which may, through on-going
purchase arrangements, provide additional sources of mortgage portfolios,
individual mortgage assets and real estate assets. The Company believes this
strategy will augment its current practice of purchasing at auctions portfolios
of non-performing and subperforming mortgages.

      During the year ended December 31, 1997 the Company purchased 771 loans
with an aggregate face value of $47.7 million and 107 other real estate owned
("OREO") properties with an aggregate purchase price of $2.6 million. As of
December 31, 1997, the Company's portfolio includes approximately 3,000 loans
with an aggregate face value of $116.0 million. An allowance for loan losses of
$27.4 million has been recorded against this face value. Approximately 86.0% of
the Company's loan portfolio consists of first mortgages, home equity/home
improvement and second mortgages collateralized by real estate, 10.5% consisted
of unsecured loans, and 3.5% consist of loans collateralized by other assets.
See "Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 7. Financial Statements".

      In 1996 the Company began to sell portfolios of reperforming loans when
the anticipated yield resulting from such sales exceeds the yield anticipated
from holding the portfolio to maturity. During 1996, the Company sold 78
reperforming loans with an aggregate face value of $6.3 million. During 1997 the
Company sold 289 reperforming loans with a face value of $7.7 million.

      As of December 31, 1997, the Company owed an aggregate amount of $83.6
million ("Senior Debt") to a bank ("Senior Debt Lender"), which was incurred in
connection with the purchase of, and is secured by the Company's loan and OREO
portfolios. In March 1997, the Company renegotiated its Senior Debt agreement,
subsequent to which interest on Senior Debt incurred to finance portfolio
acquisitions after December 31, 1996 accrues at the prime rate and on Senior
Debt incurred prior to such date at prime plus 1.75% rather than prime plus
2.125%.


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<PAGE>   3

      Additionally, in March 1997, certain ongoing service fees payable on
Senior Debt were replaced with a 1% exit fee applicable only to outstanding
Senior Debt as of December 31, 1996, for total fees payable of $700,000. Such
fees will be payable after repayment, in full, of such Senior Debt. If the funds
collected from the underlying notes receivable are insufficient to satisfy the
related Senior Debt any exit fee shortfall shall be forgiven. The Company
believes that the reduction in the cost of funds will have a material beneficial
impact on the Company's earnings.

      Although the Company attempts to collect on all loans in its portfolio, it
is unlikely that the Company will be successful in collecting the full amount
due under each loan in its portfolio. In addition, significant administrative
and litigation expenses are often incurred in its collection efforts.

      In January 1997, the Company formed Tribeca, a wholly owned subsidiary, to
originate and purchase primarily non-conforming and subprime mortgages
nationwide on a retail and wholesale basis. Management currently expects that
Tribeca will provide first and second mortgages to communities under-served by
banks and other lending institutions. Tribeca is currently licensed as a
mortgage banker in Connecticut, District of Columbia, Florida, Maryland,
Massachusetts, New York, New Jersey, Pennsylvania, and Virginia, and is licensed
as a FHA Title I and Title II lender. The Company's current expectation is that
loans will be sold in the secondary market through whole-loan,
servicing-released sales. The Company also anticipates holding certain of
Tribeca's mortgages in its portfolio when it believes that the return from
holding the mortgage, on a risk-adjusted basis, outweighs the return from
selling the mortgage in the secondary market.

      The Company funded the start-up of Tribeca with $1.1 million of proceeds
from the refinancing of two loan portfolios through its Senior Debt Lender.
Additionally, such lender has provided Tribeca with a warehouse line of credit
of $2,000,000. The Company has secured additional warehouse lines of credit for
Tribeca's use of $9.5 million from two other lending institutions. Tribeca began
originating mortgages on September 1, 1997. In the fourth quarter of 1997
Tribeca originated 34 mortgages with an aggregate principle balance of
$4,430,700.

<TABLE>
<CAPTION>
                   Tribeca Loan Origination Volume for 1997
--------------------------------------------------------------------------------
                  FHA           Conforming     Nonconforming        Total
--------------------------------------------------------------------------------
<S>            <C>               <C>              <C>             <C>       
 Face Value    $3,813,900        $265,500         $351,300        $4,430,700
--------------------------------------------------------------------------------
      Loans        25               4                5                34
--------------------------------------------------------------------------------
</TABLE>

      The Company employs standardized in-house servicing procedures in the
acquisition, origination, and collection of loans. The Company's operations are
divided into five departments, which are described below:

      Acquisition Department. The Acquisition Department identifies
opportunities to purchase portfolios of mortgage loans, individual mortgage
loans or real property, performs due diligence, and purchases and integrates the
acquired assets into the Companies existing portfolio. The due diligence
process, with respect to loan purchases, includes an analysis of the majority of
loans in a portfolio, evaluating, among other things, lien position and value of
collateral, debt-to-income ratios, the borrower's creditworthiness, employment
stability, years of home ownership, education, credit bureau reports and
mortgage payment history. The due diligence process, with respect to OREO
purchases, includes an analysis of the majority of properties in a portfolio,
verification of appraised values, and analysis of liens and encumbrances on such
properties. The Acquisition Department conducts on-sight reviews of the loan
files comprising the portfolio rather than relying on the statistical digests of
information provided by the seller. This process often provides the Company
additional information critical to properly evaluating the portfolio. The
information derived from due diligence, coupled with the Company's cumulative


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knowledge of distressed assets, enables the Acquisition Department to project a
collection strategy and estimate the collectibility of each loan or a marketing
strategy in cases of OREO acquistions. Based upon this information the
Acquisition Department prepares a bid which meets the Company's established
pricing and yield guidelines.

      Once loans are acquired, the Acquisition Department: (i) processes
acquired loan files into the Company's information system; (ii) issues
introductory letters with information regarding the change of ownership of the
loan, payment information and a toll-free Company information telephone number;
(iii) conducts internal audits of newly acquired loans to identify and address
any disputes or problems relating to the accounting for these loans; (iv) issues
an audit letter advising the borrower of the outstanding balance, last payment
date and remaining term of the loan; (v) initiates collection and servicing
activities in connection with performing loans and restructuring, refinancing,
or foreclosure activities with respect to non-performing loans.

      Service Department. The Service Department manages the Company's
performing loans and seeks to provide quality service to customers and secure
full payment of the total face value and accrued charges, by monitoring monthly
cash flow, maintaining customer relations and, where appropriate entering into
extension and modification agreements. Service Department members continuously
review and monitor the status of collections and individual loan cash flow in
order to proactively identify and solve potential collection problems as well as
identify potential loans for bulk sale or refinance though Tribeca. As of
December 31, 1997 the Service Department managed approximately 2000 loan
accounts, with a total principal outstanding balance of approximately $70.0
million.

      Legal Department. The Legal Department monitors the progress of loans
requiring a legal action for recovery which are identified and referred by the
Acquisition or Service Departments. The Legal Department prepares an analysis of
each such loan to determine a litigation and collection strategy to maximize the
size and speed of recovery and minimize costs, based upon the individual
borrower's past payment history, current ability to pay, collateral lien
position and value of the collateral. The Legal Department retains counsel and
monitors any ensuing litigation to insure the optimal recovery of the remaining
principal and interest balance. As of December 31, 1997 the Legal Department
managed approximately 1000 loans with a total face value outstanding of
approximately $46.0 million.

      Real Estate Department. The Real Estate Department manages the sale of
properties acquired through direct acquisitions or foreclosure, accepted by deed
in lieu of foreclosure or through other proceedings. The Real Estate Department
also manages OREO held as rental properties until such time as the Company can
arrange an economically beneficial sale. As of December 31, 1997 the Real Estate
Department managed approximately 260 OREO properties with an estimated
realizable market value (market value less estimated commissions and legal
expenses associated with the disposition of the asset) of approximately $13.0
million.

      Subprime Single-Family Residential Lending. Tribeca provides first and
second mortgages to a target market of communities that are under-served by
banks and other lending institutions. This population often does not meet
conventional underwriting criteria. Tribeca focuses on developing an array of
niche products to fulfill needs such as rehabilitation, high LTV,
non-conforming, and second mortgages. Loans are originated through a network of
affiliates including mortgage brokers, banks, and a retail sales force. The
majority of loans are ultimately expected to be sold by Tribeca in the secondary
market. Tribeca processes, underwrites, and closes all loans in its name, or in
some circumstances in a correspondent's name where the loan is purchased
immediately after closing by the Company.

      Formation of the Company. The Company was organized in Delaware in 1990,
by Thomas J. Axon and Frank B. Evans, Jr., currently executive officers of the
Company, to acquire consumer loan 


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portfolios from the RTC and the FDIC. In March 1993, the Company completed the
private placement of $2,000,000 of 15% Debentures (the "15% Debentures") and
warrants for the purchase of the Company's Common Stock, the proceeds of which
were used to acquire interests in loan portfolios and for operations. In
December 1994, the Company merged with Miramar Resources, Inc., a public oil and
gas company organized in Delaware, that had emerged from bankruptcy proceedings
on December 6, 1993. In January 1995, the Company completed the private
placement of $705,000 of 12% Debentures (the "12% Debentures"), the proceeds of
which were used to fund the acquisition of a loan portfolio, including amounts
advanced by stockholders, service existing debt obligations and for general
working capital. Additionally, in late 1995, the Company completed the private
placement of $555,000 of 12% Debentures (the "Harrison 1st Debentures"), the
proceeds of which were used to fund the acquisition of an additional loan
portfolio. Prior to 1995 the Company purchased all portfolios through funds
raised through limited partnerships. In 1995 the remaining limited partnership
interests were purchased by the Company.

      Competition. The consumer mortgage industry is fragmented and highly
competitive. The Company faces significant competition in the acquisition of
loan portfolios from private institutions, private auctions involving financial
institutions, and the FDIC. Many of the Company's competitors have financial
resources, acquisition departments and servicing capacity considerably larger
than those of the Company. Among the Company's largest competitors, are
Greenthal Realty Partners of New York, New York, Ocwen Financial Corporation of
West Palm Beach, Florida, Wilshire Financial Services Group of Portland, Oregon
and EMC Mortgage Corporation of Irving, Texas. Competition for acquisitions is
generally based on price, reputation of the purchaser, funding capacity and
timing. The Company believes that the recent reduction of its cost of funds will
increase its competitiveness in acquiring portfolios. See "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations:
General - Cost of Funds".

      The market for loan origination is also highly competitive and fragmented.
It is estimated by the Mortgage Banking Association of America that
approximately $856 billion of residential mortgages were originated in 1997. The
Company competes with banks, mortgage bankers, mortgage brokers, and wholesale
originators for the origination of mortgages. Among the largest of these
competitors are Chase Manhattan Bank, First Union, NationsBank, Money Store
Inc., Norwest, Ocwen Financial Corporation, IMC Mortgage Corporation, Manhattan
Mortgage and others. Many of the Company's competitors possess greater financial
resources, longer operating histories, and lower costs of capital than the
Company. Competition for mortgage originations is based upon marketing efforts,
loan processing capabilities, funding capacity, and loan product desirability.

      The Company also experiences competition from mortgage and finance
companies in the sale of rehabilitated and newly originated loan portfolios.
Secondary market demand has increased for pools of performing mortgages, which
may later be packaged in a pool and securitized. The Company believes that such
market demand will provide attractive prices and liquidity for portfolios
offered for sale. Important characteristics, which impact competition in this
market, are price, loan-to-value, size of pools and the integrity of portfolio
data. The Company faces intense competition, from numerous companies seeking to
re-sell mortgage portfolios in this highly fragmented, diverse marketplace.
Nearly all of the Company's competitors have greater experience and volume to
supply to the securitization market. The Company believes that its information
system and the continuous review and monitoring of accounts and asset
availability from new portfolio acquisitions and originations should position
the Company to compete efficiently in the sale of loan portfolios.

      Customers. The Company's income is derived from interest and purchase
discount recognized from the collection of loans, origination fees, rental
income, gains recorded from the bulk sale of performing loans to banks and other
financial institutions, and gains on sales recorded from the sale of OREO. The
Company's borrowers are a diverse population and no single borrower represents a


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<PAGE>   6

significant portion of the Company's loans. The Company will continue to sell
bulk portfolios of performing loans, when such sales are economically beneficial
to the Company. To date the Company has only sold three portfolios of performing
mortgage to two different institutions. While the Company has been successful in
marketing loan portfolios, which it has elected to sell in the past, and
believes there are sufficient buyers for its products, there can be no assurance
that the Company will be able to successfully market loan portfolios in the
future.

      Suppliers. The Company acquires its loans and purchased OREO through a
variety of sources including private and public auctions, negotiated sales,
ongoing purchase agreements, and joint-bids with other institutions. The supply
of assets available for purchase by the Company is influenced by a number of
factors including knowledge of the seller of the Company's interest in
purchasing assets, the general economic climate, financial industry regulation,
and new loan origination volume. While the Company continues to pursue
additional sources for purchasing assets, there can be no assurance that
existing and future sources will provide sufficient opportunities for the
Company to purchase assets at favorable prices. Prior to 1996 the RTC, and its
successor the FDIC, represented the majority of the Company's loan purchases.
During the last two years no single institution has supplied the Company with
more than 15% of its portfolio acquisitions, as measured by purchase price.

      Year 2000 Compliance. The inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process date
fields containing a 2 digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, such systems may be unable to
process accurately certain date-based information.

      The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. The Company's loan servicing and
loan origination systems vendor is currently making the required modifications
and testing Year 2000 Compliance. The modification process of all significant
applications is underway. The Company's vendor has informed the Company that it
currently plans to complete the testing process of all significant applications
by December 31, 1998.

      The cost to the Company of its Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operation in any given year. These costs and the date on which the Company
anticipates the Year 2000 Compliance modification and testing processes to be
complete are based on management's estimates, which depend upon numerous
assumptions relating to future events, including the continued availability of
certain resources, third party modification plans and other factors. There can
be no assurance that these estimates will be achieved and that actual results
will not differ from these estimates.

      Regulation. The Company's lending activities are subject to the Federal
Truth-in-Lending Act ("TILA") and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994), the Equal Credit Opportunity Act of 1974, as
amended ("ECOA") and Regulation B, the Fair Credit Reporting Act of 1970, as
amended, the Real Estate Settlement Procedures Act of 1974, as amended ("RESPA")
and Regulation X, the Home Mortgage Disclosure Act ("HMDA") and Regulation C,
the Federal Debt Collection Practices Act and the Fair Housing Act, as well as
other federal and state statutes and regulations affecting the Company's
activities. Failure to comply with these requirements can lead to loss of
approved status, demands for indemnification or mortgage loan repurchases,
certain rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.

      The Company is subject to the rules and regulations of, and examinations
by, the Department of Housing and Urban Development ("HUD"), the Federal Housing
Administration and other federal and state regulatory authorities with respect
to originating, underwriting, funding, acquiring, selling and servicing mortgage
loans. In addition, there are other federal and state statutes and regulations
affecting


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such activities. These rules and regulations, among other things, impose
licensing obligations on the Company, establish eligibility criteria for loans,
prohibit discrimination, provide for inspection and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features and,
in some cases, fix maximum interest rates, fees and loan amounts. The Company is
required to submit annual audited financial statements to various governmental
regulatory agencies that require the maintenance of specified net worth levels.

      TILA requires a written statement showing an annual percentage rate of
finance charges and requires that other information be presented to debtors when
consumer credit contracts are executed. RESPA requires written disclosure
concerning settlement fees and charges, mortgage servicing transfer practices
and escrow or impound account practices. It also prohibits the payment or
receipt of "kickbacks" or referral fees in connection with the performance of
settlement services. The Fair Credit Reporting Act requires certain disclosures
to applicants concerning information that is used as a basis for denial of
credit. HMDA requires collection and reporting of statistical data concerning
the loan transaction. ECOA prohibits discrimination against applicants with
respect to any aspect of a credit transaction on the basis of sex, marital
status, race, color, religion, national origin, age, derivation of income from
public assistance programs, or the good faith exercise of a right under the
Federal Consumer Credit Protection Act. The Fair Housing Act prohibits
discrimination in mortgage lending on the basis of race, color, religion, sex,
handicap, familial status or national origin.

      In October 1997, HUD issued proposed regulations regarding the treatment
and disclosure of fees charged and collected by mortgage brokers providing
certain safe harbors for the payment of fees by lenders to mortgage brokers and
setting forth standards to determine whether payments to mortgage brokers
violate RESPA. Whether such regulations will be adopted and the form and content
of any final regulations and their impact on the Company is unknown.

      The interest rates which the Company may charge on its loans are subject
to state usury laws, which specify the maximum rate which may be charged to
consumers. In addition, both federal and state truth-in-lending regulations
require that the Company disclose to its borrowers prior to execution of the
loans all material terms and conditions of the financing, including the payment
schedule and total obligation under the loans. The Company believes that it is
in compliance in all material respects with such regulations.

      As a condition to funding the loans it originates, the Company requires
each borrower to obtain and maintain in force a policy of insurance providing
coverage for improvements on any real property securing the borrower's loan. If
the borrower fails to provide fire and extended coverage insurance (and flood
insurance if required) prior to closing of the borrower's loan or if the
borrower's coverage is subsequently canceled or not renewed at any time during
the loan period and the borrower fails to obtain new coverage, the Company will
provide coverage on the borrower's behalf under policies insuring the Company's
interest in the collateral. Such practice is commonly referred to as a "forced
placement" of insurance. The insurance which can be required and insurance which
is forced placed is subject to regulation under TILA, the National Flood
Insurance Act, and state insurance regulatory and lender statutes. Such laws and
regulations generally impose disclosure and notice requirements which must be
satisfied in connection with insurance requirements and the forced placement of
coverage, limitations on the amount of coverage that a lender may obtain to
protect its interest in the collateral and restrictions on fees and charges that
the Company may assess in connection with such insurance.

      Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil and criminal penalties on
the Company, class action lawsuits and administrative enforcement actions. The
Company does not expend material amounts of financial resources complying with
federal, state or local laws and regulations.


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      Environmental Matters. In the course of its business, the Company has
acquired, and may acquire in the future, properties securing loans that are in
default. It is possible that hazardous substances or waste, contaminations,
pollutants or sources thereof could be discovered on such properties after
acquisition by the Company. In such event, the Company may be required by law to
remove such substances from the affected properties at its sole cost and
expense. There can be no assurance that (i) the cost of such removal would not
substantially exceed the value of the affected properties or the loans secured
by the properties, (ii) the Company would have adequate remedies against the
prior owner or other responsible parties, or (iii) the Company would not find it
difficult or impossible to sell the affected properties either prior to or
following such removal.

      Employees. As of December 31, 1997, the Company had 44 full-time
employees, including 4 employees in the Acquisitions Department, 10 employees in
the Service Department, 3 employees in the Legal Department, 5 employees in the
Real Estate Department and 2 clerical employees, 4 managerial employees, and 16
employees in Tribeca.

      The Company has never experienced a material work stoppage or slowdown due
to labor disagreements. The Company believes that its relations with all
employees are satisfactory. None of the employees are covered by a collective
bargaining agreement.

Item 2.  Description of Properties.

      Properties. The Company owns a 6,600 square foot office condominium unit
located on the Sixth Floor of Six Harrison Street, New York, New York which
houses its principal offices. See "Item 12. Certain Relationships and Related
Transactions." A description of secondary offices the Company maintains is as
follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
           Property Description        Approximate Annual  Approximate Square  Lease Expiration       Property Use
                                              Rent              Footage
--------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                   <C>          <C>              <C>
185 Franklin Street                         $75,600               3200         January 1, 1999  Tribeca corporate
      New York, New York                                                                        headquarters
--------------------------------------------------------------------------------------------------------------------------
4221 Baymeadows Square, Suite 2              $7,400               740          February 28,     Tribeca wholesale branch
      Jacksonville, Florida                                                    1999             office
--------------------------------------------------------------------------------------------------------------------------
134 Holiday Court, Suite 310                 $6,060               560          January 31, 1999 Tribeca wholesale branch
      Annapolis, Maryland                                                                       office
--------------------------------------------------------------------------------------------------------------------------
2275 Silas Dean Highway                     $18,000               1500         February 28,     Tribeca wholesale and
      Rocky Hill, Connecticut                                                  2000             retail office
--------------------------------------------------------------------------------------------------------------------------
303 Amboy Avenue                             $4,800               400          March 14, 1999   Tribeca wholesale branch
      Metuchen, New Jersey                                                                      office
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

Item 3.  Legal Proceedings.

      Asset Purchase Agreement Dispute. On August 19, 1997 the Company commenced
a civil action in the United States District Court for the Southern District of
New York against Preferred Credit Corporation ("PCC") alleging fraud, breach of
contract, and unjust enrichment in connection with the purchase by the Company
of $3.7 million in face value of notes receivable from Preferred Credit
Corporation ("PCC") for $1.8 million. The Company is seeking recision of the
asset purchase agreement or damages incurred in connection with the purchase.


                                     Page 8
<PAGE>   9

      Although the Company conducted its own review of each loan file, it has
come to believe since the closing of the acquisition that certain information
was intentionally omitted or removed from such files or kept in another
repository of files which was not made available to the Company and that PCC
intentionally and materially misrepresented the status and quality of the notes
receivable included in the portfolio. Although, its estimate will be refined as
the purchased portfolio is seasoned, the Company currently believes that as much
as approximately 90% of the face value of the portfolio may be uncollectable,
due to debtor bankruptcies, in certain instances prior to the execution of the
Asset Purchase Agreement, or senior credit foreclosures of the underlying
collateral.

      PCC filed a motion to dismiss in December 1997 which has been fully
briefed and is currently before the court for a decision on the matter. The
Company's litigation counsel has advised the Company that it believes the
Company has a substantial probability of prevailing in such suit.

      Letter Agreement Dispute. On November 17, 1997 K Mortgage Corporation
("K") filed a civil action in the United States District Court for the Southern
District Court of New York against the Company, Tribeca, and Thomas J. Axon
alleging breach of contract, fraud, and unjust enrichment in connection with a
May 9, 1997 letter agreement (the "Letter Agreement") pursuant to which Tribeca
was to purchase certain assets of K and retain three principles of K as paid
consultants and employ a fourth, Jim Ragan ("Ragan"). In the suit K seeks to
recover for damages of $10 million for the failure of the Company to make
certain payments to third parties, provide Ragan with an employment agreement
and provide the three other principals of with consulting contracts pursuant to
the terms of the Letter Agreement.

      On December 22, 1997 the Company filed an answer and counterclaim
vigorously denying the allegations of the complaint and alleging fraud and
breach of contract against K and Ragan, and breach of fiduciary duty against
Ragan in what it believes to have been Ragan's unjustified unilateral
termination of his employment in violation of the Letter Agreement and is
collectively seeking damages of $1 million. The Company intends to vigorously
defend itself against these allegations and vigorously pursue recovery of
damages and does not at this time believe that its operations or financial
position will be materially impacted. The court has directed all parties to
proceed with mediation, which is currently scheduled for May 6998.

      Trademark Dispute. In September 1995, Franklin Resources Inc. ("FRI")
commenced a civil action in the United States District Court for the Southern
District of New York against the Company, seeking to enjoin the Company from
using the terms "Franklin", "Franklin Credit Management Corporation", "Franklin
Credit Recovery Fund, L.P.", "Franklin Asset Recovery Fund, L.P.", and any other
names or marks confusingly similar to "Franklin" in conjunction with financial
and investment services. On December 16, 1997 the suit was dismissed by the
Court which found no grounds for the action and ruled that the Company may
recover certain legal expenses from FRI, which the Company is currently seeking
to collect.

      Legal Fee Dispute. On October 28, 1997 Rosen, Dainow & Jacobs ("Rosen")
filed a civil action against the Company in the Supreme Court of the State of
New York, County of New York alleging failure by the Company to pay fees due
Rosen in connection with work done for the Company in the Trademark Dispute and
seeking $145,000 in damages. Rosen was dismissed by the Company as counsel in
the Trademark Dispute after the law partnership was disbanded and James Jacobs,
the lead attorney for the Company in the Trademark Dispute, joined a firm that
was representing FRI in other matters. The Company plans to vigorously defend
itself in this matter and at this time does not feel that its operations or
financial position will be materially impacted.


                                     Page 9
<PAGE>   10

      Other Legal Actions. Since in July, 1991, the Company has been a plaintiff
in various actions ("Miramar Litigation") and party to settlements, with the
former directors and officers of Miramar Resources, Inc. ("Miramar"), a company
which the Company merged with in 1994, based upon allegations relating to
certain premerger events. Information regarding the Miramar Litigation ("Shultz
Settlement") concerning these matters, specifically the Shultz Settlement, and
the legal status of the Company's collection efforts is incorporated herein by
reference to "Item 3. Legal Proceedings" included in the Company's Form 10-KSB
for the year ended December 31, 1994, filed with the SEC on March 31, 1995 and
included in the Company's10-KSB for the year ended December 31, 1996, filed with
the SEC on March 31, 1997 (the "1996 10-KSB").

      During 1997 the Company initiated efforts to foreclose on its Deed of
Trust on a 4,000-acre ranch owned by the parties to the original Shultz
Settlement. A judicial foreclosure is expected by management to be placed on the
Court's calendar for hearing in the fourth quarter of 1998. The Company is a
defendant in related matters in which the same parties are seeking quiet title
to the above mentioned ranch and thereby deny enforceability of the Deed of
Trust in favor of the Company.

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

      On August 8, 1997 the Board of Directors and stockholders representing
3,867,215 shares of the outstanding Common Stock of the Company, or
approximately 70.2% of the outstanding Common Stock of the Company, acting by
written consent approved a four-for-one stock dividend (the Stock Dividend") of
the Company's outstanding Common Stock which Stock Dividend was distributed on
September 1, 1997 to shareholders of record on August 20, 1997.


                                     Page 10
<PAGE>   11

                                     PART II

Item 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Market Information. The Company's Common Stock is quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq")
under the symbol "FCSC" since December 26, 1996, and "FCMC" from December 30,
1994 until such date.

      Effective, December 12, 1996, the Board of Directors and holders of a
majority of the Company's Common stockholders authorized a one-for-five reverse
stock split (the "Reverse Split") of the Common Stock $.01 par value per share.
The Company paid $1,300 in lieu of any fractional shares resulting from the
Reverse Split as of December 31, 1996.

      On August 8, 1997 in connection with a proposed private placement the
board of directors and holders of a majority of the Company's Common Stock
approved a four-for-one stock dividend ("Stock Dividend") which was distributed
on September 1, 1997.

      The following table sets forth the bid prices for the common stock on
Nasdaq Bulletin Board, for the periods indicated adjusted to reflect the Reverse
Split and the Stock Dividend. Trading during these periods was limited and
sporadic. Therefore, the following quotes may not accurately reflect the true
market value of the securities. Such prices reflect inter-dealer prices without
retail markup or markdown or commissions and may not represent actual
transactions. The Company has obtained the information in the following table
directly from the Nasdaq Bulletin Board for the year 1996. Information for 1997
was compiled from information representing the daily inter-dealer bid activity
during the period. Such information was not available from the Nasdaq Bulletin
Board due to a lack of two complete inter-dealer postings during the period as
is required by the Nasdaq Bulletin Board to publish such prices.

<TABLE>
<CAPTION>
                                1997 Bid                        1996 Bid
                                --------                        --------
                             High         Low               High          Low
                             ----         ---               ----          ---
<S>                         <C>         <C>                <C>           <C>  
First Quarter               $0.60       $0.50              $1.34         $1.34
Second Quarter              $1.10       $0.40              $0.78         $0.75
Third Quarter               $1.20       $0.05              $1.00         $1.00
Fourth Quarter              $1.00       $0.50              $2.75         $1.75
</TABLE>

      As of March 30, 1998, there were approximately 524 record holders of the
Company's Common Stock.

      Dividend Policy. The Company intends to retain any future earnings that
may be generated from operations to help finance the operations and expansion of
the Company and accordingly does not plan to pay cash dividends to holders of
the Common Stock during the reasonably foreseeable future. Any decisions as to
the future payment of dividends will depend on the earnings and financial
position of the Company and such factors as the Company's Board of Directors
deem relevant.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

General

      Forward-Looking Statements. When used in this report, press releases and
elsewhere by the Company from time to time, the words "believes", "anticipates",
and "expects" and similar expressions are intended to identify forward-looking
statements that involve certain risks and uncertainties. 


                                    Page 11
<PAGE>   12

Additionally, certain statements contained in this discussion and the form
10-KSB may be deemed forward-looking statements that involve a number of risks
and uncertainties. Among the factors that could cause actual results to differ
materially are the following: unanticipated changes in the U.S. economy,
business conditions and interest rates and the level of growth in the finance
and housing markets, the availability for purchases of additional loans, the
status of relations between the Company and its primary sources for loan
purchases, the status of relations between the Company and its primary Senior
Debt Lender, unanticipated difficulties in collections under loans in the
Company's portfolio and other risks detailed from time to time in the Company's
SEC reports. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date thereof. The Company
undertakes no obligation to release publicly the results on any events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

      Loan and OREO Acquisitions. During the year ended December 31, 1997
("fiscal 1997") the Company purchased 771 loans with an aggregate face value of
$47.7 million at an aggregate purchase price of $23.7 million or 49.7% of the
face value and 107 OREO properties with an aggregate purchase price of $2.6
million compared with the purchase during the year ended December 31, 1996
("fiscal 1996") of 499 loans with an aggregate face value of $34.0 million at an
aggregate purchase price of $26.2 million or 77.1% of aggregate face value, and
no portfolios of OREO. Acquisition of these portfolios was fully funded through
Senior Debt in the amount equal to the purchase price plus a 1% loan origination
fee.

      The Company believes these acquisitions will result in substantial
increases in the level of interest income and purchase discount income during
future periods. During the initial period following acquisitions, the Company
incurs the carrying costs of the related Senior Debt and administrative costs of
the new portfolios. Payment streams are only generated once the loans are
incorporated into the Company's loan tracking system, contact with the borrower
is made, and non-performing loans are restructured or collection litigation
initiated.

      In May 1997, the Company purchased a portfolio of $3.7 million in face
value of notes receivable from PCC for $1.8 million. Although the Company
conducted its own review of each loan file, it has come to believe since the
closing of the acquisition that certain information was intentionally omitted or
removed from such files or kept in another repository of files which were not
made available to the Company and that PCC intentionally and materially
misrepresented the status and quality of the notes receivable included in the
portfolio. Although, its estimate will be refined as the purchased portfolio is
seasoned, the Company currently believes that as much as approximately 90% of
the face value of the portfolio may be uncollectable, due to debtor
bankruptcies, in certain instances prior to the execution of the Asset Purchase
Agreement, or senior credit foreclosures of the underlying collateral. The
Company has recorded, on its Consolidated Statement of Income, a Special Charge
of $1.5 million reflecting its current estimate of the uncollectable portion of
the purchase price of such portfolio.

      The Company has initiated a suit and is seeking recision of the asset
purchase agreement or damages incurred in connection with the purchase. See
"Part I Item 3. Legal Proceedings." The Company's litigation counsel has advised
the Company that it believes the Company has a substantial probability of
prevailing in such suit.

      During the normal course of business, the Company acquires properties
either from portfolio acquisitions or via foreclosures. Such properties are
classified as OREO and are evaluated regularly to ensure that recorded amounts
are supported by current fair market values.

      Management intends to continue to expand the Company's earning asset base
through the acquisition of additional portfolios including performing and
non-performing real estate secured loans and 


                                    Page 12
<PAGE>   13

OREO properties. The Company believes that its current infrastructure is
adequate to service additional loans without any material increases in expenses.
There can be no assurance the Company will be able to acquire any additional
loans or that it may do so on favorable terms. While management believes that
the acquisition of additional loan portfolios would be beneficial, management
does not believe that current operations would be materially impacted if
additional loan portfolios were not acquired during 1998.

      Cost of Funds. The increase in the prime rate from 8.25% from 8.50%, on
March 26, 1997, increased the benchmark rate for the cost of funds on Senior
Debt used to fund loan portfolio acquisitions, directly decreasing net income.
As of December 31, 1997, the Company had thirty-four loans outstanding with an
aggregate principal balance of $83,643,550. Additionally the Company has lines
of credit which had an outstanding balance of $1,376,403 at December 31, 1997.
References herein to the Company's Senior Debt Lender or lending arrangements
refer to such continuing lender.

      The majority of the loans purchased by the Company bear interest at a
fixed rate; consequently, there is little corresponding change in interest
income due to changes in market interest rate conditions. The weighted average
interest rate on borrowed funds for the Senior Debt based on the balances as of
December 31, 1997 and December 31, 1996 were 9.56% and 10.37, respectively.
Management believes that any future increases in the prime rate will negatively
impact the net income of the Company while decreases may be expected to
positively impact such net income.

      During fiscal 1996, and a portion of 1997, the Company incurred additional
financing costs in the form of service fees and loan commitment fees. The
service fees are calculated as a percentage of gross collections on four
specific portfolios while loan commitment fees are points based upon origination
of Senior Debt. Additionally certain of the Company's loan agreements required,
during fiscal 1996 payment of "service fees" based upon cash collections of
principal and interest, as well as accelerated principal reductions from early
payoff collections.

      Additionally, in March 1997, certain ongoing service fees payable on
Senior Debt were replaced with a 1% exit fee applicable only to outstanding
Senior Debt as of December 31, 1996, for total fees payable of $700,000. Such
fees will be payable after repayment, in full, of such Senior Debt. If the funds
collected from the underlying notes receivable are insufficient to satisfy the
related Senior Debt any exit fee shortfall shall be forgiven. The Company
believes that its reduced cost of funds will have a material beneficial impact
on the Company's earnings.

      The impact of inflation on the Company's operations during both fiscal
1997 and 1996 was immaterial.

Results of Operations

Year ended December 31, 1997 Compared to Year ended December 31, 1996

      Total revenue, comprised of interest income, purchase discount earned,
gains recognized on the bulk sale of notes, gain on sale of repossessed
collateral, gain on sale of OREO, rental income and other income, increased by
$232,287 or 2%, to $14,284,198 during fiscal 1997, from $14,051,911 during
fiscal 1996.

      Interest income on notes receivable increased by $88,505 or 2%, to
$5,997,976 during fiscal 1997 from $5,889,471 during fiscal 1996. The Company
recognizes interest income on notes included in its portfolio based upon three
factors: (i) interest on performing notes, (ii) interest received with
settlement payments on non-performing notes and (iii) the balance of settlements
in excess of the carried face value. This increase resulted primarily from an
increase in interest on performing notes.


                                    Page 13
<PAGE>   14

      Purchase discount earned decreased by $1,915,417 or 28%, to $4,971,781
during fiscal 1997 from $6,887,198 during fiscal 1996. The decrease in purchase
discount earned reflected an increase in the Company's practice, initiated
during 1996, of selling reperforming loans, (which results in purchase discount
which would otherwise be earned in subsequent periods being in part accelerated
as gain on sale of loans and in part lost to the purchaser), a maturing of the
Company's portfolio, and an increase in foreclosures of loans in the Company's
portfolio, which defers realization of any gain until the sale of such property
for more than the carrying cost (the lower of cost or market) at the date of the
foreclosure. The Company believes that the aggregate sales proceeds on its OREO
portfolio will exceed the lower of cost or market value at which it is recorded.

      Gains from the bulk sale of loans increased by $353,614 or 36% to
$1,331,133 during fiscal 1997 from $977,519 during fiscal 1996. The Company sold
approximately $7.7 million and $6.3 million in face value notes receivable
during fiscal 1997 and during fiscal 1996, respectively. This increase reflected
an increase in the number of loans available for sale and an increase in the
number of sales to two from one.

      Gain on sale of repossessed collateral increased $63,877 or 100% to $0
during fiscal 1997 from a loss of $63,877 during fiscal 1996. The increase
resulted from sale of remainder of the Company's automobiles inventory in 1996.

      Gain on sale of OREO increased by $969,611 to $1,045,144 during fiscal
1997 from $75,533 during fiscal 1996. The increase resulted from an increase in
the number of properties available for sale and an increase in marketing of
those properties by the Company. Rental income was $296,420 during fiscal 1997,
an increase from an immaterial amount of rental income during fiscal 1996. This
increase was a result of an increase in the number of properties in the
Company's portfolio for which the Company believes that renting produces a
greater return than selling at the present time.

      Other income increased by $375,677 or 131%, to $661,744 during fiscal 1997
from $286,067 during fiscal 1996. The primary increase in other income resulted
from an increase in settlement income, relating to the Miramar Litigation, of
$242,597 or 437%, to $298,097 during fiscal 1997 from $55,500 during fiscal
1996. This increase reflects an improvement in the performance of a receivable
arising in connection with certain claims of the Company against certain
principals of its corporate predecessor. The remainder of other income increased
$133,080 during 1997.

      Total revenue as a percentage of notes receivable, net of allowance for
loan losses and joint venture participation during fiscal 1997 was 16.2% as
compared with 15.7% during fiscal 1996.

      Total operating expenses increased by $2,432,698 or 19% to $15,048,899
during fiscal 1997 from $12,616,202 during fiscal 1996. Total operating expenses
includes interest expense, collection, general and administrative expenses,
provisions for loan losses, service fees, amortization of loan commitment fees
and depreciation expense.

      Interest expense increased by $1,011,674 or 14%, to $8,350,490 during
fiscal 1997 from $7,338,815 during fiscal 1996. Total debt increased by
$10,673,537 or 14%, to $86,194,536 as of December 31, 1997 as compared with
$75,520,999 as of December 31, 1996. Total debt includes Senior Debt,
debentures, lines of credit and loans from affiliates.

      Collection, general and administrative expenses increased by $2,123,442 or
56%, to $5,923,745 during fiscal 1997 from $3,800,303 during fiscal 1996. The
primary components of the increase in 


                                    Page 14
<PAGE>   15

collection, general and administrative expense are personnel expense, OREO
related expense, litigation expense, and miscellaneous collection expense.

        Personnel expenses increased by $589,122 or 54%, to $1,686,868 during
fiscal 1997 from $1,097,745 during fiscal 1996. This increase resulted largely
from the staffing of Tribeca, which accounted for $270,492 of the increase, and
increases in staffing and the experience level of personnel in the Company's
core business. OREO related expenses increased by $517,101 or 149%, to $863,641
during fiscal 1997 from $346,540 during fiscal 1996. This increase resulted from
an increase in properties held as OREO as of December 31, 1997, which had
increased by $7,069,388 or 149%, to $11,806,473 as of December 31, 1997 from
$4,737,085 as of December 31, 1996. These increases reflected increased
foreclosure activity resulting from the growth in size of the Company's
portfolio and also the purchase of OREO. Litigation expenses increased by
$192,176 or 16%, to $1,376,218 during fiscal 1997 from $1,184,042 during fiscal
1996. Litigation expenses increased due to the quality and quantity of notes
receivable purchased and OREO related activities. All other collection expenses
increased $825,043 due to an increase in acquisition in new notes and the
preparation of loan sales.

      Provisions for loan losses, exclusive of a "Special Charge" related to the
PCC transaction, decreased by $322,251 or 63%, to $191,121 during fiscal 1997
from $513,372 during fiscal 1996. This decrease reflects the improved
performance during fiscal 1997 of the Company's portfolio (exclusive of the PCC
transaction). Bad debt expense expressed as a percentage of face value of notes
receivable as of the last day of such years for fiscal 1997 and fiscal 1996 was
approximately 0.16% and 0.45%, respectively. Provisions for loan losses are
incurred as soon as the valuation of the asset diminishes and there is no
unamortized discount remaining associated with that asset.

      Banking service fees decreased by $333,938 or 91%, to $31,520 during
fiscal 1997 from $365,459 during fiscal 1996. This decrease resulted from the
elimination of service fees charged by its Senior Debt Lender effective March
1997.

      Amortization of deferred financing costs decreased by $52,385 or 10%, to
$479,510 during fiscal 1997 from $531,895 during fiscal 1996. This decrease
resulted from a decrease in the asset balance of deferred financing costs
relative to the Company's total Senior Debt outstanding. On December 31, 1997
and December 31, 1996 deferred financing costs as a percentage of Senior Debt
outstanding was 1.39% and 1.85%, respectively.

      Depreciation expense increased by $6,155 or 9%, to $72,513 during fiscal
1997 from $66,358 during fiscal 1996. This increase resulted from an increase in
depreciable assets owned by the Company.

      Operating income decreased by $2,200,411 or 133% to a loss of $764,701
during fiscal 1997 from a gain of $1,435,709 during fiscal 1996. This decrease
resulted primarily from the reduction in purchase discount earned and from the
Company's investment in Tribeca Lending, which through an investment in
infrastructure and personnel contributed approximately $515,000 to the Company's
operating losses during fiscal 1997, and from increases in collection, general,
and administrative expenses which were only partially offset by increases in
interest income, gain from the sale of portfolios of loans and income associated
with sales and rental of OREO.

      The Company has taken a $1,500,000 Special Charge to income during fiscal
1997 in order to create a reserve for what it has discovered to be the impaired
value of a portfolio of notes receivable purchased by the Company from Preferred
Credit Corporation, in connection with which purchase the Company believes it
was defrauded. The portfolio was purchased for approximately $1.8 million and
the Company currently expects approximately $300,000 of the notes receivable in
the portfolio to be collectible. The Company is currently vigorously pursuing
legal remedies from PCC and has been 


                                    Page 15
<PAGE>   16

advised by its litigation counsel that it has a substantial probability of
prevailing in such suit. See "Part I. Item 3. Legal Proceedings."

      Provisions for income taxes decreased by $2,305,359 to a benefit of
$1,698,803 during fiscal 1997 from a provision of $606,556 during fiscal 1996.
This decrease resulted from the impact of timing differences in the recognition
of purchase discount income for income tax and book purposes. Deferred tax
liabilities incurred in prior years were eliminated and a deferred tax asset
recorded to reflect a current period taxable loss.

      Net income decreased by $1,395,051 to a loss of $565,898 during fiscal
1997 from a gain of $829,153 during fiscal 1996.

Liquidity and Capital Resources

          General. During fiscal 1997 the Company purchased 771 loans with an
aggregate face value of $47.7 million at an aggregate purchase price of $23.7
million or 49.7% of the face value and 107 OREO properties with an aggregate
purchase price of $2.6 million compared with the purchase during fiscal 1996 of
499 loans with an aggregate face value of $34.0 million at an aggregate purchase
price of $26.2 million or 77.1% of aggregate face value, and no portfolios of
OREO. This increase reflected more competitive bids from the Company resulting
from the reduction in its cost of funding relative to the prime rate and the
increased marketing activity to cultivate additional business.

      The Company's portfolio of notes receivable at December 31, 1997 had a
face value of $115,965,158 and included net notes receivable of approximately
$72,043,539. Net notes receivable are stated at the amount of unpaid principal,
reduced by purchase discount, an allowance for loan losses, and joint venture
participation. The Company has the ability and intent to hold its notes until
maturity, payoff or liquidation of collateral or where economically
advantageous, sale.

      During fiscal 1997, the Company used cash in the amount of $7,343,757 in
its operating activities primarily for interest expense, overhead, ordinary
litigation expense incidental to its collections and for the foreclosure and
improvement of OREO. The Company used $2,575,557 in its investing activities,
which reflected primarily the use of $34,922,678 for the purchase of notes
receivable and OREO offset by principal collections upon its notes receivable of
$15,438,035, proceeds from sales of OREO of $4,822,718, proceeds from sales of
notes of $7,382,329. The amount of cash used in operating and investing
activities was funded by $10,735,271 of net cash provided by financing
activities, primarily from a net increase in Senior Debt of $10,104,684. The
above activities resulted in a net increase in cash at December 31, 1997 over
December 31, 1996 of $815,957.

      In the ordinary course of its business, the Company accelerates and
forecloses upon real estate securing non-performing notes receivable included in
its portfolio. As a result of such foreclosures and selective direct purchases
of OREO, at December 31, 1997 and 1996, the Company held OREO recorded in the
financial statements of the Company at $11,806,473 and $4,737,085, respectively.
OREO is recorded on the financial statements of the Company at the lower of cost
or fair market value. The Company believes that the OREO inventory held at
December 31, 1997 has a net realizable value (market value less estimated
commissions and legal expenses associated with the disposition of the asset) of
approximately $13.0 million based on market analyses of the individual
properties less the estimated closing costs. The Company generally holds OREO as
rental property or sells such OREO in the ordinary course of business when it is
economically beneficial to do so.

      During the last quarter of 1997 and through January 18, 1998 the Company
attempted to raise approximately $6.3 million of additional equity through the
private placement of units consisting of its 


                                    Page 16
<PAGE>   17

Common Stock and Warrants. (the "Private Placement") The Private Placement
expired unconsummated because certain minimum sales of units were not achieved.
Nevertheless, management believes that the Company's existing cash balances,
credit lines, and anticipated cash flow from operations will provide sufficient
working capital resources for its anticipated operating needs. The Company has
negotiated with its Senior Debt Lender a modification of the terms of its
funding of cash flows for operation, which may improve cash flows. See "Cash
Flow from Financing Activities". The Senior Debt agreement has been modified to
increase amount of operating cash flows the Company retains in connection with
budgeted allowances to operate the Company after the current principal, interest
and escrow obligations are met. Funds remaining after such obligations have been
met are used first to fund the Company's budgeted operating cash flows, and then
fund certain reserve agreements, with any remaining funds to be applied toward
the prepayment of Senior Debt. Management believes that this modification may
improve cash flows.

      Start-up and Operating Expenses of Tribeca. During 1997 Tribeca incurred
an operating loss of $515,211. This loss stemmed from substantial start-up costs
and an increase in operating expenses without a corresponding increase in
revenues. The Company funded the start-up of Tribeca with $1.1 million of
proceeds from the refinancing of two loan portfolios through its Senior Debt
Lender. Additionally, such lender has provided Tribeca with a warehouse line of
credit of $2,000,000. The Company has secured additional warehouse lines of
credit for Tribeca's use of $9.5 million from two other lending institutions.
Tribeca began originating mortgages on September 1, 1997. There can be no
assurances that Tribeca will earn a profit in the future, however, management
believes that Tribeca's existing cash balances, credit lines, and anticipated
cash flow from operations will provide sufficient working capital resources for
Tribeca's anticipated operating needs.

Cash Flow From Operating and Investing Activities

      Substantially all of the assets of the Company are invested in its
portfolios of notes receivable and OREO. The Company's primary source of cash
flow for operating and investing activities is collections on notes receivable
and gain on sale notes and OREO properties.

      At December 31, 1997, the Company had unrestricted cash, cash equivalents
and marketable securities of $2,788,920. A portion of the Company's available
funds may be applied to fund acquisitions of companies or assets of companies in
complementary or related fields. Although the Company from time to time engages
in discussions and negotiations, it currently has no agreements with respect to
any particular acquisition. This may cause the Company to incur additional
capital expenditures, outside the acquisitions of additional notes receivable.

      In October 1997, the Company negotiated with its Senior Debt Lender a
modification to the Senior Debt obligation, which increases the cash flow
available to the Company for operations. The outstanding balances were
reamortized, thereby increasing the amount of cash available for the Company's
monthly operating cost allocation. Management believes that this modification
may reduce irregular periods of cash flow shortages arising from operations. The
Senior Debt Lender, on February 2, 1998 further modified the Company's Senior
Debt obligation by increasing the monthly cash advance from $350,000 per month
to $425,000. Management also believes that sufficient cash flow from the
collection of notes receivable will be available to repay the Company's secured
obligations and that sufficient additional cash flows will exist, through
collections of notes receivable, the bulk sale of performing loan portfolios,
sales and rental of OREO, continued modifications to the secured debt credit
agreements or additional borrowing, to repay the current liabilities arising
from operations and to repay the long term indebtedness of the Company.


                                    Page 17
<PAGE>   18

Cash Flow From Financing Activities

      Senior Debt.  As of December 31, 1997,  the Company owed an aggregate of
$83,643,550 to the Senior Debt Lender, under 34 loans.

      The Senior Debt is collateralized by first liens on the respective loan
portfolios for the purchase of which the debt was incurred and is guaranteed by
the Company. The monthly payments on the Senior Debt have been, and the Company
intends for such payments to continue to be, met by the collections from the
respective loan portfolios. The loan agreements for the Senior Debt call for
minimum interest and principal payments each month and accelerated payments
based upon the collection of the notes receivable securing the debt during the
preceding month. The Senior Debt accrues interest at variable rates of 0% and
1.75% over the prime rate. The accelerated payment provisions are generally of
two types: the first requires that all collections from notes receivable, other
than a fixed monthly allowance for servicing operations, be applied to reduce
the Senior Debt, and the second requires a further amount to be applied toward
additional principal reduction from available cash after scheduled principal and
interest payments have been made. As a result of the accelerated payment
provisions, the Company is repaying the amounts due on the Senior Debt at a rate
faster than the minimum scheduled payments. While the Senior Debt remains
outstanding, these accelerated payment provisions may limit the cash flow which
is available to the Company.

      Certain of the Senior Debt credit agreements required establishment of
restricted cash accounts, funded by an initial deposit at the loan closing and
additional deposits based upon monthly collections up to a specified dollar
limit. The restricted cash is maintained in a interest bearing account, at the
Company's Senior Debt Lender. Restricted cash may be accessed by the Senior Debt
Lender only upon the Company's failure to meet the minimum monthly payment due
if collections from notes receivable securing the loan are insufficient to
satisfy the installment due. Historically, the Company has not called upon these
reserves. The aggregate balance of restricted cash in such accounts was $990,466
on December 31, 1997 and $828,845 on December 31, 1996.

      Total Senior Debt funding capacity was approximately $125.0 million at
December 31, 1997, of which approximately $83.6 million had been drawn down as
of such date. Additionally the Senior Debt Lender has verbally informed the
Company that it will not deem approximately $13 million of Senior Debt that it
had syndicated to other banks as of such date as outstanding for purposes of
determining availability under the Senior Debt Facility. As a result, the
Company has approximately $54.4 million available to purchase additional
portfolios of notes receivable and OREO.

      12% Debentures. In connection with the acquisition of a loan portfolio
during 1994, the Company offered to investors $750,000 of subordinated
debentures. As of December 31, 1997 and December 31, 1996, $352,500 and
$470,000, respectively, of these debentures were outstanding. The 12% Debentures
bear interest at the rate of 12% per annum payable in quarterly installments.
The principal is to be repaid over four years in sixteen equal installments of
$44,062 that commenced March 31, 1996. The 12% Debentures are secured by a lien
on the Company's interest in certain notes receivable and are subordinated to
the Senior Debt encumbering the loan portfolio.

      Harrison First Corporation 12% Debentures. In connection with the
acquisition of a loan portfolio during 1995, the Company offered to investors
$800,000 of subordinated debentures of which $555,000 were issued. As of
December 31, 1997 and December 31, 1996, $510,600 and $555,000, respectively, of
these debentures were outstanding. The Harrison 1st 12% Debentures bear interest
at the rate of 12% per annum payable in quarterly installments. The principal is
to be repaid over three years in ten equal quarterly installments of $22,200
which payments commenced on September 30, 1997 with the 


                                    Page 18
<PAGE>   19

remaining balloon payment of $333,000 due June 30, 2000. The Harrison 1st 12%
Debentures are secured by a lien on the Company's interest in certain notes
receivable and are subordinated to the Senior Debt encumbering the loan
portfolio.

      Lines of Credit. The Company has a line of credit with the Senior Debt
Lender permitting it to borrow a maximum of approximately $1,500,000 at a rate
equal to the bank's prime rate plus two percent per annum. Principal repayment
of the lines is due six months from the date of each cash advance and interest
is payable monthly. The total amounts outstanding under the lines of credit as
of December 31, 1997 and December 31, 1996, were $1,376,403 and $583,916,
respectively. Advances made under the line of credit were used to satisfy senior
lien positions and fund property capital improvements in connection with
foreclosures of certain real estate loans financed by the Company. Management
believes the ultimate sale of these properties will satisfy the related
outstanding lines of credit and accrued interest, as well as surpass the
collectible value of the original secured notes receivable. Management has
reached an agreement in principal with its Senior Debt Lender to increase the
availability under this credit facility to cover additional properties
foreclosed upon by the Company which the Company may be required to hold as
rental property to maximize its return.


Item 7.  Financial Statements.

      See the financial statements and notes related thereto, beginning on page
F-1, included elsewhere in this report.

Item 8.  Changes in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

See Item 4 of the Company's 8-K as filed with the Securities and Exchange
Commission on July 2, 1997.


                                   PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of Exchange Act.

<TABLE>
<CAPTION>
                                             Current
                             Year First      Term as
                              Elected        Director
Name                Age       Director        Expires            Office
----                ---       --------        -------            ------
<S>                 <C>         <C>            <C>        <C>
Joseph Bartfield    43          1994           1998       Director
                                                          Vice President,
                                                          Chief Operating
Joseph Caiazzo      40          1994           1998       Officer and Director
Robert M. Chiste    51          1994           1998       Director
Allan R. Lyons      57          1994           1999       Director
William F.
  Sullivan          48          1996           1999       Director
Eugene T.
  Wilkinson         48          1996           1999       Director
                                                          President, Chief
                                                          Executive Officer
</TABLE>


                                    Page 19
<PAGE>   20

<TABLE>
<S>                 <C>         <C>            <C>        <C>
Thomas J. Axon      46          1988           2000       and Director
                                                          Vice President,
                                                          Chief Financial
                                                          Officer, Treasurer,
                                                          Secretary and
Frank B. Evans      46          1994           2000       Director
Steven W.
  Lefkowitz         42          1996           2000       Director
</TABLE>

                              CLASS 1 DIRECTORS
                           WITH TERMS EXPIRING 1998

      Joseph Bartfield has practiced law in New York State since 1980. From 1988
until September 1997 Mr. Bartfield was self-employed as an attorney,
specializing in commercial litigation and commercial arbitration. Since
September 1997, Mr. Bartfield has been a partner in RMTS Associates LLC.
("RMTS"), an insurance consulting and underwriting business with emphasis in
professional sports, medical stop loss insurance and large risk management. RMTS
is a partnership in which Mr. Axon is also a partner. Mr. Bartfield graduated
from New York Law School and holds a masters degree in political science from
Long Island University.

      Joseph Caiazzo has served as Vice President and Chief Operating Officer
since March of 1996. From August 1989 to March 1996, Mr. Caiazzo served as
corporate controller of R.C. Dolner, Inc., a general contractor. Mr. Caiazzo
holds a Bachelor of Science from St. Francis College and a Masters of Business
Administration in Finance from Long Island University.

      Mr. Chiste has been President, Industrial Services Group, of Philip
Services Corp, since August 1997. He served as Vice Chairman of Allwaste, Inc.
("Allwaste"), a provider of industrial and environmental services, from May 6997
through July 1997, President and Chief Executive Officer of Allwaste from
November 1994 through July 1997 and a director of Allwaste from January 1995
through August 1997. Philip Services Corp. acquired Allwaste effective July 31,
1997. Mr. Chiste served as Chief Executive Officer and President of America
National Power, Inc., a successor company of Transco Energy Ventures Company,
from its inception in 1986 until August 1994. During the same period he served
as Senior Vice President of Transco Energy Company. Mr. Chiste also serves as a
director of Innovative Valve Technology, Inc. Mr. Chiste holds a Bachelor of
Science with honors in mathematics from Trenton State College, a J.D. cum laude
from Rutgers University School of Law and a Master of Business Administration
cum laude from Rutgers University School of Management.

                              CLASS 2 DIRECTORS
                           WITH TERMS EXPIRING 1999

      Mr. Lyons is a Certified  Public  Accountant who has been a principal in
Piaker & Lyons,  P.C., an accounting  firm, and its  predecessors  since 1968.
Mr. Lyons is engaged primarily in estate,  tax and financial planning services
including  investment  structuring.  Mr.  Lyons has been a director of Starlog
Franchise  Corporation  since  August 1993 and a Director of The Score  Board,
Inc.,  since June 1990.  Mr.  Lyons holds a Bachelor of Science in  accounting
from Harpur College and a Masters of Business  Administration  from Ohio State
University.

      Mr. Sullivan has been a Partner at Marnik & Sullivan, a general practice
law firm, since 1985 and is admitted to both the New York State and
Massachusetts Bar Associations. Mr. Sullivan graduated


                                    Page 20
<PAGE>   21

from Suffolk University School of Law and holds a Bachelor of Arts in political
science from the University of Massachusetts.

      Mr. Wilkinson has served as President and CEO of Management Facilities
Corporation, a Warren, New Jersey reinsurance facilities manager, underwriter
and consultant primarily in the health care field, since 1987. Mr. Wilkinson
holds a Bachelor of Business Administration from the University of Ohio.

                              CLASS 3 DIRECTORS
                           WITH TERMS EXPIRING 2000

      Thomas J. Axon has served as President, Chief Executive Officer and
Chairman of Board of Directors of the Company since December 30, 1994. Mr. Axon
also served as Director of Franklin Credit Management Corporation ("Franklin")
from May 6988 until the merger of Franklin and Miramar Resources, Inc. in
December 1994 (the "Merger") and President of Franklin from October 8, 1991
until the Merger. Since 1985, Mr. Axon has been the President and principal
owner of RMTS Associates, LLC. Mr. Axon holds a Bachelor of Arts in economics
from Franklin and Marshall College and attended the New York University Graduate
School of Business.

      Frank B. Evans, Jr. has served as Vice President, Treasurer, Secretary,
and Chief Financial Officer of the Company since December 30, 1994. Mr. Evans
also served as the Secretary, Treasurer, a Vice President and a Director of
Franklin from its inception in 1990 until the Merger. Mr. Evans has served as
CEO of Earthsafe Corporation, a McLean, Virginia firm that designs and supplies
environmental compliance systems, since its inception in 1990. Mr. Evans is a
Certified Public Accountant and holds a Bachelor of Science from the University
of Maryland and a Masters in business from the University of Southern
California.

      Steven W. Lefkowitz is the founder and President of Wade Capital
Corporation, a privately held investment firm organized in 1990. From 1988 to
1990, Mr. Lefkowitz served as a Vice President of Corporate Finance for Drexel
Burnham Lambert, Incorporated, where he had been employed since 1985. Mr.
Lefkowitz serves on the Board of Directors of several private companies. Mr.
Lefkowitz holds a Bachelor of Arts in history from Dartmouth College and a
Masters in business administration from Columbia University.

                        COMPLIANCE WITH SECTION 16(a)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

      Section 16(a) of the Securities Exchange Act of 1934, as amended requires
the Company's Directors and Executive Officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Reporting
persons are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms that they file.

      Based solely on review of the copies of such reports furnished to the
Company, the Company believes that during fiscal 1997 all Section 16(a) filing
requirements applicable to its Officers, Directors and ten percent stockholders
were complied with.


Item 10.  Executive Compensation.


                                    Page 21
<PAGE>   22
Summary Compensation Table

      The following table sets forth compensation earned by or paid to Thomas J.
Axon, the Chief Executive Officer of the Company and Joseph Caiazzo, the Chief
Operating Officer of the Company (collectively the "Named Executive Officers").
No other executive officers of the Company earned over $100,000 in salary and
bonus during the fiscal year ended December 31, 1997:

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                            Annual Compensation                Long-Term Compensation
                                                                                        Awards
                                         ----------------------------------------------------------------
                                                                Other                          Securities
                                                               Annual                          Underlying
                                                               Compen-      Restricted          Options/
                               Fiscal     Salary     Bonus     sation       Stock Award(s)        SARs
Name and Principal Position     Year       ($)        ($)        ($)            ($)               (#)
---------------------------------------------------------------------------------------------------------
<S>                            <C>       <C>        <C>        <C>          <C>               <C> 
Thomas J. Axon--Chief           1997        --        --       7,000(1)          --                --
Executive Officer               1996        --        --       7,000(1)          --                --
                                1995        --        --       7,000(1)          --                --
Joseph Caiazzo--Chief           1997     $145,577   $6,000       --              --                --
Operating Officer               1996      $91,527     --         --              --            100,000(2)
</TABLE>

(1)   Represents health insurance benefits received by Mr. Axon.
(2)   Represents options to purchase shares of the Company's Common Stock
      granted on March 25, 1996 at $1.57 per share, 50,000 of which vested upon
      grant and 50,000 of which vested on March 26, 1998.

      The following table sets forth the aggregate value, realized gain, and
number of options granted to the Named Executive Officers.

  AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
                                     VALUES

        AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
                               OPTION/SAR VALUES

<TABLE>
<CAPTION>
                      Shares                    Number Of Securities Underlying    Value Of Unexercised In-The-
                   Acquired On      Value       Unexercised Options/SARs At FY-    Money Options/SARs At
                     Exercise      Realized                    End                             Fy-End
                   --------------------------------------------------------------------------------------------
Name                    #            ($)        Exercisable       Unexercisable    Exercisable    Unexercisable
------------------------------------------------------------------------------------------------------------
<S>                <C>             <C>          <C>               <C>              <C>            <C>
Thomas J. Axon         --            --              --                  --              --              --
Joseph Caiazzo(1)      --            --         50,000             50,000                --              --
</TABLE>

(1)   Based upon a $1.50 share price at December 31, 1997.

      Employment Agreements. Mr. Caiazzo, the Chief Operating Officer of the
Company, has a five-year contract for annual compensation of $125,000 beginning
March 25, 1996 and expiring on March 24, 2001. In addition, under his employment
contract Mr. Caiazzo will receive a bonus of 3.5% of post tax profits in excess
of $500,000. Mr. Caiazzo also received a grant of 100,000 options to purchase
Common Stock, of which 50,000 vested upon grant and 50,000 vested on March 26,
1998.

      Directors Compensation. Directors receive no compensation for their
service as such. Effective June 5, 1996, each non-employee director of the
Company was granted an option to purchase 10,000 shares of Common Stock pursuant
to the Company's 1996 Stock Incentive Plan. These options vest 25% each year on
the first four anniversaries of the date of grant at $1.57 per share. To date
none of these options have been exercised.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

      The following table sets forth, as of March 31, 1997, the number of shares
of Common Stock and the percentage of the Company's Common Stock beneficially
owned by (i) each person known (based solely on Schedules 13D or 13G filed with
the Securities and Exchange Commission (the "Commission") to the Company to be
the beneficial owner of more than 5% of the Common Stock, (ii) each Director and
nominee for Director of the Company, (iii) the Named Executive Officers, and
(iv) all Directors and executive Officers of the Company as a group (based upon
information furnished by such persons). Under the rules of the Commission, a
person has beneficial ownership of Common Stock if the power or shares the power
to vote or direct the disposition of such security or the power to dispose of or
to direct the disposition of such security. In general, a person is also deemed
to be a beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days. Accordingly, more than one person
may be deemed to be a beneficial owner of the same securities.


<TABLE>

NAME                                  NUMBER           PERCENT
<S>                                 <C>                <C>
Thomas J. Axon(1)(2)                2,996,870           54.3%
Frank B. Evans, Jr.(1)(3)             897,960           16.3%
Joseph Caiazzo(1)(4)                  102,450            1.9%
Joseph Bartfield(1)(5)                 99,790            1.8%
Robert M. Christe(1)(5)(6)             65,843            1.2%
Allan R. Lyons(1)(5)(7)                16,888              *
William F. Sullivan(1)(8)               4,950              *
Eugene T. Wilkinson(1)(5)              17,010              *
Stephen Leftkowitz(1)(8)(9)            88,250            1.6%
Vincent A. Merola(10)                 295,935            5.4%
--------------------------------------------------------------
All Directors and officers as a     4,290,011           74.7%
group (9 persons)(11)          

</TABLE>
-----------------------
*Indicates beneficial ownership of less than one (1%) percent.

(1)   Mailing address: C/O Franklin Credit Management Corporation, Six Harrison
      Street, New York, New York 10013.


                                    Page 22
<PAGE>   23

(2)   Does not include 11,610 beneficially owned by Mr. Axon's mother, Ann Axon,
      with respect to which shares Mr. Axon disclaims beneficial ownership.
      Includes 1,030 shares owned of record by him as custodian for a minor
      child.

(3)   Does not includes 11,610 shares beneficially owned by Mr. Evans' father
      Frank Evans, with respect to which shares Mr. Evans disclaims beneficial
      ownership. Includes 5,000 shares beneficially owned by each of his four
      minor children for which Mr. Evans is the trustee.

(4)   Includes 100,000 shares issuable upon exercise of options exercisable
      within sixty days

(5)   Includes 2,500 shares issuable upon exercise of options exercisable within
      sixty days.

(6)   Includes 18,288 shares issuable upon exercise of warrants exercisable
      within sixty days.

(7)   Includes 11,888 shares issuable upon exercise of warrants exercisable
      within sixty days.

(8)   Includes 1,250 shares issuable upon exercise of options exercisable within
      sixty days.

(9)   Includes 87,000 shares issuable upon exercise of warrants exercisable
      within sixty days.

(10)  Mr. Merola's mailing address is P.O. Box 769 Tannesville, PA 18372-0769.

(11)  Includes 229,676 shares issuable upon exercise of options and warrants
      exercisable within sixty days.

Item 12.  Certain Relationships and Related Transaction.

      The Company has indebtedness to Mr. Axon currently in the amount of
$79,000, $75,000 of which was originally incurred to Axon Associates, Inc. on
December 31, 1995 in respect of the purchase by the Company of the remainder of
the condominium unit in which it is headquarters are located and $4,000 of which
is the principal amount remaining outstanding on a 1994 advance of $120,000 to
fund the purchase of a loan portfolio. This indebtedness bears interest at a
rate of 10% per annum and requires quarterly payments of $6,000 in respect of
principal and interest.

      As of December 31, 1997, the Company also had indebtedness of $150,098
outstanding to RMTS in respect of a November 1996 advance under a line of credit
provided to the Company by RMTS to fund deposits required in connection with
bids at portfolio auctions. The indebtedness bears interest at a rate of 10.5%
per annum.

      In January, 1995 the Company incurred indebtedness to Vincent A. Merola,
the former Secretary of Miramar, and Mr. Axon the President of the Company, of
$90,034 and $82,139, respectively, in respect of advances used to finance
certain of the Company's ordinary operating expenses in 1995. Such indebtedness
bears interest at a rate of 10% per annum. The indebtedness to Mr. Merola is
paid in full and the indebtedness to Mr. Axon requires monthly interest
payments, with the principal due upon demand.

      On April 2, 1997, the Company entered into a letter agreement with Wade
Capital Corporation ("WCC"), of which Steven W. Lefkowitz, a member of the
Company's Board of Directors, serves as President, pursuant to which WCC was
retained through April 30, 1998 to provide financial advisory services to the
Company. Pursuant to such agreement, WCC was granted 87,000 warrants to purchase
Common Stock at $1.56 per share and receives $2,500 per month for the duration
of the agreement.

Item 13.  Exhibits and Reports on Form 8-K.

(a)                                    EXHIBIT TABLE

     Exhibit
     No.     Description
     ---     -----------

      3(a)  Restated Certificate of Incorporation. Previously filed with, and
            incorporated herein by reference to, the Company's 10-KSB, filed
            with the Commission on December 31, 1994. Filed here with.

      (b)   Bylaws of the Company. Previously filed with, and incorporated
            herein by reference to, 


                                    Page 23
<PAGE>   24

            the Company's Registration Statement on Form S-4, No. 33-81948,
            filed with the Commission on November 24, 1994.

      4(a)  15% Convertible Subordinate Debentures. Previously filed with, and
            incorporated herein by reference to, the Company's Registration
            Statement on Form S-4, No. 33-81948, filed with the Commission on
            November 24, 1994.

      (b)   Warrants associated with principal repayment of the 15% Convertible
            Subordinated Debentures. Previously filed with, and incorporated
            herein by reference to, the Company's Registration Statement on Form
            S-4, No. 33-81948, filed with the Commission on November 24, 1994.

      10(c) Employment Agreement, dated December 4, 1996, between the Company
            and Marcia Vacacela

      10(d) Employment Agreement, dated December 4, 1996, between the Company
            and Joseph Caiazzo.

      10(e) Agreement dated March 29, 1997 between the Company and the Citizens
            Banking Company.

      11    Computation of earnings per share. Filed here with.

      21    Listing of subsidiaries. Filed here with.

(b)          None

                                   SIGNATURES

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

May 12, 1998                              FRANKLIN CREDIT MANAGEMENT
                                          CORPORATION



                                    By:   THOMAS J. AXON
                                          ---------------------------------
                                          Thomas J. Axon
                                          President and Chief Executive
                                          Officer


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

Signature               Title                                    Date

THOMAS J. AXON          President, Chief Executive Officer       May 12, 1998
--------------------    and Director
Thomas J. Axon          
(Principal executive officer)


FRANK B. EVANS, Jr.     Vice President, Treasurer,               May 12, 1998
--------------------    Chief Financial Officer and Director
Frank B. Evans, Jr.     
Secretary (Principal financial and accounting officer)


JOSEPH CAIAZZO          Vice President, Chief Operating          May 12, 1998
--------------------    Officer and Director
Joseph Caiazzo          


                                    Page 24
<PAGE>   25

                                 FRANKLIN CREDIT
                             MANAGEMENT CORPORATION
                                 AND AFFILIATES

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 1997

                                    CONTENTS


                                    Page 25
<PAGE>   26

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS
--------------------------------------------------------------------------------

                                                                      Page

INDEPENDENT AUDITORS' REPORT                                            1

FINANCIAL STATEMENTS FOR THE YEARS ENDED
  DECEMBER 31, 1997 AND 1996:

  Consolidated Balance Sheets                                          F-3

  Consolidated Statements of Operations                                F-4

  Consolidated Statements of Stockholders' Equity                      F-5

  Consolidated Statements of Cash Flows                                F-6

  Notes to Consolidated Financial Statements                       F-7 - F-24
<PAGE>   27

INDEPENDENT AUDITORS' REPORT


To the Board of Directors
Franklin Credit Management Corporation and Subsidiaries

We have audited the consolidated balance sheet of Franklin Credit Management
Corp. and Subsidiaries (the "Company") as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, such 1997 financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.



                                         Deloitte & Touche, LLP

New York, New York
April 16, 1998
<PAGE>   28

INDEPENDENT AUDITORS' REPORT


To the Board of Directors
Franklin Credit Management Corporation and Subsidiaries


We have audited the accompanying consolidated balance sheet of Franklin Credit
Management Corporation and Subsidiaries (the "Company") as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended (appearing on pages F-2 to F-5 in this Form
10-KSB).

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

In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Franklin
Credit Management Corporation and Subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.



                                          McGladrey and Pullen, LLP

Jericho, New York
March 7, 1997


                                       2
<PAGE>   29
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
----------------------------------------------------------------------------------------------------

ASSETS                                                                      1997             1996
<S>                                                                   <C>              <C>          
CASH AND CASH EQUIVALENTS                                             $   2,783,920    $   1,967,964

RESTRICTED CASH                                                             990,466          828,845

NOTES RECEIVABLE:
  Principal                                                             115,965,158      113,610,782
  Joint venture participations                                             (321,460)        (360,395)
  Purchase discount                                                     (16,175,518)     (18,160,403)
  Allowance for loan losses                                             (27,424,641)     (23,604,810)
                                                                      -------------    -------------

           Net notes receivable                                          72,043,539       71,485,174

LOANS HELD FOR SALE                                                       3,702,723               --

ACCRUED INTEREST RECEIVABLE                                                 929,908        1,132,370

OTHER REAL ESTATE OWNED                                                  11,806,473        4,737,085

OTHER RECEIVABLE                                                            695,471          421,392

DEFERRED TAX ASSET                                                        1,479,939          328,838

OTHER ASSETS                                                                735,075          704,695

BUILDING, FURNITURE AND FIXTURES - Net                                      729,285          640,749

DEFERRED FINANCING COSTS                                                  1,161,437        1,358,874
                                                                      -------------    -------------
TOTAL ASSETS                                                          $  97,058,236    $  83,605,986
                                                                      =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
  Accounts payable and accrued expenses                               $   2,938,340    $   1,874,267
  Line of credit                                                          1,376,403          583,916
  Notes payable                                                          83,643,550       73,538,865
  203(k) rehabilitation escrows payable                                   2,828,239               --
  Subordinated debentures                                                   863,100        1,025,000
  Notes payable affiliates and stockholders                                 311,484          373,218
  Deferred tax liability                                                  1,559,998        2,107,700
                                                                      -------------    -------------
           Total liabilities                                             93,521,114       79,502,966
                                                                      -------------    -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Common stock, $.01 par value, 10,000,000 authorized shares issued
    and outstanding; 1997: 5,516,527; 1996: 1,102,077                        55,167           11,022
  Additional paid-in capital                                              6,489,968        6,534,113
  Accumulated deficit                                                    (3,008,013)      (2,442,115)
                                                                      -------------    -------------
           Total stockholders' equity                                     3,537,122        4,103,020
                                                                      -------------    -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $  97,058,236    $  83,605,986
                                                                      =============    =============
</TABLE>

See notes to consolidated financial statements.


                                      F-3
<PAGE>   30
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------

                                                      1997              1996
<S>                                               <C>              <C>         
REVENUES:
  Interest income                                 $  5,977,976     $  5,889,471
  Purchase discount earned                           4,971,781        6,887,198
  Gain on sale of notes receivable                   1,331,133          977,519
  Gain on sale of other real estate owned            1,045,144           75,533
  Rental income                                        296,420               --
  Loss on sale of repossessed collateral                    --          (63,877)
  Other                                                661,744          286,067
                                                  ------------     ------------
                                                    14,284,198       14,051,911
                                                  ------------     ------------

OPERATING EXPENSES:
  Interest expense                                   8,350,490        7,338,815
  Collection, general and administrative             5,923,745        3,800,303
  Special charge                                     1,500,000               --
  Provision for loan losses                            191,121          513,372
  Banking service fees                                  31,520          365,459
  Amortization of deferred financing costs             479,510          531,895
  Depreciation                                          72,513           66,358
                                                  ------------     ------------
                                                    16,548,899       12,616,202
                                                  ------------     ------------
(LOSS) INCOME BEFORE PROVISION FOR INCOME
  TAXES                                             (2,264,701)       1,435,709
BENEFIT (PROVISION) FOR INCOME TAXES                 1,698,803         (606,556)
                                                  ------------     ------------
NET (LOSS) INCOME                                 $   (565,898)    $    829,153
                                                  ============     ============
NET (LOSS) INCOME PER COMMON SHARE:
  Basic                                           $      (0.10)    $       0.15
                                                  ============     ============
  Dilutive                                        $      (0.10)    $       0.14
                                                  ============     ============

WEIGHTED AVERAGE NUMBER OF SHARES
  OUTSTANDING                                        5,516,527        5,757,235
                                                  ============     ============

</TABLE>
See notes to consolidated financial statements.


                                      F-4
<PAGE>   31

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
-----------------------------------------------------------------------------------------------------------------------

                                                                           
                                                        Common Stock           Additional
                                                 ---------------------------    Paid-in      Accumulated
                                                    Shares        Amount        Capital        Deficit         Total
<S>                                               <C>          <C>            <C>            <C>            <C>        
BALANCE, DECEMBER 31, 1995                        5,503,896    $    55,040    $ 6,470,952    $(3,271,268)   $ 3,254,724

  Conversion of warrants                             10,225            102         20,348             --         20,450

  One-for-five reverse stock split               (4,411,297)       (44,113)        44,113             --             --

  Purchase of fractional shares in connection
    with reverse stock split                           (747)            (7)        (1,300)            --         (1,307)

  Net income                                             --             --             --        829,153        829,153
                                                -----------    -----------    -----------    -----------    -----------

BALANCE, DECEMBER 31, 1996                        1,102,077         11,022      6,534,113     (2,442,115)     4,103,020

  Four-for-one stock dividend                     4,414,450         44,145        (44,145)            --             --

  Net loss                                                                                      (565,898)      (565,898)
                                                -----------    -----------    -----------    -----------    -----------
BALANCE, DECEMBER 31, 1997                        5,516,527    $    55,167    $ 6,489,968    $(3,008,013)   $ 3,537,122
                                                ===========    ===========    ===========    ===========    ===========
</TABLE>


See notes to consolidated financial statements.


                                      F-5
<PAGE>   32

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
-----------------------------------------------------------------------------------------------

                                                                        1997           1996
<S>                                                                <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                                $   (565,898)   $    829,153
  Adjustments to reconcile net (loss) income to net cash used in
    operating activities:
    Gain on sale of notes receivable                                 (1,331,133)       (977,519)
    Special charge                                                    1,500,000              --
    Loss on sale of repossessed collateral                                   --          63,877
    Gain on sale of other real estate owned                          (1,045,144)        (75,533)
    Depreciation                                                         72,513          66,358
    Amortization of deferred financing costs                            479,510         531,895
    Purchase discount earned                                         (4,971,781)     (6,887,198)
    Provision for loan losses                                           191,121         513,372
    Deferred tax (benefit) provision                                 (1,698,803)        538,322
    Changes in assets and liabilities:
      Decrease in accrued interest receivable                           202,462          18,499
      (Increase) decrease in other assets and other receivables        (304,459)        388,640
      Increase in loans held for sale                                (3,702,723)             --
      Increase in accounts payable and accrued expenses               1,064,073       1,173,125
      Decrease in due to affiliates                                     (61,734)             --
      Increase in 203(k) rehabilitation escrows payable               2,828,239              --
                                                                   ------------    ------------
           Net cash provided by (used in) operating activities        7,343,757      (3,817,009)
                                                                   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Increase in restricted cash                                          (161,621)       (211,734)
  Purchase of other real estate owned                                (2,571,459)             --
  Purchase of notes receivable                                      (23,705,563)    (26,210,244)
  Principal collections on notes receivable                          15,438,035      18,928,465
  Joint venture participation                                           (38,936)        (88,571)
  Acquisition and loan fees                                            (282,072)             --
  Foreclosures on real estate                                        (8,645,655)             --
  Reclassification of notes receivable for foreclosures               5,347,716              --
  Proceeds from sale of other real estate owned                       4,822,718       3,771,035
  Proceeds from sale of notes receivable                              7,382,329       5,789,279
  Proceeds from sale of building, furniture and fixtures                     --          20,000
  Purchase of building, furniture and fixtures                         (161,049)        (28,689)
                                                                   ------------    ------------
           Net cash (used in) provided by investing activities       (2,575,557)      1,969,541
                                                                   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from notes payable                                        30,626,654      23,244,945
  Principal payments of notes payable                               (20,521,969)    (20,223,607)
  Proceeds from line of credit                                        1,302,591              --
  Payments on line of credit                                           (510,106)             --
  Principal payments of subordinated debentures                        (161,900)       (235,000)
  Debt issuance costs paid                                                   --        (325,849)
  Conversion of warrants                                                     --          20,450
  Purchase of fractional shares of common stock                              --          (1,307)
                                                                   ------------    ------------
           Net cash provided by financing activities                 10,735,270       2,479,632
                                                                   ------------    ------------

NET INCREASE IN CASH                                                    815,956         632,164

CASH, BEGINNING OF YEAR                                               1,967,964       1,335,800
                                                                   ------------    ------------
CASH, END OF YEAR                                                  $  2,783,920    $  1,967,964
                                                                   ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash payments for interest                                       $  8,333,722    $  6,702,448
                                                                   ============    ============

  Cash payments (receipts) for taxes                               $     38,371    $       (264)
                                                                   ============    ============

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
  FINANCING ACTIVITIES:
  Other assets received in settlement of loans                                     $  4,646,936
                                                                                   ============
</TABLE>

See notes to consolidated financial statements.


                                      F-6
<PAGE>   33

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31,1997 AND 1996
--------------------------------------------------------------------------------

1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

    Nature of Business - Franklin Credit Management Corporation (the "Company"),
    incorporated under the laws of the State of Delaware, acquires
    nonperforming, nonconforming and subperforming notes receivable and
    promissory notes from financial institutions, mortgage and finance companies
    and the Federal Deposit Insurance Corporation ("FDIC"). The Company services
    and collects such notes receivable through enforcement of terms of original
    note, modification of original note terms and, if necessary, liquidation of
    the underlying collateral.

    In January 1997, a new wholly owned subsidiary was formed, to originate or
    purchase, sub prime residential mortgage loans to individuals whose
    borrowing needs are not being served by traditional financial institutions.

    A summary of the Company's significant accounting policies follows.

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

    Estimates - The preparation of financial statements in conformity with
    generally accepted accounting principles requires management to make
    estimates and assumptions that affect the reported amounts of assets and
    liabilities and disclosure of contingent assets and liabilities at the date
    of the financial statements and the reported amounts of revenue and expenses
    during the period. Actual results could differ from those estimates.

    Cash and Cash Equivalents - Cash and cash equivalents includes all cash
    accounts, with the exception of restricted cash, and money market funds. The
    Company maintains amounts due from banks which at times may exceed federally
    insured limits. The Company has not experienced any losses from such
    concentrations.

    Notes Receivable and Income Recognition - The notes receivable portfolio
    consists primarily of secured consumer and real estate mortgage loans
    purchased from financial institutions, mortgage and finance companies and
    the FDIC. Such notes receivable are generally nonperforming or
    underperforming at the time of purchase and, accordingly, are usually
    purchased at a substantial discount from the principal balance remaining.

    Notes receivable are stated at the amount of unpaid principal, reduced by
    purchase discount and an allowance for loan losses. The Company has the
    ability and intent to hold its notes until maturity, payoff or liquidation
    of collateral.

    In general, interest on the notes receivable is calculated based on
    contractual interest rates applied to daily balances of the collectible
    principal amount outstanding using the simple-interest method.


                                      F-7
<PAGE>   34

    Accrual of interest on notes receivable, including impaired notes
    receivable, is discontinued when management believes, after considering
    economic and business conditions and collection efforts, that the borrowers'
    financial condition is such that collection of interest is doubtful. When
    interest accrual is discontinued, all unpaid accrued interest is reversed.
    Subsequent recognition of income occurs only to the extent payment is
    received subject to management's assessment of the collectibility of the
    remaining interest and principal. A nonaccrual note is restored to an
    accrual status when it is no longer delinquent and collectibility of
    interest and principal is no longer in doubt and past due interest is
    recognized at that time.

    Loan purchase discount is amortized to income using the interest method over
    the period to maturity. The interest method recognizes income by applying
    the effective yield on the net investment in the loans to the projected cash
    flows of the loans. Discounts are amortized if the projected payments are
    probable of collection and the timing of such collections is reasonably
    estimable. The projection of cash flows for purposes of amortizing purchase
    loan discount is a material estimate which could change significantly in the
    near term. Changes in the projected payments are accounted for as a change
    in estimate and the periodic amortization is prospectively adjusted over the
    remaining life of the loans. Should projected payments not exceed the
    carrying value of the loan, the periodic amortization is suspended and
    either the loan is written down or an allowance for uncollectibility is
    recognized.

    Allowance for Loan Losses - The allowance for loan losses, a material
    estimate which could change significantly in the near-term, is initially
    established by an allocation of the purchase loan discount based on the
    management's assessment of the portion of purchase discount that represents
    uncollectible principal. Subsequently, increases to the allowance are made
    through a provision for loan losses charged to expense and the allowance is
    maintained at a level that management considers adequate to absorb potential
    losses in the loan portfolio.

    Management's judgment in determining the adequacy of the allowance is based
    on the evaluation of individual loans within the portfolios, the known and
    inherent risk characteristics and size of the note receivable portfolio, the
    assessment of current economic and real estate market conditions, estimates
    of the current value of underlying collateral, past loan loss experience and
    other relevant factors. Notes receivable, including impaired notes
    receivable, are charged against the allowance for loan losses when
    management believes that the collectibility of principal is unlikely based
    on a note-by-note review. Any subsequent recoveries are credited to the
    allowance for loan losses when received. In connection with the
    determination of the allowance for loan losses, management obtains
    independent appraisals for significant properties, when considered
    necessary.

    The Company's real estate notes receivable are collateralized by real estate
    located throughout the United States with a concentration in the Northeast.
    Accordingly, the collateral value of a substantial portion of the Company's
    real estate notes receivable and real estate acquired through foreclosure is
    susceptible to changes in market conditions.

    Management believes that the allowance for loan losses is adequate. While
    management uses available information to recognize losses on notes
    receivable, future additions to the allowance or write-downs may be
    necessary based on changes in economic conditions.

    Other Real Estate Owned - Other real estate owned consisting of properties
    acquired through, or in lieu of, foreclosure or other processings are held
    for sale and are carried at the lower of cost or fair value less estimated
    costs of disposal. Any write-down to fair value, less cost to sell, at the
    time of acquisition is charged to the allowance for loan losses. Subsequent
    write-downs are charged to 


                                      F-8
<PAGE>   35

    operations based upon management's continuing assessment of the fair value
    of the underlying collateral. Property is evaluated regularly to ensure that
    the recorded amount is supported by current fair values and valuation
    allowances are recorded as necessary to reduce the carrying amount to fair
    value less estimated cost to dispose. Revenue and expenses from the
    operation of other real estate owned and changes in the valuation allowance
    are included in operations. Costs relating to the development and
    improvement of the property are capitalized, subject to the limit of fair
    value of the collateral, while costs relating to holding the property are
    expensed. Gains or losses are included in operations upon disposal.

    Building, Furniture and Fixtures- Building, furniture and fixtures are
    recorded at cost net of accumulated depreciation. Depreciation is computed
    using the straight-line method over the estimated useful lives of the assets
    which range from 3 to 40 years. Gains and losses on dispositions are
    recognized upon realization. Maintenance and repairs are expensed as
    incurred.

    Deferred Financing Costs - Debt financing costs, which include loan
    origination fees incurred by the Company in connection with obtaining
    financing, are deferred and are amortized based on the principal reduction
    of the related loan.

    Mortgage Servicing Rights - The Company allocates the total cost of the
    mortgage loans purchased or originated, proportionately, to the mortgage
    servicing rights and the loans based on the relative fair value. The
    servicing rights capitalized are amortized in proportion to and over the
    period of, estimated net servicing income including prepayment assumptions
    based upon the characteristics of the underlying loans. Capitalized
    servicing rights are periodically assessed for impairment based on the fair
    value of the rights with any impairment recognized through a valuation
    allowance.

    Pension Plan - The Company has a defined contribution retirement plan (the
    "Plan") covering all full-time employees who have completed one year of
    service. Contributions to the Plan are made in the form of payroll
    reductions based on employees' pretax wages. Currently, the Company does not
    offer a matching provision for the Plan.

    Income Taxes - The Company recognizes income taxes under an asset and
    liability method. Under this method, deferred tax assets are recognized for
    deductible temporary differences and operating loss or tax credit
    carryforwards and deferred tax liabilities are recognized for taxable
    temporary differences. Temporary differences are the differences between the
    financial statement carrying amounts of existing assets and liabilities and
    their respective bases. Deferred tax assets and liabilities are measured
    using enacted tax rates expected to apply to taxable income in the years in
    which those temporary differences are expected to be recovered or settled.
    Deferred tax assets are reduced by a valuation allowance when management
    determines that it is more likely than not that some portion or all of the
    deferred tax assets will not be realized. Deferred tax assets and
    liabilities are adjusted for the effects of changes in tax laws and rates on
    the date of the enactment.

    Earnings Per Common Share - In February 1997, the Financial Accounting
    Standards Board (FASB) issued Statement of Financial Accounting Standards
    No. 128, Earnings Per Share (SFAS No. 128), which requires dual presentation
    of Basic EPS and Diluted EPS on the face of the income statement for all
    entities with complex capital structures and the restatement of all prior
    period earnings per share data presented. SFAS No. 128 also requires a
    reconciliation of the numerator and denominator of Basic EPS and Diluted EPS
    computation.


                                      F-9
<PAGE>   36

    The reconciliation is as follows:

<TABLE>
<CAPTION>
                                               For the Year Ended                          For the Year Ended
                                                December 31, 1997                           December 31, 1996
 
                                     Income           Shares         Per Share     Income         Shares          Per Share
                                   (Numerator)    (Denominator)       Amount     (Numerator)   (Denominator)        Amount
<S>                                <C>               <C>              <C>         <C>             <C>               <C>   
Net (loss) income                  $ (565,898)                                    $ 829,153

Basic EPS                            (565,898)       5,516,527        $ (0.10)      829,153       5,510,385         $ 0.15
                                                                      =======                                       ======

Effect of dilutive securities:
  Dilutive warrants                        -                -                            -          121,150
  Dilutive stock options                   -                -                            -          125,700
                                   ----------        ---------                    ---------       ---------                
Diluted EPS                        $ (565,898)       5,516,527        $ (0.10)    $ 829,153       5,757,235         $ 0.14
                                   ==========        =========        =======     =========       =========         ======
</TABLE>


    Fair Value of Financial Instruments - Statement of Financial Accounting
    Standards No. 107, Disclosures About Fair Value of Financial Instruments,
    requires disclosure of fair value information about financial instruments,
    whether or not recognized in the balance sheet for which it is practicable
    to estimate that value. In cases where quoted market prices are not
    available, fair values are based on estimates using present value or other
    valuation techniques. Those techniques are significantly affected by the
    assumptions used, including the discount rate and estimates of future cash
    flows. In that regard, the derived fair value estimates cannot be
    substantiated by comparison to independent markets and, in many cases, could
    not be realized in immediate settlement of the instruments. Statement No.
    107 excludes certain financial instruments and all nonfinancial assets and
    liabilities from its disclosure requirements. Accordingly, the aggregate
    fair value amounts do not represent the underlying value of the Company.

    The following methods and assumptions were used by the Company in estimating
    the fair value of its financial instruments:

    a.  Cash, Restricted Cash, Accrued Interest Receivable, Other Receivable and
        Accrued Interest Payable - The carrying values reported in the balance
        sheet are a reasonable estimate of fair value.

    b.  Notes Receivable - Fair value of the net note receivable portfolio is
        estimated by discounting the future cash flows using the interest
        method. The carrying amounts of the notes receivable approximate fair
        value.

    c.  Short-Term Borrowings - The carrying amounts of the line of credit and
        other short-term borrowings approximate their fair value.

    d.  Long-Term Debt - Fair value of the Company's long-term debt (including
        notes payable, subordinated debentures and notes payable, affiliate) is
        estimated using discounted cash flow analysis based on the Company's
        current incremental borrowing rates for similar types of borrowing
        arrangements. The carrying amounts reported in the balance sheet
        approximate their fair value.


                                      F-10
<PAGE>   37

    Recent Accounting Pronouncements - The Financial Accounting Standards Board
    ("FASB") has issued several new accounting pronouncements. Statement No.
    130, Reporting Comprehensive Income ("SFAS No. 130"), which establishes
    standards for reporting and displaying of comprehensive income and its
    components. Statement No. 131, Disclosures about Segments of an Enterprise
    and Related Information (SFAS No. 131), which establishes standards for the
    way public business enterprises report information about operating segments
    in annual financial statements and requires that those enterprises report
    selected information about products and services, geographic areas, and
    major customers. The two standards are effective for the Company's 1998
    financial statements. The Company does not believe that SFAS 130 will have
    any effect on the Company's computation or presentation of net income. The
    Company will adopt SFAS 131 for its mortgage origination subsidiary
    beginning in 1998.

2.  NOTES RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

    Notes receivable consist principally of real estate mortgage and unsecured
    consumer notes receivable as of December 31, 1997 and 1996 and are
    classified as follows:

<TABLE>
<CAPTION>
                                                   1997                1996
<S>                                           <C>                 <C>          
Real estate secured                           $  92,920,679       $  95,513,512
Consumer, unsecured                              12,175,541           9,167,623
Automobiles                                         307,551             562,093
Mobile homes                                      3,641,000           3,877,140
Other                                             6,920,387           4,490,414
                                              -------------       -------------

                                                115,965,158         113,610,782

Less:
  Joint venture participation                      (321,460)           (360,395)
  Purchase discount                             (16,175,518)        (18,160,403)
  Allowance for loan losses                     (27,424,641)        (23,604,810)
                                              -------------       -------------

                                              $  72,043,539       $  71,485,174
                                              =============       =============
</TABLE>

    As of December 31, 1997, contractual maturities of classified notes
    receivables net of the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
Year Ending December 31,                                            Amount
<S>                                                              <C>         
1998                                                             $ 20,634,212
1999                                                               18,129,690
2000                                                               16,572,281
2001                                                                8,922,106
2002                                                                3,797,519
Thereafter                                                         14,524,866
                                                                 ------------
                                                                 $ 82,580,674
                                                                 ============
</TABLE>

    Excluded from the contractual maturities reflected above are the notes
    receivable acquired during the last quarter of 1997 with approximately
    $5,900,000 of aggregate principal balances, net of allowance for loan
    losses. Management is in the process of performing the analyses to determine
    the final 


                                      F-11
<PAGE>   38

    discount allocation and the initial determination of the allowance for loan
    losses associated with these purchases which are necessary to develop the
    related contractual maturities of the underlying notes receivable.

    It is the Company's experience that a portion of the note receivable
    portfolio may be renewed or repaid before contractual maturity dates. The
    above tabulation, therefore, is not to be regarded as a forecast of future
    cash collections. During the years ended December 31, 1997 and 1996, cash
    collections of principal amounts totaled approximately $15,400,000 and
    $19,000,000, respectively, and the ratios of these cash collections to
    average principal balances were approximately 13.4% and 16.5%, respectively.

    Changes in the allowance of loan losses for the years ended December 31,
    1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                         1997            1996
<S>                                                  <C>             <C>         
Balance, beginning                                   $ 23,604,810    $ 20,420,311
Initial allowance allocated on purchased portfolio     12,074,372      10,084,115
Loans charged to allowance                             (8,445,662)     (7,412,988)
Provision for loan losses                                 191,121         513,372
                                                     ------------    ------------
Balance, ending                                      $ 27,424,641    $ 23,604,810
                                                     ============    ============
</TABLE>

    At December 31, 1997 and 1996, principal amounts of notes receivable
    included approximately $72,000,000 and $61,000,000, respectively, of notes
    for which there was no accrual of interest income. At December 31, 1997 and
    1996, approximately $6,800,000 and $16,000,000 of such notes at principal
    amounts relate to recent portfolio acquisitions whose performance and
    collection classification by management is currently in the process of being
    determined.

    The following information relates to impaired notes receivable which include
    all nonaccrual loans as of and for the year ended December 31, 1997 and
    1996:

<TABLE>
<CAPTION>
                                                                    1997          1996
<S>                                                              <C>           <C>        
Impaired notes receivable for which there is a related
  allowance for loan losses determined:  Based on discounted
  cash flows                                                     $72,069,675   $68,028,844

Impaired notes receivable for which there is no related
  allowance for loan losses                                               --            --
                                                                 -----------   -----------

Total impaired notes receivable                                  $72,069,675   $68,028,844
                                                                 ===========   ===========

Allowance for loan losses related to impaired notes receivable   $26,508,033   $21,180,533
                                                                 ===========   ===========

Average balance of impaired notes receivable                     $70,049,260   $50,257,848
                                                                 ===========   ===========

Interest income recognized                                       $ 2,158,988   $ 1,810,654
                                                                 ===========   ===========
</TABLE>


                                      F-12
<PAGE>   39

    In the normal course of business, the Company restructures or modifies terms
    of notes receivable to enhance the collectibility of certain notes which
    were impaired at the date of acquisition and were included in certain
    portfolio purchases.

3.  SPECIAL CHARGE

    The Company has taken a $1,500,000 Special Charge to income during fiscal
    1997 in order to create a reserve for what it has discovered to be the
    impaired value of portfolio of notes receivable purchased by the Company and
    in connection with such purchase the Company believes it was defrauded. The
    portfolio was purchased for approximately $1.8 million and the Company
    currently expects approximately $300,000 of the notes receivable in the
    portfolio to be collectible.


4.  BUILDING, FURNITURE AND FIXTURES

    At December 31, 1997 and 1996, building and improvements, and furniture and
    equipment consisted of the following:

<TABLE>
<S>                                                    <C>              <C>     
Building and improvements                              $754,804         $603,563
Furniture and equipment                                 228,625          221,209
                                                       --------         --------
                                                        983,429          824,772
Less accumulated depreciation                           254,144          184,023
                                                       --------         --------
                                                       $729,285         $640,749
                                                       ========         ========
</TABLE>

5.  NOTES PAYABLE

    Notes payable consists of bank loans made to the Company or a subsidiary
    primarily to acquire portfolios of notes receivable. All notes payable are
    secured by a security interest in the notes receivable, payments to be
    received under the notes and the underlying collateral securing the notes.

<TABLE>
<CAPTION>
                                                                                           1997         1996
<S>                                                                                     <C>          <C>    
Note payable with monthly principal installments of $66,868 currently, plus
  interest at prime plus 1.75% per annum with an 8% floor (currently 10.25%)
  through April 1997, guaranteed by a stockholder of the Company                        $       --   $  267,472

Note payable with monthly principal installments of $113,585 currently, plus
  interest at prime plus 1.75% per annum (currently 10.25%) through July 1997,
  guaranteed by a stockholder of the Company                                                    --      795,816

Note payable with monthly principal installments of $17,243 currently, plus
  interest at prime plus 1.75% per annum (currently 10.25%) through December 1997               --      627,239

Note payable with monthly principal installments of $79,864 currently, plus
  interest at prime plus 1.75% per annum (currently at 10.25%) through December 2000     2,751,630    4,579,304
   
                                                                                                     (Continued)
</TABLE>


                                      F-13
<PAGE>   40

<TABLE>
<CAPTION>
                                                                                                  1997         1996
<S>                                                                                            <C>          <C>    
Note payable with monthly principal installments of $61,654 currently, plus
  interest at prime plus 1.75% per annum (currently at 10.25%) through April 2000              $4,936,100   $6,664,523

Note payable with monthly principal installments of $68,962 currently, plus
  interest at prime plus 1.75% per annum (currently 10.25%) through December 1999               5,665,908    8,474,302

Note payable with monthly principal installments of $10,270 currently, plus
  interest at a rate of prime plus 1.75% per annum (currently 10.25%) through May 2000            915,834    1,104,979

Note payable with monthly principal installments of $28,519 currently, plus
  interest at prime plus 1.75% per annum (currently 10.25%) through May 2000                    5,927,482    8,337,680

Note payable with monthly principal installments of $18,358 currently, plus
   interest at a rate of prime plus 1.75% per annum (currently 10.25%) through April 2003       1,040,516    1,850,811

Note payable with monthly principal installments of $11,977 currently, plus
  interest at a rate of prime plus 1.75% per annum (currently 10.25%) through January 1999      1,922,520    2,672,401

Note payable with monthly principal installments of $18,146 currently, plus
  interest at a rate of prime plus 1.75% per annum (currently 10.25%) through January 1999      2,929,583    3,340,485

Note payable with monthly principal installments, of $41,098 currently, plus
  interest at a rate of prime plus 1.75% per annum (currently 10.25%) through July 1999         6,490,120    7,590,632

Note payable with monthly principal installments of $78,171 currently, plus
  interest at a rate of prime plus 1.75% per annum (currently 10.25%) through December 2001     2,716,378    4,685,560

Note payable with monthly principal installments of $1,776 plus interest at a
  rate of prime plus 1.75% per annum (currently 10.25%) through May 1999                          395,421      832,787

Note payable with monthly principal installments of $8,120, plus interest at a
  rate of prime plus 1.75% per annum (currently 10.25%) through June 1999                       1,724,662    1,915,774

Note payable with monthly principal installments of $11,355 plus interest at a
  rate of prime plus 1.75% per annum (currently 10.25%) through August 1999                     2,243,090    2,659,333

Note payable with quarterly principal payments of $24,882, plus interest payable
  monthly at a rate of prime plus 1.75% per annum (currently 10.25%) through August 2011        1,331,109    1,895,896

                                                                                                           (Continued)
</TABLE>

                                      F-14
<PAGE>   41

<TABLE>
<CAPTION>
                                                                                                      1997        1996
<S>                                                                                                <C>          <C>    
Note payable with monthly principal installments of $11,500, plus interest at a
  rate of prime plus 1.75% per annum (currently 10.25%) through August 1999                        $2,563,093   $2,716,748

Note payable with monthly principal installments of $14,083 beginning June 1997,
  plus interest at a rate of prime plus 1.75% per annum (currently 10.25%) through October 1999     2,942,173    3,370,000

Note payable with monthly principal installments of $9,714 beginning June 1997,
  plus interest at a rate of prime plus 1.75% per annum (currently 10.25%) through October 1999     2,220,914    2,325,947

Note payable with monthly principal installments of $19,840 beginning August
  1997, plus interest at a rate of prime plus 1.75% per annum (currently 10.25%)
  through December 1999                                                                             4,308,075    4,761,795

Note payable with monthly principal installments of $5,633, plus interest at a
   rate of prime plus 1.75% per annum (currently 10.25%) through October 2000                       1,203,653    1,352,000

Note payable with monthly principal installments of $1,550, plus interest at a
   rate of prime plus 1.75% per annum (currently 10.25%) through November 2000                        362,408      372,142

Note payable with monthly principal installments of $5,178 currently, plus
  interest at prime per annum (currently at 8.5%) through February 2000                             1,169,986           --

Note payable with monthly principal installments of $2,908 currently, plus
  interest at prime per annum (currently 8.5%) through February 2000                                  682,308           --

Note payable with monthly principal installments of $16,446 currently, plus
  interest at prime per annum (currently 8.5%) through February 2000                                3,693,713           --

Note payable with monthly principal installments of $20,904 currently, plus
  interest at prime per annum (currently 8.5%) through March 2000                                   4,414,560           --

Note payable with monthly principal installments of $2,178 currently, plus
   interest at a rate of prime per annum (currently 8.5%) through April 2000                          515,059           --

Note payable with monthly principal installments of $5,727 currently, plus
  interest at prime per annum (currently 8.5%) through April 2000                                   1,242,109           --

Note payable with monthly principal installments of $5,727
  currently, plus interest at prime per annum through April 2000                                      771,965           --

                                                                                                                (Continued)
</TABLE>


                                      F-15
<PAGE>   42

<TABLE>
<CAPTION>
                                                                                         1997          1996
<S>                                                                                   <C>           <C>    
Note payable with monthly principal installments, of $10,163 currently, plus
  interest at prime per annum (currently 8.5%) through April 2000                     $ 1,861,684   $        --

Note payable with monthly principal installments of $23,958 currently, plus
  interest at prime per annum (currently 8.5%) through May 2000                         5,479,823            --

Note payable with monthly principal installments, starting in July 1998, of
  $2,536 plus interest at prime per annum (currently 8.5%) through November 2000          608,435            --

Note payable with monthly principal installments, starting in July 1998, of
  $9,054, plus interest at prime per annum (currently 8.5%) through September 2000      2,173,001            --

Note payable with monthly principal installments, starting in August 1998, of
  $15,647 plus interest at prime per annum (currently 8.5%) through January 2001        3,753,326            --

Note payable with monthly principal installments, starting in August 1998, of
   $5,368, plus interest at prime per annum (currently 8.5%) through January 2001       1,103,652            --

Note payable with monthly principal installments of $5,483 plus interest at
  prime per annum (currently 8.5%) through March 2000                                   1,249,117            --

Note payable with monthly principal installments of $3,511, with
  interest at a rate of 8.75% per annum through July 2006                                 334,143       345,239
                                                                                      -----------   -----------

                                                                                      $83,643,550   $73,538,865
                                                                                      ===========   ===========
</TABLE>

    The above financing agreements also provides for additional monthly
    principal reduction based on cash collections received by the Company.
    Substantially all notes receivable are pledged as collateral on the above
    debt.

    Certain agreements require that a noninterest-bearing cash account be
    established at the closing of the loan and may require additional deposits
    based on a percentage of monthly collections up to a specified dollar limit.
    The aggregate balance of restricted cash at December 31, 1997 and 1996 was
    $990,466 and $828,845, respectively.

    Substantially all of the Company's outstanding financing with respect to its
    notes receivable portfolio acquisition activities is provided by one
    financial institution.


                                      F-16
<PAGE>   43

    Aggregate maturities of all long-term debt at currently effective principal
    payment requirements, including subordinated debentures (Note 7), financing
    agreement (Note 9) and notes payable to affiliates (Note 8), at December 31,
    1997 are as follows:

<TABLE>
<CAPTION>
                                                                                      Notes
  Year Ending                      Notes         Subordinated       Financing        Payable
  December 31,                    Payable         Debentures        Agreement       Affiliate          Total
<S>                             <C>               <C>             <C>               <C>              <C>        
1998                            $ 6,631,086       $ 265,050       $ 1,376,403       $ 311,484        $ 8,584,023
1999                             31,223,654         265,050                                           31,488,704
2000                             32,489,275         333,000                                           32,822,275
2001                              7,483,007                                                            7,483,007
2002                                643,236                                                              643,236
Thereafter                        5,173,292                                                            5,173,292
                               ------------                                                         ------------
                               $ 83,643,550       $ 863,100       $ 1,376,403       $ 311,484       $ 86,194,537
                               ============       =========       ===========       =========       ============
</TABLE>

6.  CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS

    During 1993, the Company issued $2,000,000 of 15% convertible subordinated
    debentures and during 1995, the Company fully repaid the remaining
    outstanding obligation of $526,600. The debentures were convertible into
    common stock of the Company at the rate of $2.00 per share. Warrants,
    exercisable to the extent that conversion rights have not been exercised, to
    purchase common stock at the rate of $2.00 per share, were issued on
    principal repayment dates and were due to expire one year thereafter. In
    December 1997, the Company extended the warrants provision, due to expire on
    December 31, 1997, through December 31,1998.

    Warrants to purchase 110,133 shares, at $2.00 per share of common stock were
    outstanding as of December 31, 1997 and 1996.

7.  SUBORDINATED DEBENTURES

    In connection with the acquisition of a loan portfolio, the Company offered
    $750,000 in subordinated debentures of which $705,000 were issued. As of
    December 31, 1997 and 1996, $352,500 and $470,000, respectively, of these
    debentures were outstanding. The debentures bear interest at 12% per annum
    payable in quarterly installments. The principal is payable over 4 years in
    16 equal quarterly installments of $44,062 which commenced March 31, 1996.
    The debentures are secured by a lien of the Company's interest in certain
    notes receivable and are subordinate to a note payable with a December 31,
    1997 balance of $2,716,378 (see Note 5) encumbering the notes receivable
    portfolio.

    In connection with the acquisition of a notes receivable portfolio during
    1995, the Company offered $800,000 in subordinated debentures. As of
    December 31, 1997 and 1996, $510,600 and $555,000, respectively, of these
    debentures were outstanding. The debentures bear interest at a rate of 12%
    per annum payable in quarterly installments. The principal is payable over 3
    years in 10 equal quarterly installments of $22,200 commencing September 30,
    1997 with the remaining balance of $333,000 payable on June 30, 2000. The
    debentures are secured by a lien on the Company's interest in certain notes
    receivable and are subordinate to a note payable with a December 31, 1997
    balance of $5,927,482 (see Note 5) encumbering the note receivable
    portfolio.


                                      F-17
<PAGE>   44

8.  NOTES PAYABLE, AFFILIATES AND STOCKHOLDERS

    Notes payable, affiliates and stockholders consist of the following at
    December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                   1997       1996
<S>                                                                               <C>        <C>    
Note payable to a stockholder of the Company, payable in quarterly installments
  of $6,000 plus interest at a rate of 10% per annum through August 31, 1998      $ 79,247   $ 79,247

Note payable to a company affiliated through certain common ownership due on
  demand, with interest payable monthly at a rate of 10% per annum                 150,098         --

Note payable to a company affiliated through certain common ownership due on
  demand, with interest payable monthly at a rate of 10% per annum                      --    100,000

Note payable to a company affiliated through certain common ownership, payable
  in two monthly installments of $32,500 plus
  interest at a rate of 9.5% per annum through February 1997                            --     65,000

Note payable to a stockholder of the Company due on demand
  with interest payable monthly at a rate of 10% per annum                          82,139     82,139

Note payable to a stockholder of the Company, payable in monthly
  installments of $4,155 including interest at a rate of 10% per annum                  --     46,832
                                                                                  --------   --------

                                                                                  $311,484   $373,218
                                                                                  ========   ========
</TABLE>

9.  FINANCING AGREEMENTS

    The Company has a financing agreement with a bank. The agreement provides
    the Company with the ability to borrow a maximum of $1,500,000 at a rate
    equal to the bank's prime rate plus two percent per annum. The credit
    facility is to be utilized through a series of loans made to purchase the
    underlying collateral of certain nonperforming real estate secured loans.
    Principal repayment of each resulting loan is due six months from the date
    of each advance and interest is payable monthly. As of December 31, 1997 and
    1996, $916,957 and $583,916, respectively, is outstanding on this credit
    facility.

    The financing agreement is secured by a first priority security interest in
    the notes receivable, the individual real estate that may be purchased,
    payments to be received under the notes receivable, an unconditional
    suretyship by one of the stockholders of the Company, and collateral
    securing the notes of certain loan portfolios.


                                      F-18
<PAGE>   45

    In 1997 the Company opened three warehouse lines of credit with banks. The
    first provides the Company with the ability to borrow a maximum of
    $2,000,000 at a rate equal to the bank's prime rate plus two percent per
    annum. The second provides the Company with the ability to borrow a maximum
    of $7,000,000 at a rate equal to the LIBOR rate plus two percent per annum.
    The third provides the Company with the ability to borrow a maximum of
    $2,000,000 at a rate equal to the LIBOR rate plus three and a half percent
    per annum. The credit facilities are to be utilized for the purpose of
    originating mortgage loans. As of December 31, 1997, $459,446 is outstanding
    on these lines of credit.

    The Company has an additional credit facility with the same bank. The
    facility provides the Company with the ability to borrow a maximum of
    $100,000,000 at rates ranging from prime plus one to prime plus two percent
    per annum. The facility is to be utilized through a series of loans made to
    purchase note receivable portfolios. The term of each resulting loan will be
    thirty-six months calling for a balloon payment at the end of such term.

    The facility is secured by a first priority security interest in the note
    receivable portfolio, the respective collateral for each loan purchased and
    a lien on certain other note receivable portfolios. As of December 31, 1997,
    no amount is outstanding on this facility.

10. INCOME TAX MATTERS

    The components of income tax (benefit) provision for the years ended
    December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                      1997              1996
<S>                                               <C>                <C>        
Current provision:
  Federal                                         $                  $
  State and local                                      12,926             68,234
                                                  -----------        -----------

                                                       12,926             68,234
                                                  -----------        -----------

Deferred provision (benefit):
  Federal                                          (1,230,195)           394,247
  State and local                                    (481,534)           144,075
                                                  -----------        -----------

                                                   (1,711,729)           538,322

(Benefit) provision                               $(1,698,803)       $   606,556
                                                  ===========        ===========
</TABLE>


                                      F-19
<PAGE>   46

    A reconciliation of the anticipated income tax expense (computed by applying
    the Federal statutory income tax rate of 35% to income before income tax
    expense) to the provision for income taxes in the statements of income for
    the years ended December 31, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                                    1997           1996
<S>                                                             <C>            <C>        
Tax (benefit) determined by applying U.S. statutory rate
  to income (loss)                                              $  (693,297)   $   502,498
Increase (decrease) in taxes resulting from:
  State and local income taxes, net of Federal benefit             (258,750)       231,815
Tax (benefit) of deferred deductions and net operating losses      (796,141)      (174,673)
Other items, net                                                     49,385         46,916
                                                                -----------    -----------
                                                                $(1,698,803)   $   606,556
                                                                ===========    ===========
</TABLE>

    The tax effects of temporary differences that give rise to significant
    components of deferred tax assets and deferred tax liabilities at December
    31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
                                                                 1997         1996
<S>                                                           <C>          <C>       
Deferred liabilities:
  Purchase discount                                           $1,497,149   $2,042,772
  Joint venture participation                                     62,849       64,928
                                                              ----------   ----------

           Gross deferred tax liabilities                     $1,559,998   $2,107,700
                                                              ==========   ==========

Deferred tax assets:
  Accounts payable and accrued expenses                       $       --   $   45,291
  Debt issuance costs                                                 --       22,635
  Inventory, repossessed collateral                            1,273,199      260,912
  Special charge on purchased loans                              706,740           --
  Net operating loss carryforward                                362,782      184,320
                                                              ----------   ----------

           Gross deferred tax assets                           2,342,721      513,158

  Less valuation allowance                                       862,782      184,320
                                                              ----------   ----------

           Deferred tax assets - net of valuation allowance   $1,479,939   $  328,838
                                                              ==========   ==========
</TABLE>

    The Company has net operating loss carryforwards of approximately $745,000
    for Federal purposes, available to reduce future taxable income. Such net
    operating loss carryforwards expire through 2010.

11. STOCK OPTION PLAN

    During 1996, the Company adopted an incentive stock option plan (the "Plan")
    for certain of its officers and directors. Under the terms of the Plan,
    options to purchase an aggregate of up to 600,000 shares of the Company's
    common stock may be granted. Each option has an exercise price at least
    equal to the fair market value of the shares of common stock at the time the
    option is granted. Options become exercisable to various times after the
    date granted and will expire ten years after the date granted.


                                      F-20
<PAGE>   47

    During 1996 the Company granted 209,500 options to employees and directors.
    The Company did not grant any options in 1997.

    The Company applies APB Opinion 25 and related interpretations in accounting
    for stock options; accordingly no compensation cost has been recognized. Had
    compensation cost been determined upon the fair value of the stock options
    at the grant date consistent with the method of FAS 123, the Company's nets
    income and earnings per share would have been reduced to the pro forma
    amounts indicated below:

<TABLE>
<CAPTION>
                                                                          1996
<S>                                                                    <C>      
Net income - as reported                                               $ 829,153
Net income - pro forma                                                   770,635

Net income per common share - basic - as reported                           0.15
Net income per common share - basic - pro forma                             0.14
Net income per common share - dilutive - as reported                        0.14
Net income per common share - dilutive - pro forma                          0.13
</TABLE>

    The fair value of each option grant is estimated on the date of the grant
    using the Black-Scholes option pricing model with the following weighted
    average assumptions used for grants in 1996:

<TABLE>
<CAPTION>
                                                                         1996
<S>                                                                     <C>     
Dividend rate                                                                 0%
Expected volatility                                                           48
Risk-free interest rate                                                     6.15
Weighted average expected lives                                         10 years
</TABLE>


                                      F-21
<PAGE>   48

    Transactions in stock options under the Plan are summarized as follows:

<TABLE>
<CAPTION>
                                                                       Weighted
                                                                        Average
                                                                       Exercise
                                                             Shares     Price
<S>                                                          <C>        <C>  
Options outstanding, at January 1, 1996                           --    $  --
Granted                                                       41,900     7.80
Exercised                                                         --       --
Expired                                                           --       --
                                                            --------    -----

Options outstanding at December 31, 1996                      41,900     7.80

Effect of 4:1 stock dividend in 1997                         167,600    (6.24)
Granted                                                           --       --
Exercised                                                         --       --
Expired                                                       (3,500)      --
                                                            --------    -----

Options outstanding at December 31, 1997                     206,000    $1.56
                                                            ========    =====

Weighted average fair value per option of options granted
  during 1996 after giving effect fo 4:1 stock dividend                 $0.42
                                                                        =====
</TABLE>

    As of December 31, 1997, 89,250 options are exercisable. For the year ended
    December 31, 1998, 89,250 additional options will be exercisable. For the
    year ended December 31, 1999, 13,750 additional options will be exercisable.
    For the year ended December 31, 2000, 13,750 additional options will be
    exercisable.

12. SALE OF NOTES RECEIVABLE WITH RECOURSE

    In June 1996, the Company sold notes receivable with a net carrying value of
    approximately $5.4 million for approximately $6.4 million to the Company's
    primary lender and retained the servicing rights. Such loans were sold with
    recourse. The recourse provision amounted to approximately $600,000 and
    provides that the Company either buy back or replace a note with a note that
    is approximately equivalent to the outstanding principal and accrued
    interest should the note receivable become sixty days past due. At December
    31, 1997, the remaining obligation under the recourse provision was
    approximately $340,000. In addition, the buyer of the notes has the right to
    proceed to foreclose on the delinquent note and, after sale of the
    collateral, require the Company to pay any deficiency balance on the note.
    The Company recognized a gain of approximately $980,000 on this sale.


                                      F-22
<PAGE>   49

    In June 1997, the Company sold notes receivable with a net carrying value of
    approximately $3.9 million for approximately $4.9 million to the Company's
    primary lender and retained the servicing rights. Such loans were sold with
    recourse. The recourse provision amounted to approximately $500,000 and
    provides that the Company either buy back or replace a note with a note that
    is approximately equivalent to the outstanding principal and accrued
    interest should the note receivable become sixty days past due. At December
    31, 1997, the remaining obligation under the recourse provision was
    approximately $430,000. In addition, the buyer of the notes has the right to
    proceed to foreclose on the delinquent note and, after sale of the
    collateral, require the Company to pay any deficiency balance on the note.
    The Company recognized a gain of approximately $920,000 on this sale.

    As of December 31,1997 and 1996, unpaid balances of mortgage loans serviced
    for others were $8,900,000 and $5,500,000, respectively. Mortgage loans
    serviced for others are not included in the Company's consolidated balance
    sheet.

13. REVERSE STOCK SPLIT AND STOCK DIVIDEND

    On December 9, 1996, shareholders approved a one-for-five reverse stock
    split of the issued and outstanding common stock of the Company with no
    corresponding change in par value of the common stock. Accordingly, $44,113
    was transferred from the common stock account to the paid-in capital account
    to record the transaction. All remaining fractional shares in connection
    with the reverse split were purchased by the Company and paid to
    shareholders in 1997.

    On August 8, 1997, shareholders approved a five-for-one split up, effected
    in the form of a four-for-one stock dividend, of the issued and outstanding
    common stock of the Company with no corresponding change in par value of the
    common stock. Accordingly, $44,145 was transferred from the paid-in capital
    account to the common stock account to record the transaction. Weighted
    average shares outstanding and all per share amounts included in the
    financial statements and notes hereto are based on the increased number of
    shares giving retroactive effect to the stock dividend.

14. CERTAIN CONCENTRATIONS

    Geographic Concentrations of Notes Receivable - Approximately 45% of the
    Company's secured consumer real estate notes receivable are with customers
    in the northeastern region of the U.S., which includes the New York
    metropolitan area. Such real estate notes receivable are collateralized by
    real estate with a concentration in this region. Accordingly, the collateral
    value of a substantial portion of the Company's real estate notes receivable
    and real estate acquired through foreclosure is susceptible to changes in
    market conditions. In the event of sustained adverse economic conditions, it
    is possible that the Company could experience a negative impact in its
    ability to collect on existing loans, or liquidate foreclosed assets in this
    region which could impact the Company's related loan loss estimates.

    Financing - Substantially all of the Company's existing debt and available
    credit facilities are with one financial institution. Management believes
    that alternative financing on similar terms and conditions is available in
    the event this institution is unable or unwilling to continue to provide the
    credit facilities to the Company.


                                      F-23
<PAGE>   50

15. COMMITMENTS AND CONTINGENCIES

    Employment Agreement - Effective March 25, 1996, the Company entered into a
    five year employment agreement with its Chief Operating Officer. The
    agreement provides for, among other things, a stipulated base salary, and a
    bonus of up to 3.5% of the Company's net income in excess of $500,000.

    Operating Leases - Certain secondary office space is leased under various
    operating leases. The future minimum lease payments are as follows: 1998 -
    $112,000 and 1999 - $21,000.

    Letter Agreement Dispute - On November 17, 1997 K Mortgage Corporation ("K")
    filed a civil action in the United States District Court for the Southern
    District Court of New York against the Company, Tribeca Lending Corp. (a
    subsidiary), and the Company's chief executive officer alleging breach of
    contract, fraud, and unjust enrichment in connection with a May 9, 1997
    letter agreement (the "Letter Agreement") pursuant to which Tribeca was to
    purchase certain assets of K and retain three principals of K as paid
    consultants and employ a fourth principal. In the suit K seeks to recover
    damages of $10 million for the failure of the Company to make certain
    payments to third parties, provide the fourth principal with an employment
    agreement and provide the three other principals of with consulting
    contracts pursuant to the terms of the Letter Agreement.

    On December 22, 1997 the Company filed an answer and counterclaim vigorously
    denying the allegations of the complaint and alleging fraud and breach of
    contract against K and the fourth principal, and breach of fiduciary duty
    against the fourth principal in what it believes to have been the fourth
    principal's unjustified unilateral termination of his employment in
    violation of the Letter Agreement and is collectively seeking damages of $1
    million. The Company intends to vigorously defend itself against these
    allegations and vigorously pursue recovery of damages and does not at this
    time believe that its operations or financial position will be materially
    impacted. The court has directed all parties to proceed with mediation,
    which is currently scheduled for May 1998.

    Loan Commitments - The Company has issued approximately $3,329,000 of
    commitments to applicants to close loans at prevailing rates. The Company,
    in order to assure itself of a market place to sell its loans, has
    agreements with investors who will accept all loans meeting certain investor
    criteria, to deliver the loans at the rate prevailing at the time of
    delivery.

16. RELATED PARTY TRANSACTIONS

    In addition to the notes payable, affiliates and stockholders disclosed in
    Note 8, the Company received approximately $100,000 and $90,000,
    respectively, for the year ended December 31, 1997 and 1996 from a company
    related through common ownership, for the use of the Company's facilities.

    At December 31, 1995, the Company purchased the interest of a commonly owned
    office condominium from two entities that are affiliated through certain
    common ownership. At December 31, 1996, $75,000 was due to the affiliates in
    connection with this transaction.

17. SUBSEQUENT EVENTS

    Subsequent to year-end, the Company has purchased approximately $10,100,000
    in notes receivable at a cost of approximately $8,200,000.

                                     ******

                                      F-24