INDEPENDENT AUDITORS' REPORT

The Board of Trust Managers and Shareholders
Church Loans & Investments Trust
Amarillo, Texas

We have audited the  accompanying  balance  sheets of Church Loans & Investments
Trust (a real estate  investment  trust) as of March 31, 1998 and 1997,  and the
related statements of income, shareholders' equity, and cash flows for the years
then ended.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Church Loans &  Investments
Trust as of March 31, 1998 and 1997,  and the results of its  operations and its
cash  flows for the years  then  ended in  conformity  with  generally  accepted
accounting principles.

/s/ Clifton Gunderson P.L.L.C.

Amarillo, Texas
May 8, 1998

                                      -16-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)
                                 BALANCE SHEETS
                             MARCH 31, 1998 AND 1997

                  ASSETS                                1998            1997
                                                   ------------    -------------

CASH AND CASH EQUIVALENTS .......................   $     32,403    $   586,629

RECEIVABLES
    Mortgage loans and church bonds - performing      22,165,629     19,177,849
    Interim construction loans - performing .....     10,732,915     12,133,111
    Nonperforming mortgage loans, church bonds
      and interim construction loans ............      2,492,095      3,158,484
    Less: Allowance for possible credit losses ..     (1,035,213)      (855,213)
                                                    ------------    ------------
                                                      34,355,426     33,614,231
                                                    ------------    ------------
    Accrued interest receivable .................        341,360        303,756
    Notes receivable ............................        405,860        536,453
                                                    ------------    ------------
                  Total receivables .............     35,102,646     34,454,440
                                                    ------------    ------------
PROPERTY AND EQUIPMENT, net of accumulated
    depreciation of $460,721 and $445,049 in
    1998 and 1997, respectively .................        197,619        213,291
REAL ESTATE ACQUIRED
     THROUGH FORECLOSURE ........................      1,479,486        119,150
UNAMORTIZED DEBT EXPENSE AND OTHER ASSETS .......         62,960         82,242
                                                    ------------    ------------
TOTAL ASSETS ....................................   $ 36,875,114    $35,455,752
                                                    ============    ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
     Notes payable and line of credit:
         Related party ..........................   $  1,969,938    $ 1,648,660
         Other ..................................      5,740,773      4,397,216
                                                    ------------    ------------
                                                       7,710,711      6,045,876
     Secured savings certificates:
         Related party ..........................        240,000        315,692
         Other ..................................      6,823,823      7,258,280
                                                    ------------    ------------
                                                       7,063,823      7,573,972
     Accrued interest payable ...................         29,768         45,211
     Other ......................................        781,455        555,574
                                                    ------------    ------------
                  Total liabilities .............     15,585,757     14,220,633
                                                    ------------    ------------
SHAREHOLDERS' EQUITY
     Shares of beneficial interest, no par value;
       authorized shares unlimited, 7,007,402 shares
       issued and outstanding ...................     20,623,866     20,623,866
     Undistributed net income ...................        665,491        611,253
                                                    ------------    ------------
                  Total shareholders' equity ....     21,289,357     21,235,119
                                                    ------------    ------------
TOTAL LIABILITIES AND
     SHAREHOLDERS' EQUITY .......................   $ 36,875,114    $35,455,752
                                                    ============    ============

        These financial statements should be read only in connection with
         the accompanying summary of significant accounting policies and
                         notes to financial statements.

                                      -17-

<PAGE>


                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                              STATEMENTS OF INCOME

                       YEARS ENDED MARCH 31, 1998 AND 1997

                                                            1998        1997
                                                            ----        ----
 INTEREST INCOME AND FEES
     Interest and fees on loans and notes receivable ..  $3,926,008   $3,788,611
     Interest on temporary investments ................      62,705       52,595
                                                         ----------   ----------
                  Total interest income and fees .....    3,988,713    3,841,206
DEBT EXPENSE
     Interest ........................................      921,787      937,410
     Amortization of:
         Registration costs ..........................        4,984       30,285
         Commissions paid to brokers .................       56,314       58,144
                                                         ----------   ----------
                  Total debt expense .................      983,085    1,025,839
                                                         ----------   ----------
                  Net interest income ................    3,005,628    2,815,367

PROVISION FOR POSSIBLE
     CREDIT LOSSES ...................................      180,000      135,000
                                                         ----------   ----------
               Net interest income less provision
                 for possible credit losses ..........    2,825,628    2,680,367
                                                         ----------   ----------

OTHER INCOME .........................................      122,183       24,898

OTHER OPERATING EXPENSES
     General and administrative ......................      650,446      520,575
     Board of Trust Managers' fees ...................       47,692       40,952
                                                         ----------   ----------
                  Total other operating expenses .....      698,138      561,527
                                                         ----------   ----------
                  Income before provision for
                   income taxes ......................    2,249,673    2,143,738

PROVISION FOR INCOME TAXES ...........................       23,140       16,980
                                                         ----------   ----------
NET INCOME ...........................................   $2,226,533   $2,126,758
                                                         ==========   ==========
NET INCOME PER SHARE .................................   $      .32   $      .30
                                                         ==========   ==========

        These financial statements should be read only in connection with
         the accompanying summary of significant accounting policies and
                         notes to financial statements.

                                      -18-
<PAGE>


                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                       YEARS ENDED MARCH 31, 1998 AND 1997

                                     SHARES OF BENEFICIAL INTEREST
                                     ----------------------------  UNDISTRIBUTED
                                           SHARES       AMOUNT       NET INCOME
                                        -----------   -----------   -----------
 BALANCE, MARCH 31, 1996 ............     7,007,402   $20,623,866   $   726,863

      Cash dividends ($.32 per share)          --            --      (2,242,368)

      Net income ....................          --            --       2,126,758
                                        -----------   -----------   -----------

 BALANCE, MARCH 31, 1997 ............     7,007,402    20,623,866       611,253

      Cash dividends ($.31 per share)          --            --      (2,172,295)

      Net income ....................          --            --       2,226,533
                                        -----------   -----------   -----------

 BALANCE, MARCH 31, 1998 ............     7,007,402   $20,623,866   $   665,491
                                        ===========   ===========   ===========

        These financial statements should be read only in connection with
         the accompanying summary of significant accounting policies and
                         notes to financial statements.

                                      -19-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                            STATEMENTS OF CASH FLOWS

                       YEARS ENDED MARCH 31, 1998 AND 1997

                                                        1998            1997
                                                        ----            ----
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income ...............................   $  2,226,533      $  2,126,758
    Adjustments to reconcile net income to net
     cash provided by operating activities:
        Depreciation .........................         15,672            15,674
        Amortization of debt expense .........         61,298            88,429
        Amortization of loan discounts .......       (236,512)         (166,457)
        Provision for possible credit losses .        180,000           135,000
        Changes in:
          Accrued interest receivable ........        (37,604)            3,535
          Accrued interest payable ...........        (15,443)            7,394
          Federal income taxes payable .......           --              (7,060)
          Other liabilities ..................        225,881           335,315
        Other, net ...........................        (42,816)         (159,130)
                                                 ------------      ------------
                Net cash provided by
                  operating activities .......      2,377,009         2,379,458
                                                 ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES
    Investment in mortgage and interim
     construction loans and church bonds .....    (33,238,225)      (16,691,347)
    Payments received on mortgage and
     interim construction loans and
     church bonds ............................     31,194,006        14,921,586
    Advances on notes receivable .............       (270,836)         (530,708)
    Payments received on notes receivable ....        401,429           477,886
    Proceeds from sale of property
     held for investment .....................           --              71,810
                                                 ------------      ------------
                  Net cash used by
                   investing activities ......     (1,913,626)       (1,750,773)
                                                 ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES
    Sale of secured savings certificates .....      3,314,121         2,648,579
    Borrowings on notes payable and line
     of credit ...............................      6,358,320         9,563,442
    Principal payments on:
       Secured savings certificates ..........     (3,824,270)       (2,619,982)
       Notes payable and line of credit ......     (4,693,485)       (8,073,646)
    Commissions paid to brokers on issuance
     of secured savings certificates .........           --             (40,511)
    Cash dividends paid ......................     (2,172,295)       (2,242,368)
                                                 ------------      ------------
                  Net cash used by
                    financing activities .....     (1,017,609)         (764,486)
                                                 ------------      ------------
                  Decrease in cash and
                    cash equivalents .........       (554,226)         (135,801)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .        586,629           722,430
                                                 ------------      ------------
CASH AND CASH EQUIVALENTS, END OF YEAR .......   $     32,403      $    586,629
                                                 ============      ============

        These financial statements should be read only in connection with
         the accompanying summary of significant accounting policies and
                         notes to financial statements.

                                      -20-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                             MARCH 31, 1998 AND 1997

NATURE OF OPERATIONS

Church Loans &  Investments  Trust  (Church  Loans) is a real estate  investment
trust that  invests  primarily  in mortgage  and interim  construction  loans to
churches and other borrowers (see note 1) across the United States, particularly
in the  southern  portion of the U.S.  Church  Loans  requires  that real estate
properties  be pledged  against  loans as security  which could be foreclosed by
Church  Loans  should  the  borrower  default.   Repayment  of  each  borrower's
obligations is generally  expected to be repaid from  contributions  from church
members  or  from  operations  of  the  borrower,  or in  the  case  of  interim
construction loans, by permanent financing provided by others.

USE OF ESTIMATES

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

CURRENT OPERATING ENVIRONMENT

Church Loans has historically invested in long-term,  fixed-rate mortgage loans,
generally funded by relatively  short-term secured savings  certificates  (SSCs)
and debt obligations. The volatility of interest rates and increased competition
to attract  customers'  funds have caused Church Loans'  liability  structure to
become short-term and rate sensitive. Church Loans reflected an average interest
yield on its loan and church bond  portfolio,  an average  interest  rate on its
total  indebtedness and a net interest rate margin at March 31, 1998 and 1997 as
follows:

                                   LOAN AND CHURCH      TOTAL       NET INTEREST
                                   BOND PORTFOLIO    INDEBTEDNESS   RATE MARGIN
                                   --------------    ------------   -----------
March 31, 1998 ....................    10.95%            7.44%          3.51%
March 31, 1997 ....................    10.82%            7.36%          3.46%

Church  Loans  finances  maturities  of SSCs and debt  obligations  through  its
available  lines of credit and principal  payments  received on its mortgage and
interim construction loans.

CHURCH BONDS

Church bonds,  secured by first mortgage liens on church facilities,  are stated
at cost,  as there is no traded market for the bonds and  management  intends to
hold such securities until maturity.

                                      -21-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                             MARCH 31, 1998 AND 1997

LOANS AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES

Loans are  stated at the  amount of unpaid  principal,  reduced  by  unamortized
purchase discounts and the allowance for possible credit losses. Interest income
is recognized when earned.

Impaired loans are measured  based on the present value of expected  future cash
flows  discounted at the loan's  effective  interest rate or the market price or
the  fair  value of the  collateral  if the loan is  collateral  dependent.  The
accrual of interest is  generally  discontinued  on loans and church  bonds more
than 90 days past due or when there is sufficient  doubt as to the collection of
interest. When interest accrual is discontinued,  all unpaid accrued interest is
reversed.  Cash  interest  payments  received  are  applied  to  principal  when
collection of principal is in doubt or are  recognized  as interest  income when
recovery of principal is reasonably assured.

The allowance for possible credit losses is established  through a provision for
possible  credit losses  charged to expense.  Loans and church bonds are charged
against  the  allowance  when  collectibility  of  the  principal  is  unlikely.
Recoveries of amounts previously charged off are credited to the allowance.  The
charge  to  operations  is based on  management's  and the  board of  directors'
evaluation of the loan and church bond portfolio,  including such factors as the
security  collateralizing the loans or church bonds, past credit loss experience
and general economic  conditions.  The allowance is subjective in nature and may
be  adjusted  in the near term  because of changes in the  borrower's  financial
status or economic conditions.

Loan  origination fees are collected only on a few permanent loans and generally
recognized as income when received and the associated loan origination costs are
expensed when incurred.  The effect on the accompanying  financial statements is
not materially  different from generally  accepted  accounting  principles which
require that loan fees, net of origination costs, be deferred and amortized into
interest income over the life of the related loan.

Commitment fees received on interim  construction  loans are recognized over the
interim commitment period for loans that are not permanently  financed by Church
Loans  and over the life of the  mortgage  loan for loans  that are  permanently
financed by Church Loans.  Amounts are being amortized  using the  straight-line
method.  This method was not  materially  different from the method of deferring
commitment fees until the commitment is exercised and  recognizing  such fees as
an adjustment to yield by the interest  method over the related  loans' lives as
prescribed by generally accepted accounting principles for the years ended March
31, 1998 and 1997.

Purchase discounts on loans are amortized based on the interest method.

PROPERTY AND EQUIPMENT

Property  and  equipment  are  stated at cost,  less  accumulated  depreciation.
Depreciation is provided on the  straight-line  method over the estimated useful
lives of the assets, which range from 3 to 18 years.

REAL ESTATE ACQUIRED THROUGH FORECLOSURE

Real estate acquired through,  or in lieu of, loan foreclosure is to be sold and
is  initially   recorded  at  estimated   fair  value  at  date  of  foreclosure
establishing a new cost basis. Other real estate owned,  after  foreclosure,  is
carried at the lower of carrying  amount or the property's  estimated fair value
minus estimated costs to sell (fair value). Declines in the estimated fair value
below cost are recognized as a valuation allowance.  If the estimated fair value
subsequently  increases  above its carrying  value,  the valuation

                                      -22-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                             MARCH 31, 1998 AND 1997

allowance  is  reduced,  but not  below  zero.  Increases  or  decreases  in the
valuation allowance are charged or credited to operations.

The  valuation  of other real estate  owned is  subjective  in nature and may be
adjusted  in the near term  because of changes in economic  conditions  or other
factors.

UNAMORTIZED DEBT EXPENSE

Commissions paid to brokers in connection with the sale of SSCs are deferred and
amortized  over the terms of the related  certificates  on the interest  method.
Costs  incurred in  connection  with the  registration  of SSCs are deferred and
amortized on the straight-line  method over the period the related  certificates
are sold,  but no longer than two years from the date the  registration  becomes
effective.

INCOME TAXES

Income taxes are accounted for under  Statement No. 109,  ACCOUNTING  FOR INCOME
TAXES.  Under the asset and  liability  method of  Statement  109,  deferred tax
assets  and  liabilities   are  recognized  for  the  future  tax   consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and liabilities  and their  respective tax 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.  Under Statement 109, the effect on deferred tax assets
and  liabilities  of a change in tax rates is recognized in income in the period
that includes the enactment date.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

In  the   ordinary   course  of   business,   Church   loans  has  entered  into
off-balance-sheet  financial  instruments  consisting of  commitments  to extend
credit. Such financial instruments are recorded in the financial statements when
they become payable.

CASH FLOWS

For  purposes  of  reporting  cash  flows,  cash  and cash  equivalents  include
cash-on-hand  and investment in a money market mutual fund and  certificates  of
deposit with maturities of less than 90 days at the time of acquisition.

RECLASSIFICATIONS

Certain amounts in the 1997 balance sheet have been reclassified to conform with
the 1998 presentation.

                  This information is an integral part of the
                       accompanying financial statements.

                                      -23-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997

NOTE 1 - LOANS AND CHURCH BONDS

Mortgage loans  receivable  consist of  conventional  loans of  $23,974,905  and
$20,600,313  and church  bonds of  $488,839  and  $520,894 at March 31, 1998 and
1997, respectively. Interim construction loans of $11,695,994 and $14,327,500 at
March 31, 1998 and 1997,  respectively,  consist  primarily of loans to churches
for the construction of church facilities and assisted living centers.  Mortgage
loans,  church bonds and interim  construction  loans are  generally  secured by
first liens on real estate  comprised  primarily of church  buildings  and other
real  estate.  The  amount of a loan is  generally  limited  to  66-2/3%  of the
appraised  value of the  related  property.  Certain  loans  are  guaranteed  by
individual  members of the  congregations or other individuals or congregations,
depending on the circumstances.

Church  Loans'  portfolio  included  mortgage  loans,  church  bonds and interim
construction loans with interest rates ranging from 7.75% to 17.00% at March 31,
1998.  The weighted  average  annual  interest  rates of Church  Loans' loan and
church  bond  portfolio  were  10.95%  and  10.82% at March  31,  1998 and 1997,
respectively.

Generally accepted accounting principles require disclosure of information about
certain current vulnerabilities due to certain concentrations.  In addition to a
concentration  of loans to  churches,  Church Loans makes  certain  interim real
estate  construction  loans and permanent loans to entities other than churches.
At March 31,  1998,  Church  Loans had five  loans  secured by  assisted  living
centers which  totaled  approximately  $8,063,000.  Three of these loans were to
affiliated  borrowers  totaling  approximately  $7,230,000 at March 31, 1998. In
addition,  Church Loans had four loan  commitments at March 31, 1998 for interim
construction  and permanent  financing of assisted  living centers which totaled
approximately $7,845,000.

                                      -24-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997


The following schedule is a summary of the combined  mortgage,  church bonds and
interim construction loan portfolios by size of loan at March 31, 1998 and 1997:


                                          1998                      1997
                                   -----------------         -------------------
                                   No. of  Carrying          No. of     Carrying
   Description                     loans    amount            loans      amount
------------------------           -----    ------            -----      ------

Over $1,500,000 ........             6   $13,940,641             4   $ 7,071,684
$1,300,000-1,499,999 ...             2     2,655,842             1     1,300,000
$1,000,000-1,299,999 ...             1     1,296,980             3     3,539,095
$900,000-999,999 .......             2     1,840,381             2     1,901,062
$800,000-899,999 .......             1       847,948             1       826,009
$700,000-799,999 .......             3     2,203,579             2     1,493,020
$600,000-699,999 .......             3     1,905,673             4     2,583,025
$500,000-599,999 .......             -         -                 1       525,000
$400,000-499,999 .......             3     1,339,271             6     2,698,452
$300,000-399,999 .......             5     1,819,868             8     2,591,687
$200,000-299,999 .......            12     3,083,597             9     2,193,612
$100,000-199,999 .......            20     2,824,929            37     5,464,095
Under $100,000 .........            71     2,401,029            91     3,261,966
                                   ---   -----------           ---   -----------
                                   129    36,159,738           169    35,448,707
                                   ===   -----------           ===   -----------
Less:  unamortized purchase discounts
        on mortgage loans ........           769,099                     979,263
Less:  allowance for possible credit
        losses ...................         1,035,213                     855,213
                                         -----------                 -----------
TOTAL ............................       $34,355,426                 $33,614,231
                                         ===========                 ===========

                                      -25-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997


The mortgage and interim  construction  loan  portfolios  included the following
loans at March 31, 1998, with  individual  balances in excess of 3% of the total
carrying amount of the combined portfolios:

Great Plains Assisted Living L.L.C., Lincoln, Nebraska;
 interest at 10.50%; monthly payments of $28,741 to
 maturity on January 1, 2013 ...................................... $ 2,583,797*
Meade Ministries, Lake City, Florida; interest at 10.25%; monthly
 payments of $27,249 to maturity on November 11, 2012 .............   2,476,117
Great Plains Assisted Living L.L.C., Omaha, Nebraska;
 interest at prime plus 2% (10.50% at March 31, 1998); principal
 and interest due at maturity on May 1, 1998 ......................   2,395,384*
Arlington Baptist Church, Baltimore, Maryland; interest at 11.25%;
 monthly payments of $24,416 to maturity on September 1, 2017 .....   2,293,310
Great Plains Assisted Living L.L.C., Sioux City, Iowa; interest at
 10.50%; monthly payments of $25,149 to maturity
 on December 10, 2012 .............................................   2,251,289*
New Birth Baptist Church, Miami, Florida; interest at prime
 plus 2% (10.50% at March 31, 1998); principal and interest due at
 maturity on March 27, 1999 .......................................   1,940,745
West Charleston Baptist Church, Las Vegas, Nevada; interest at
 prime plus 2% (10.50% at March 31, 1998); principal and interest
 due at maturity on March 12, 1999 ................................   1,355,841
Pennsylvania Baptist State Convention, Philadelphia, Pennsylvania;
    interest at prime plus 2% (10.50% at March 31, 1998); principal
    and interest due at maturity on December 28, 1997 .............   1,300,000
Bethany Baptist Church, Melbourne, Florida; interest at 10.50%;
    monthly payments of $15,138 to maturity on June 30, 2011 ......   1,296,980
                                                                    -----------
                                                                    $17,893,463
                                                                    ===========
*   Borrowers are affiliated.

In the normal  course of  business,  Church  Loans makes  commitments  to extend
credit which are not reflected in the financial  statements.  These  commitments
involve elements of credit risk,  interest rate risk,  liquidity risk and market
risk.  At March 31, 1998,  Church Loans had  outstanding  loan  commitments  (by
contract amounts) of approximately  $14,275,000  including  $5,495,000 for three
loans to  affiliated  borrowers  (not  related to those  mentioned  in the table
above) to finance the  construction  of three assisted  living  centers.  Church
Loans has no other financial instruments with off-balance-sheet risk.

Nonperforming  mortgage loans,  church bonds and interim  construction  loans at
March 31, 1998 and 1997 were $2,492,095 and $3,158,484,  respectively.  Interest
income which would have been recorded under the original terms of  nonperforming
loans and

                                      -26-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997

church bonds amounted to approximately $339,000 and $389,000 for the years ended
March 31,  1998 and 1997,  respectively.  Interest  income  actually  recognized
during 1998 was approximately  $111,000.  Interest income actually recognized in
1997 was not significant.

In addition to the aforementioned loans, management has doubts about the ability
of a borrower for a $1,300,000 loan to comply with its present  repayment terms.
This loan was not included as nonperforming at March 31, 1998.

The  original  terms of the  individual  loans  included  in the loan  portfolio
generally vary from 1 to 30 years.  Scheduled  maturities  during the five years
subsequent to March 31, 1998, are:

              1999  .................          $13,630,826
              2000  .................            1,655,727
              2001  .................            1,574,204
              2002  .................            1,521,664
              2003  .................            1,373,389

At March 31, 1998, mortgage loans were pledged to support indebtedness of Church
Loans as follows:

Line of credit payable to bank .................     $ 5,025,556
Secured savings certificates   .................       7,085,080
                                                     -----------
TOTAL MORTGAGE LOANS PLEDGED   .................     $12,110,636
                                                     ===========

A summary of  transactions  in the allowance for possible  credit losses for the
years ended March 31, 1998 and 1997 follows:

                                                   1998          1997
                                                   ----          ----

BALANCE AT BEGINNING OF YEAR                 $   855,213     $ 728,665
Provisions charged to operating expenses         180,000       135,000
Charge-offs, net                                   -            (8,452)
                                             -----------    ----------

BALANCE AT END OF YEAR ...................   $ 1,035,213    $  855,213
                                             ===========    ==========

At March  31,  1998 and  1997,  the  recorded  investment  for  loans  for which
impairment was recognized in accordance with Statement No. 114 was approximately
$1,038,000 and $300,000,  respectively.  The related allowance for credit losses
was $270,000 and $50,000, respectively, at March 31, 1998 and 1997.

                                      -27-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997

NOTE 2 - DEBT OBLIGATIONS

Information relating to debt obligations follows:


<TABLE>
<CAPTION>
                                                      WEIGHTED           MAXIMUM                        WEIGHTED
                                                      AVERAGE            AMOUNT         AVERAGE         AVERAGE
                                   BALANCE AT       INTEREST RATE     OUTSTANDING AT   MONTH-END     INTEREST RATE
                                 END OF PERIOD     AT END OF PERIOD   ANY MONTH-END     BALANCE     FOR THE PERIOD
                                 -------------     ----------------   --------------  -----------   --------------
<S>                              <C>                     <C>           <C>            <C>                <C>
     MARCH 31, 1998
Line of credit payable to bank   $ 2,800,000             7.50%*        $ 2,800,000    $   505,078        7.81%
Other demand notes payable ...     2,800,000             7.50%         $ 4,910,711    $ 4,503,880        7.56%
Secured savings certificates .     7,063,823             7.38%         $ 7,863,480    $ 7,452,851        7.29%
                                 -----------             =====         -----------    -----------        -----
         TOTAL ...............   $14,774,534             7.44%         $14,774,534    $12,461,809        7.26%
                                 ===========             =====         ===========    ===========        =====
     MARCH 31, 1997

Line of credit payable to bank  $ 1,733,001              8.25%*        $ 1,975,001    $   665,381        8.20%
Other demand notes payable        4,312,875              7.50%           4,628,528      4,355,477        7.25%
Secured savings certificates      7,573,972              7.07%           7,889,315      7,715,510        6.95%
                                -----------             ------         -----------    -----------        -----
         TOTAL                  $13,619,848              7.36%         $14,360,054    $12,736,368        7.12%
                                ===========             ======         ===========    ===========        =====
</TABLE>

* Does not consider commitment fees.

Maturities  of debt for each of the three years  subsequent  to March 31,  1998,
are:

              1999  ........................       $11,360,157
              2000  ........................         2,085,377
              2001  ........................         1,329,000
                                                   -----------
                                                   $14,774,534
                                                   ===========
Included in maturities  for the year ended March 31, 1999 are other demand notes
payable of $4,910,711.

All debt obligations,  except for other demand notes payable, are secured by the
pledge of specific mortgage notes receivable.

Maturities of SSCs and debt obligations are financed through principal  payments
received on loans,  advances on other demand  notes  payable and advances on the
$15,000,000 line of credit which is expected to be renewed on an annual basis.

                                      -28-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997

Descriptions of the various categories of debt obligations follow:

SECURED SAVINGS CERTIFICATES

SSCs were  issued in amounts of $1,000 or more and have  single  maturity  dates
from 30 days to 10 years  from  date of issue.  With  respect  to an  individual
certificate, interest rate and frequency of payment of interest (either monthly,
quarterly,  semiannually,  annually  or at  maturity)  are  fixed at the time of
issuance of the certificate.  Effective July 1997, Church Loans discontinued the
sale of SSCs.

The certificates are secured under the terms of certain indentures that require,
among other things,  the pledge of mortgage notes  receivable  with total unpaid
principal  amounts  not less  than  100% of the  aggregate  principal  amount of
certain respective SSC registrations outstanding. As of March 31, 1998 and 1997,
Church Loans was in compliance with the requirement.

LINE OF CREDIT PAYABLE TO BANK

The line of credit payable to bank consists of borrowings under a loan agreement
effective   through   September  1,  1998,   that  provides  for  a  $15,000,000
($10,000,000  in 1997) line of credit with  certain  commitment  fees.  The loan
agreement  requires  Church Loans to pledge  mortgage  loans  receivable  having
unpaid principal balances with an aggregate present value, discounted at 2% over
the  prime  rate  (10.50%  at March  31,  1998),  of not less  than  110% of all
indebtedness  owed to the bank.  Interest  accrued  at the  prime  rate less one
percent from  September  1, 1997 to March 31,  1998,  at the prime rate less one
quarter of one  percent  from  September  1, 1996 to August 31,  1997 and at the
prime  rate  from  April  1,  1996 to  August  31,  1996.  Interest  is  payable
semiannually.

Additionally,  the line of credit  requires  that Church  Loans' net worth be no
less than  $18,000,000 and its total  indebtedness  shall not exceed 150% of its
net worth. At March 31, 1998, Church Loans' total indebtedness was approximately
$17,200,000 less than the maximum amount permitted under the agreement.

DEMAND NOTES PAYABLE

The demand notes  payable bear  interest at 1% less than the prime rate (payable
monthly) and are unsecured (see note 6).

NOTE 3 - INCOME TAX PROVISION

Church Loans has elected to be taxed as a real estate investment trust under the
provisions of the Internal Revenue Code. To qualify as a real estate  investment
trust under the Code, Church Loans must, among other things, distribute at least
95% of its taxable income to its shareholders through dividends. Church Loans is
required to pay  dividends  of at least 85% of its calendar  year  undistributed
income by February 1 or be subject to a special  federal excise tax of 4% on the
undistributed amount.

Deferred  taxes were not  significant  to Church Loans' 1998 and 1997  financial
statements.

                                      -29-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997


Total  income tax  expense  for the years  ended March 31, 1998 and 1997 is less
than the amount computed by applying the applicable statutory federal income tax
rate (35%) to income before provision for income taxes as follows:

                                                        1998             1997
                                                        ----             ----
Computed "expected" federal income tax expense .....  $787,386         $750,308
Increases (decreases) in taxes resulting from:
    Dividends ......................................  (784,829)        (809,355)
    Graduated rate differential ....................   (12,669)         (12,570)
    Difference in provision for loan losses for
       financial and tax purposes ..................   (28,127)          27,842
    Difference in accounting for interest
       recognized for financial and tax purposes ...    58,102           60,755
    Other ..........................................     3,277              -
                                                      --------         --------
ACTUAL TAX EXPENSE .................................  $ 23,140         $ 16,980
                                                      ========         ========

NOTE 4 - NET INCOME PER SHARE

Net income per share of  beneficial  interest is based on the  weighted  average
number of shares  outstanding,  which was  7,007,402 for each of the years ended
March 31, 1998 and 1997.  There were no share  equivalents or other  potentially
dilutive securities outstanding during any of the periods presented.

NOTE 5 - DIVIDENDS

All  dividends  paid by  Church  Loans are  taxable  as  ordinary  income to the
recipient.  A schedule of  dividends  paid during the years ended March 31, 1998
and 1997 follows:

                                                        Divdend amount
                                                    ---------------------
          Date of record             Date paid      Per share     Total
          ------------------------   ------------   ---------  ----------
          March 31, 1996 .........   May 1996       $   .09    $  630,666
          December 31, 1996 ......   January 1997       .23     1,611,702
          March 31,1997 ..........   May 1997           .10       700,740
          December 31, 1997 ......   January 1998       .21     1,471,555

In April  1998,  a  dividend  of  $770,814  ($.11 per share)  was  declared  for
stockholders of record on March 31, 1998.

NOTE 6 - RELATED PARTY TRANSACTIONS

Other demand notes  payable at March 31, 1998 and 1997 included  notes  totaling
$1,969,938 and $1,648,660, respectively, which represent borrowings from related
parties.  The  notes  bear  interest  at 1% less  than  the  prime  rate and are
unsecured. Interest expense incurred on related party other demand notes payable
was not significant for 1998 or 1997.

                                      -30-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST

                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997


Secured  savings  certificates  at March 31, 1998 and 1997 include  certificates
totaling  $240,000 and $315,692,  respectively,  which represent  liabilities to
related parties.  Interest  expense incurred on savings  certificates of related
parties was not significant for 1998 or 1997.

NOTE 7 -      CASH FLOW INFORMATION

Supplemental information on cash flows and noncash transactions is as follows:

                                                        1998              1997
                                                        ----              ----
Supplemental cash flow information:
    Interest paid  ...............................  $  937,230          $930,016
                                                    ==========          ========

    Income taxes paid were not material in 1998 and 1997

Schedule of noncash investing and financing activity:

    Real estate acquired through foreclosure ....   $1,359,536          $119,950
                                                    ==========          ========

NOTE 8 - COMMITMENTS

Church Loans is a party to financial instruments with  off-balance-sheet risk in
the normal course of business.  Commitments  to extend credit are  agreements to
lend to a customer as long as there is no violation of any condition established
in the contract.  Commitments  generally  have variable  interest  rates,  fixed
expiration  dates or other  termination  clauses and  require  payment of a fee.
Since some of the  commitments  may expire  without being drawn upon,  the total
commitment amounts do not necessarily represent future cash requirements. Church
Loans  evaluates each  customer's  credit  worthiness on a  case-by-case  basis.
Collateral  generally  includes real estate  properties.  The exposure to credit
loss in the event of  nonperformance  by the other party to the  commitments  to
extend  credit is  represented  by the  contractual  amount.  At March 31, 1998,
Church  Loans  had  outstanding  loan  commitments  (by  contract   amounts)  of
approximately  $14,275,000,  including $7,845,000 to finance the construction of
or provide permanent financing for assisted living centers.  Management does not
anticipate any losses as a result of these transactions.

NOTE 9 -      DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial  instruments,  the results of applying  such methods and
assumptions to the financial  instruments and limitations inherent in fair value
estimates:

CASH AND CASH EQUIVALENTS

The assets are considered  short-term  instruments for which the carrying amount
is a reasonable estimate of fair value.

                                      -31-
<PAGE>

                        CHURCH LOANS & INVESTMENTS TRUST

                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1998 AND 1997

LOANS AND CHURCH BONDS

Fair  values  are  estimated  for  portfolios  of loans with  similar  financial
characteristics.  Loans are  segregated  by type,  such as mortgage  and interim
construction  loans and church bonds.  Each loan  category is further  segmented
into  fixed  and  adjustable  rate  interest  terms.  For  variable-rate  loans,
primarily  interim  construction  loans,  that  reprice  frequently  and with no
significant  change in credit risk,  fair values are based on carrying  amounts.
The fair value of fixed-rate  mortgage loans and bonds is generally estimated by
discounting  the future cash flows  through  the  estimated  maturity  using the
current  rates at which  similar  loans would be made to borrowers  with similar
credit  ratings.  The estimate of maturity is based on Church Loans'  historical
experience with repayments for each loan classification,  modified, as required,
by an estimate of the effect of current  economic  and lending  conditions.  The
carrying  value of loans,  net of the allowance for loan losses was  $34,355,426
and  $33,614,231 and the fair value of loans was  approximately  $34,800,000 and
$33,900,000 at March 31, 1998 and 1997, respectively.

NOTES PAYABLE AND LINE OF CREDIT

The fair value of notes payable and the line of credit are equal to the carrying
value as such liabilities are deemed to be short-term borrowings.

SECURED SAVINGS CERTIFICATES

The fair value of secured  savings  certificates  is  estimated  using the rates
currently  offered for financial  instruments  of similar  characteristics.  The
carrying value of secured savings certificates was $7,063,823 and $7,573,972 and
the fair value of secured savings certificates was approximately  $7,200,000 and
$7,600,000 at March 31, 1998 and 1997, respectively.

COMMITMENTS TO EXTEND CREDIT

Generally,  Church Loans enters into  commitments to extend credit at adjustable
interest terms.  Accordingly,  the commitment amount is a reasonable estimate of
fair value.

LIMITATIONS

Fair value  estimates  are made at a specific  point in time,  based on relevant
market  information  and  information  about  the  financial  instrument.  These
estimates do not reflect any premium or discount that could result from offering
for sale at one time Church  Loans'  entire  holdings of a particular  financial
instrument.  Because no market exists for a significant portion of Church Loans'
financial  instruments,  fair value  estimates are based on judgments  regarding
future   expected   loss   experience,   current   economic   conditions,   risk
characteristics  of various  financial  instruments,  and other  factors.  These
estimates  are  subjective  in nature and involve  uncertainties  and matters of
significant  judgment  and,  therefore,  cannot be  determined  with  precision.
Changes in assumptions could significantly affect the estimates.

                      This information is an integral part
                    of the accompanying financial statements.

                                      -32-
<PAGE>