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, 1997 and 1996,  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, 1997 and 1996,  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 9, 1997

                                      -12-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)
                                 BALANCE SHEETS
                             MARCH 31, 1997 AND 1996

                  ASSETS                                1997            1996
                                                   ------------    -------------
CASH AND CASH EQUIVALENTS ......................   $    586,629    $    722,430
RECEIVABLES
    Mortgage loans and church bonds - performing     19,177,849      21,886,390
    Interim construction loans - performing ....     12,133,111       7,877,489
    Nonperforming mortgage loans, church bonds
      and interim construction loans ...........      3,158,484       2,769,345
    Less: Allowance for possible credit losses .       (855,213)       (728,665)
                                                   ------------    ------------
                                                     33,614,231      31,804,559
                                                   ------------    ------------
    Accrued interest receivable ................        303,756         307,291
    Notes receivable ...........................        536,453         483,631
                                                   ------------    ------------
                  Total receivables ............     34,454,440      32,595,481
                                                   ------------    ------------
PROPERTY AND EQUIPMENT, net of accumulated
    depreciation of $445,049 and $429,375 in
    1997 and 1996, respectively ................        213,291         228,965
PROPERTY HELD FOR INVESTMENT ...................           --            83,714
UNAMORTIZED DEBT EXPENSE AND OTHER ASSETS ......        201,392          86,730
                                                   ------------    ------------
TOTAL ASSETS ...................................   $ 35,455,752    $ 33,717,320
                                                   ============    ============
                      LIABILITIES AND SHAREHOLDER' EQUITY
LIABILITIES
     Notes payable and line of credit:
         Related party .........................   $  1,648,660    $  1,482,250
         Other .................................      4,397,216       3,073,830
                                                   ------------    ------------
                                                      6,045,876       4,556,080
     Secured savings certificates:
         Related party .........................        315,692         485,692
         Other .................................      7,258,280       7,059,683
                                                   ------------    ------------
                                                      7,573,972       7,545,375
     Accrued interest payable ..................         45,211          37,817
     Federal income taxes payable ..............           --             7,060
     Other .....................................        555,574         220,259
                                                   ------------    ------------
                  Total liabilities ............     14,220,633      12,366,591
                                                   ------------    ------------
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 ....................        611,253         726,863
                                                   ------------    ------------
                  Total shareholders' equity ...     21,235,119      21,350,729
                                                   ------------    ------------
TOTAL LIABILITIES AND
     SHAREHOLDERS' EQUITY ......................   $ 35,455,752    $ 33,717,320
                                                   ============    ============

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

                                      -13-
<PAGE>


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

                              STATEMENTS OF INCOME

                       YEARS ENDED MARCH 31, 1997 AND 1996

                                                            1997        1996
                                                            ----        ----
INTEREST INCOME AND FEES
     Interest and fees on mortgage loans, church
      bonds and interim construction loans ...........   $3,788,611   $4,174,217
     Interest on temporary investments ...............       52,595       32,959
                                                         ----------   ----------
                  Total interest income and fees .....    3,841,206    4,207,176

DEBT EXPENSE
     Interest ........................................      937,410    1,121,311
     Amortization of:
       Registration costs ............................       30,285       21,321
       Commissions paid to brokers ...................       58,144       50,212
                                                         ----------   ----------
                  Total debt expense .................    1,025,839    1,192,844
                                                         ----------   ----------
                  Net interest income ................    2,815,367    3,014,332

PROVISION FOR POSSIBLE
     CREDIT LOSSES ...................................      135,000       85,000
                                                         ----------   ----------
               Net interest income less provision
                 for possible credit losses ..........    2,680,367    2,929,332
                                                         ----------   ----------

OTHER INCOME .........................................       24,898       11,683

OTHER OPERATING EXPENSES
     General and administrative ......................      520,575      513,689
     Board of Trust Managers' fees ...................       40,952       40,708
                                                         ----------   ----------
               Total other operating expenses ........      561,527      554,397
                                                         ----------   ----------
               Income before provision for
                income taxes .........................    2,143,738    2,386,618

PROVISION FOR INCOME TAXES ...........................       16,980       27,488
                                                         ----------   ----------
NET INCOME ...........................................   $2,126,758   $2,359,130
                                                         ==========   ==========

NET INCOME PER SHARE .................................   $      .30   $      .34
                                                         ==========   ==========

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

                                      -14-
<PAGE>


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

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                       YEARS ENDED MARCH 31, 1997 AND 1996

                                     SHARES OF BENEFICIAL INTEREST
                                     ----------------------------  UNDISTRIBUTED
                                           SHARES       AMOUNT       NET INCOME
                                        -----------   -----------   -----------
 BALANCE, MARCH 31, 1995 ............     7,007,402   $20,623,866   $   610,102

      Cash dividends ($.32 per share)          --            --      (2,242,369)

      Net income ....................          --            --       2,359,130
                                        -----------   -----------   -----------

 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
                                        ===========   ===========   ===========

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

                                      -15-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                            STATEMENTS OF CASH FLOWS

                       YEARS ENDED MARCH 31, 1997 AND 1996

                                                        1997            1996
                                                        ----            ----
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income .................................   $  2,126,758    $  2,359,130
    Adjustments to reconcile net income to net
     cash provided by operating activities:
        Depreciation ...........................         15,674          15,670
        Amortization of debt expense ...........         88,429          71,533
        Amortization of loan discounts .........       (166,457)       (311,975)
        Provision for possible loan losses .....        135,000          85,000
        Changes in:
          Accrued interest receivable ..........          3,535          32,342
          Accrued interest payable .............          7,394         (56,606)
          Federal income taxes payable .........         (7,060)          2,050
          Other liabilities ....................        335,315         (94,512)
        Other, net .............................       (159,130)         (2,590)
                                                   ------------    ------------
            Net cash provided by
              operating activities .............      2,379,458       2,100,042
                                                   ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES
    Investment in mortgage and interim
     construction loans and church bonds .......    (16,691,347)    (11,424,033)
    Payments received on mortgage and
     interim construction loans and
     church bonds ..............................     14,921,586      18,434,281
    Advances on notes receivable ...............       (530,708)       (321,598)
    Payments received on notes receivable ......        477,886         319,845
    Proceeds from sale of property held
     for investment ............................         71,810            --
                                                   ------------    ------------
             Net cash provided (used) by
              investing activities .............     (1,750,773)      7,008,495
                                                   ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES
    Sale of secured savings certificates .......      2,648,579       4,595,999
    Borrowings on notes payable and line
     of credit .................................      9,563,442       9,059,755
    Principal payments on:
       Secured savings certificates ............     (2,619,982)     (3,834,355)
       Notes payable and line of credit ........     (8,073,646)    (16,243,033)
    Registration costs of secured savings
     certificates ..............................           --           (22,321)
    Commissions paid to brokers on issuance
     of secured savings certificates ...........        (40,511)        (66,760)
    Cash dividends paid ........................     (2,242,368)     (2,242,369)
                                                   ------------    ------------
              Net cash used by
                financing activities ...........       (764,486)     (8,753,084)
                                                   ------------    ------------
              Increase (decrease) in cash and
               cash equivalents ................       (135,801)        355,453
CASH AND CASH EQUIVALENTS,
    BEGINNING OF YEAR ..........................        722,430         366,977
                                                   ------------    ------------
CASH AND CASH EQUIVALENTS,
    END OF YEAR ................................   $    586,629    $    722,430
                                                   ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the year for interest .........   $    930,016    $  1,177,917
                                                   ============    ============
Income taxes paid were not material in 1997 and 1996.

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

                                      -16-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                             MARCH 31, 1997 AND 1996

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 across the United States,  particularly in the southern  portion of the
U.S.  During 1995,  Church Loans also began making  certain  interim real estate
construction  loans to entities other than churches.  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 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, 1997 and 1996 as
follows:

                                   LOAN AND CHURCH      TOTAL       NET INTEREST
                                   BOND PORTFOLIO    INDEBTEDNESS   RATE MARGIN
                                   --------------    ------------   -----------
March 31, 1997 ....................    10.82             7.36           3.46
March 31, 1996 ....................    11.21             7.10           4.11

Church  Loans  finances  maturities  of SSCs and debt  obligations  through  its
available lines of credit,  the issuance of SSCs 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.

                                      -17-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                             MARCH 31, 1997 AND 1996

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
on loans and church bonds 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  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 management  believes that the  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  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 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, 1997 and 1996.

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.

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.

                                      -18-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                             MARCH 31, 1997 AND 1996

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.

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.

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

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

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1997 AND 1996

NOTE 1 - LOANS AND CHURCH BONDS

Mortgage loans  receivable  consist of  conventional  loans of  $20,600,313  and
$23,637,917 and church bonds due principally  from  congregations of Churches of
Christ  of  $520,894  and  $828,661  at March 31,  1997 and 1996,  respectively.
Interim  construction  loans of $14,327,500 and $9,213,466 at March 31, 1997 and
1996, respectively,  consist primarily of loans to churches for the construction
of church  facilities.  Mortgage  loans,  church bonds and interim  construction
loans are generally secured by first liens on real estate comprised primarily of
church buildings,  ministers'  residences 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.  The individual  endorsements  are usually for a specific  amount
with the sum of all such  guarantees  being an amount at least equal to the loan
amount.

Church  Loans'  portfolio  included  mortgage  loans,  church  bonds and interim
construction loans with interest rates ranging from 7% to 17% at March 31, 1997.
The weighted average annual interest rates of Church Loans' loan and church bond
portfolio were 10.82% and 11.21% at March 31, 1997 and 1996, respectively.

The following schedule is a summary of the combined  mortgage,  church bonds and
interim construction loan portfolios by size of loan at March 31, 1997 and 1996:

                                          1997                      1996
                                   -----------------         -------------------
                                   No. of  Carrying          No. of     Carrying
   Description                     loans    amount            loans      amount
------------------------           -----    ------            -----      ------

Over $1,500,000 ........             4   $ 7,071,684             3   $ 5,567,500
$1,300,000-1,499,999 ...             1     1,300,000             1     1,335,977
$1,000,000-1,299,999 ...             3     3,539,095             2     2,586,120
$900,000-999,999 .......             2     1,901,062             3     2,840,559
$800,000-899,999 .......             1       826,009             2     1,718,141
$700,000-799,999 .......             2     1,493,020             3     2,355,791
$600,000-699,999 .......             4     2,583,025             1       614,969
$500,000-599,999 .......             1       525,000             1       542,000
$400,000-499,999 .......             6     2,698,452             6     2,643,844
$300,000-399,999 .......             8     2,591,687             8     2,738,050
$200,000-299,999 .......             9     2,193,612            10     2,365,192
$100,000-199,999 .......            37     5,464,095            31     4,593,366
Under $100,000 .........            91     3,261,966           102     3,778,535
                                   ---   -----------           ---   -----------
                                   169    35,448,707           173    33,680,044
                                   ===   -----------           ===   -----------
Less:  unamortized purchase discounts
        on mortgage loans ........           979,263                   1,146,820
Less:  allowance for possible credit
        losses ...................           855,213                     728,665
                                         -----------                 -----------
TOTAL ............................       $33,614,231                 $31,804,559
                                         ===========                 ===========

                                      -20-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1997 AND 1996

NOTE 1 - LOANS AND CHURCH BONDS (CONTINUED)

The mortgage and interim  construction  loan  portfolios  included the following
loans at March 31, 1997, with  individual  balances in excess of 3% of the total
carrying amount of the combined portfolios:

Arlington Baptist Church, Baltimore, Maryland; interest
   at 11.25%; monthly payments of $24,265 to maturity
   on September 1, 2017 .....................................   $2,339,187
First United Pentecostal Church of Arnold, Arnold, Maryland;
    interest at 11.00%; monthly payments of $16,225 to
    maturity on September 1, 2020 ...........................    1,631,025
New Jerusalem Church, Lansing, Michigan; interest at prime
    + 2% (10.50% at March 31, 1997); monthly payments of
    $17,686 to maturity on December 1, 1995 .................    1,554,757 *
Meade Ministry, Lake City, Florida; interest at prime + 2%
    (10.50% at March 31, 1997); principal and interest due
    at maturity on November 1, 1997 .........................    1,546,715
Pennsylvania Baptist State Convention, Philadelphia,
    Pennsylvania; interest at prime plus 2% (10.50% at
    March 31, 1997); principal and interest due at
    maturity on June 28, 1997 ...............................    1,300,000
Bethany Baptist Church, Melbourne, Florida; interest at
    10.50%; monthly payments of $14,371 to maturity on
    January 1, 2011 .........................................    1,255,585
Duncanville Church of Christ, Duncanville, Texas; interest
    at 10.25%; monthly payments of $22,000 to maturity on
    February 1, 1998 ........................................    1,207,533 *
St. Stevens Church of God in Christ, San Diego, California;
    interest at prime + 2% (10.50%  at March 31, 1997);
    principal  and  interest  due at maturity on October 25,
    1994 (included in nonperforming assets at March 31, 1997)    1,075,977
                                                                ----------
                                                               $11,910,779
                                                               ===========
* Subsequent to March 31, 1997, these loans were paid in full.

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, 1997,  Church Loans had  outstanding  loan  commitments  (by
contract amounts) of approximately  $13,580,000,  including $6,584,000 for three
loans to one  borrower  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, 1997 and 1996 were $3,158,484 and $2,769,345,  respectively.  Interest
income which would have been recorded under the original terms of  nonperforming
loans and church bonds amounted to  approximately  $389,000 and $310,000 for the
years ended  March 31, 1997 and 1996,  respectively.  Interest  income  actually
recognized was not significant.

                                      -21-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1997 AND 1996

NOTE 1 - MORTGAGE AND INTERIM CONSTRUCTION LOANS (CONTINUED)

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, 1997, are:

                      1998 .............      $16,449,579
                      1999 .............        1,613,230
                      2000 .............        1,445,402
                      2001 .............        1,348,896
                      2002 .............        1,215,377

At March 31, 1997, mortgage loans were pledged to support indebtedness of Church
Loans as follows:

         Line of credit payable to bank ...                   $ 8,013,983
         Secured savings certificates .....                     9,087,494
                                                              -----------
         TOTAL MORTGAGE LOANS PLEDGED .....                   $17,101,477
                                                              ===========

A summary of  transactions  in the allowance for possible  credit losses for the
years ended March 31, 1997 and 1996 follows:

                                                  1997              1996
                                                  ----              ----

BALANCE AT BEGINNING OF YEAR ............... $    728,665     $     645,049
Provisions charged to operating expenses ...      135,000            85,000
Charge offs, net ...........................       (8,452)           (1,384)
                                             ------------     -------------

BALANCE AT END OF YEAR ..................... $    855,213     $     728,665
                                             ============     =============

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

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>  
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%
                                 -----------             =====         ===========    ===========        =====
                                   6,045,876

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>

                                      -22-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1997 AND 1996

NOTE 2 - DEBT OBLIGATIONS (CONTINUED)

<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, 1996
Term notes payable to banks      $      -                  -           $  2,666,667   $  1,861,111       9.45%
Line of credit payable to bank       550,001             8.25%*           5,606,001      2,194,522       8.98%
Other demand notes payable         4,006,079             7.25%         $  4,006,079   $  3,453,192       7.69%
                                ------------             =====         ============   ============       =====
                                   4,556,080
Secured savings certificates       7,545,375             6.93%         $  7,545,375   $  6,723,844       6.67%
                                ------------             =====         ============   ============       =====
         TOTAL                  $ 12,101,455             7.10%         $ 18,523,089   $ 14,089,507       7.72%
                                ============             =====         ============   ============       =====
                                                  
<FN>
* Does not consider commitment fees.
</FN>
</TABLE>

* Does not consider commitment fees.

Maturities  of debt for each of the three years  subsequent  to March 31,  1997,
are:

              1998 ..........               $   9,558,747
              1999 ..........                   2,716,725
              2000 ..........                   1,344,376
                                            -------------
                                            $  13,619,848
                                            =============

Included in maturities  for the year ended March 31, 1997 are other demand notes
payable of $4,312,875.

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 mortgage loans,  advances on other demand notes payable and advances
on the  $10,000,000  line of credit which is expected to be renewed on an annual
basis.

Descriptions of the various categories of debt obligations follow:

SECURED SAVINGS CERTIFICATES

SSCs are 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.

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% or 125% of the aggregate  principal amount
of certain respective SSC registrations outstanding.  Due to the fluctuations in
the amount of sales of certificates as well as in the repayment of notes pledged
to secure the certificates,  Church Loans has on occasion failed to maintain the
required ratios of pledged notes to outstanding  certificates for a short period
of time until the deficiency could be corrected.  The indenture trustee has been
aware of these  temporary  technical  defaults  of Church  Loans and has  waived
declaration  of a default under the respective  Indenture.  As of March 31, 1997
and 1996, Church Loans was in compliance with the requirement.

                                      -23-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1997 AND 1996

NOTE 2 - DEBT OBLIGATIONS (CONTINUED)

SECURED SAVINGS CERTIFICATES (Continued)


Church Loans has an agreement with Great Nation  Investment  Corporation  (Great
Nation)  whereby Great Nation will use its best efforts to sell SSCs  registered
by Church Loans. The agreement  provides that Church Loans will pay Great Nation
a commission on the basis of an annualized  rate equal to  three-fourths  of one
percent per annum of the face amount of each certificate sold by Great Nation.

LINE OF CREDIT PAYABLE TO BANK

The line of credit payable to bank consists of borrowings under a loan agreement
effective  through  September 1, 1997,  that provides for a $10,000,000  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 1% over the prime rate (8.50% at March
31, 1997), of not less than 110% of all indebtedness owed to the bank.  Interest
accrued at the prime rate less one quarter of one percent from September 1, 1996
to March 31,  1997 and at the prime rate from April 1, 1995 to August 31,  1996.
Interest is payable semiannually.

Additionally,  the line of credit  requires  that Church Loans' net worth not be
less than  $18,000,000 and its total  indebtedness  shall not exceed 150% of its
net worth. At March 31, 1997, Church Loans' total indebtedness was approximately
$18,200,000 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' 1997 and 1996  financial
statements.

Total  income tax  expense  for the years  ended March 31, 1997 and 1996 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:

                                                         1997        1996
                                                         ----        ----
   Computed "expected" federal income tax expense .   $ 750,308    $ 835,316
   Increases (decreases) in taxes resulting from:
       Dividends ..................................    (809,355)    (809,355)
       Graduated rate differential ................     (12,570)     (11,983)
       Difference in provision for loan losses for
          financial and tax purposes ..............      27,842      (69,784)
       Difference in accounting for interest
          recognized for financial and tax purposes      60,755       83,294
                                                      ---------    ---------
   ACTUAL TAX EXPENSE .............................   $  16,980    $  27,488
                                                      =========    =========

                                      -24-
<PAGE>
                        CHURCH LOANS & INVESTMENTS TRUST
                        (A REAL ESTATE INVESTMENT TRUST)

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1997 AND 1996

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, 1997 and 1996.  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, 1997
and 1996 follows:
                                                        Divdend amount
                                                    ---------------------
          Date of record             Date paid      Per share     Total
          ------------------------   ------------   ---------  ----------
          March 31, 1995 .........   May 1995       $   .08    $  560,592
          December 31, 1995 ......   January 1996       .24     1,681,777
          March 31,1996 ..........   May 1996           .09       630,666
          December 31, 1996 ......   January 1997       .23     1,611,702

In April  1997,  a  dividend  of  $700,740  ($.10 per share)  was  declared  for
stockholders of record on March 31, 1997.


NOTE 6 - RELATED PARTY TRANSACTIONS

Other demand notes  payable at March 31, 1997 and 1996 included  notes  totaling
$1,648,660 and $1,482,250, 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 1997 or 1996.

Secured  savings  certificates  at March 31, 1997 and 1996 include  certificates
totaling  $315,692 and $485,692,  respectively,  which represent  liabilities to
related parties.  Interest  expense incurred on savings  certificates of related
parties was not significant for 1997 or 1996.

NOTE 7 -      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.

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

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1997 AND 1996

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  $33,614,231
and  $31,804,559 and the fair value of loans was  approximately  $34,759,000 and
$33,164,000 at March 31, 1997 and 1996, 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 $7,573,972 and $7,545,375 and
the fair value of secured savings certificates was approximately  $7,585,000 and
$7,549,000 at March 31, 1997 and 1996, 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.

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

                          NOTES TO FINANCIAL STATEMENTS

                             MARCH 31, 1997 AND 1996

NOTE 8 - QUARTERLY OPERATING RESULTS (UNAUDITED)

The following quarterly operating results are unaudited,  but, in the opinion of
management,  include all adjustments  (consisting of normal recurring  accruals)
necessary for a fair  presentation  of Church Loans'  operating  results for the
periods indicated:

                                                  QUARTER ENDED
                                  ---------------------------------------------
                                  JUNE 30  SEPTEMBER 30  DECEMBER 31   MARCH 31
                                  -------  ------------  -----------   --------
Year ended March 31, 1997

     Interest income and fees    $896,316    $1,015,632     $987,924   $941,334
     Debt expense ...........     254,509       270,456      247,462    253,412
     Net interest income ....     641,807       745,176      740,462    687,922
     Net income .............     471,624       595,170      580,120    479,844
     Net income per share ...         .07           .08          .08        .07

                                                  QUARTER ENDED
                                  ---------------------------------------------
                                  JUNE 30  SEPTEMBER 30  DECEMBER 31   MARCH 31
                                  -------  ------------  -----------   --------
Year ended March 31, 1996

   Interest income and fees    $1,183,485    $1,034,747     $983,793  $1,005,151
   Debt expense ...........       342,644       304,055      261,022     285,123
   Net interest income ....       840,841       730,692      722,771     720,028
   Net income .............       644,032       596,635      587,838     530,625
   Net income per share ...           .09           .09          .08         .08

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

                                      -27-