UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
(Mark One)

   [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                       OR

   [_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

      For the transition period from _________________ to _________________

                         Commission File Number 0-11663

                             Chancellor Corporation
              (Exact name of Small Business Issuer in its Charter)

        Massachusetts                                     042626079
(State or other jurisdiction of                   (I.R.S. Employer I.D. No.)
 incorporation or organization)

  210 South Street, Boston, Massachusetts                   02111
 (Address of principal executive offices)                  Zip Code

          Issuer's telephone number, including area code (617) 368-2700


Securities registered pursuant to Section 12(b) of the Act:

Title of each class                              Name of each exchange on
                                                      which registered
       None                                                 None

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, par value $.01
                                (Title of Class)

Check  whether  the Issuer:  (1) has filed all  reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.                         Yes [X] No [ ]
<PAGE>
Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

Issuer's  revenues  for the year  ended  December  31,  1997 were  approximately
$4,433,000.

As of March 15,  1998,  25,404,156  shares of Common  Stock,  $.01 par value per
share; 8,000,000 shares of Series AA Convertible Preferred Stock, $.01 par value
per share (with a liquidation  preference of $.50 per share or $4,000,000);  and
710,526 shares of Series A Convertible Preferred Stock, $.01 par value per share
(with a  liquidation  preference  of  $1.90  per  share,  or  $1,350,000),  were
outstanding.  As of March 15,  1998,  2,000,000  shares of Series B  Convertible
Preferred Stock were authorized. Aggregate market value of the voting stock held
by  non-affiliates  of the  registrant  as of March 15,  1998 was  approximately
$1,201,000.  Aggregate  market value of the total voting stock of the registrant
as of March 15, 1998 was approximately $8,129,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Proxy  Statement for the Annual Meeting of  Stockholders to be held at 2:00 p.m.
on May 15,  1998 at the offices of  Sullivan &  Worcester  LLP,  One Post Office
Square, 23rd Floor, Boston, MA 02109 is incorporated into Part III hereof.

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This Annual Report on Form 10-KSB contains certain "Forward-Looking"  statements
as such term is defined in the Private Securities  Litigation Reform Act of 1995
and information  relating to the Company and its subsidiaries  that are based on
the beliefs of the  Company's  management  as well as  assumptions  used in this
report, the words "anticipate",  "believe",  "estimate",  "expect", and "intend"
and words or phrases of similar  import,  as they  relate to the  Company or its
subsidiaries or the Company management, are intended to identify forward-looking
statements.  Such  statements  reflect  the  current  risks,  uncertainties  and
assumptions   related  to  certain  factors   including,   without   limitation,
competitive   factors,   general  economic   conditions,   customer   relations,
relationships  with  vendors,   the  interest  rate  environment,   governmental
regulation  and  supervision,   seasonality,   distribution  networks,   product
introduction  and  acceptance,   technology  changes  and  changes  in  industry
conditions.  Should any one or more of these risks or uncertainties materialize,
or should any underlying  assumptions  prove incorrect,  actual results may vary
materially from those  described  herein as  anticipated,  believed,  estimated,
expected   or   intended.   The  Company   does  not  intend  to  update   these
forward-looking statements.

                                     PART I

                         ITEM 1. DESCRIPTION OF BUSINESS

         Chancellor Corporation ("Chancellor" or the "Company") was incorporated
in  Massachusetts  in January  1977.  It is  principally  engaged in (1) buying,
selling,  leasing and remarketing new and used equipment, (2) managing equipment
on and  off-lease,  and (3) arranging  equipment-related  financing  through its
principal  subsidiary,   Chancellor  Fleet  Corporation  ("Fleet"),   which  was
incorporated in Massachusetts in January 1980.

        HISTORICAL BUSINESS AND FISCAL YEAR 1997 SIGNIFICANT DEVELOPMENTS

         The Company originates lease transactions directly with equipment users
and in most cases sells those leases to investors. The Company also manages most
of the leases it sells to  investors  and,  when the original  leases  expire or
terminate,  remarket  the  equipment  for the benefit of the  investors  and the
Company.  The  Company  originates  leases  involving  primarily  transportation
equipment,  but also other equipment  including  material handling equipment and
construction  equipment.  Investors  who purchase  equipment  subject to a lease
receive  the tax and most of the  economic  benefits  associated  with the lease
transaction.  In certain  cases,  the  Company has  retained  leases for its own
account. The Company also arranges non-recourse financing for some of the leases
which it sells and for most leases  which it has  retained  for its own account.
Typically,  when the Company originates leases, the investors or buyers of those
leases are not known.  Therefore,  the Company at the time of entering  into the
lease  transaction  is  "underwriting"  the lease.  At the  expiration  or early
termination of the original lease,  the Company  typically sells or releases the
equipment on behalf of the investor.

         During the period 1989 through 1996,  the Company  incurred  cumulative
losses in excess of $50 million.  The Company  recorded losses of $1,802,000 and
$6,373,000  during fiscal 1997 and 1996,  respectively.  This decline led

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<PAGE>
to the  restructuring  and transition plan developed and  implemented  under the
direction of Vestex, the Company's majority  shareholder.  The continued loss in
1997 is due primarily to the lack of  sufficient  cash flow to add new leases to
the Company's own lease portfolio and continued  costs that were  anticipated to
occur in the first half of 1997 in connection  with the Company's  restructuring
efforts.  However,  the marked  decrease in loss from 1996 to 1997  reflects the
positive effect of management's  restructuring and cost containment  strategies,
which began in late fiscal 1996 and continued throughout fiscal 1997.

         In December 1996, a restructuring of the Company (the  "Restructuring")
occurred  pursuant to which certain  members of the Company's Board of Directors
and senior management were replaced.  In connection with the Restructuring,  the
Company's  Board of Directors  unanimously  adopted  resolutions  accepting  the
resignations submitted by Messrs. Dayton, Killilea and Morison as directors; Mr.
Morison's  resignation as an officer;  and approving the termination of a Voting
Agreement  dated April 11, 1996,  other than section 1.5 of such Agreement which
relates to indemnification of directors,  among the Company,  Brian M. Adley and
the  Company's  majority  shareholder,  Vestex  Capital  Corporation  ("VCC"  or
"Vestex").

         During 1994, and prior to becoming an affiliate, the board of directors
recommended  and  the  shareholders  approved  at the  1995  Annual  Meeting  of
Stockholders,  a consulting  agreement  with Vestex,  Inc.,  an affiliate of the
majority stockholder,  whereby the affiliate provides specified services related
to the Company's  equity  raising  efforts and financing  activities.  Under the
agreement,   the  affiliate  earns  a  fee  for  consummating   equity  or  debt
transactions.  The fee related to debt  transactions  is 1.5% of the transaction
amount through December 1996 at which time the Board of Directors  increased the
fee to 3.0% of the transaction  amount.  The fee related to equity  transactions
equals 7.5% of the  transaction  amount if a broker or  underwriting  fee is not
paid to a third  party  and  2.5%  of the  transaction  amount  if a  broker  or
underwriting fee is paid to a third party. The agreement was extended  effective
July 1, 1997 on the same terms and  conditions  through  June 2000.  Vestex also
provides  services to the Company on operational  and other matters for which it
is compensated at levels negotiated with the Company, as described below.

         During 1996 and through March 1997,  the affiliate  charged the Company
fees for certain  transactions it determined were consummated  during the period
and were covered by the  agreement.  The Company  disputed a certain  portion of
these charges.  The parties settled this dispute by agreeing that $3,000,000 was
incurred  relating to these  services,  of which  $800,000 and  $2,200,000  were
performed in 1997 and 1996,  respectively.  In connection with this  settlement,
Vestex agreed to write-off $1,113,000 of fees originally claimed.  These amounts
are  included  in  selling,   general,   and  administrative   expenses  on  the
consolidated statement of operations.  Per the agreement,  the payment is due on
demand, however, the affiliate has agreed that the Company will only pay the fee
during  the  coming  year if  payment  can be made  from  refinancing  or equity
proceeds  in a manner  that does not  impact the  Company's  ability to meet its
other obligations.

         As of December 31, 1996,  the Company had received  from Vestex a total
of $4,121,000, net of repayments and cost of $312,500, which consisted of

                                        4
<PAGE>

equity of  $1,421,000  and debt and  payables of $ 2,700,000.  During 1997,  the
Company  entered  into  several  transactions  with Vestex  that  resulted in an
increase of $ 1,856,000  resulting in a net equity  infusion of $ 5,977,000  and
debt and payables of $59,000 as of December 31, 1997.

         In accordance with the terms of the consulting agreement, Vestex earned
fees totaling $957,000.  The fees earned in 1997 were for services in connection
with the following: i) $800,000 through March 31, 1997 as described above, ii) a
monthly fee of $12,500 for April 1997 through  December 1997, and iii) a $45,000
fee relating to the $1,500,000  loan provided by the then  Vice-Chairman  of the
Board of Directors. This loan was guaranteed by Brian M. Adley and Vestex.

         The Company  also  entered into  several  transactions  whereby  Vestex
received  fees  of  approximately  $1,288,000  in  1997.  The  Company  recorded
approximately   $519,000  of  these   expenses  in   connection   with  Vestex's
negotiations  on  behalf  of the  Company  resulting  in  significant  financial
benefits  and  savings to the  Company.  This  includes,  but is not limited to,
savings  of  approximately   $930,000,   whereby  the   intercreditor   loan  of
approximately  $1,906,000  was paid in  advance  of term;  savings  in excess of
$2,000,000 on the termination of the Company's  office lease and  renegotiations
of more favorable  terms on the Company's new office lease;  and development and
implementation  of strategies  enabling the Company to properly  recover certain
administrative  costs  incurred in  connection  with the  administration  of the
Company's  trust  portfolio  assets.  The Company  also  recorded an  additional
$394,000 in connection with Vestex's services for development and implementation
of the Company's  successful  restructuring  and  transition  plan.  This amount
reduced the  restructuring  charges  accrued at December 31, 1996. In connection
with a $1,500,000 loan provided to the Company by the Vice-Chairman of the Board
of Directors,  Vestex  provided  certain  guarantees and was  compensated in the
amount of $375,000 for providing such guarantee.

         The Company purchased  furniture and computer  equipment from Vestex in
the amount of $300,000.  The  acquisition  prices were based on  estimated  fair
value as of the date of the  transaction.  At December 31,  1997,  approximately
$60,000 of the furniture acquired was not in service by the Company.

         The Company received loans from Vestex during 1997 totaling $1,735,000,
including  $1,500,000 in connection  with the repayment of the Company's debt to
the Vice-Chairman. Interest on loans payable to Vestex accrues at the prime rate
plus 2% (10.5% as of December 31, 1997).  During 1997, interest of approximately
$92,000 was incurred on debt owed Vestex.

         During 1997, Vestex agreed to take stock, at the then fair market value
on the  date  of  conversion,  in  lieu of  cash  in  consideration  of  certain
obligations due Vestex by the Company.  In February 1997, the Board of Directors
approved the issuance of 3,000,000  shares of the Company's  Series AA Preferred
Stock at $.30 per share to Vestex in  consideration  of  $900,000 of the amounts
due Vestex. In June 1997, the Company issued 8,333,333 shares of Common Stock to
Vestex  in  consideration  of  $1,000,000  of fees and debt  including  Vestex's
guarantee of the  $1,500,000  loan provided to the Company by the Vice Chairman,
stated above.  Also in June 1997, the Company issued  6,716,667 shares of Common
Stock to Vestex in consideration of approximately 

                                        5

<PAGE>

$806,000 of fees and debt due. In September  1997, the Company issued  5,000,000
shares of Common Stock to Vestex in consideration  of approximately  $500,000 of
Vestex fees and debt due. In December 1997, the Company issued 710,526 shares of
the Company's  Series A Preferred Stock to Vestex in consideration of $1,350,000
of Vestex fees and debt due. In addition  to the  conversion  of accrued  Vestex
fees  and  debt  into  the  Company's   preferred  and  common  stock   totaling
approximately  $4,556,000,  the Company  also repaid debt and fees  through cash
payments in the amount of approximately $2,848,000. For the years ended December
31, 1997 and 1996,  the Company  incurred  expenses to Vestex of $1,850,000  and
$2,594,000,  respectively.  As of December  31,  1997,  the Company  owed Vestex
$50,000 of unpaid loans and  approximately  $9,000 of unpaid fees.  In addition,
Vestex is due  $50,000  of unpaid  fees  assumed  by the  Company at the time of
acquisition of Long River Capital.

         An  affiliate  of the  Chairman  of the  Board  of  Directors  provided
supervisory and other construction services in connection with the build-out and
improvements  to the Company's  new office  space.  The total fees earned by the
affiliate  were $275,000,  all of which was paid in 1997.  The Company  recorded
these amounts as capitalized leasehold improvements.

         In April 1997, the Company's loans due to an  intercreditor  group were
paid in advance of their terms. The balance due on the intercreditor group loans
as of the repayment date was approximately  $1,906,000.  The intercreditor group
accepted a payment of  $976,000  in cash,  plus  closing  fees of  $22,000,  and
forgave the remaining  balance of $930,000.  In connection with this transaction
the Company provided a security interest in all assets of the Company to Vestex.

         During 1996, the Company acquired a fifty percent interest in TruckScan
LLC  ("TruckScan")  for a $350,000  contribution to equity.  Due to the level of
control the Company  exercised  over the  operation  of  TruckScan,  TruckScan's
financial  statements  are  consolidated  with the  financial  statements of the
Company  and its other  subsidiaries.  On May 1, 1997 the  Company  sold its 50%
investment  in  TruckScan  to Telescan,  the joint  venture  partner and a party
unrelated to the Company.  In  consideration  for the sale, the Company received
certain  assets from Telescan with an estimated  value of $11,000 and a one year
promissory  note in the amount of $50,000  secured by certain assets of Telescan
and   forgiveness   of  a  promissory   commitment  to  contribute   capital  of
approximately  $300,000 which was authorized by the former management and board.
The Company realized a gain of $41,000 on the sale of this investment. TruckScan
had a loss of $29,000 and $422,000  from January 1, 1997 through  April  30,1997
(date of sale) and from June 21, 1996 (date of inception)  through  December 31,
1996, respectively.  The minority owner's share of this loss exceeded its equity
by $225,000. As a result, the entire loss of $29,000 and $422,000,  respectively
is recognized by the Company.

         On July 31,  1997,  the  Company  acquired  certain  assets and assumed
certain liabilities of Long River Capital, Inc., a company engaged in automobile
loan application  processing and origination of automobile loans for high credit
risk  consumers.  The  acquisition  was accounted for by the purchase  method of
accounting,  and  accordingly,  the purchase  price has been allocated to assets
acquired and liabilities assumed based on their fair market value at the date of
acquisition. (See Note O of the Notes to Consolidated Financial Statements).

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<PAGE>

         In August  1997,  the  Company  committed  to make a $1 million  equity
investment  in the New Africa  Opportunity  Fund,  LP  ("NAOF").  NAOF is a $120
million  investment  fund  composed  of $40  million  from  equity  participants
including  the  Company,  and $80  million  in debt  financing  provided  by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency.  The  purpose  of the fund is to make  direct  investments  in  emerging
companies  throughout  Africa.  As of December 31, 1997,  the Company had funded
approximately  $185,000 and is obligated  to provide  additional  funding in the
approximate amount of $815,000.

         On December 12, 1997, the Company,  Afinta Motor Corporation (Pty) Ltd.
("AMC"),  its wholly  owned  subsidiary  Afinta  Financial  Services  (Pty) Ltd.
("AFS"), and New Africa Opportunity Fund, LP ("NAOF"),  entered into a letter of
intent,  under which a diversified  financial  services company,  Africa Finance
Corporation ("AFC"), specializing in commercial and consumer financing in Africa
will be formed.  The parties commenced  operations on January 1,1998 pursuant to
an agreement reached in principle, as outlined in the Letter of Intent. On March
27, 1998, the parties finalized the terms of the agreement and  responsibilities
of the parties by the closing of the  transaction  and executing the  documents.
The parent holding company will be Chancellor Africa  Corporation  ("CAC").  The
Company will provide,  through CAC,  $5,000,000 of start-up  capital to AFC, and
1,000,000  shares of the Company's  Series B  Convertible  Preferred  Stock.  In
consideration of a 40% ownership  interest in AFC, NAOF will infuse  $10,000,000
of cash in two $5,000,000 tranches.  Upon the event of a material adverse change
in the  financial  condition  of AFC prior to the second  funding,  and with the
unanimous  consent of the board of directors  of AFC, the second  funding may be
extended to a mutually  agreeable  date or terminated.  In connection  with this
capital  infusion,  AFC will also issue 500,000 shares of the Company's Series B
Convertible Preferred Stock to NAOF. In consideration of a 9% ownership interest
in AFC, and the issuance of 500,000 shares of the Company's Series B Convertible
Preferred  Stock,  AMC  will  contribute  the  net  assets  of  AFS;   exclusive
distribution  rights for AMC  products in North  America,  Eastern  Europe,  the
Russian  Federation and Commonwealth of Independent  States,  and  Asia-Pacific;
nonexclusive  distribution  rights  for  AMC  products  in  South  America;  and
discounted  pricing for the  purchase of AMC  products to be sold and/or  leased
through AFC or its assignee.  AMC will also  transfer a 2-1/2 percent  ownership
interest  in AMC to CAC in  connection  with  this  transaction.  The  Series  B
Convertible Preferred stock has a liquidation  preference of $2.00 per share and
is convertible  into 10 shares of the Company's  Common Stock for each one share
of preferred stock at the holders option.

         During  1997,  as  part  of  the  Company's  restructuring,  management
undertook  a  review  of its  operations.  As part of this  review,  management,
outside  counsel and  industry  consultants  reviewed the trust  agreements  and
determined that the Company historically had not charged the trust for the costs
of their  administration.  As a result of this review management determined that
the Company had not been reimbursed  approximately $22 million of costs incurred
for trust administration for periods prior to 1997. Management,  with the advice
of  counsel,  subsequently  began to charge the trusts  for these  services  and
implemented  plans  to  recover  past  costs.  The  consolidated  statements  of
stockholders'  equity (deficit) reflects an increase in stockholders'  equity of
$1,437,000 from $1,365,000 to $2,802,000


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as of December 31, 1995 for trust  administration  costs  recovered  for periods
prior to 1996.  Management  makes no  representations  concerning  the Company's
ability  to  recover  any  further  costs for  periods  prior to 1997.  The 1996
consolidated   statements  of  operations  have  been  restated  to  reflect  an
adjustment to include a reduction in the general and administrative  expenses of
approximately   $431,000  for  trust   administration   costs  recovered  and  a
corresponding  decrease in the net loss from  $6,804,000 to  $6,373,000  for the
year ended December 31, 1996. The net loss per share amounts in the consolidated
statements of  operations  have been restated from $1.32 to $1.24 as a result of
this change.

         The  ability of the  Company to operate  profitably  in the future will
depend  largely on the amount of new  capital  available  to the Company and the
cost of that capital.  The Company  continues to explore possible sources of new
capital  including,  for example,  obtaining  new or additional  recourse  debt,
obtaining new equity capital, securitizing lease transactions,  obtaining equity
capital from private investors,  purchases of equipment leases originated by the
Company  and/or  entering  into  strategic  alliances/joint  ventures with other
leasing or financial services companies and the sale of ancillary business units
and/or assets as considered  appropriate.  The Company intends to invest any new
capital that it obtains in leases for its own  portfolios (if practical) as well
as to invest in certain remarketing and other business operations.

Description of Business

         The majority of the  Company's  leases are  noncancelable  "net" leases
which contain  provisions  under which the customer must make all lease payments
regardless  of any defects in the  equipment  and which  require the customer to
insure the equipment against casualty loss, and pay all related property,  sales
and other  taxes.  Some of the leases  written by the Company  provide for early
termination  options.  Generally,  these  options may be  exercised at specified
times upon receipt by the Company of an amount at least equal to the  discounted
present value of remaining  rent  payments.  The Company  intends to collect all
termination payments.  Other leases allow the lessee at certain times to require
the Company to attempt to sell or sublease the  equipment  for the lessee,  with
the  Company  sharing in any losses or gains  should a decrease  or  increase in
revenue streams occur as a result.

         Leases are generally  originated for private third party  purchasers of
equipment.  The Company's lease  origination  marketing  strategy is transaction
driven. With each lease origination opportunity,  the Company evaluates both the
prospective  lessee  and  the  equipment  to be  leased.  With  respect  to each
potential  lessee,  the Company evaluates the lessee's credit  worthiness.  With
respect to the equipment, the Company evaluates the remarketing potential.

         The Company currently concentrates on leasing transportation equipment,
such as  tractors,  trailers and trucks.  The Company  also leases  construction
equipment,  aircraft,  material  handling  equipment  and other  equipment.  The
Company's business plan calls for  diversification of the equipment available to
be  financed.   This   diversification   will  provide  for  the   financing  of
low-obsolescence,  hard-asset equipment with predictable and dependable residual
values,  including  but not limited to,  plastics,  printing,  construction  and
general  manufacturing  equipment.  Further,  the Company will seek to syndicate
transactions not meeting these criteria or the Company's credit risk profile.

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<PAGE>
         The  Company  leases   equipment  to  lessees  in  diverse   industries
throughout the United States. Additionally, the Company's international presence
includes  transactions  in  the  Russian  Federation  and  the  Commonwealth  of
Independent States ("CIS").  Although the Company's direct solicitation  efforts
involving  leases of new  equipment  have shifted from Fortune 100  companies to
include  smaller  business  entities,  most  of  the  Company's  lessees  of new
equipment are still of substantial  creditworthiness,  with minimum net worth in
excess of $25 million.

         The Company's level of lease origination declined  significantly in the
years 1989 through 1997.  Between 1989 and 1997, the Company sold  substantially
all new lease  origination  to private  investors  and  retained  very few lease
originations  for its  own  account.  During  1997,  the  Company  entered  into
approximately 10 new lease transactions  involving  equipment having an original
equipment cost of  approximately  $3 million,  versus 42 transactions  involving
equipment  having an  original  cost of $21 million in 1996.  Additionally,  the
Company  realized  cash from  origination  activities of $93,000 and $224,000 in
1997 and 1996, respectively.

         During 1997,  92% (based on original  equipment  cost) of the new lease
transactions  originated  by the Company  were with the one largest  lessee.  In
addition,  approximately  55% and 37%  (based  on  original  equipment  cost) of
equipment sold to investors in 1997 were purchased by the two largest investors.
During  1996,  42%,  11% and 10% (based on original  equipment  cost) of the new
lease  transactions  originated  by the  Company  were  with the  three  largest
lessees.  In  addition,  approximately  26%,  16% and  13%  (based  on  original
equipment  cost) of equipment  sold to  investors in 1996 were  purchased by the
three largest investors.

         Equipment  Acquisition.  The Company acquired $214,000 of new equipment
under 4 leases  during  1997.  Additionally,  the  Company  acquired 10 existing
leases in connection with the prepayment of the intercreditor  loan. The Company
acquired no equipment in 1996.

         Equipment Disposition. In 1997, the Company disposed of $4.0 million of
the Company's  portfolio  equipment (measured by its original cost) on operating
leases and  disposed of $590,000 on direct  finance  leases,  reducing the total
equipment (net of  depreciation,  pay-down and  write-downs) on operating leases
and direct finance leases to $232,000 and $521,000,  respectively.  In 1997, the
Company,  as a result of a commitment  from the previous  management  and board,
sold  $1,300,000  (based on original cost) of equipment under one lease from the
portfolio  prior to lease  expiration.  In 1996,  the Company  disposed of $11.4
million of the Company's  portfolio equipment (measured by its original cost) on
operating leases and disposed of no equipment on direct finance leases, reducing
the total equipment (net of depreciation, pay-down and write-downs) on operating
leases and direct  finance  leases to $497,000 and  $748,000,  respectively.  In
1996,  the Company  voluntarily  sold $1.1 million of equipment  under one lease
from the portfolio prior to lease expiration.

                                        9

<PAGE>
Remarketing Activities

         The  remarketing  of equipment  plays a vital role in the operations of
the Company. In connection with the sale of lease transactions to investors, the
Company  typically  is  entitled  to share in a portion  of the  residual  value
realized upon remarketing.  Successful remarketing of the equipment is essential
not only to the realization of the Company's  interest in the residual value but
also for the Company to recover its original  investment in the equipment in its
portfolios and to recognize a return on that investment.

         The Company  continues to dedicate  substantial  resources  towards the
development  and  improvement  of  its  remarketing  capabilities,  which  is  a
significant profit center for the Company.  The Company's strategy is to exploit
its remarketing  expertise by providing fee-based  remarketing services to fleet
equipment owners and lessees and also to create a dealer  capability under which
the  Company  would buy and re-sell  fleet  equipment.  The Company  continually
explores the  potential  for financing  relationships  enabling the  remarketing
group to enter into transactions to purchase used transportation equipment which
can be quickly and profitably remarketed.

         The  Company  has found  that its  ability  to  remarket  equipment  is
affected by a number of factors. The original equipment specifications,  current
market conditions,  technological  changes,  and condition of the equipment upon
its  return  all  influence  the price for  which the  equipment  can be sold or
re-leased.  Delays in remarketing caused by various market conditions reduce the
profitability of remarketing.

         Remarketing efforts are pursued on a direct retail sale or lease basis.
The Company's  fleet equipment  remarketing  experience has shown that generally
the  greatest  residual  value is realized by  initially  re-leasing  equipment,
rather than immediately selling it. Therefore,  the Company has concentrated its
remarketing efforts on re-leasing,  although re-leasing involves more risks than
selling  because  lessees  of  used  equipment  are  generally   smaller,   less
creditworthy  enterprises than the Company's initial lessees.  The Company sells
fleet equipment through its retail sales center located in Elizabeth, New Jersey
and through its indirect retail sales centers in California,  Florida,  Georgia,
Illinois and Texas.

Equity Syndications

         The Company sells its lease  transactions to private  investors through
the sale of interests in grantor  trusts.  In the grantor trust  structure,  the
equipment is acquired directly by the trust and the related lease is transferred
to the trust. The Company or one of its subsidiaries usually acts as trustee and
in  that  capacity   holds  title  to  the  equipment  and  performs   specified
administrative  functions for which it is entitled to receive  reimbursement for
costs incurred.  The Company typically sells equipment  directly to an investor.
The  Company  sold  approximately  $3 million and $21  million of  equipment  to
private investors during 1997 and 1996, respectively.  The Company receives fees
upon these sales. In addition, the Company often shares with the investor in the
residual value derived from the remarketing of equipment at lease  expiration or
early termination.

                                       10

<PAGE>
Competition

         The principal  methods by which the Company competes are its ability to
underwrite  the lease  transactions  which it  originates;  its knowledge of the
equipment used by its lessees; the training and experience of its personnel; the
relationships  and  reputation  it  has  established  with  lessees,   equipment
suppliers  and  financial  institutions;   its  ability  to  adapt  to  changing
regulations  and tax laws; and its experience in  successfully  remarketing  the
equipment at lease termination.

         The  equipment  leasing  business,  on a  global  basis,  is  a  highly
competitive,  fragmented marketplace with thousands of competitors. However, the
Company has  identified  emerging  markets such as the Russian  Federation,  the
Commonwealth  of  Independent  States,  and the  Republic of South  Africa,  the
Kingdom of Swaziland and other  sub-Saharan  countries.  These emerging  markets
hold significant  opportunity to provide financial services such as leasing. The
Company is aggressively  pursuing the transacting of lease deals and negotiation
of strategic  alliances in these markets.  Chancellor's  competitors include (1)
large diversified financial services companies,  (2) other leasing companies and
(3)  vendor  financing  programs.  Many  of  these  organizations  have  greater
financial resources than the Company and, therefore, may be able to obtain funds
or  equipment  on more  favorable  terms than those  available  to the  Company.
Additionally,   the  Company  competes  against  other  financing   alternatives
available to lessees for the purchase of equipment.

BUSINESS PLAN

         The Company's  strategy is to return to profitability,  increase market
share,  and create growth  opportunities  by expanding its core business through
servicing middle market clients, expanding into new transportation and equipment
markets  and  seeking  strategic  financial   partnerships  and  joint  ventures
domestically and internationally.

         Strengthening of Core Business.  Historically,  the Company has focused
its efforts on Fortune 100  companies.  The  Company has  implemented  a plan to
re-focus its transportation equipment and remarketing expertise by expanding the
number of customers within its target market.  The Company will be a transaction
intermediary to Fortune 100 companies and focus origination activities on middle
market  clients with a variety of  transportation  equipment  requirements.  The
strategic  decision to  de-emphasize  origination  activities  within the highly
competitive  Fortune  100  marketplace  is  expected  to result in higher  gross
margins  while  utilizing the  Company's  twenty years of  historical  equipment
residual  performance.  The Company will leverage off of its expertise  allowing
entry into emerging international markets seeking these basic financial services
in their economic development.

         Aggressive  Entry  into  Select  Markets.   Through   acquisitions  and
strategic financial partnerships,  the Company will compliment its core business
by entering  into general  equipment  leasing.  The Company  believes that these
businesses will strengthen its origination  base and provide valuable new market
opportunities.

                                       11
<PAGE>
         Independent  outside  advisers  believes that tremendous  opportunities
also exist in the  origination  and  remarketing  of aircraft,  barges and other
equipment utilized for infrastructure  projects.  These "big ticket" leases play
to  Chancellor's  strength and are natural  avenues for  expansion.  The Company
opened a new Florida office in 1997 and has committed resources and expertise to
target these structured finance projects.

         Structured  finance represents a logical extension of both Chancellor's
middle  market  financing  and  its  commitment  to  new  business  development.
Structured finance offerings are significantly larger in scope (typically $5-150
million) than the Company's  typical middle market  transaction  and may require
significant tax and legal human resource support. Transactions in this area will
fall into four general categories:  project finance, facility finance, equipment
finance and  sale-leaseback.  The keys to success  include  employing  extremely
knowledgeable  and  experienced  personnel and working  efficiently  to identify
"real"  transactions  where the Company can make an impact and be recognized for
the value-added it brings to a project.

         International    Expansion.    The   Company   perceives    significant
opportunities  for its  services in  international  markets.  Additionally,  the
Company  can  benefit  from  higher  margins in less  competitive  international
markets.  In 1997,  the Company  completed  certain  lease  transactions  in the
Russian  Federation and the Commonwealth of Independent  States ("Russia and the
CIS"). In addition, the Company has entered into a letter of intent with certain
parties  investing  in and  operating  companies in the Republic of South Africa
("RSA"), the Kingdom of Swaziland and other sub-Saharan  countries.  The Company
contemplates  providing  financial  services  in  the  RSA  as a  result  of the
strategic alliance which was recently executed.

Business Expansion

         Since the change in  management  and Board  control on December 3, 1996
the Company closely  scrutinizes  transactions to maximize  profitability.  As a
result of the  restructuring,  which  was near  completion  in 1997,  and a move
towards  concentrating  on profit centers,  the Company has established a strong
foundation upon which future profitable business expansion can be achieved.

         As an outgrowth of the Company's core transportation  leasing business,
several   acquisitions  are  being  evaluated  that  provide  for  vertical  and
horizontal   integration  into  businesses  that  utilize  similar  back  office
operations.

         In March 1997, the Company  originated its first equipment  transaction
in Russia  and the CIS.  The  opportunity  to  deliver  equipment  leasing in an
emerging  market  with  minimal  competition  is  an  important  first  step  in
Chancellor's  origination  growth.  To date,  Chancellor  has forged a strategic
alliance with  InterLeasing,  a local Russian  licensed and  authorized  leasing
company,  to aid the  Company in its  expansion  into the  Russian  market.  The
Company  has  originated  2  equipment  lease  transactions  in Russia with Kent
International,  a company owned 50 percent by a director of the Company,  in the
approximate amount of $144,000 (based on original equipment cost). Additionally,
the  Company  is in  negotiations  with the  Moscow  government,  several of the
largest  financial  institutions  and Digital  Equipment  Corporation  regarding
multiple  lease  transactions,  management  can  give no  assurance  that  these
transactions will be completed.

                                       12
<PAGE>
         In 1997, the Company  instituted an aggressive  mergers and acquisition
strategy,  seeking candidates  providing  vertical and horizontal  opportunities
within the areas of commercial,  consumer and real estate finance. The expansion
of the  Company's  core  business  through  the  acquisition  of and merger with
complementary  businesses within financial services will be an ongoing strategic
focus. The implementation of this strategy involves members of senior management
and outside professionals  reporting to a Mergers and Acquisitions  subcommittee
of the Board of  Directors.  This group is  constantly  evaluating  a variety of
domestic and  international  leasing  companies and related  opportunities,  for
potential alliances and/or business combinations.

Communications and Information

         The Company is in the process of reviewing and enhancing its Management
Information  System (MIS)  capabilities  and  identifying  those  strategies and
technologies  that  will  enhance  the  Company's  back  office  systems.   This
integrated  system  will  provide  back  office  operations  with  the  detailed
information  necessary to track  transactions  and will facilitate  management's
ability to evaluate operations to ensure proactive decision-making.

         In its efforts to enhance the  current  MIS system,  attention  will be
given  to   upgrading  to   client-server   technology,   which  will   increase
productivity,  reduce costs, provide easy access to centralized data and improve
communications.  A broader scope of benefits includes company re-engineering and
cultural  change,  sophisticated  customer  services,   elimination  of  outside
delivery and soft cost  reductions.  The Year 2000 Issue will also be considered
in connection with the system upgrade project. The Year 2000 Issue is the result
of computer  programs  being written using two digits rather than four to define
the  applicable  year.  Any  of  the  Company's   computer  programs  that  have
date-sensitive  software may recognize a date using "00" as the year 1900 rather
than the year  2000.  This  could  potentially  result  in a system  failure  or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things, a temporary inability to process transactions,  send invoices, or engage
in other  similar  normal  activities.  In  updating  its  computer  software to
increase  operational  efficiencies and information  analysis,  the Company will
ensure that the new system properly utilizes dates beyond December 31, 1999. The
cost of this  upgrade  project,  as it  relates to the Year 2000  Issue,  is not
expected to have a material  effect on the operations of the Company and will be
funded through operating cash flow.

         The Company has  re-designed  and  implemented a new Internet  presence
(http://www.chancellorfleet.com)   allowing   the   Company  to   electronically
disseminate  information on its financial services and remarketing expertise, as
well  as  improve   financial   and  corporate   information   delivery  to  its
shareholders, the financial community and interested parties.

Market Opportunities

         Through  implementation  of a  strategy  allowing  for  penetration  of
non-Fortune 100 customers,  the Company will broaden its target market to a less

                                       13
<PAGE>

competitive  and price  sensitive  arena.  The Company  will focus its  energies
domestically   and   internationally   on  the   multi-billion   dollar  leasing
marketplace.  The ability of the Company to originate and remarket  equipment in
underdeveloped and inefficient markets translates into higher potential rates of
return.  Additionally,  the  willingness  of the Company's  strategic  financial
partners  to augment  the  Company's  deal  underwriting  capabilities  provides
financial strength to execute transactions.

Domestic Market

         The   diversification   outside  the  highly  competitive  Fortune  100
tractor/trailer market as an origination portfolio player enables the Company to
focus  its  leasing  activities  on  selective  transportation  deals as well as
non-transportation  equipment  such  as  computers,  general  office  equipment,
telecommunications,  and  other  high  technology  equipment.  The  decision  to
originate  assets in the growing  equipment  leasing  marketplace  will focus on
assets  with three to five year life  cycles  and  capitalize  on the  Company's
strong  remarketing  efforts.  Adding  additional  lines of  origination in less
competitive markets will allow Chancellor to execute profitable transactions.

         The Company will establish an in-house  Buy/Sell  division as a part of
its Remarketing group to execute asset arbitrage transactions of used equipment.
Through effective  utilization of the Company's  management  information system,
and using  historical  pricing  values as a basis,  an asset  will be priced and
marketed immediately to customers who have a relationship with the Company. This
strategic  tool allows  Chancellor  to identify the most likely  candidates  and
pre-sell equipment, resulting in minimal capital risk and higher margins.

         Additionally,  the Company  plans to expand  beyond  traditional  lease
origination by engaging in venture leasing activity, which will secure equipment
for high growth companies.  This operation will seek  relationships with rapidly
growing  venture  capital  backed  enterprises  that may not qualify for bank or
other  conventional  financing at the time.  As these  relationships  grow,  the
Company envisions  maintaining  exclusive  equipment leasing contracts for these
customers' future equipment requirements.

         The Company is actively engaged in negotiations with strategic domestic
financial partners to leverage the Company's remarketing expertise.

International Markets

         A key element of the corporate growth strategy is to make the Company a
global originator/remarketer of transportation and non-transportation equipment.
These additional  international revenue streams, where margins are significantly
higher than the domestic  market,  should help  facilitate the Company's goal of
returning to  profitability.  Exposure on these  transactions  will be mitigated
through  the use of credit  enhancement,  letters  of credit  and other  similar
instruments.

         The  Company's  management  is  committed to a strategy  providing  for
international  diversification  within emerging  global markets.  Management has
identified  Russia and the CIS,  the  Republic of South  Africa,  the Kingdom of
Swaziland  and  other   sub-Saharan   countries,   as  emerging  markets  having

                                       14

<PAGE>

significant demand for the financial services and expertise that the Company can
provide to further their economic development. As a result of this strategy, the
Company  in  1997  entered  into  several  transactions  in  Russia  and the CIS
providing  lease  financing for  agricultural  equipment  with a total  original
equipment cost of $144,000.

         Additionally, the Company has made significant progress in establishing
a major presence in the RSA as the premier  financial  services  company in this
region.  The Company's efforts as a key contributor in the economic  development
of the RSA are demonstrated  indirectly  through an investment in the New Africa
Opportunity  Fund, LP ("NAOF"),  and directly through the creation of a majority
owned  subsidiary  incorporated  under the laws of  Mauritius  that will provide
financial services and specialize in equipment leasing in the RSA.

         NAOF  is  a  $120  million  investment  fund  created  to  make  direct
investments in emerging companies  throughout Africa. The fund consists of a $40
million equity commitment from various limited partners.  In connection with the
equity commitment,  the Overseas Private  Investment  Corporation  ("OPIC"),  an
independent U.S.  government  agency, has provided $80 million of debt financing
as part of the  capitalization of NAOF. As a result of the OPIC participation in
NAOF,  the fund's  investment  activities  have become of interest to  President
Clinton's Economic Initiative for Africa,  which is intended to assist investors
and  American  small  businesses  that are  investing  and  operating in Africa.
Capital  contributions  are payable  within 10 business  days of a capital  call
pursuant to the terms of the partnership  agreement.  The Company,  as an equity
participant  in NAOF,  has  committed  $1 million of which  $185,000  was funded
through December 31, 1997.

         NAOF  is  advised  by New  Africa  Advisers  ("NAA"),  the  first  U.S.
investment  firm to open offices in  post-apartheid  South Africa.  The Company,
together  with NAA and Afinta  Motor  Corporation  (Pty) Ltd.  ("AMC"),  a local
manufacturer  of  transportation  and  material  handling  equipment,  expect to
develop this  subsidiary,  Africa Finance  Corporation  ("AFC"),  into a premier
provider of  financial  services to RSA  businesses,  specializing  in equipment
lease financing.  As part of this  development  plan, AFC will acquire the lease
financing arm of AMC and provide  captive  financing for the equipment  that AMC
manufactures.

         Businesses  throughout  the RSA are in need of short-term and long-term
financing  facilities to increase and improve production.  The Company,  through
AFC, will make available  purchase order  financing,  working capital lines, and
real estate  financing,  including  sale-leaseback,  to  businesses  in the RSA.
Further,  the RSA also demonstrates the need for consumer financial services and
credit data collection and processing systems.

         The Company and NAA believe that to be  successful  in the RSA, it will
be important to develop  business  initiatives  that support the black  economic
empowerment  program.  These  initiatives  will allow the  companies  to promote
advancement  of the majority of the  population,  as well as,  capitalize on the
black economic empowerment opportunities that will be available.

         In  conjunction  with Kent  International,  an  international  business
developer  having a primary focus of operating  companies in Russia and the 

                                       15
<PAGE>

CIS, the Company completed  several lease  transactions in Russia and the CIS in
1997  with a total  original  equipment  cost of  approximately  $344,000.  Kent
International  has  guaranteed  all  payment  streams  on  these   transactions.
Negotiations are ongoing with first tier Russian financial institutions, as well
as companies with equipment  needs in technology,  consumer goods and automotive
industries.  Chancellor is also currently negotiating several lease transactions
between  Digital  Equipment  Corporation  (DEC)  and the  Siberian  Ministry  of
Transportation.

         Chancellor has formed a strategic alliance with InterLeasing, a Russian
licensed  leasing  company.  InterLeasing  is a 50/50 joint  venture of two U.S.
business development  companies that focus their energies on Russia and the CIS.
As a  strategic  partner  of  Chancellor's,  InterLeasing  will help to  promote
Chancellor's  financial  services  in Russia  and the CIS.  InterLeasing  has an
established  business network that has generated several  potential  large-scale
lease transactions.

         Under Russian regulations,  a Russian entity can only engage in leasing
activity with a Russian licensed leasing company.  InterLeasing will function as
the leasing arm for Chancellor in Russia and the CIS.  InterLeasing is currently
working with local financial  institutions  and legal staff to create solid back
office  operations and transaction  processes.  InterLeasing will locally market
and promote leasing opportunities in Russia and the CIS and participate in trade
shows that will market leasing services.

         As a result of its strength in the  management  of assets,  the Company
has a unique  opportunity to originate and/or remarket  long-lived assets in the
international  marketplace.  As  continued  emphasis  is placed on  projects  to
rebuild and improve  infrastructure,  the need for  capital  equipment  in these
international markets is expected to grow.

Operating Facility

         The Company's  fully  integrated  sales and marketing  departments  are
headquartered in Boston,  Massachusetts.  Three additional  satellite operations
are located in Palm Beach, Florida; New York City, New York; and Elizabeth,  New
Jersey.  A direct  sales  staff and  telemarketing  program  support a  national
network of sales representatives.

Seasonality

         Because  of tax and  investment  considerations,  investors  frequently
defer their decisions to purchase lease  transactions until after the first half
of the calendar year.

Employees

         As of March 15, 1998, the Company employed  approximately 40 persons on
a full time basis.

                                       16

<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

         The Company leases an office  facility in Boston,  Massachusetts.  This
facility   houses  the   Company's   administrative,   financing  and  marketing
operations.  The Boston,  Massachusetts lease is for a non-cancelable  period of
five years,  with four and a half years  remaining in the term,  and with a base
rent, as of December 31, 1997, of approximately  $11,000 per month.  This amount
was approximately $35,000 per month in 1996. The Boston,  Massachusetts facility
adequately  provides  for present and future  needs,  as currently  planned.  In
addition,  the Company leases regional  marketing offices at an aggregate rental
of approximately $7,000 per month.


ITEM 3. LEGAL PROCEEDINGS

         The Company is involved in the following legal proceedings:

         On January 15, 1997,  Chancellor  filed a complaint in Superior  Court,
Suffolk County, Massachusetts,  alleging that certain of its former officers and
directors are liable to the corporation for losses incurred as a result of their
negligence,  breach of fiduciary  duties,  unjust  enrichment,  conversion,  and
unfair and deceptive trade practices. In addition, Chancellor's complaint sought
the imposition of a constructive trust for the corporation's  benefit on various
assets that Chancellor  claims were wrongfully taken from the corporation by its
former officers and directors, as well as recovery of damages arising from legal
malpractice allegedly committed by the corporation's former general counsel, and
defamatory  statements made by one former officer and director to certain of the
corporation's customers.

         Four of the defendants,  Stephen G. Morison,  David W. Parr, Gregory S.
Harper and Thomas W. Killilea, answered the complaint (denying its allegations),
and filed a counterclaim against Chancellor,  and commenced a third-party action
against Brian M. Adley, Vestex Corporation and Vestex Capital  Corporation.  The
counterclaim  alleged that Chancellor is liable for breach of certain employment
and severance  agreements allegedly entered into with the defendants Morison and
Harper,  and for the  abuse of  process  in  connection  with the  corporation's
initiation of this lawsuit. The third-party complaint sought indemnification and
contribution from Adley,  Vestex  Corporation and Vestex Capital  Corporation in
connection  with the claims  raised by  Chancellor  in the  primary  action.  In
addition,  the third party  complaint  sought  recovery  of damages  from Adley,
Vestex Corporation and Vestex Capital  Corporation for alleged abuse of process,
interference  with the contractual  relations and deceit. In their answer to the
counterclaim  and  third-party  complaint,  Chancellor and third party defendant
denied the defendants allegations. In January 1998, the litigation was dismissed
with  prejudice as to all parties,  except for Kevin  Kristick,  pursuant to the
terms of a settlement agreement.

         On September 9, 1997, Cheyenne Leasing commenced litigation against the
Company to recover funds that the Company withheld from Cheyenne pursuant to the
terms of the Trust  Agreement  between the parties.  The funds withheld  totaled
approximately  $107,000  and were placed in escrow by the  Company.  In December
1997, the parties  settled the matter for an undisclosed  amount and

                                       17
<PAGE>

the Company was allowed to charge for reimbursement of administrative costs. The
funds held in escrow were released as provided for in the settlement.

         In December 1997,  Complex Design and  Construction,  Inc.  ("Complex")
filed a complaint against  Chancellor  Corporation and others in Superior Court,
Suffolk County,  Massachusetts  alleging that the Company  breached its contract
with Complex relating to the build-out of the Company's leasehold. The complaint
also alleges that Chancellor  committed  unfair and deceptive acts and practices
in connection with the construction  contract. The complaint seeks approximately
$44,000 in damages  for the  alleged  breach of  contract,  as well as double or
treble  damages for purported  unfair and deceptive  acts and  practices.  Legal
counsel has advised the Company that it is reasonably  possible that the Company
may be liable for up to  approximately  $155,000  plus legal costs and expenses.
Chancellor filed an answer and  counterclaim  against Complex alleging breach of
contract,  breach of expenses and implied warranty,  liquidated damages pursuant
to a  penalty  clause  in the  contract,  and  unfair  and  deceptive  acts  and
practices.  In addition,  Chancellor  filed a motion to dismiss the count in the
complaint against it, which alleges unfair and deceptive acts and practices. The
motion was heard on March 26, 1998, but has not yet been decided.

         The  Company was named as a  defendant  along with the  Chairman of the
Board and an affiliate,  of the Chairman in a suit brought by Ernest Rolls,  the
former Vice-Chairman, on February 5, 1998. The suit brought by Mr. Rolls alleges
that the Company is in default on the payment of $2.7  million,  which Mr. Rolls
claims he loaned to the Company.  It is the Company's position that $1.5 million
of the loan has been  repaid to Mr.  Rolls and that the  balance  is  subject to
offsets and  counterclaims  by the Company.  The Company has removed the case to
federal  court  and  has  filed  an  answer.  The  Company  intends  to  file  a
counterclaim against Mr. Rolls.

         The Board of Directors of  Chancellor  Corporation  voted to remove Mr.
Ernest L. Rolls as a Director  and Vice  Chairman of the Board  effective  March
10,1998.  The reasons cited by the Board for removing Mr. Rolls included  breach
of his fiduciary duties of care and loyalty,  Mr. Rolls' suspected  self-dealing
and his  failure  to  provide  a total  of $7.5  million  in  financing  that he
represented to the Board he would  provide.  The Board also believed that a suit
filed by Mr.  Rolls was an  attempt by Mr.  Rolls to  jeopardize  the  Company's
strategic alliances and other activities that are currently being negotiated.

         The Company is also involved in routine legal proceedings incidental to
the  conduct  of its  business.  Management  believes  that none of these  legal
proceedings  will have a material  adverse effect on the financial  condition or
operations of the Company.


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

         None.



                                       18
<PAGE>

                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The  Company's  Common  Stock has traded on the  NASDAQ OTC  Electronic
Bulletin  Board  under the symbol  "CHLR"  since  August 21,  1996 and under the
symbol  "CHCR"  between  January  28,  1994 and August 21,  1996 on the basis of
actual trading prices.  The Company's Common Stock had traded from June 30, 1992
to January 28, 1994 on the Small Cap Market of the Automated Quotation System of
NASDAQ on the basis of actual trading prices.

         The  following  table sets  forth the high and low sales  prices of the
Company's  Common  Stock  for the  periods  indicated,  according  to  published
sources.

1998                                                 High        Low

First quarter (through March 15, 1998)                .44        .27

1997                                                 High        Low

Fourth quarter                                        .44        .15
Third quarter                                         .18        .10
Second quarter                                        .15        .09
First quarter                                         .10        .04
              
1996                                                 High        Low

Fourth quarter                                        .28        .06
Third  quarter                                        .31        .19
Second quarter                                        .31        .19
First quarter                                         .31        .19
                                                          
         On March 15, 1998, there were  approximately  415 beneficial  owners of
the Company's common stock.

         The Company has not paid or declared cash dividends on its common stock
during the periods indicated and does not currently intend to pay cash dividends
on its common stock for the foreseeable future.


                                       19

<PAGE>

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Results of Operations

Year Ended December 31, 1997 vs. December 31, 1996

         Revenues.  Total  revenues  for the year ended  December  31,  1997 was
$4,433,000  as  compared  to  $5,513,000  for the  prior  year,  a  decrease  of
$1,080,000  or 19.6%.  For the year  ended  December  31,  1997,  rental  income
decreased by $1,063,000 or 55.0% as compared to the prior year.  The decrease in
rental income is  attributable  primarily to the  expiration of several  leases,
including the subsequent  disposition of $4.0 million of equipment (based on its
original cost).  With the completion of its restructuring  efforts,  the Company
has started to originate new equipment  leases ($214,000 at cost during the year
ended December 31, 1997), however, rental income will continue to decrease until
new  equipment  additions  are  sufficient  to  compensate  for an  aging  lease
portfolio.  For the year ended  December 31,  1997,  lease  underwriting  income
decreased by $211,000 or 41.9% as compared to the prior year. Lease underwriting
income  decreased  due to the  origination  of only $3.0  million  of  equipment
leases,  at cost,  as  compared to  origination  of $21.0  million of  equipment
leases,  at cost, during the prior year.  Additionally,  as a consequence of the
restructuring  which commenced at the end of 1996, the Company is rebuilding its
lease  origination  sales  force and broker  network  and  developing  strategic
alliances to provide future growth in this area.  Management  believes growth in
its lease origination business will grow through modest addition to its existing
lease portfolio and increased emphasis on services as a financial  intermediary.
For the year ended December 31, 1997,  direct finance lease income  increased by
$81,000 or 42.4%,  as compared to the prior year. The increase in direct finance
lease income is  attributable  to the transfer of 10 leases acquired as a result
of the buyout in April 1997 of the inter-creditor  agreement and the addition of
3  international  leases.  For the year  ended  December  31,  1997,  gains from
portfolio  remarketing  decreased  by $590,000 or 42.4% as compared to the prior
year. The decrease in gains from portfolio  remarketing is  attributable  to the
decrease in sales of portfolio assets during the year ended December 31, 1997 as
compared to the prior year.  For the year ended  December  31,  1997,  fees from
remarketing  activities  increased by $668,000 or 81.5% as compared to the prior
year.  This increase is  attributable  to a continued focus by management on the
remarketing of trust assets, as they become available for sale. This increase is
also attributable to remarketing fees earned from third parties other than trust
investors.  Management  plans  to  increase  the  utilization  of the  Company's
remarketing  expertise to provide such services to third  parties.  For the year
ended December 31, 1997,  other income  increased by $51,000 or 8.3% as compared
to the corresponding prior year period.

         Costs  and  Expenses.  Total  costs  and  expenses  for the year  ended
December 31, 1997 was $7,152,000 as compared to $12,125,000  for the prior year,
a decrease of $4,973,000  or 41.0%.  The 1996 costs and expenses were reduced by
$431,000 as a result of the restatement  discussed in Note T to the consolidated
financial statements. In general, the significant decrease is primarily a result
of  management's   successful   implementation  of  a  

                                       20
<PAGE>

restructuring   plan  that  stabilized  the  Company's  cost  structure  thereby
providing  a stable  foundation  upon which to grow.  During  1997,  the Company
incurred  additional legal,  accounting and consulting  charges of approximately
$1,791,000 in connection  with the continued  implementation  of the  transition
plan and litigation  against certain members of the Company's former  management
and  directors  during the first two quarters of fiscal  1997.  The Company also
recorded  $375,000  of costs in  connection  with the  guarantee  by Vestex of a
$1,500,000 line of credit. As expected, the Company reduced selling, general and
administrative  costs by  approximately  $1,807,000  or 22.0% as compared to the
prior year.  These cost  reductions  represent the direct benefit derived by the
Company  from  the  restructuring  and  stabilization  efforts  effected  by the
management,  including the reduction of headcount and general  operating  costs.
The Company also realized significant cost savings,  net of abatements,  through
the termination of its former facility lease  arrangement and negotiation of its
current  facility  arrangement.  Finally,  in  connection  with  its  review  of
operations, resulting in the recovery of trust administration costs, the Company
recorded  cost  recoveries  for  1997  and 1996 of  approximately  $405,000  and
$431,000, respectively.  Management believes it has successfully implemented the
cost stabilization phase of its restructuring strategy.  These cost improvements
have resulted in a stabilization of the corporate  infrastructure  and provide a
firm foundation for the new management team to implement the growth phase of its
business plan.

         Interest  expense for the year ended  December 31, 1997 was $281,000 as
compared to $480,000 for the prior year,  a decrease of $199,000 or 41.5%.  This
decrease  is  primarily  a  result  of  the   reduction  in  both  recourse  and
non-recourse debt.

         Depreciation and  amortization  expense for the year ended December 31,
1997 was  $459,000 as compared to  $1,042,000  for the prior year, a decrease of
$583,000  or  56.0%.  The  decrease  is  primarily  due to the  decrease  in the
operating lease base, resulting from decreases in operating leases originated by
the  Company  over the past year and sale of  equipment  coming off lease.  This
decrease is partly offset by $51,000 of amortization on assets acquired in 1997.

         Prior to 1996, the Company utilized a combination of benchmark/matrices
for  establishing  performance  of the residual  portfolio.  During 1996, due to
changes in market  conditions,  the Company evaluated residual values based upon
independent  assessments by industry  professionals,  in addition to the already
established criteria used in the benchmark/matrices methodology previously used.
As a result of such  procedures,  the Company recorded a residual value estimate
reduction of  $2,384,000  for the year ended  December  31,  1996.  Although the
Company had initially recorded an additional  estimated residual value reduction
of $709,000 in the first  quarter of fiscal 1997,  upon audit it was  determined
that such a residual value reduction was not warranted. Accordingly, the Company
did not record a residual value reduction in 1997 as compared to the prior year.

         Extraordinary  Item - Gain on Debt Forgiveness.  The Company recorded a
gain on debt  forgiveness  for the year ended December 31, 1997 of $930,000.  In
April  1997,  the  Company  repaid  in  advance  of  their  respective  terms an
inter-creditor  loan and secured  inventory  loan. The aggregate  amount of this

                                       21
<PAGE>

debt on the repayment date was $1,906,000,  of which approximately  $976,000 was
paid in cash and the balance of $930,000 was forgiven. In addition,  the Company
paid approximately $22,000 in legal and bank fees to complete this transaction.

Net Loss.  Net loss for the year  ended  December  31,  1997 was  $1,802,000  as
compared to  $6,373,000  for the prior year, a decrease of  $4,571,000 or 71.7%.
The  decrease  in the net  loss is  primarily  attributable  to the  significant
reduction in cost components as specifically  described  above.  The decrease in
the net loss is  further  affected  by the  positive  impact of the gain on debt
forgiveness. Net loss per share (basic) for the year ended December 31, 1997 was
$.12 per share as compared to $1.24 per share for the prior year,  a decrease of
$1.12 per share or 90.3%.  The decrease is due primarily to the marked  decrease
in the overall net loss and an increase of 196.4% in the number of shares issued
and outstanding. 

Liquidity and Capital Resources

         The Company  recognized a net increase in cash and cash equivalents for
the year ended December 31, 1997 of $76,000.  Operating activities provided cash
of $1,875,000  during the year ended December 31, 1997 and is primarily a result
of collections in connection with the Company's recovery of trust administration
costs  of  approximately  $2,100,000.  Investing  activities  provided  cash  of
$946,000  during the year ended  December  31, 1997 and is primarily a result of
cash  received  in  connection  with the  completion  of  transactions  awaiting
syndication  as of December 31, 1997 and normal sale of portfolio  assets coming
off lease during the year.  Cash paid  primarily  for the purchase of furniture,
fixtures and computer equipment and build-out of the new office facility offsets
this.  Financing  activities  used  cash of  $2,745,000  during  the year  ended
December  31,  1997  and is  primarily  a  result  of  payments  made to  reduce
obligations on an  intercreditor  loan.  Cash and cash  equivalents  amounted to
$97,000 at December 31, 1997 as compared to $21,000 at December  31, 1996.  Cash
and cash  equivalents  restricted  amounted to  $2,419,000 at December 31, 1997.
Withdrawals  of  restricted  cash  balances are limited to the  distribution  of
rents,  sales  proceeds  and  reimbursable  expenses  of  trust-owned  leases to
investors.  As of  December  31,  1997,  the  amount due to  investors  for cash
collected on their behalf exceeded the balance in restricted cash by $446,000.

         In  April  1997,  the  Company  executed  and  delivered  (1) the  Loan
Reduction and Purchase and Assignment Agreement dated as of April 1997 among the
Company,  its corporate  affiliates  and/or  subsidiaries,  Fleet National Bank-
Corporate  Trust  Division,  as agent (the "Agent") for the Company's  principal
recourse lenders, and Vestex, the Company's majority stockholder; (2) release in
favor of the principal  recourse  lenders to be given by Vestex and Brian Adley,
Chairman  of the Board of  Directors  of the Company  and  president  of Vestex,
individually; (3) release in favor of the principal recourse lenders to be given
by the Company, its corporate affiliates and/or subsidiaries; and (4) $1,500,000
Secured  Promissory Note given by the Company,  its corporate  affiliates and/or
subsidiaries in favor of Vestex.  The  intercreditor  loan and secured inventory
loan were then repaid in advance of their respective terms. The aggregate amount
of this  debt on the  repayment  date  was  approximately  $1,906,000  of  which
approximately  $976,000  was  paid  in cash  and the  balance  of  $930,000  was
forgiven. In addition,  the 

                                       22
<PAGE>

Company  paid  approximately  $22,000  in legal and bank fees to  complete  this
transaction.

         As  approved  by  the  stockholders  at  the  1997  Annual  Meeting  of
Stockholders,  the Company  increased its  authorization  of Preferred Stock and
Common Stock to 20,000,000 shares and 75,000,000 shares, respectively.

         During 1996 and through March 1997,  the affiliate  charged the Company
fees for certain  transactions it determined were consummated  during the period
and were covered by the  agreement.  The Company  disputed a certain  portion of
these charges.  The parties settled this dispute by agreeing that $3,000,000 was
incurred  relating to these  services,  of which  $800,000 and  $2,200,000  were
performed in 1997 and 1996,  respectively.  In connection with this  settlement,
Vestex agreed to write-off $1,113,000 of fees originally claimed.  These amounts
are  included  in  selling,   general,   and  administrative   expenses  in  the
consolidated statement of operations.  Per the agreement,  the payment is due on
demand, however, the affiliate has agreed that the Company will only pay the fee
during  the  coming  year if  payment  can be made  from  refinancing  or equity
proceeds  in a manner  that does not  impact the  Company's  ability to meet its
other obligations.

         As of December 31, 1996,  the Company had received  from Vestex a total
of $4,121,000, net of repayments and cost of $312,500, which consisted of equity
of  $1,421,000  and debt and payables of $ 2,700,000.  During 1997,  the Company
entered into several  transactions  with Vestex that  resulted in an increase of
$1,856,000  resulting  in a net  equity  infusion  of  $5,977,000  and  debt and
payables of $59,000 as of December 31, 1997.

         In accordance with the terms of the consulting agreement, Vestex earned
fees totaling $957,000.  The fees earned in 1997 were for services in connection
with the following: i) $800,000 through March 31, 1997 as described above, ii) a
monthly fee of $12,500 for April 1997 through  December 1997, and iii) a $45,000
fee relating to the  $1,500,000  loan  provided by the then Vice Chairman of the
Board of Directors.

         The Company  also  entered into  several  transactions  whereby  Vestex
received  fees  of  approximately  $1,288,000  in  1997.  The  Company  recorded
approximately   $519,000  of  these   expenses  in   connection   with  Vestex's
negotiations  on  behalf  of the  Company  resulting  in  significant  financial
benefits  and  savings to the  Company.  This  includes,  but is not limited to,
savings  of  approximately   $930,000,   whereby  the   intercreditor   loan  of
approximately  $1,906,000  was paid in  advance  of term;  savings  in excess of
$2,000,000 on the termination of the Company's  office lease and  renegotiations
of more favorable  terms on the Company's new office lease;  and development and
implementation  of strategies  enabling the Company to properly  recover certain
administrative  costs  incurred in  connection  with the  administration  of the
Company's  trust  portfolio  assets.  The Company  also  recorded an  additional
$394,000 in connection with Vestex's services for development and implementation
of the Company's  successful  restructuring  and  transition  plan.  This amount
reduced the  restructuring  charges  accrued at December 31, 1996. In connection
with a $1.5 million  loan  provided to the Company by the  Vice-Chairman  of the
Board of Directors,  Vestex provided  certain  guarantees and was compensated in
the amount of $375,000 for providing such guarantee.

                                       23
<PAGE>
         The Company purchased  furniture and computer  equipment from Vestex in
the amount of $300,000.  The  acquisition  prices were based on  estimated  fair
value as of the date of the  transaction.  At December 31,  1997,  approximately
$60,000 of the furniture acquired was not in service by the Company.

         The Company received loans from Vestex during 1997 totaling $1,735,000,
including  $1,500,000 in connection  with the repayment of the Company's debt to
the Vice-Chairman. Interest on loans payable to Vestex accrues at the prime rate
plus 2% (10.5% as of December 31, 1997).  During 1997, interest of approximately
$92,000 was incurred on debt owed Vestex.

         During 1997, Vestex agreed to take stock, at the then fair market value
on the  date  of  conversion,  in  lieu of  cash  in  consideration  of  certain
obligations due Vestex by the Company.  In February 1997, the Board of Directors
approved the issuance of 3,000,000  shares of the Company's  Series AA Preferred
Stock at $.30 per share to Vestex in  consideration  of  $900,000 of the amounts
due Vestex. In June 1997, the Company issued 8,333,333 shares of Common Stock to
Vestex  in  consideration  of  $1,000,000  of fees and debt  including  Vestex's
guarantee of the  $1,500,000  loan provided to the Company by the Vice Chairman,
stated above.  Also in June 1997, the Company issued  6,716,667 shares of Common
Stock to Vestex in consideration of approximately $806,000 of fees and debt due.
In September 1997, the Company issued 5,000,000 shares of Common Stock to Vestex
in  consideration  of  approximately  $500,000  of Vestex  fees and debt due. In
December  1997,  the Company  issued  710,526  shares of the Company's  Series A
Preferred Stock to Vestex in  consideration of $1,350,000 of Vestex fees an debt
due.  In  addition  to the  conversion  of accrued  Vestex  fees and debt to the
Company's  preferred and common stock  totaling  approximately  $4,556,000,  the
Company  also  repaid  debt and fees  through  cash  payments  in the  amount of
approximately  $2,848,000.  For the years ended  December 31, 1997 and 1996, the
Company incurred expenses to Vestex of $1,850,000 and $2,594,000,  respectively.
As of December  31, 1997,  the Company  owed Vestex  $50,000 of unpaid loans and
approximately  $9,000 of unpaid  fees.  In  addition,  Vestex is due  $50,000 of
unpaid  fees  assumed by the  Company at the time of  acquisition  of Long River
Capital.

         An  affiliate  of the  Chairman  of the  Board  of  Directors  provided
supervisory and other construction services in connection with the build-out and
improvements  to the Company's  new office  space.  The total fees earned by the
affiliate  were $275,000,  all of which was paid in 1997.  The Company  recorded
these amounts as capitalized leasehold improvements.

         The  Company   entered   into  several   transactions   with  the  then
Vice-Chairman  of the Board of Directors.  On May 19, 1997, the Company issued a
$1,500,000  promissory  note to the then  Vice-Chairman  of the Board  which was
guaranteed by Vestex and the Chairman of the Board.  Interest on the  promissory
note  accrued at the prime rate plus 2 1/8%.  On  September  3, 1997,  Vestex on
behalf of the Company  repaid the  promissory  note.  The  resultant  obligation
recorded as owing to Vestex was subsequently  converted into equity as described
above.  Interest  accrued  to the  Vice-Chairman  during  1997 of  approximately
$59,000.  The  Vice-Chairman  also  made  a   non-interest-bearing   advance  of
$1,200,000 to the Company in October 1997.

                                       24
<PAGE>

         During 1997,  the Company  directly and through  Valmont  Ventures Inc.
("Valmont"), a wholly-owned subsidiary,  providing consulting services, incurred
costs on behalf of and made  advances  to Global  Weather  Services  ("GWS"),  a
company   represented  by  the  then   Vice-Chairman  as  an  affiliate  of  the
Vice-Chairman.  The Company  provided  these services at the request of the then
Vice-Chairman  with the approval of management.  The total due from GWS amounted
to  approximately  $756,000,  including  consulting  fees of  $600,000  that are
included in other revenue in the consolidated statements of operations.  Company
funds  were  used  to  pay  amounts  on  behalf  of the  Vice-Chairman  totaling
approximately  $58,000 during 1997. Based on discussions with legal counsel, the
Company believes it has the right to offset the amounts due to and from the then
Vice-Chairman  and GWS. As a result,  the  accompanying  consolidated  financial
statements  reduced the  amounts due  totaling  approximately  $814,000  and the
amounts owed of $1,200,000.  The difference of approximately $386,000 has offset
the amount due by the  Vice-Chairman  or GWS to Vestex and has been reflected as
an increase in the amount due by the Company to Vestex.

         On July 31,  1997,  the  Company  acquired  certain  assets and assumed
certain liabilities of Long River Capital, Inc., a company engaged in automobile
loan application  processing and origination of automobile loans for high credit
risk  consumers.  The  acquisition  was accounted for by the purchase  method of
accounting,  and  accordingly,  the purchase  price has been allocated to assets
acquired and liabilities assumed based on their fair market value at the date of
acquisition. (See Note O of the Notes to Consolidated Financial Statements).

         As a result  of a review of trust  agreements  by  management,  outside
counsel and industry  consultants,  it was  determined  that the Company had not
been  reimbursed  for  approximately  $22  million of costs  incurred  for trust
administration  for  periods  prior to 1997.  Management  subsequently  began to
charge the trusts  for these  services  and  implemented  plans to recover  past
costs. The consolidated  statement of stockholders' equity (deficit) reflects an
increase in stockholders'  equity of $1,437,000 from $1,365,000 to $2,802,000 as
of December 31, 1995 for trust  administration costs recovered for periods prior
to 1996. Management makes no representations concerning the Company's ability to
recover  any  further  costs for periods  prior to 1997.  The 1996  consolidated
statements of operations  have been restated to reflect an adjustment to include
a reduction in the general and administrative expenses of approximately $431,000
for trust administration costs recovered and a corresponding decrease in the net
loss from $6,804,000 to $6,373,000 for the year ended December 31, 1996.

         The Company's  ability to underwrite  equipment  lease  transactions is
largely dependent upon the availability of short-term warehouse lines of credit.
Management is engaged in  continuing  dialogue  with several  inventory  lenders
which appear be interested in providing the Company with warehouse financing. If
the Company  experiences  delays in putting  warehouse  facilities in place, the
Company  transacts deals by coterminous  negotiation of lease  transactions with
customers and  financing  with  institutions  upon which it obtains a fee as the
intermediary of up to 3% of the amount of financing.

         The  remarketing  of equipment  has played and will  continue to play a
vital role in the Company's operating activities. In connection with the sale of
lease transactions to investors, the Company typically is entitled to 

                                       25
<PAGE>

share in a portion of the residual value realized upon  remarketing.  Successful
remarketing  of the equipment is essential to the  realization  of the Company's
interest in the residual value of its managed portfolio. It is also essential to
the Company's ability to recover its original investment in the equipment in its
own  portfolios  and to recognize a return on that  investment.  The Company has
found that its ability to remarket equipment is affected by a number of factors.
The original equipment specifications,  current market conditions, technological
changes,  and condition of the equipment upon its return all influence the price
for which the equipment can be sold or re-leased.  Delays in remarketing  caused
by various market conditions reduce the profitability of the remarketing.

         The  Company  anticipates  it will  continue  to  dedicate  substantial
resources  toward the further  development  and  improvement of its  remarketing
capabilities  and believes that  remarketing will continue to be a profit center
for the Company.  The Company's  strategy is to further  exploit its remarketing
expertise by continuing to develop its ability to sell  remarketing  services to
other lessors,  fleet owners, and lessees and also to create a dealer capability
under which the Company  would buy and resell  fleet  equipment.  The Company is
also using the Internet for additional promotion of its business activities.

         The Company has now  successfully  begun a growth  strategy of applying
its knowledge of the highly competitive  tractor/trailer/forklift  industry into
markets  outside of the Unites  States where margins are  significantly  higher.
Through  December 31, 1997, the Company entered into several lease  transactions
in the former Soviet Union with a total  equipment  cost of $144,000,  and is in
the process of  completing  additional  equipment  financing  transactions.  The
Company has been presented  with numerous  opportunities  for  additional  lease
placements outside of the United States.

         In August  1997,  the  Company  committed  to make a $1 million  equity
investment  in the New Africa  Opportunity  Fund,  LP  ("NAOF").  NAOF is a $120
million  investment  fund  composed  of $40  million  from  equity  participants
including  the  Company,  and $80  million  in debt  financing  provided  by the
Overseas Private Investment Corporation ("OPIC"), an independent U.S. government
agency.  The  purpose  of the fund is to make  direct  investments  in  emerging
companies  throughout  Africa.  As of December 31, 1997,  the Company had funded
approximately  $185,000 and is obligated  to provide  additional  funding in the
approximate amount of $815,000.

         On March 27, 1998, the Company,  AMC, AFS, and NAOF finalized the terms
of the agreement, initially set forth in the December 12, 1997 Letter of Intent,
and  responsibilities  of the  parties  by the  closing of the  transaction  and
executing the  documents.  The parties  commenced  operations on January 1, 1998
pursuant  to an  agreement  reached in  principle,  as outlined in the Letter of
Intent.  The parent  holding  company  will be CAC.  The Company  will  provide,
through CAC,  $5,000,000 of start-up capital to AFC, and 1,000,000 shares of the
Company's  Series B  Convertible  Preferred  Stock.  In  consideration  of a 40%
ownership  interest  in  AFC,  NAOF  will  infuse  $10,000,000  of  cash  in two
$5,000,000  tranches.  Upon  the  event  of a  material  adverse  change  in the
financial  condition of AFC prior to the second funding,  and with the unanimous
consent of the board of directors of AFC, the second  funding may be extended to
a  mutually  agreeable  date or  terminated.  In  connection  with this  

                                       26
<PAGE>

capital  infusion,  AFC will also issue 500,000 shares of the Company's Series B
Convertible Preferred Stock to NAOF. In consideration of a 9% ownership interest
in AFC, and the issuance of 500,000 shares of the Company's Series B Convertible
Preferred  Stock,  AMC  will  contribute  the  net  assets  of  AFS;   exclusive
distribution  rights for AMC  products in North  America,  Eastern  Europe,  the
Russian  Federation and Commonwealth of Independent  States,  and  Asia-Pacific;
nonexclusive  distribution  rights  for  AMC  products  in  South  America;  and
discounted  pricing for the  purchase of AMC  products to be sold and/or  leased
through AFC or its assignee.  AMC will also  transfer a 2-1/2 percent  ownership
interest  in AMC to CAC in  connection  with  this  transaction.  The  Series  B
Convertible Preferred stock has a liquidation  preference of $2.00 per share and
is convertible  into 10 shares of the Company's  Common Stock for each one share
of preferred stock at the holders option.

         The Company's  renewal or  replacement of recently  expired lines,  its
expected  access to the public and  private  securities  markets,  both debt and
equity,  anticipated  new lines of credit (both  short-term  and  long-term  and
recourse  and  non-recourse),  anticipated  long-term  financing  of  individual
significant lease transactions, and its estimated cash flows from operations are
anticipated to provide adequate capital to fund the Company's operations for the
next twelve months.  Although no assurances can be given, the Company expects to
be able to renew or timely  replace its  recently  expired  lines of credit,  to
continue to have access to the public and private securities markets,  both debt
and  equity,  and to be able to enter  into new lines of credit  and  individual
financing transactions.

Potential Fluctuations In Quarterly Operating Results

         The Company's future quarterly  operating  results and the market price
of its stock may fluctuate.  In the event the Company's revenues or earnings for
any  quarter  are less than the level  expected  by  securities  analysts or the
market in  general,  such  shortfall  could have an  immediate  and  significant
adverse  impact on the market  price of the  Company's  stock.  Any such adverse
impact could be greater if any such  shortfall  occurs near the same time of any
material  decrease in any widely  followed stock index or in the market price of
the stock of one or more public equipment  leasing  companies or major customers
or vendors of the Company.

         The  Company's  quarterly  results of  operations  are  susceptible  to
fluctuations for a number of reasons, including, without limitation, as a result
of sales by the Company of equipment it leases to its  customers.  Such sales of
equipment,  which are an  ordinary  but not  predictable  part of the  Company's
business,  will have the effect of increasing revenues, and, to the extent sales
proceeds  exceeds  net book value,  net income,  during the quarter in which the
sale occurs. Furthermore,  any such sale may result in the reduction of revenue,
and net income,  otherwise expected in subsequent quarters,  as the Company will
not receive lease revenue from the sold equipment in those quarters.

         Given the possibility of such  fluctuations,  the Company believes that
comparisons of the results of its operations to immediately  succeeding quarters
are not necessarily  meaningful and that such results for one quarter should not
be relied upon as an indication of future performance.

                                       27
<PAGE>

Recent Accounting Pronouncements

         The Company has adopted  SFAS No. 128 "Earnings  Per Share",  which has
changed the method of  calculating  earnings  per share and related  disclosure.
SFAS No. 128 requires the  presentation  of "basic" and  "diluted"  earnings per
share on the face of the  income  statement.  Basic  loss  per  common  share is
computed by dividing net loss by the weighted  average  number of common  shares
outstanding during the period.

         In June 1997, the Financial  Accounting Standards Board issued SFAS No.
130, "Reporting  Comprehensive  Income".  SFAS No. 130 prescribes  standards for
reporting comprehensive income and its components. SFAS No. 130 is effective for
years beginning after December 15, 1997. The  implementation  of SFAS No. 130 is
not  expected  to  materially  effect  the  Company's   consolidated   financial
statements.

         In June 1997, SFAS No. 131, "Disclosure About Segments of an Enterprise
and  Related  Information"  was  issued.  SFAS No.  131 is  effective  for years
beginning after December  15,1997 and early adoption is encouraged.  The Company
intends to adopt SFAS No. 131 for the year ending  December  31,  1998.  At that
time, the Company will be required to disclose  certain  geographic  information
including  revenue from external  customers and certain  assets and  liabilities
based on country of domicile.

Impact of the Year 2000 Issue

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits  rather  than four to define the  applicable  year.  Any of the
Company's  computer programs that have  date-sensitive  software may recognize a
date  using  "00" as the  year  1900  rather  than  the year  2000.  This  could
potentially result in a system failure or miscalculations causing disruptions of
operations,  including,  among other  things,  a temporary  inability to process
transactions,  send invoices, or engage in other similar normal activities.  The
Company  had  already  planned on  updating  its  computer  software to increase
operational  efficiencies and information  analysis and will ensure that the new
systems  properly  utilizes  dates beyond  December  31, 1999.  The cost of this
upgrade project, as it relates to the Year 2000 Issue, is not expected to have a
material  effect on the  operations  of the Company  and will be funded  through
operating cash flow.



                                       28
<PAGE>



ITEM 7. FINANCIAL STATEMENTS


         The  following  documents  are  filed as a part of this  report on Form
10-KSB:

                                                               Page No.

Independent Auditors' Report                                     F-1

Consolidated Balance Sheet as of 
     December 31, 1997                                           F-2

Consolidated  Statements of Operations for the 
     years ended December 31, 1997 and 1996                      F-3

Consolidated  Statements of  Stockholders  
     Equity  (Deficit) for the years ended
     December 31, 1997 and 1996                                  F-4

Consolidated  Statements of Cash Flows for the 
     years ended December 31, 1997 and 1996                      F-5

Notes to Consolidated Financial Statements                       F-6


         All schedules have been omitted  because they are  inapplicable  or the
required  information  is  included in the notes to the  consolidated  financial
statements.



ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURES

         None.


                                       29
<PAGE>
                                    PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

         The  information  required by Item 401 and 405 of  Regulation  S-B with
respect to directors and executive  officers of the registrant will be set forth
in the Proxy  Statement for the Annual Meeting of Stockholders to be held on May
15, 1998 and to be filed with the  Securities  and Exchange  Commission in April
1998, and is incorporated herein by this reference.

ITEM 10. EXECUTIVE COMPENSATION

         The information  required by Item 402 of Regulation S-B with respect to
executive  compensation  will be set forth in he Proxy  Statement for the Annual
Meeting  of  Stockholders  to be held on May 15,  1998 and to be filed  with the
Securities and Exchange  Commission in April 1998, and is incorporated herein by
this reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information  required by Item 403 of Regulation S-B with respect to
security ownership of certain beneficial owners and management will be set forth
in the Proxy  Statement for the Annual Meeting of Stockholders to be held on May
15, 1998 and to be filed with the  Securities  and Exchange  Commission in April
1998, and is incorporated herein by this reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information  required by Item 404 of Regulation S-B with respect to
certain  relationships  and related  transactions will be set forth in the Proxy
Statement for the Annual Meeting of  Stockholders to be held on May 15, 1998 and
to be filed with the  Securities  and Exchange  Commission in April 1998, and is
incorporated herein by this reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K


         (a)Exhibits:

                  3(a)     Restated  Articles  of  Organization  of the  Company
                           (incorporated  by  reference  from  Exhibit 3A to the
                           Company's  Registration  Statement on Form S-1, filed
                           with the Securities  and Exchange  Commission on July
                           22,  1983  (Registration  Statement)),  as amended by
                           Articles of  Amendment  filed with the  Massachusetts
                           Secretary of State on May 18, 1990  (incorporated  by
                           references from Exhibit 3(a) to the Company's  Annual
                           Report,  Form 10-K,  for the year ended  December 31,
                           1991) and by  Articles  of  Amendment  filed with the
                           Massachusetts  Secretary of State on January 26, 1995
                           (incorporated  by reference  from Exhibit 3(a) to the
                           Company's  Annual  Report,  Form  10-K,  for the year
                           ended December 31, 1994)

                                       30
<PAGE>
                  3(b)     By-laws   of  the   Company,   as   amended  to  date
                           (incorporated  by reference  from Exhibit 3(b) to the
                           Company's  Annual  Report,  Form  10-K,  for the year
                           ended December 31, 1994)

                  10(a)    Lease dated June 8, 1988  between  Arthur  DiMartino,
                           Trustee of 745 Atlantic  Realty Trust and the Company
                           (incorporated  by reference from Exhibit 10(m) to the
                           Company's  Annual  Report,  Form 10-K, for the fiscal
                           year  ended  March 31,  1988),  as was  provisionally
                           amended by a  proposal  letter  dated June 11,  1990,
                           from   Richard  A.  Galvin  to  Stephen  G.   Morison
                           (incorporated  by reference from Exhibit 10(g) to the
                           Company's  Annual  Report,  Form  10-K,  for the year
                           ended December 31, 1990);  First  Amendment to Lease,
                           dated as of June 5, 1992, between the Company and The
                           Aetna  Casualty and Surety Company  (incorporated  by
                           reference  from Exhibit 2 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           July 6, 1992 and dated  June 23,  1992);  and  Second
                           Amendment  to Lease,  dated as of  December  8, 1993,
                           between the Company and The Aetna Casualty and Surety
                           Company  (incorporated by reference from Exhibit 1 to
                           the Company's  Form 8-K filed with the Securities and
                           Exchange  Commission  on January  24,  1994 and dated
                           December 8, 1993).

                  10(b)    Loan  Agreement  dated as of April  6,  1990  between
                           Shawmut Bank, N.A.-Corporate Trust Division, as agent
                           ("Agent"),   and  the   Company,   Chancellor   Fleet
                           Corporation,   Chancellor  Acquisition   Corporation,
                           Chancellor Asset Management  Corporation,  Chancellor
                           Financial  lease,  Inc.,   Chancellor  Credit,  Ltd.,
                           Valmont  Financial  Corporation  and  Valmont  Credit
                           Corp.  ("Borrowers")  (incorporated by reference from
                           Exhibit 10(j) to the Company's  Annual  Report,  Form
                           10K,  for the  year  ended  December  31,  1989),  as
                           amended by Amendment No. 1 to Loan Agreement dated as
                           of  May  16,  1990  between   Agent  and   Borrowers,
                           Amendment  No. 2 to Loan  Agreement  dated as of June
                           12, 1990 between Agent and Borrowers, Amendment No. 3
                           to Loan  Agreement  dated as of July 9, 1990  between
                           Agent and  Borrowers(incorporated  by reference  from
                           Exhibit 10(j) to the Company's  Annual  Report,  Form
                           10-K,   for  the  year  ended   December  31,  1990),
                           Amendment  and Extension  Agreement  dated as of July
                           30, 1990 between Agent and Borrowers (incorporated by
                           reference from Exhibit 28A to the Company's Quarterly
                           Report,  Form 10-Q,  for the  quarter  ended June 30,
                           1990)  Amendment No. 5 to Loan Agreement  dated as of
                           October     15,     1990     between     Agent    and
                           Borrowers(incorporated   by  reference  from  Exhibit
                           10(j) to the Company's Annual Report,  Form 10-K, for
                           the year ended December 31, 1990),  Second  Amendment
                           and  Extension  Agreement  dated as October  31, 1990
                           between   Agent  and   Borrowers   (incorporated   by
                           reference  from  Exhibit 3 to the  Company's  Form 8K
                           filed with the Securities and Exchange  Commission on
                           November 1, 1990 and dated October 25,  1990),  Third
                           Amendment and Extension Agreement dated as of January
                           31, 1991  between  Agent and  Borrowers  by reference
                           from Exhibit 2 to the  Company's  Form 8-K filed with
                           the Securities and Exchange

                                       31
<PAGE>
                           Commission  on February 8, 1991 and dated January 31,
                           1991),Fourth  Amendment and Extension Agreement dated
                           as of April 30,  1991  between  Agent  and  Borrowers
                           (incorporated  by  reference  from  Exhibit  2 to the
                           Company's  Form 8-K  filed  with the  Securities  and
                           Exchange  Commission  on May 2, 1991 and dated May 1,
                           1991), Fifth Amendment and Extension  Agreement dated
                           as of July  31,  1991  between  Agent  and  Borrowers
                           (incorporated  by  reference  from  Exhibit  2 to the
                           Company's  Form 8-K  filed  with the  Securities  and
                           Exchange Commission on August 12, 1991 and dated July
                           19, 1991),  Sixth  Amendment and Extension  Agreement
                           dated as of  September  18,  1991  between  Agent and
                           Borrowers  (incorporated  by reference from Exhibit 2
                           to the Company's  Form 8-K filed with the  Securities
                           and  Exchange   Commission   on  September  25,  1991
                           anddated  September 18, 1991),  Seventh Amendment and
                           Extension  Agreement  dated as of  November  19, 1991
                           between   Agent  and   Borrowers   (incorporated   by
                           reference  from Exhibit 2 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           November  25,  1991 and  dated  November  19,  1991),
                           Eighth Amendment and Extension  Agreement dated as of
                           March     19,     1992     between      Agent     and
                           Borrowers(incorporated   by  reference  from  Exhibit
                           10(j) to the Company's Annual Report,  Form 10-K, for
                           the year ended  December 31, 1991),  Ninth  Amendment
                           and  Extension  Agreement  dated  as of May  5,  1992
                           between Agent and Borrowers(incorporated by reference
                           from Exhibit 2 to the  Company's  Form 8-K filed with
                           the  Securities  and Exchange  Commission  on May 14,
                           1992 and  dated May 5,  1992),  Tenth  Amendment  and
                           Extension  Agreement  dated  as  of  August  4,  1992
                           between   Agent  and   Borrowers   (incorporated   by
                           reference  from Exhibit 2 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           August 14,  1992 and dated  August 4,  1992),Eleventh
                           Amendment  and  Extension   Agreement   dated  as  of
                           November  5,  1992   between   Agent  and   Borrowers
                           (incorporated  by  reference  from  Exhibit  2 to the
                           Company's  Form  8-K  filed  with  theSecurities  and
                           Exchange  Commission  on November  16, 1992 and dated
                           November 5, 1992),  Twelfth  Amendment  and Extension
                           Agreement  dated as of February 5, 1993 between Agent
                           and Borrowers (incorporated by reference from Exhibit
                           2 to the Company's Form 8-K filed with the Securities
                           and  Exchange  Commission  on  February  16, 1993 and
                           dated  February  5,  1993),   Modification   of  Loan
                           Agreement and Forbearance  Agreement dated as of June
                           30, 1993 between Agent and Borrowers (incorporated by
                           reference  from Exhibit 2 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           July 19,  1993 and dated  June 9,  1993),  Moratorium
                           Agreement  dated as of October 29, 1993 between Agent
                           and Borrowers  incorporated by reference from Exhibit
                           2 to the Company's Form 8-K filed with the Securities
                           and  Exchange  Commission  on  November  10, 1993 and
                           dated October 29, 1993),  Moratorium  Amendment dated
                           as of December 24, 1993 between  Agent and  Borrowers
                           (incorporated  by  reference  from  Exhibit  2 to the
                           Company's  Form 8-K  filed  with the  Securities  and
                           Exchange  Commission  on  January  2,1994  and  dated
                           December 8, 1993), Second Moratorium  Amendment dated
                           as of March 25,  1994  between  Agent  and  Borrowers
                           (incorporated by

                                       32
<PAGE>
                           reference  from Exhibit 1 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           April 1,  1994  and  dated  March  25,  1994),  Third
                           Moratorium Amendment dated as of May 27, 1994 between
                           Agent and Borrowers  (incorporated  by reference from
                           Exhibit 10(j) to the Company's  Annual  Report,  Form
                           10-K, for the year ended  December 31, 1994),  Fourth
                           Moratorium  Agreement  dated as of  August  26,  1994
                           between   Agent  and   Borrowers   (incorporated   by
                           reference  from Exhibit 1 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           September 27, 1994 and dated August 26, 1994),  Fifth
                           Moratorium  Agreement  dated as of September 30, 1994
                           between   Agent  and   Borrowers   (incorporated   by
                           reference  from Exhibit 1 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           October 6, 1994 and dated September 30, 1994), letter
                           agreement  dated as of January 31,  between Agent and
                           Borrowers  (incorporated  by  reference  from Exhibit
                           10(j) to the Company's Annual Report,  Form 10-K, for
                           the year ended December 31, 1994),  letter  agreement
                           dated as of  February  28,  1995  between  Agent  and
                           Borrowers  (incorporated  by  reference  from Exhibit
                           10(j) to the Company's Annual Report,  Form 10-K, for
                           the year ended December 31, 1994),  letter  agreement
                           dated  as  of  March  31,  1995  between   Agent  and
                           Borrowers  (incorporated  by  reference  from Exhibit
                           10(j) to the Company's Annual Report,  Form 10-K, for
                           the year ended December 31, 1994),  letter  agreement
                           dated  as  of  April  30,  1995  between   Agent  and
                           Borrowers  (incorporated  by reference from Exhibit 2
                           to the Company's  Form 8-K filed with the  Securities
                           and  Exchange  Commission  on June 1,  1995 and dated
                           April 30, 1995),  letter  agreement  dated as of July
                           25, 1995 between Agent and Borrowers (incorporated by
                           reference  from Exhibit 2 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           August  4,  1995 and  dated  July 25,  1995),  letter
                           agreement dated as of December 29, 1995 between Agent
                           and Borrowers (incorporated by reference from Exhibit
                           1 to the Company's Form 8-K filed with the Securities
                           and  Exchange  Commission  on March 5, 1996 and dated
                           December 29, 1995),Loan TermOut Agreement dated as of
                           January   31,1996   between   Agent   and   Borrowers
                           (incorporated  by  reference  from  Exhibit  2 to the
                           Company's  Form 8-K  filed  with the  Securities  and
                           Exchange   Commission   on  March  5,1996  and  dated
                           December 29, 1995), and Extension  Agreement dated as
                           of January 7, 1997 between Agent and Borrowers.

                  10(c)    Forbearance  Agreement  dated  as of  April  6,  1990
                           between Northwestern National Life Insurance Company,
                           Farm Bureau Life Insurance Company of Michigan,  F.B.
                           Annuity Company, Farm Bureau Mutual Insurance Company
                           of  Michigan,  Atlantic  Bank of New York,  The Daiwa
                           Bank,    Ltd.,    Shawmut    Bank,N.A.,    The    CIT
                           Group/Equipment  Financing,  Inc.,  First  Mutual  of
                           Boston,  and First NH Bank,  N.A.,  and the  Company,
                           Chancellor Fleet  Corporation,Chancellor  Acquisition
                           Corporation, Chancellor Asset Management Corporation,
                           Chancellor Financial lease, Inc.,  Chancellor Credit,
                           Ltd.,Valmont Financial Corporation and Valmont Credit
                           Corp.  (incorporated  by reference from Exhibit 10(k)
                           to the  Company's  Annual  Report,  Form 10-K,for the
                           year ended December 31, 1989).

                                       33
<PAGE>
                  10(d)    *First  Refusal  Agreement  dated as of June 1,  1992
                           between   Bruncor   Inc.   and  Stephen  G.   Morison
                           (incorporated  by  reference  from  Exhibit  1 to the
                           Company's  Form 8-K  filed  with the  Securities  and
                           Exchange  Commission  on July 6, 1992 and dated  June
                           23, 1992).

                  10(e)    Specimen of Final Form of Warrant to Purchase  Common
                           Stock of Chancellor Corporation issued by the Company
                           on February 5, 1993 to each of Northwestern  National
                           Life  Insurance  Company,  Farm Bureau Life Insurance
                           Company  of  Michigan,  F.B.  Annuity  Company,  Farm
                           Bureau Mutual Insurance Company of Michigan, Atlantic
                           Bank of New York, The Daiwa Bank, Ltd., Shawmut Bank,
                           N.A.,  The  CIT  Group/Equipment   Financing,   Inc.,
                           Federal  Deposit  Insurance  Corporation and First NH
                           Bank, N.A. (the "Lenders") in denominations set forth
                           on  Schedule A to  Twelfth  Amendment  and  Extension
                           Agreement  dated as of February 5, 1993 between Agent
                           and Borrowers (incorporated by reference from Exhibit
                           2 to the Company's Form 8-K filed with the Securities
                           and Exchange  Commission  on February 16, 1993 and of
                           dated February 5, 1993);  and Modification of Warrant
                           Agreement  dated  as of  March  31,  1993  among  the
                           Borrowers and the Lenders  (incorporated by reference
                           from Exhibit 2 to the  Company's  Form 8-K filed with
                           the  Securities  and Exchange  Commission  on May 27,
                           1993 and dated May 25,1993).

                  10(f)    Letter  agreement  dated as of March 1, 1993  between
                           the Company and Bruncor Inc. relating to the proposed
                           conversion of certain  indebtedness into Common Stock
                           of the  Company  under a  formula  based  on the book
                           value of the Common Stock  (incorporated by reference
                           from Exhibit  10(r) to the Company's  Annual  Report,
                           Form 10-K, for the year ended December 31, 1992); and
                           Consent  Agreement  dated as of March 31,  1993 among
                           the Borrowers, the Lenders, Bruncor Inc. and The Bank
                           of  Nova  Scotia   (incorporated  by  reference  from
                           Exhibit 3 to the  Company's  Form 8-K filed  with the
                           Securities  and Exchange  Commission  on May 27, 1993
                           and dated May 25, 1993).

                  10(g)    Secured  Warehouse Loan Agreement dated as of June 9,
                           1993 between  Chancellor  Fleet  Corporation  and IBJ
                           Schroder   Leasing   Corporation   (incorporated   by
                           reference  from Exhibit 3 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           July 19, 1993 and dated June 9, 1993).



                  10(h)    Recapitalization  and Stock Purchase  Agreement dated
                           as of September  20, 1994 among the Company,  Bruncor
                           Inc.   and  Vestex   Corporation   (incorporated   by
                           reference  from Exhibit 3 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           September  27, 1994 and dated  August 26,  1994),  as
                           amended by Amendment No. 1 (incorporated by reference
                           from  Appendix  I to the  Company's  Proxy  Statement
                           dated December 9, 1994), by a letter  agreement dated
                           as of February  28, 1995 

                                       34
<PAGE>

                           among  the   Company,   Bruncor   Inc.   and   Vestex
                           Corporation  (incorporated  by reference from Exhibit
                           10(t) to the Company's Annual Report,  Form 10-K, for
                           the year ended December 31, 1994), by Amendment No. 3
                           to  Recapitalization  and  Stock  Purchase  Agreement
                           dated as of July 14,  1995 by and among the  Company,
                           Bruncor Inc., and Vestex Corporation (incorporated by
                           reference  from Exhibit 1 to the  Company's  Form 8-K
                           filed with the Securities and Exchange  Commission on
                           August  4,  1995 and  dated  July 25,  1995),  and by
                           Amendment  No.  4  to   Recapitalization   and  Stock
                           Purchase  Agreement  dated as of July 14, 1995 by and
                           among  the   Company,   Bruncor   Inc.,   and  Vestex
                           Corporation (incorporated by reference from Exhibit 1
                           to the Company's  Form 8-K filed with the  Securities
                           and Exchange  Commission  on April 22, 1996 and dated
                           April 12, 1996).

                  10(i)    *1994  Stock  Option  Plan,  adopted  by the Board of
                           Directors  of the  Company  on  August  12,  1994 and
                           approved  by  the  Stockholders  of  the  Company  on
                           January  20, 1995  (incorporated  by  reference  from
                           Appendix III to the Company's  Proxy  Statement dated
                           December 9, 1994).

                  10(j)    *1994  Directors'  Stock Option Plan,  adopted by the
                           Board of  Directors of the Company on August 12, 1994
                           and  approved by the  Stockholders  of the Company on
                           January  20, 1995  (incorporated  by  reference  from
                           Appendix III to the Company's  Proxy  Statement dated
                           December 9, 1994).

                  10(k)    *1994 Employee  Stock  Purchase Plan,  adopted by the
                           Board of  Directors of the Company on August 12, 1994
                           and  approved by the  Stockholders  of the Company on
                           January  20, 1995  (incorporated  by  reference  from
                           Appendix IV to the Company's  Proxy  Statement  dated
                           December 9, 1994).

                  10(l)    Interim  Voting  Agreement  dated as of July 25, 1995
                           among the  Company,  Vestex  Corporation,  Stephen G.
                           Morison and the Company's other employees and form of
                           Voting   Agreement   among   the   Company,    Vestex
                           Corporation,  Stephen G. Morison, Bruce M. Dayton and
                           Thomas W. Killilea  (incorporated  by reference  from
                           Exhibits 4 and 5, respectively, to the Company's Form
                           8-K filed with the Securities and Exchange Commission
                           on August 4, 1995 and dated July 25, 1995).

                  10(m)    $200,000  Subordinated  Promissory  Note  dated as of
                           July 25, 1995 by the Company in favor of Bruncor Inc.
                           (incorporated  by  reference  from  Exhibit  3 to the
                           Company's  Form 8-K  filed  with the  Securities  and
                           Exchange  Commission on August 4, 1995 and dated July
                           25, 1995).

                  10(n)    Note  dated   November   22,  1996  in  the  original
                           principal   amount  of   $500,000   from   Chancellor
                           Corporation to Vestex Capital Corporation.

                  16(a)    Letter dated January 9, 1997,  from Deloitte & Touche
                           LLP  (incorporated  by reference  from Exhibit to the
                           Company's  

                                       35
<PAGE>

                           Amendment No. 1 to Form 8-K filed with the Securities
                           and Exchange Commission on January 13, 1997 and dated
                           December 26, 1996).  21  Subsidiaries  of the Company
                           (incorporated  by  reference  from  Exhibit 21 to the
                           Company's  Annual  Report  on Form  10-K for the year
                           ended December 31, 1995).

                  23(a)    Independent  Auditors'  Consent  -  Reznick  Fedder &
                           Silverman

                  27.1     Financial  Data Schedule for year ended  December 31,
                           1997

                  27.2     Restated  Financial Data Schedules for quarters ended
                           March 31, 1996,  June 30, 1996 and September 30, 1996
                           and year ended December 31, 1996.

                  27.3     Restated  Financial Data Schedules for quarters ended
                           March 31, 1997, June 30, 1997 and September 30, 1997.

-------------------

         *Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.

Copies of these exhibits are available to  stockholders of record at a charge of
$.09 per page, plus postage upon written  request.  Direct requests to: Peter J.
Mullen, Clerk, or Debra E. Rich, Assistant Clerk,  Chancellor  Corporation,  210
South Street, Boston, MA 02111.


         (b)Reports on Form 8-K:         None

                                       36


<PAGE>

                          INDEPENDENT AUDITORS' REPORT



To the Stockholders and Board of Directors
of Chancellor Corporation


We have  audited  the  accompanying  consolidated  balance  sheet of  Chancellor
Corporation   and   subsidiaries  as  of  December  31,  1997  and  the  related
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows for the years ended December 31, 1997 and 1996. 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 consolidated  financial statements referred to above present
fairly,  in  all  material  respects,   the  financial  position  of  Chancellor
Corporation  and its  subsidiaries  as of December 31, 1997,  and the results of
their  operations and their cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.





                                               /s/ Reznick Fedder & Silverman

Boston, Massachusetts 
March 18, 1998, except for Note V 
which is as of March 27, 1998

                                      F-1

<PAGE>

                     CHANCELLOR CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                DECEMBER 31, 1997
                      (In Thousands, Except Share Amounts)

ASSETS

Cash and cash equivalents                                             $    97
Cash and cash equivalents, restricted                                   2,419
Receivables, net                                                          667
Leased equipment held for underwriting                                    502
Net investment in direct finance leases                                   521
Equipment on operating lease, net of
 accumulated depreciation of $4,106                                       232
Residual values, net                                                      465
Furniture, equipment and leaseholds, net of
 accumulated depreciation of $1,291                                       937
Security deposits                                                          12
Other investment                                                        1,000
Intangibles, net                                                          122
Other assets                                                              117
                                                                      -------
  Total Assets                                                        $ 7,091
                                                                      =======

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable and accrued expenses                                 $ 5,921
Indebtedness:
 Nonrecourse                                                              528
 Recourse                                                                 415
                                                                      -------
  Total liabilities                                                     6,864
                                                                      -------
Commitments and contingencies                                             --

Stockholders' equity (deficit)
 Preferred  Stock,  $.01 par value, 20,000,000  
  shares  authorized  
  Convertible Series A, 710,526 shares
   issued and outstanding                                                   7
  Convertible Series AA, 8,000,000 shares
   issued and outstanding                                                  80
  Convertible Series B, 2,000,000
   shares authorized, none issued and outstanding                         --
 Common stock, $.01 par value, 75,000,000 shares
  authorized, 25,401,391 issued and outstanding                           254
 Additional paid-in capital                                            28,426
 Accumulated deficit                                                  (28,540)
                                                                      -------
  Total stockholders' equity                                              227
                                                                      -------
  Total liabilities and stockholders' equity                          $ 7,091
                                                                      =======


                 See notes to consolidated financial statements.

                                      F-2
<PAGE>
                     CHANCELLOR CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1997 and 1996
               (In Thousands, Except Per Share and Share Amounts)

                                                         1997            1996
                                                         ----            ----

Revenues:
 Rental income                                       $      870       $   1,933
 Lease underwriting income                                  293             504
 Direct finance lease income                                272             191
 Interest income                                             44              60
 Gains from portfolio remarketing                           801           1,391
 Fees from remarketing activities                         1,488             820
 Other income                                               665             614
                                                     ----------       ---------
                                                          4,433           5,513
                                                     ----------       ---------
Costs and expenses:
 Selling, general and administrative                      6,412           8,219
 Interest expense                                           281             480
 Depreciation and amortization                              459           1,042
 Residual value estimate reduction                         --             2,384
                                                     ----------       ---------
                                                          7,152          12,125
                                                     ----------       ---------
Loss before extraordinary
  item and income tax (benefit)
  provision                                              (2,719)         (6,612)

Income tax (benefit) provision                               13            (239)
                                                     ----------       ---------
Loss before extraordinary item                         ($ 2,732)       ($ 6,373)

Extraordinary item - gain on
  debt forgiveness                                          930            --
                                                     ----------       ---------

Net Loss                                             $   (1,802)      $  (6,373)
                                                     ==========       =========
Basic net loss per share:
 Loss before extraordinary item                          ($0.18)         ($1.24)
 Extraordinary item                                         .06             --
                                                     ----------       ---------
 Net Loss                                                ($0.12)         ($1.24)
                                                     ==========       =========
Shares used in computing Basic
 Net Loss per share                                  15,224,432       5,136,391
                                                     ==========       =========

                 See notes to consolidated financial statements.

                                      F-3
<PAGE>

<TABLE>
<CAPTION>
                                      CHANCELLOR CORPORATION AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                       YEARS ENDED DECEMBER 31, 1997 and 1996
                                                   (In Thousands)


                                                              Additional                                Stockholders
                         Preferred Stock      Common Stock      paid-in   Accumulated  Treasury Stock      Equity
                         Shares   Amount     Shares  Amount     capital     Deficit   Shares    Amount    (Deficit)

<S>                       <C>        <C>     <C>      <C>       <C>        <C>        <C>        <C>       <C> 
BALANCE, 12/31/95, as         -      $ -      6,567     $65     $23,638    ($21,802)   1,431     ($536)     $1,365
 previously reported

Prior Period                                                                  1,437                          1,437
 adjustment
                         -------  --------  --------  ------  ----------  ---------- --------  --------   --------

BALANCE, 12/31/95,
as restated                                   6,567      65      23,638     (20,365)   1,431      (536)      2,802


Preferred Stock
 Series AA issued,
 net of expenses of
 approximately $329       5,000       50                            971                                      1,021

Net loss                                                                    ( 6,373)                        (6,373)
                         -------  --------  --------  ------  ----------  ---------- --------  --------   --------

BALANCE, 12/31/96         5,000       50      6,567      65      24,609     (26,738)   1,431      (536)     (2,550)

Preferred Stock
 Series A issued            711        7                          1,343                                      1,350

Preferred Stock
 Series AA issued         3,000       30                            870                                        900

Common Stock
 issued                                      20,250     203       2,123                                      2,326

Exercise of
 stock options                                   15                   3                                          3

Retirement of
 Treasury Stock                              (1,431)    (14)       (522)              (1,431)      536           -

Net Loss                                                                     (1,802)                        (1,802)
                         -------  --------  --------  ------  ----------  ---------- --------  --------   --------

BALANCE, 12/31/97         8,711   $   87     25,401    $254     $28,426    ($28,540)   $   -      $  -      $  227
                         =======  ========  ========  ======  ==========  ========== ========  ========   ========

</TABLE>




                                  See notes to consolidated financial statements



                                                      F-4



<PAGE>
<TABLE>
<CAPTION>
                                      CHANCELLOR CORPORATION AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      YEARS ENDED DECEMBER 31, 1997 and 1996
                                                  (In Thousands)

                                                                        1997                      1996
                                                                        ----                      ----
<S>                                                                   <C>                       <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                             ($1,802)                  ($6,373)
                                                                       ------                    ------
  Adjustments to reconcile net loss to net
   cash provided by (used in) operating activities:
   Depreciation and amortization                                          459                     1,042
   Deferred income taxes (benefit)                                          -                      (400)
   Gain on debt forgiveness                                              (930)                        -
   Changes in assets and liabilities:
     Receivables                                                         1,896                     (674)
     Residual values, net                                                  283                    2,592
     Other assets                                                          141                       39
     Accounts payable and accrued expenses                               1,828                    2,987
                                                                         -----                    -----
          Total Adjustments                                              3,677                    5,586
                                                                         -----                    -----
   Net cash provided by (used in)
      operating activities                                               1,875                     (787)
                                                                        ------                    -----
CASH FLOWS FROM INVESTING ACTIVITIES:
  Leased equipment held for underwriting                                   729                      628
  Net investment in direct finance leases                                  227                      673
  Equipment on operating lease                                              59                      302
  Net change in cash restricted                                          1,134                      960
  Additions to furniture and equipment, net                             (1,018)                    (100)
  Other investments                                                       (185)                       -
                                                                        ------                    -----
   Net cash provided by investing activities                               946                    2,463
                                                                        ------                    -----
CASH FLOWS FROM FINANCING ACTIVITIES:
  Additions to indebtedness - recourse                                   1,879                      570
  Additions to indebtedness - nonrecourse                                   40                        -
  Repayments on indebtedness - nonrecourse                                (701)                  (1,979)
  Repayments on indebtedness - recourse                                 (3,966)                  (1,452)
  Sale of common stock                                                       3                        -
  Sale of preferred stock, net of expenses                                   -                    1,021
                                                                         -----                    -----
    Net cash used in financing activities                               (2,745)                  (1,840)
                                                                        ------                   ------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                                                76                     (164)

CASH AND CASH EQUIVALENTS, BEGINNING                                        21                      185
                                                                        ------                   ------

CASH AND CASH EQUIVALENTS, ENDING                                       $   97                   $   21
                                                                        ======                   ======

Non-Cash Activity

  Issuance of common and preferred stock
    in exchange for fees and debt due
    to related party                                                    $4,556                    $   -
                                                                        ======                    =====

  Issuance of common stock for acquisition of
    subsidiary company                                                   $  20                    $   -
                                                                         =====                    =====
</TABLE>
                 See notes to consolidated financial statements

                                      F-5
<PAGE>






                     CHANCELLOR CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

A.       Business Organization and Significant Accounting Policies

         Business

         Chancellor  Corporation and Subsidiaries (the "Company") are engaged in
(1) buying, selling,  leasing and remarketing new and used equipment,  primarily
transportation,  material  handling  and  construction  equipment,  (2) managing
equipment on and off-lease, and (3) arranging  equipment-related  financing. The
Company's  primary market has  historically  been the United States,  and during
1997 has expanded its market  presence  into  international  markets,  primarily
Russia and the Commonwealth of Independent States.

         Principles of Consolidation

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

         Accounting for Estimates

         The  preparation of financial  statements in accordance  with generally
accepted accounting principles requires management to make assumptions regarding
estimates reported in these consolidated  financial statements.  These estimates
primarily include residual values, the useful lives of fixed assets and deferred
income  taxes,  among  others.  These  assumptions  could change based on future
experience and, accordingly, actual results may differ from these estimates.

         Revenue Recognition

         Lease underwriting income - Lease underwriting fees arise from the sale
of equipment  leasing  transactions  and include cash  underwriting  margins and
residual  value fees.  The excess of the sales price of equipment to an investor
(including the assumption of any nonrecourse  indebtedness) over its cost to the
Company  represents lease  underwriting fees. The Company typically arranges for
the lease of equipment to a lessee and, in some cases, for borrowings to finance
the purchase of the equipment, assigning lease rentals to secure such borrowings
on a  nonrecourse  basis.  If the  Company  elects to sell the  transaction  (as
opposed to retaining the  transaction  for its own  portfolio),  the  equipment,
subject to the lease and the borrowing (if any), is then sold to investors using
the  structure  of a  grantor  trust  which  is  then  managed  by the  Company.
Consideration  for the sale of the leased  equipment to investors is normally in
the form of a cash investment.

         Residual  value  fees  arise  from the sale of  lease  transactions  to
investors.  These fees represent the Company's present value share of the future
residual value of the leased  equipment that the Company expects to realize upon
successful remarketing of the equipment.

         Direct finance lease income - Lease  contracts  which qualify as direct
finance leases are accounted for by recording on the balance sheet minimum lease
payments  receivable  and estimated  residual  values on leased  equipment  less
unearned lease income and credit allowances. Revenues from direct finance leases
are recognized as income over the term of the lease,  on the basis that produces
a constant rate of return.

         Operating  leases (Rental Income) - Lease  contracts,  which qualify as
operating  leases,  are accounted  for by recording  the leased  equipment as an
asset, at cost. The equipment is then depreciated on a straight-line  basis over
two to fifteen  years to its  estimated  residual  value.  Equipment  is further
depreciated  below its  initial  residual  value upon  release to its  estimated
revised residual value at release  expiration.  Any changes in depreciable lives
affect the  associated  expense  on a  prospective  basis.  Rental  income  from
operating  leases is recognized  using a  straight-line  method over the initial
term of the lease.


                                       F-6

<PAGE>



         Reimbursable Expenses

         The Company is entitled to  reimbursement  of expenses  incurred in the
remarketing of certain equipment as outlined in various remarketing  agreements.
Pursuant  to the terms of the trust  agreements,  the  Company is  permitted  to
charge the trusts for its costs  associated with  administrating  the trust. The
reimbursement  of  these  costs  is  recorded  as a  reduction  of  general  and
administrative expenses.

         Residual Values

         The Company reviews recorded residual values on an annual basis.  Write
downs in estimated  residual  values,  due to declines in equipment value or the
financial  creditworthiness  of individual  customers and major  industries into
which the Company  leases  equipment,  are recorded when  considered  other than
temporary.  Through 1995, the residual  values were estimated based on a Company
developed   database  by  comparing  future  estimated  values  with  historical
experience.  In 1996, as a result of changes in market  conditions,  the Company
reassessed  the  valuation  model and database,  and the residual  valuation was
based on  independent  valuation  of the  equipment  held under  trust lease and
valuation model.

         Cash and Cash Equivalents

         The Company  considers all highly liquid  investments  purchased with a
remaining maturity of three months or less to be cash equivalents.

         Cash Restricted

         Restricted  cash  balances are  available  only for  specific  purposes
related to payments to investors, escrow agreements and payment of taxes related
to equipment owned by investors.

         Leased Equipment Held for Underwriting

         Equipment  inventories  are  valued  at the  lower  of  cost  (specific
identification) or market.  Revenues and expenses associated with this equipment
are  deferred  until  the  equipment  is sold or  added to the  Company's  owned
portfolio.

         Furniture, Equipment and Leaseholds

         Furniture and equipment are recorded at cost.  Depreciation is computed
using a the  straight-line  method  over 5 years based on the  estimated  useful
lives of the related  assets.  No depreciation is recorded on idle furniture and
equipment. Leasehold improvements are amortized over the lease term.

         Intangibles

         Intangibles  consist of goodwill  which is amortized  over an estimated
life of fifteen years using the straight-line  method and license agreements and
a customer list which are being  amortized  over an estimated life of four years
using the straight-line method.

         Income Taxes

         Statement  of  Financial   Accounting   Standards   ("SFAS")  No.  109,
"Accounting  for Income  Taxes,"  requires an asset and  liability  approach for
financial  accounting  and reporting for income taxes.  In addition,  future tax
benefits, such as net operating tax carry forwards, are recognized to the extent
realization of such benefits is more likely than not.

         Stock-based Compensation

         The Company  has adopted  SFAS No.  123,  "Accounting  for  Stock-Based
Compensation",  which  allows  the  Company to account  for  stock-based  awards
(including  stock  options) to  employees  using the  intrinsic  value method in
accordance with Accounting Principles Board Opinion No, 25, "Accounting for
Stock Issued to Employees".


                                       F-7



<PAGE>

         Net Loss per Share

         Basic net loss per share  amounts are  computed  based on the  weighted
average number of common shares and diluted net loss per share amounts are based
on common and common  equivalent  shares,  when  dilutive.  Diluted net loss per
share is not  presented for 1997 and 1996 since common stock  equivalent  shares
from  convertible  preferred  stock and from  stock  options  and  warrants  are
antidilutive.

         Supplemental Cash Flow Information

         Cash  paid for  income  taxes  during  1997 and  1996 was  $13,000  and
$29,000,  respectively.  Interest  paid  during 1997 and 1996 was  $340,000  and
$903,000, respectively.

         Other Investments

         The  Company  accounts  for its  equity  investment  of less  than  20%
ownership in an investee on a cost basis.

         Recent Accounting Pronouncements

         The Company has adopted SFAS No. 128  "Earnings  Per Share",  which has
changed the method of  calculating  earnings  per share and related  disclosure.
SFAS No. 128 requires the  presentation  of "basic" and  "diluted"  earnings per
share on the face of the  income  statement.  Basic  loss  per  common  share is
computed by dividing net loss by the weighted  average  number of common  shares
outstanding  during the period.  The implementation of this SFAS has no material
effect on the financial statements of the Company.

         In June 1997, the Financial  Accounting Standards Board issued SFAS No.
130, "Reporting  Comprehensive  Income".  SFAS No. 130 prescribes  standards for
reporting comprehensive income and its components. SFAS No. 130 is effective for
years beginning after December 15, 1997. The  implementation  of SFAS No. 130 is
not  expected  to  materially  effect  the  Company's   consolidated   financial
statements.

         In June 1997, SFAS No. 131, "Disclosure About Segments of an Enterprise
and  Related  Information"  was  issued.  SFAS No.  131 is  effective  for years
beginning after December  15,1997 and early adoption is encouraged.  The Company
intends  to adopt SFAS No. 131 for the year ended  December  31,  1998.  At that
time, the Company will be required to disclose  certain  geographic  information
including  revenue from external  customers and certain  assets and  liabilities
based on country of domicile.

         Impact of the Year 2000 Issue

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits  rather  than four to define the  applicable  year.  Any of the
Company's  computer programs that have  date-sensitive  software may recognize a
date  using  "00" as the  year  1900  rather  than  the year  2000.  This  could
potentially result in a system failure or miscalculations causing disruptions of
operations,  including,  among other  things,  a temporary  inability to process
transactions,  send invoices, or engage in other similar normal activities.  The
Company  had  already  planned on  updating  its  computer  software to increase
operational  efficiencies and information  analysis and will ensure that the new
systems  properly  utilizes  dates beyond  December  31, 1999.  The cost of this
upgrade project, as it relates to the Year 2000 Issue, is not expected to have a
material effect on the operations of the Company and will be funded through

         Fair Value of Financial Instruments

         The fair value of the Company's  assets and liabilities that constitute
financial  instruments as defined in SFAS No. 107,  "Disclosure about Fair Value
of Financial Instruments", approximate their recorded amounts.




                                       F-8



<PAGE>



B.       Receivables
                                      December 31, 1997
                                       (In Thousands)
     Loans receivable, net                $  6
     Auto loans receivable, net             87
     Receivables from trusts, net          507
     Accrued rents, net                     38
     Other                                  29
                                          ----
                                          $667
                                          ====

         Receivables  from  trusts  include  amounts  due the  Company  for cash
outlays  associated  with the  remarketing  of equipment of $150,000,  net of an
allowance  of  $59,000.   These  amounts  will  be  collected  upon   successful
remarketing of such equipment.  Additionally,  receivables  from trusts includes
amounts due for costs incurred by the Company for  administration  of the trusts
in  accordance  with the trust  agreements  of $357,000,  net of an allowance of
$588,000.  Collection of costs of  administration is not certain due to numerous
factors and is, therefore, included net of the estimated reserve.

         Loans  receivable  includes  $6,000 relating to the Company's lease and
loan  origination,  underwriting  and  syndication  business and a loan from the
divestiture  from a former  subsidiary  (see note P) of  $50,000.  A reserve  of
$50,000 has been recorded against the loans at December 31, 1997.

         Auto loans receivable  consists of 15 loans,  which are payable monthly
with interest of 19%. The underlying automobiles secure the loans.

         Accrued rents represent  amounts due from portfolio  leases,  net of an
allowance of $129,000.

C.       Residual Values, Net

         The Company's lease underwriting  income includes  consideration in the
residual value sharing arrangements  received from originating and selling lease
transactions  to  investors.  The Company upon  remarketing  of the equipment at
termination  or  expiration  of the  related  leases will  realize  this type of
consideration (residual values). The Company's share of expected future residual
values is recorded as income at their  discounted  present value at the time the
underlying leases are sold to investors. Any increases in the Company's expected
residual sharing are recorded as gains upon realization. Write-down in estimated
residual   value  due  to  declines  in   equipment   value  or  the   financial
creditworthiness  of individual  customers and major  industries  into which the
Company leases equipment, are recorded when considered other than temporary. The
Company evaluates residual values based upon independent assessments by industry
professionals,   in  addition  to  already  established  criteria  used  in  the
benchmark/matrices methodology.

The activity in the  residual  value  accounts for the years ended  December 31,
1997 and 1996 is as follows:

                                                              December 31,
                                                           1997        1996
                                                            (In Thousands)

         Residual values, beginning of year, net          $ 748        $3,340
         Residual fees recorded                               -           268
         Realization                                       (283)         (476)
         Residual value estimate reduction                    -        (2,384)
                                                         -------       -------
         Residual values, end of year, net                $ 465        $  748
                                                         =======       =======

         Residual value  estimate  reductions  represent  reductions in expected
future   residual  values  on  certain   equipment,   the  residuals  that  were
substantially  all recorded  prior to 1996.  Such  reductions  resulted  from an
extensive  review and valuation of all assets  owned,  leased and managed by the
Company. See Note G for additional information on the review and valuation.  For
the years ended  December  31, 1997 and 1996,  the  Company  realized  income of
approximately $1,488,000 and $820,000, respectively, relating to the remarketing
of equipment for which no residuals were recorded or realized  amounts  exceeded
the booked residual.


                                      F-9
<PAGE>
         Aggregate  residual  value fees  expected to be realized as of December
31, 1997 are as follows (in thousands):

              Year ending December 31:

                       1998                     $ 118
                       1999                       223
                       2000                        76
                       2001                         5
                       2002                         4
                       Thereafter                  39
                                                 ----
                                                 $465
                                                 ====

D.       Net Investment in Direct Finance Leases and Equipment on Operating
         Lease:

         Net investment in direct  finance leases  consisted of the following at
December 31, 1997:

         Minimum lease payments receivable                  $496
         Estimated unguaranteed residual values of
               leased equipment, net                         160
         Less unearned income                               (135)
                                                            ----
                                                            $521
                                                            ====

         The cost of equipment on operating lease by category of equipment as of
December 31, 1997 is as follows:


         Transportation equipment                         $1,370
         Other equipment                                   2,838
                                                           -----
                                                           4,208
         Less accumulated depreciation                     3,976
                                                           -----
                                                          $  232
                                                           =====

         The  aggregate  amounts of minimum  lease  payments to be received from
noncancelable direct finance and operating leases are as follows:

                                             Direct Finance        Operating
                                             --------------        ---------
                  Year ending December 31:            (In Thousands)
                           1998                   $235               $223
                           1999                    101                 45
                           2000                     76                 31
                           2001                     72                 30
                           2002                     12                 10
                                                  ----               ----
                                                  $496               $339
                                                  ====               ====

         Included in the operating lease and direct finance lease portfolios are
equipment held for remarketing with an original cost of  approximately  $650,000
and a net book value of $0.

E.       Accounts Payable and Accrued Expenses:

         Accounts  payable and accrued  expense  consists of the following as of
December 31, 1997:

             Trade accounts payable                          $  598
             Payables to trusts                               2,842
             Accrued interest payable                            46
             Contribution payable to NAOF                       815
             Accrued income taxes payable                       230
             Other accrued expenses                           1,390
                                                            -------
                                                            $ 5,921
                                                            =======
                                     F-10
<PAGE>
F.       Restricted Cash

         The balance in restricted cash represents cash proceeds  collected from
the sale of equipment  owned by the  investors  and rental  income  collected on
behalf of the  investors,  net of expenses.  As of December 31, 1997, the amount
due to investors  for cash  collected  on their  behalf  exceeded the balance in
restricted cash by $446,000.

G.       Residual Value Estimate Reductions and Lessee Credit-Related Portfolio
         Losses

         The  Company  performs a review and  revaluation  of all assets  owned,
leased and managed by the Company every year.

         The  Company   evaluates   residual   values  based  upon   independent
assessments  by  industry  professionals,  in  addition  to already  established
criteria  used  in the  benchmark/matrices  methodology.  The  Company  did  not
recognize a reduction in trust residual values in 1997. Substantially all of the
residual  write-down for the year 1996 was associated with equipment  leased and
sold to investors by the Company prior to 1996.

H.       Indebtedness

         In  April  1997,  the  Company  executed  and  delivered  (1) the  Loan
Reduction  and  Purchase  and  Assignment  Agreement  dated April 1997 among the
Company,  its  corporate  affiliates,  Fleet  National  Bank -  Corporate  Trust
Division,  as agent (the "Agent") for the Company's  principal recourse lenders,
and Vestex,  the  Company's  majority  shareholder;  (2) release in favor of the
principal recourse lenders to be given by Vestex and Brian M. Adley, Chairman of
the Board of  Directors of the Company and  President  and sole  shareholder  of
Vestex, individually;  (3) release in favor of the principal recourse lenders to
be given by the Company, its corporate affiliates and/or subsidiaries,  in favor
of Vestex.  Coterminous with this transaction,  both the intercreditor  loan and
secured  inventory loan were repaid in advance on their  respective  terms.  The
aggregate  amount  of  this  debt  on  the  repayment  date  was   approximately
$1,906,000,  of which approximately $976,000 was paid in cash and the balance of
$930,000 was forgiven.  In addition,  the Company paid approximately  $22,000 in
legal and bank fees to complete this transaction.


         A $50,000  subordinated  loan from Vestex,  Inc.,  $73,000 in equipment
loans, a $68,000 bank loan and a $24,000  shareholder  and director loan owed by
the Company's  subsidiary Long River Capital,  and a $200,000  subordinated loan
from a  former  shareholder  together  make up the  $415,000  of  recourse  debt
outstanding  at December 31, 1997.  The loan payable to Vestex bears interest at
2% above the prime rate (10.5% at December 31,  1997) and is due on demand.  The
loan payable to a former  shareholder bears interest at 1% over the base rate as
defined in the  agreement X% at December 31, 1997.  Pursuant to the terms of the
loan,  principal  payments of $40,000 per month were  scheduled to commence upon
repayment  of the  intercreditor  debt.  No  payments  were  made in  1997.  The
equipment  loan  provides  for monthly  principal  and interest at 8% and 15% of
approximately  $2,000  payable in advance and expires in November 2000. The bank
loan is due on demand with interest at 2% over prime rate (10.5% at December 31,
1997) payable monthly and is secured by auto loans  receivable (see Note B). The
shareholder  and director loan is payable monthly with interest at X% and is due
on demand.

         Aggregate  annual  maturities under recourse debt discussed above as of
December 31, 1997 are as follows (in thousands):

                  Year ending December 31:

                           1998                           $374
                           1999                             22
                           2000                             19
                                                         -----
                                                          $415

         Maximum  recourse  indebtedness   outstanding  during  the  year  ended
December 31, 1997 was approximately $3.4 million.

                                      F-11
<PAGE>
         Nonrecourse  indebtedness  consists  of  notes  payable  to  banks  and
financial  institutions  arising from assignments of the Company's rights, (most
notably the right to receive  rental  payments)  as lessor,  at  interest  rates
ranging from 7.5% to 14%. Amounts due under nonrecourse notes are obligations of
the Company which are secured only by the leased  equipment and  assignments  of
lease  receivables,  with no recourse to any other  assets of the  Company.  The
Company  is at risk,  however,  for the  amount  of  residual  value  booked  on
equipment for its own portfolio in the event of a lessee default.

         Aggregate future maturities of nonrecourse  indebtedness as of December
31, 1997 are as follows (in thousands):

                  Year ending December 31:
                       1998                         $226
                       1999                          102
                       2000                           91
                       2001                           87
                       2002                           22
                                                    ----
                                                    $528
                                                    ====

I.       Income Taxes

         The provision (benefit) for income taxes consists of the following:
   
                                           1997               1996
                                          -----              ----- 
         Current:
                  Federal                 $   -               $ 90
                  State                      13                 71
         Deferred:
                  Federal                     -               (400)
                  State                       -                  -
                                          -----              ----- 
         Total                              $13              ($239)
                                          =====              ===== 

         A  reconciliation  of the rate  used for the  provision  (benefit)  for
income taxes is as follows:
                                           1997               1996
                                          -----              ----- 
Tax benefit at statutory rate              34.0%              34.0%
Net operating loss carry forward
 benefit for which utilization 
 is not assured and other items           (34.0)             (37.4)
                                          -----              ----- 
Total                                       0.0%             ( 3.4%)
                                          ======              ======= 

         The Company files  consolidated  federal income tax returns with all of
its  subsidiaries.  As of December 31, 1997,  the Company has net operating loss
carryforwards of approximately  $23,385,000  available for federal tax purposes,
which expire in the years 2001 through 2012. In addition,  at December 31, 1997,
the Company  has  investment  tax credit  carryforwards  for federal  income tax
purposes available to offset future taxes of approximately  $2,276,000  expiring
in the years 1998 through 2001 and minimum tax credit  carryforwards for federal
income tax purposes  available to offset future taxes of approximately  $105,000
which do not expire.  For federal tax  purposes,  utilization  of net  operating
losses and tax credit  carryforwards will be limited in future years as a result
of a greater than 50% change in ownership which occurred in July 1995.

         Deferred  income  taxes  reflect the net tax  effects of (a)  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the  amounts  used for  income  tax  purposes,  and (b)
operating loss and tax credit carryforwards.


                                      F-12

<PAGE>
         The tax effects of  significant  items  comprising  the  Company's  net
deferred tax liability as of December 31, 1997 are as follows:
 
                                                          December 31,
                                                          ------------
                                                             1997
                                                             ----
                                                         (In Thousands)
Deferred tax liabilities:
         Differences between book and tax
                  basis of property                          $   292
Deferred tax assets:
         Reserves not currently deductible                       500
         Net operating loss carryforwards                      9,354
         Tax credit carryforwards                              2,381
         Other                                                    10
                                                              ------
                  Total deferred tax assets                   12,245
                                                              ------
                                                              11,953

Valuation allowance                                          (11,953)
                                                              ------
Net deferred tax liability                                     $   -
                                                              ======

         All deferred tax liabilities and deferred tax assets (except tax credit
carryforwards)  are tax  effected  at the  enacted  rates for state and  federal
taxes.  The  valuation   allowance  relates  primarily  to  net  operating  loss
carryforwards  and  tax  credit  carryforwards  that  may not be  realized.  The
valuation allowance decreased by $1,050,000 in 1997. For the year ended December
31, 1996 the valuation allowance increased by $3,046,000.

         The deferred tax asset is available to offset  taxable income in excess
of book income  generated from the lease portfolio and residual values which are
the principal components of the total deferred tax liabilities of $292,000 as of
December 31, 1997.  The deferred tax asset,  net of the deferred tax  liability,
has been fully reserved as of December 31, 1997.

J.       Stockholders Equity (Deficit)

         The Preferred Stock issued by the Company  carries certain  preferences
and rights as discussed below.  Each share of Preferred Stock is entitled to the
number of votes equal to the number of whole  shares of Common  Stock into which
the share of the Preferred Stock held are then  convertible.  The holders of the
Preferred  Stock shall be entitled to receive cash  dividends only to the extent
and in the same  amounts as  dividends  are  declared  and paid with  respect to
Common  Stock as if the  Preferred  Stock has been  converted to Common Stock in
accordance with the provisions  related to conversion.  Preferences  specific to
each series are as follows:

         Series A -  convertible  into ten shares of Common Stock for each share
         of Preferred Stock and has a liquidation preference of $1.90 per share;

         Series AA -  convertible  into one share of Common Stock for each share
         of Preferred Stock and has a liquidation preference of $.50 per share.

         Series B -  convertible  into ten shares of Common Stock for each share
         of Preferred Stock and has a liquidation preference of $2.00 per share.

K.       Stock Option Plans and Stock Purchase Plan

         The Company has four stock  option  plans:  a 1994 Stock Option Plan, a
1994  Directors'  Stock Option Plan, a 1997 Stock Option Plan,  and a 1983 Stock
Option Plan.  The 1983 Stock Option Plan has expired and  remaining  outstanding
options under this Plan were canceled in 1997 and reissued under the 1994
Stock Option Plan.

         The Company's stock option plans provide for incentive and nonqualified
stock  options  to  purchase  up to an  aggregate  of  5,707,000  shares  of the
Company's  Common Stock which may be granted to key contributors of the Company,
including officers,  directors,  employees and consultants. The aggregate number
of shares pursuant to the plans do not include  1,100,500 options related to the
1983 stock option plan which have expired.  The options are generally granted at
the fair market  value of the  Company's  Common Stock at the date of the grant,

                                      F-13
<PAGE>
vest over a five-year period, are exercisable upon vesting and expire five years
from the date of grant.

         Information with respect to the stock option plans was as follows:

                          1994          1994       1997         1983    Weighted
                          Stock         Directors  Stock        Stock   Average
                          Option        Option     Option       Option  Exercise
                          Plan          Plan       Plan         Plan    Price
                     -----------------------------------------------------------
Outstanding,
December 31, 1995      1,207,000       95,000                   3,981      $.16

Options granted                -      234,500                       -       .25
Options canceled         (72,715)           -                    (737)     .007
                        ---------     -------                  ------      ----
Outstanding,
December 31, 1996      1,134,285      329,500           -       3,244       .18

Options granted        1,005,000      337,500   2,240,000           -       .51
Options exercised        (15,000)           -           -           -       .15
Options canceled
 and expired          (1,119,285)           -           -                   .18

Options canceled
  and reissued             3,244            -           -      (3,244)      .01
                        --------      -------   ---------      ------      ----
Outstanding,
December 31, 1997      1,008,244      667,000   2,240,000           -      $.49
                       =========      =======   =========      ======      ====

         Additional information regarding options outstanding as of December 31,
1997 is as follows:
                               Options Outstanding

Exercise         Number      Weighted Average       Exercisable       Date of
Price          Of Shares     Contractual Life         Options        Expiration
-----          ---------     ----------------         -------        ----------
$0.01             3,244             5.00               3,244            2002
$0.06           112,500             4.00             112,500          2001-2003
$0.10           681,000             4.98             115,000          2002-2003
$0.20           225,000             4.00              75,000            2003
$0.25           920,500             4.50             329,500          2002-2003
$0.30            40,000             5.25                              2002-2003
$0.50           591,000             5.69                              2002-2005
$0.60            40,000             5.75                              2002-2004
$0.75           541,000             5.75                              2002-2006
$1.00           681,000             6.56                              2003-2007
$1.50            40,000             6.75                              2002-2006
$2.00            40,000             7.25                              2003-2007
              ---------                             --------
Total         3,915,244                              635,244
              =========                             ========

         The  weighted  average  exercise  price of the options  outstanding  at
December 31, 1997 was $.49.

         Pro forma  information.  The  Company has elected to follow APB Opinion
No. 25,  "Accounting  for Stock  Issued to  Employees,"  in  accounting  for its
employee stock options  because,  as discussed below, the alternative fair value
accounting  provided  for  under  SFAS  No.  123,  "Accounting  for  Stock-Based
Compensation,"  requires  the use of  option  valuation  models  that  were  not
developed for use in valuing  employee stock options.  Under APB No. 25, because
the  exercise  price of the  Company's  employee  stock  options  which equal or
exceeds the market price of the  underlying  stock on the date of the grant,  no
compensation expense is recognized in the Company's financial  statements.  SFAS
No. 123 requires the  disclosure of pro forma net income (loss) and earnings per
share as if the Company had adopted the fair value method as of the beginning of
fiscal  1995.  Under SFAS 123,  the fair value of stock  options to employees is
calculated  through the use of option  pricing  models,  even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options  without  vesting  restrictions,  which  significantly  differ  from the
Company's stock option awards. These models also require subjective assumptions,
including  future stock price  volatility  and expected time to exercise,  which
greatly differs from the calculated values. The Company's calculations were made
using the Black-Scholes option
                                      F-14
<PAGE>

pricing model with the following weighted average assumptions: expected life, 48
months  following  vesting-stock  volatility  200% in 1997 and  1996,  risk free
interest  rate,  8%, in 1997 and in 1996 and no  dividends  during the  expected
term.  The  forfeitures  of the options  are  recognized  as they occur.  If the
computed  fair  values of the 1996 and 1997  awards had been  expensed  over the
vesting period of the awards,  the pro forma net loss would have been $6,411,000
($1.25 per share) in 1996 and $1,850,000 ($0.12 per share) in 1997.

         Employee Stock Purchase Plan

         The Company's 1994 Employee Stock Purchase Plan authorizes the offering
to employees of up to 250,000 shares of Common Stock in six semiannual offerings
at a price of 85% of the Common Stock's bid price and in an amount determined by
a formula based on each employee's estimated annual compensation.  The Company's
stockholders  authorized  this plan in January  1995.  No shares of Common Stock
have been offered pursuant to the plan to date.

         The Company has reserved 250,000 shares of Common Stock for all amounts
that may be offered to employees under this plan.

L.       Commitments and Contingencies

         The   Company   rents  its   corporate   offices   under  a   five-year
non-cancelable lease. In addition, the Company leases regional marketing offices
at the  three  locations  along  the  east  coast.  The  future  minimum  rental
commitments are as follows:

         Year ending December 31:
                  1998                          $191,000
                  1999                           155,000
                  2000                           143,000
                  2001                           131,000
                  2002                            99,000

         Rental  expense,  net of  abatements,  for the years ended December 31,
1997 and 1996 amounted to $194,000, and $182,000, respectively.

         The  Company  undertook  a review  of its  trust  portfolio,  including
consultation with legal counsel and industry consultants, and determined that it
had  not  been  recovering  costs  associated  with  administering  the  trusts.
Management's  review  determined  that  approximately  $22,000,000  of costs for
periods prior to 1997 had not been  recovered  from the trusts.  As discussed in
Note T, the Company has recorded  $1,868,000 of cost recoveries through December
31,  1997  for  periods  prior  to 1997.  Management  makes  no  representations
concerning the Company's  ability to recover any further costs for periods prior
to 1997.  Further  recoveries for periods prior to 1997 are contingent  upon the
current  status of the  specific  trusts  and the  Company's  level of  recovery
efforts.  Consequently, the Company will record any further recoveries as income
in the period in which  collection  is  assured.  Management  cannot  reasonably
predict  if  any  trust   investors  will  claim  that  the  recovery  of  these
administrative costs was not accordance with the trust agreement.

         The  Company was named as a  defendant  along with the  Chairman of the
Board and an affiliate,  of the Chairman in a suit brought by Ernest Rolls,  the
former Vice-Chairman, on February 5, 1998. The suit brought by Mr. Rolls alleges
that the Company is in default on the payment of $2.7  million,  which Mr. Rolls
claims he loaned to the Company.  It is the Company's position that $1.5 million
of the loan has been  repaid to Mr.  Rolls and that the  balance  is  subject to
offsets  and  counterclaims  by the  Company.  The Company has moved the case to
federal  court  and  has  filed  an  answer.  The  Company  intends  to  file  a
counterclaim against Mr. Rolls.

         The Board of Directors of  Chancellor  Corporation  voted to remove Mr.
Ernest L. Rolls as a Director  and Vice  Chairman of the Board  effective  March
10,1998.  The reasons cited by the Board for removing Mr. Rolls included  breach
of his fiduciary duties of care and loyalty,  Mr. Rolls' suspected  self-dealing
and his  failure  to  provide  a total  of $7.5  million  in  financing  that he
represented to the Board he would  provide.  The Board also believed that a suit
filed by Mr.  Rolls was an  attempt by Mr.  Rolls to  jeopardize  the  Company's
strategic alliances and other activities that are currently being negotiated.

                                      F-15

<PAGE>
         In December 1997,  Complex Design and  Construction,  Inc.  ("Complex")
filed a complaint against  Chancellor  Corporation and others in Superior Court,
Suffolk County,  Massachusetts  alleging that the Company  breached its contract
with Complex relating to the build-out of the Company's leasehold. The complaint
also alleges that Chancellor  committed  unfair and deceptive acts and practices
in connection with the construction  contract. The complaint seeks approximately
$44,000 in damages  for the  alleged  breach of  contract,  as well as double or
treble  damages for purported  unfair and deceptive  acts and  practices.  Legal
counsel has advised the Company that it is reasonably  possible that the Company
may be liable for up to  approximately  $155,000  plus legal costs and expenses.
Chancellor filed an answer and  counterclaim  against Complex alleging breach of
contract,  breach of expenses and implied warranty,  liquidated damages pursuant
to a  penalty  clause  in the  contract,  and  unfair  and  deceptive  acts  and
practices.  In addition,  Chancellor  filed a motion to dismiss the count in the
complaint against it, which alleges unfair and deceptive acts and practices. The
motion is scheduled to be heard on March 26, 1998.

         In the normal course of its business,  the Company is from time to time
subject to  litigation.  Management  does not expect  that the outcome of any of
these  actions,  or the  actions as noted  above,  will have a material  adverse
impact on the Company,  its business or its consolidated  financial  position or
results of operations.

M.       Major Customers

         The Company is engaged principally in originating and selling equipment
leasing transactions. During 1997, 92% (based on original equipment cost) of the
new lease  transactions  originated  by the  Company  were with the one  largest
lessee.  In  addition,  approximately  55% and 37% (based on original  equipment
cost) of equipment  sold to investors in 1997 were  purchased by the two largest
investors.  During 1996, 42%, 11% and 10% (based on original  equipment cost) of
the new lease transactions originated by the Company were with the three largest
lessees.  In  addition,  approximately  26%,  16% and  13%  (based  on  original
equipment  cost) of equipment  sold to  investors in 1996 were  purchased by the
three largest investors.

N.       Employee Benefit Plan

         The  Company  sponsors a  401(k)retirement  plan (the  "Plan")  for the
benefit of its employees.  The Plan enables employees to contribute up to 15% of
their annual compensation.  The Company's  contributions to the Plan amounted to
approximately $18,000 and $19,000 in 1997 and 1996, respectively.

O.       Acquisition

         On July 31,  1997,  the  Company  acquired  certain  assets and assumed
certain liabilities of Long River Capital, Inc., a company engaged in automobile
loan application  processing and origination of automobile loans for high credit
risk consumers. Long River Capital was previously owned 50% by a director of the
Company.  Total  consideration  for the  purchase of $104,000 of assets at their
fair  market  value and the  assumption  of $257,000  of  liabilities  consisted
primarily of the issuance of 200,000 shares of the Company's common stock having
a fair  market  value of  $20,000.  The  acquisition  was  accounted  for by the
purchase  method of  accounting,  and  accordingly,  the purchase price has been
allocated to assets acquired and liabilities  assumed based on their fair market
value at the date of  acquisition.  The excess of  purchase  price over the fair
market values of net assets  acquired of $122,000 (net of amortization of $6,000
and a  write-down  of $45,000 to net  realizable  value)  has been  included  in
intangible assets and represents  goodwill,  license agreements,  and a customer
list.

P.       Minority Interest in a Subsidiary

         During 1996, the Company acquired a fifty percent interest in TruckScan
LLC  ("TruckScan")  for a $350,000  contribution to equity.  Due to the level of
control the Company  exercised  over the  operation  of  TruckScan,  TruckScan's
financial  statements  are  consolidated  with the  financial  statements of the
Company and its other subsidiaries.

                                      F-16
<PAGE>
         On May 1, 1997 the Company  sold its 50%  investment  in  TruckScan  to
Telescan,  the joint venture  partner and a party  unrelated to the Company.  In
consideration  for the sale, the Company  received  certain assets from Telescan
with an estimated  value of $11,000 and a one year promissory note in the amount
of $50,000 secured by certain assets of Telescan and forgiveness of a promissory
commitment to contribute capital of approximately  $300,000 which was authorized
by the former  management and board.  The Company  realized a gain of $41,000 on
the sale of this investment.

         TruckScan  had a loss of  $29,000  and  $422,000  from  January 1, 1997
through  April 30,1997 (date of sale) and from June 21, 1996 (date of inception)
through December 31, 1996, respectively. The minority owner's share of this loss
exceeded  its equity by  $225,000.  As a result,  the entire loss of $29,000 and
$422,000, respectively is recognized by the Company.

Q.       Other Investment

         Other  investment  includes  $1 million  equity  investment  in the New
Africa  Opportunity  Fund, LP ("NAOF").  NAOF is a $120 million  investment fund
with the backing of the Overseas Private Investment Corporation ("OPIC") created
to make direct investments in emerging companies throughout  sub-Saharan Africa.
Capital  contributions  are payable  within 10 business  days of a capital  call
pursuant to the terms of the partnership agreement. As of December 31, 1997, the
Company funded $185,000 of a $1 million commitment for its 2.5% interest in NAOF
and the  remaining  obligation  of $815,000 is included in accounts  payable and
accrued expenses.

R.       Concentration of Credit Risk

         The Company  maintains its cash balances in several banks. The balances
are insured by the Federal Deposit Insurance  Corporation up to $100,000 by each
bank. The Company also has arrangements whereby the funds in excess of specified
cash balances are invested in overnight repurchase agreements and such overnight
investments are  collateralized  by high grade corporate debt securities.  As of
December 31, 1997, the uninsured portion of the cash balances held at two of the
banks  were  approximately  $2,592,000  of  which  $2,404,000  was  invested  in
overnight repurchase agreements.

S.       Restructuring

         In order to improve the Company's  liquidity,  return to  profitability
and create  growth  opportunities,  management  initiated a plan during the year
ended December 31, 1996 which  provides for,  among other things,  expanding its
core  business  by  servicing   middle  market   clients,   expanding  into  new
transportation   and   equipment   markets  and  seeking   strategic   financial
partnerships and joint ventures domestically and internationally. As part of the
restructuring,  the  Company  repaid  the  intercreditor  loan  and the  secured
inventory  loan in 1997,  as described  in Note H and  relocated  its  corporate
headquarters. The Company believes that these initiatives will allow the Company
to improve  financial  performance  and  liquidity.  Included  in 1996  selling,
general and administrative expenses is a charge of $524,000 for costs associated
with the restructuring plan.

T.       Prior Period Adjustment

         During  1997,  as  part  of  the  Company's  restructuring,  management
undertook  a  review  of its  operations.  As part of  this  review,  management
reviewed the trust  agreements,  including  consultation  with legal counsel and
industry  consultants  and  determined  that the  Company  historically  had not
charged  the trust for the  costs of their  administration.  As a result of this
review   management   determined  that  the  Company  had  not  been  reimbursed
approximately $22 million of costs incurred for trust administration for periods
prior to 1997.  Management  subsequently  began to charge  the  trusts for these
services  and  implemented  plans to recover  past  costs.  Management  makes no
representations  concerning  the Company's  ability to recover any further costs
for periods prior to 1997. The consolidated  statement of  stockholders'  equity
(deficit)  reflects an  increase  in  stockholders'  equity of  $1,437,000  from
$1,365,000 to $2,802,000 as of December 31, 1995 for trust  administration costs
recovered  for  periods  prior to  1996.  The 1996  consolidated  statements  of
operations have been restated to reflect an adjustment to include a reduction in
the general and  administrative  expenses of  approximately  $431,000  for trust

                                      F-17

<PAGE>

administration costs recovered relating to 1996 and a corresponding  decrease in
the net loss from $6,804,000 to $6,373,000 for the year ended December 31, 1996.
The net loss per share amounts in the consolidated  statements of operations has
been restated from $1.32 to $1.24 as a result of this change.

U.       Related Party Activity

         During 1994, and prior to becoming an affiliate, the board of directors
recommended  and  the  shareholders  approved  at the  1995  Annual  Meeting  of
Stockholders,  a consulting  agreement  with Vestex,  Inc.,  an affiliate of the
majority stockholder,  whereby the affiliate provides specified services related
to the Company's  equity  raising  efforts and financing  activities.  Under the
agreement,   the  affiliate  earns  a  fee  for  consummating   equity  or  debt
transactions.  The fee related to debt  transactions  is 1.5% of the transaction
amount through December 1996 at which time the Board of Directors  increased the
fee to 3.0% of the transaction  amount.  The fee related to equity  transactions
equals 7.5% of the  transaction  amount if a broker or  underwriting  fee is not
paid to a third  party  and  2.5%  of the  transaction  amount  if a  broker  or
underwriting fee is paid to a third party. The agreement was extended  effective
July 1, 1997 on the same terms and  conditions  through  June 2000.  Vestex also
provides  services to the Company on operational  and other matters for which it
is compensated at levels negotiated with the Company, as described below.

         During 1996 and through March 1997,  the affiliate  charged the Company
fees for certain  transactions it determined were consummated  during the period
and were covered by the  agreement.  The Company  disputed a certain  portion of
these charges.  The parties settled this dispute by agreeing that $3,000,000 was
incurred  relating to these  services,  of which  $800,000 and  $2,200,000  were
performed in 1997 and 1996,  respectively.  In connection with this  settlement,
Vestex agreed to write-off $1,113,000 of fees originally claimed.  These amounts
are  included  in  selling,   general,   and  administrative   expenses  on  the
consolidated statement of operations.  Per the agreement,  the payment is due on
demand, however, the affiliate has agreed that the Company will only pay the fee
during  the  coming  year if  payment  can be made  from  refinancing  or equity
proceeds  in a manner  that does not  impact the  Company's  ability to meet its
other obligations.

         As of December 31, 1996,  the Company had received  from Vestex a total
of $4,121,000,  net of repayments and cost of $312,500 which consisted of equity
of  $1,421,000  and debt and payable of $ 2,700,000.  During  1997,  the Company
entered into several transactions with Vestex which resulted in an increase of $
1,856,000  resulting  in a net  equity  infusion  of $  5,977,000  and  debt and
payables of $59,000 as of December 31, 1997.

         In accordance with the terms of the consulting agreement, Vestex earned
fees totaling $957,000.  The fees earned in 1997 were for services in connection
with the following: i) $800,000 through March 31, 1997 as described above, ii) a
monthly fee of $12,500 for April 1997 through  December 1997, and iii) a $45,000
fee relating to the  $1,500,000  loan  provided by the then Vice Chairman of the
Board of Directors (as described below).

         The Company  also  entered into  several  transactions  whereby  Vestex
received  fees  of  approximately  $1,288,000  in  1997.  The  Company  recorded
approximately   $519,000  of  these   expenses  in   connection   with  Vestex's
negotiations  on  behalf  of the  Company  resulting  in  significant  financial
benefits  and  savings to the  Company.  This  includes,  but is not limited to,
savings  of  approximately   $930,000,   whereby  the   intercreditor   loan  of
approximately  $1,906,000  was paid in  advance  of term;  savings  in excess of
$2,000,000 on the termination of the Company's  office lease and  renegotiations
of more favorable  terms on the Company's new office lease;  and development and
implementation  of strategies  enabling the Company to properly  recover certain
administrative  costs  incurred in  connection  with the  administration  of the
Company's  trust  portfolio  assets.  The Company  also  recorded an  additional
$394,000 in connection with Vestex's services for development and implementation
of the Company's  successful  restructuring  and  transition  plan.  This amount
reduced the  restructuring  charges  accrued at December 31, 1996. In connection
with a $1.5  million  loan  provided to the Company by the Vice  Chairman of the
Board of Directors,  Vestex provided  certain  guarantees and was compensated in
the amount of $375,000 for providing such guarantee.



                                      F-18



<PAGE>



         The Company purchased  furniture and computer  equipment from Vestex in
the amount of $300,000.  The  acquisition  prices were based on  estimated  fair
value as of the date of the  transaction.  At December 31,  1997,  approximately
$60,000 of the furniture acquired was not in service by the Company.

         The Company received loans from Vestex during 1997 totaling $1,735,000,
including  $1,500,000 in connection  with the repayment of the Company's debt to
the Vice-Chairman.  Interest on loans payable to Vestex accrue at the prime rate
plus 2% (10.5% as of December 31, 1997).  During 1997, interest of approximately
$92,000 was incurred on debt owed Vestex.

         During 1997, Vestex agreed to take stock, at the then fair market value
on the  date  of  conversion,  in  lieu of  cash  in  consideration  of  certain
obligations due Vestex by the Company.  In February 1997, the Board of Directors
approved the issuance of 3,000,000  shares of the Company's  Series AA Preferred
Stock at $.30 per share to Vestex in  consideration  of  $900,000 of the amounts
due Vestex. In June 1997, the Company issued 8,333,333 shares of Common Stock to
Vestex  in  consideration  of  $1,000,000  of fees and debt  including  Vestex's
guarantee of the  $1,500,000  loan provided to the Company by the Vice Chairman,
stated above.  Also in June 1997, the Company issued  6,716,667 shares of Common
Stock to Vestex in consideration of approximately $806,000 of fees and debt due.
In September 1997, the Company issued 5,000,000 shares of Common Stock to Vestex
in  consideration  of  approximately  $500,000  of Vestex  fees and debt due. In
December  1997,  the Company  issued  710,526  shares of the Company's  Series A
Preferred Stock to Vestex in  consideration of $1,350,000 of Vestex fees an debt
due.  In  addition  to the  conversion  of accrued  Vestex  fees and debt to the
Company's  preferred and common stock  totaling  approximately  $4,556,000,  the
Company  also  repaid  debt and fees  through  cash  payments  in the  amount of
approximately  $2,848,000.  For the years ended  December 31, 1997 and 1996, the
Company incurred expenses to Vestex of $1,850,000 and $2,594,000,  respectively.
As of December  31, 1997,  the Company  owed Vestex  $50,000 of unpaid loans and
approximately  $9,000 of unpaid  fees.  In  addition,  Vestex is due  $50,000 of
unpaid  fees  assumed by the  Company at the time of  acquisition  of Long River
Capital.

         An  affiliate  of the  Chairman  of the  Board  of  Directors  provided
supervisory and other construction services in connection with the build-out and
improvements  to the Company's  new office  space.  The total fees earned by the
affiliate  were $275,000,  all of which was paid in 1997.  The Company  recorded
these amounts as capitalized leasehold improvements.

         The  Company   entered   into  several   transactions   with  the  then
Vice-Chairman  of the Board of Directors.  On May 19, 1997, the Company issued a
$1,500,000  promissory  note to the then  Vice-Chairman  of the Board  which was
guaranteed by Vestex and the Chairman of the Board.  Interest on the  promissory
note  accrued at the prime rate plus 2 1/8%.  On  September  3, 1997,  Vestex on
behalf of the Company  repaid the  promissory  note.  The  resultant  obligation
recorded as owing to Vestex was subsequently  converted into equity as described
above.  Interest  accrued  to the  Vice-Chairman  during  1997 of  approximately
$59,000.  The  Vice-Chairman  also  made  a   non-interest-bearing   advance  of
$1,200,000 to the Company in October 1997.

         During 1997,  the Company  directly and through  Valmont  Ventures Inc.
("Valmont"), a wholly-owned subsidiary,  providing consulting services, incurred
costs on behalf of and made  advances  to Global  Weather  Services  ("GWS"),  a
company   represented  by  the  then   Vice-Chairman  as  an  affiliate  of  the
Vice-Chairman.  The Company  provided  these services at the request of the then
Vice-Chairman  with the approval of management.  The total due from GWS amounted
to  approximately  $756,000,  including  consulting  fees of $600,000  which are
included in other revenue in the consolidated statements of operations.

         Company  funds were used to pay amounts on behalf of the  Vice-Chairman
totaling approximately $58,000 during 1997.

         Based on discussions  with legal counsel,  the Company  believes it has
the right to offset the amounts due to and from the then  Vice-Chairman and GWS.
As a result,  the accompanying  consolidated  financial  statements  reduced the
amounts due totaling  approximately $814,000 and the amounts owed of $1,200,000.
The  difference  of  approximately  $386,000  has  offset  the amount due by the
Vice-Chairman  or GWS to Vestex and has been  reflected  as an  increase  in the
amount due by the Company to Vestex.

                                      F-19
<PAGE>

Chancellor has entered into two lease  transactions with Kent  International,  a
company owned 50 percent by a director of the Company.  Total original equipment
cost for these transactions amount to approximately $144,000.

V.       Subsequent Events

         Subsequent  to December 31, 1997,  the  Company,  formed the  following
wholly-owned subsidiaries and issued the following shares:

         Chancellor  International  Corporation ("CIL"), a Delaware Corporation,
         formed as the parent holding company for diversified financial services
         companies   specializing  in  international   commercial  and  consumer
         financing.  The Company issued 2,000,000 shares of Series B Convertible
         Preferred Stock for 100% ownership of CIL.

         Chancellor Africa Corporation ("CAC"), a Mauritius corporation,  formed
         as the parent  holding  company for a  diversified  financial  services
         company  specializing  in commercial and consumer  financing in Africa.
         CIL transferred  1,500,000 shares of its Series B Convertible Preferred
         Stock of the Company to CAC in exchange for 100% ownership of CAC.

         Africa Financial Corporation ("AFC"), a Mauritius  Corporation,  formed
         as the  operating  company  providing  lease and  commercial  financing
         services in Africa.  CAC transferred  1,000,000  shares of its Series B
         Convertible  Preferred Stock of the Company to AFC in exchange for 100%
         ownership of AFC.

         On December 12, 1997, the Company,  Afinta Motor  Corporation (Pty) Ltd
("AMC"),  its wholly  owned  subsidiary  Afinta  Financial  Services  (Pty) Ltd.
("AFS"), and New Africa Opportunity Fund, LP ("NAOF"),  entered into a letter of
intent,  under which a diversified  financial services company,  specializing in
commercial  and  consumer  financing  in  Africa  will be  formed.  The  parties
commenced  operations  on January 1, 1998  pursuant to an  agreement  reached in
principle,  as outlined in the Letter of Intent.  On March 27, 1998, the parties
finalized the terms of the agreement and  responsibilities of the parties by the
closing of the  transaction  and executing  the  documents.  The parent  holding
company will be CAC.  The Company  will  provide,  through  CAC,  $5,000,000  of
start-up  capital  to AFC,  and  1,000,000  shares  of the  Company's  Series  B
Convertible  Preferred Stock. In  consideration  of a 40% ownership  interest in
AFC, NAOF will infuse $10,000,000 of cash in two $5,000,000  tranches.  Upon the
event of a material  adverse  change in the financial  condition of AFC prior to
the second funding,  and with the unanimous consent of the board of directors of
AFC,  the  second  funding  may be  extended  to a  mutually  agreeable  date or
terminated.  In  connection  with this  capital  infusion,  AFC will also  issue
500,000 shares of the Company's Series B Convertible Preferred Stock to NAOF. In
consideration  of a 9%  ownership  interest in AFC,  and the issuance of 500,000
shares  of  the  Company's  Series  B  Convertible  Preferred  Stock,  AMC  will
contribute the net assets of AFS; exclusive distribution rights for AMC products
in North America,  Eastern Europe,  the Russian  Federation and  Commonwealth of
Independent States, and Asia-Pacific;  nonexclusive  distribution rights for AMC
products  in South  America;  and  discounted  pricing  for the  purchase of AMC
products to be sold and/or  leased  through AFC or its  assignee.  AMC will also
transfer a 2 1/2 percent  ownership  interest in AMC to CAC in  connection  with
this  transaction.  The Series B Convertible  Preferred  stock has a liquidation
preference of $2.00 per share and is convertible into 10 shares of the Company's
Common Stock for each one share of preferred stock at the holders option.




                                      F-20



<PAGE>



         The following is the proforma effect on stockholder's equity if all the
transactions  described  above are executed and includes  estimated  transaction
related cost of $1 million:
<TABLE>
<CAPTION>
                                                              Per               Shares
                                                              Financial         To Be
                                                              Statements        Issued           Proforma
                                                              ----------        ------           --------
                                                                           (In Thousands)
<S>                                                           <C>                <C>               <C>   
Preferred Stock,  Series AA Convertible,  
$.01 par value,  authorized  8,000,000
shares, issued and outstanding 8,000,000
shares                                                        $   80             $    -            $   80


Preferred  Stock,  Series A,  Convertible,  
$.01 par value,  authorized  710,562
shares, issued and outstanding 710,562
shares                                                             7                  -                 7

Preferred  Stock,  Series B Convertible,  
$.01 par value,  authorized  2,000,000
shares, issued and outstanding 1,000,000
shares                                                             -                 20                20

Common Stock, $.01 par value, authorized
75,000,000 shares, issued and outstanding
25,401,156 shares                                                254                  -               254

Additional Paid in Capital                                    28,426             18,980            47,406

Accumulated Deficit                                          (28,540)                 -           (28,540)
                                                             --------            ------           --------


                                                             $   227            $19,000           $19,227
                                                             =======            =======           =======
</TABLE>





                                      F-21



<PAGE>



                                  Signatures

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

                                            CHANCELLOR CORPORATION
Dated: March 31, 1998

                                            By: /s/ Brian M. Adley
                                            Brian M. Adley
                                            Chairman of the Board and Director


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



Dated: March 31, 1998                       By: /s/ Brian M. Adley
                                               -------------------
                                            Brian M. Adley
                                            Chairman of the Board and Director
                                            (Principal Executive Officer)


Dated: March 31, 1998                       By: /s/ Rudolph Peselman
                                               ---------------------
                                            Rudolph Peselman
                                            Director


Dated: March 31, 1998                       By: /s/ Michael Marchese
                                               ---------------------
                                            Michael Marchese
                                            Director



Dated: March 31, 1998                       By: /s/ Jonathan Ezrin
                                               -------------------
                                            Jonathan Ezrin
                                            Corporate Controller and Principal
                                            Accounting Officer