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

                                    FORM 10-K
(Mark One)

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

        For the fiscal year ended December 31, 1996

                         OR

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

        For the transition period from _________________ to _________________



                             Chancellor Corporation
             (Exact name of registrant as specified in its charter)

             Massachusetts                                 04-2626079
    (State or other jurisdiction of                (I.R.S. Employer I.D. No.)
    incorporation or organization)

745 Atlantic Avenue, Boston, Massachusetts                     02111
(Address of principal executive offices)                     Zip Code

Registrant's telephone number, including area code (617) 728-8500

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)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                       Yes   X        No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

As of May 15, 1997,  5,136,391 shares of Common Stock, $.01 par value per share,
and 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)  were
outstanding.  Aggregate market value of the voting stock held by  non-affiliates
of the registrant as of March 31, 1997 was approximately $354,000.

                     DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the Annual Meeting of Stockholders to be held
August 29, 1997, at 2:00 p.m. - Part III


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This Annual Report on Form 10-K 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.   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 1996 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,
remarkets 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.

As previously  reported in regulatory  filings,  the Company incurred cumulative
losses in excess of $50 million during the period 1989 through 1996. The Company
recorded losses of $6,804,000,  $1,221,000,  and $3,343,000  during fiscal 1996,
1995, and 1994,  respectively.  These continued  losses are due primarily to the
lack of  sufficient  cash  flow to add new  leases  to the  Company's  own lease
portfolio.  Additionally,  fiscal  1996  results  were  adversely  affected by a
significant  decline in revenues;  costs incurred for financing  equipment;  and
restructuring, transition and consulting costs of approximately $2,724,000.

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").

As a result of the  termination of the Voting  Agreement  described  above,  all
directors of the Company are now subject to election by plurality vote of the



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holders of the  Company's  Common  Stock and Series AA Preferred  Stock,  voting
together as a single class.  Vestex, whose stock ownership entitles it to cast a
majority  of the votes  which may be cast by all  stockholders,  has  sufficient
voting  power  to elect  the  entire  Board.  As the  sole  remaining  incumbent
director,  Mr. Adley,  voted for the election of Messrs.  Ernest Rolls,  Michael
Marchese  and  Rudolph  Peselman  as  directors  to serve  until the next Annual
Meeting of  Stockholders.  Additionally,  Mr. Gerald Brauser was nominated as an
advisor to the Board.

In December 1996, Vestex Capital Corporation  provided to the Company a $500,000
loan due  November  1997 with a per annum  interest  of 2% above the prime rate.
This loan is subordinated to certain loans held by an  intercreditor  group (See
Note G to the Notes to the Consolidated Financial Statements).  In consideration
for  subordination of the loan to the  intercreditor  group,  the  intercreditor
group  assigned to VCC its warrants to purchase up to 10% of the Common Stock of
the Company on a fully diluted basis for $.27 per share.

In February  1997,  the Board of  Directors  approved  the issuance of 3,000,000
shares of the Company's Series AA Convertible  Preferred Stock at $.30 per share
to Vestex in  consideration  of  $900,000  of  consulting  fees due  Vestex.  In
addition,  during the first quarter of 1997, the Company received loans from VCC
of approximately $250,000 which are due on demand.

In April  1997,  the  Company  repaid  loans due to the  intercreditor  group in
advance of their terms. The balance due on the  intercreditor  group loans as of
April 1997 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 conjunction with the sale of its majority position to Vestex in 1995, Bruncor
(the previous  majority  stockholder  of the Company) also repaid the Company's,
borrowings,  inclusive of interest,  of  approximately  $4,000,000 from a lender
which Bruncor had guaranteed. In addition, Bruncor released the Company from any
obligations  to repay the  amount  paid by  Bruncor  under the  Guarantee.  This
resulted in the retention of net operating losses ("NOL's") by the Company which
will have future  benefit to the Company.  In April 1996, the Company and Vestex
entered into an additional amendment to the  Recapitalization  Agreement whereby
the Company issued and sold to VCC 5,000,000 shares of its Series AA Convertible
Preferred  Stock for  $1,350,000  in cash,  less  reimbursement  of  $329,500 of
transaction  costs  which  includes a  reimbursement  of  $312,500 to VCC by the
Company.  Additionally,  Vestex  forgave  proposed but  undeclared  dividends of
$1,150,000.

In May 1996, prior management  authorized the creation of a joint venture called
Truckscan  LLC  ("Truckscan")  pursuant  to which the  Company  was  required to
provide a $100,000  non-refundable  security  deposit.  In April  1997,  the new
senior  management team evaluated all  alternatives to divest itself of this 50%
joint  venture.  On May 1, 1997 the Company sold its 50% investment in Truckscan
to  Telescan  Technologies,  LLC  ("Telescan,")  the  other 50%  owner,  a party
unrelated to the Company.  In  consideration  for the sale, the Company received
certain  assets from Telescan with an estimated  value of $35,000 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.

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 an industry professionals, in addition to the already
established criteria used in the benchmark/matrices methodology previously used.

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


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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  leases  equipment to lessees in diverse  industries  throughout the
United States.  Although the Company's  direct  solicitation  efforts  involving
leases of new  equipment  have  shifted  from  Fortune 100  companies to include
smaller  business  entities,  to minimize  credit  risk,  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 finances equipment purchases with the proceeds of borrowings under a
short-term,  secured inventory  ("warehouse")  line of credit.  Repayment of the
warehouse  line of credit  typically  occurs upon the sale of the  equipment  to
private investors.

The Company's level of lease  originations  declined  significantly in the years
1989 through 1996.  Between 1989 and 1996 the Company sold substantially all new
lease originations to private investors and retained very few lease originations
for its own account.  During 1996, the Company entered into approximately 42 new
lease  transactions  involving  equipment  having an original  equipment cost of
approximately $21 million,  versus 56 transactions involving equipment having an
original  cost of $27 million in 1995 and 19  transactions  involving  equipment
having an  original  cost of $14  million  in 1994.  Additionally,  the  Company
realized cash from origination activities of $224,000, $144,000, and $276,000 in
1996, 1995, and 1994, respectively.

During 1996, the three largest lessees  accounted for 42% (ConAgra,  Inc.),  11%
(Western  Auto  Supply)  and  10%  (Chrysler   Corporation)  of  the  new  lease
transactions  originated by the Company (see Notes to the Consolidated Financial
Statements).  During 1996,  1995 and 1994,  revenue from leasing  activities was
approximately $867,000, $940,000 and $759,000, respectively.

Equipment Acquisition.  No equipment was acquired by the Company during 1996 and
1994 as compared to equipment  acquisitions  (at cost) of $276,000 in 1995. This
decision is the result of the former  management  teams decision not to allocate
available capital resources to equipment purchases.

Equipment  Disposition.  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


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Company  voluntarily  sold $1.1  million of  equipment  under one lease from the
portfolio prior to lease expiration in order to generate sufficient liquidity to
meet short-term  cash needs.  In 1995, the Company  disposed of $22.9 million of
equipment  measured by its original cost which reduced the total  equipment (net
of  depreciation,  paydowns  and  write-downs)  on  operating  leases and direct
finance lease to $1.7 million and $1.4 million,  respectively. In 1995 no leases
were  voluntarily  sold by the Company prior to lease  expiration.  In 1994, the
Company  disposed of $17.4 million (at original cost)of  portfolio  equipment on
operating leases and disposed of no equipment on direct finance leases, reducing
the  total  equipment  (net  of  depreciation,  pay-downs  and  write-downs)  on
operating  leases and direct  finance  leases to $7.5 million and $2.0  million,
respectively.  In 1994,  $3.9 million (at original cost) of equipment  under six
leases was voluntarily sold by the Company prior to lease expiration.

Remarketing Activities

The remarketing of equipment plays a vital role in the operations of the Company
because,  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 anticipates  continuing to dedicate substantial resources toward the
further  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.  It has also  implemented a
plan to expand its  brokerage  activities  through the  Internet  and the use of
other technologies.  Since 1993, the Company's senior lender group has permitted
the  Company  to use  some of its  equipment  financing  capability  for  dealer
financing  purposes.  The Company has developed  relationships  with two finance
companies to provide  financing  for  remarketing  customers,  which the Company
intends to expand in 1997.

Since  1988,  the  Company has  greatly  expanded  and  altered its  remarketing
activities.  In 1990,  the Company's  remarketing  operation  headquarters  were
consolidated  in  Massachusetts,  with  regional  sales  offices in New  Jersey,
Tennessee and Texas.  In 1992,  the Company  relocated its  Midwestern  regional
office  from  Tennessee  to  Illinois.  In  addition,  due  to  its  success  in
remarketing used fleet equipment from its retail sales center in New Jersey, the
Company has developed indirect retail sales capabilities in California, Florida,
Georgia, Illinois and Texas.

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.

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 has
also enjoyed success  selling fleet equipment  through its retail sales centers,
which the Company plans to further develop in 1997.

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 that


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trust.  The Company or one of its  subsidiaries  usually  acts as trustee and in
that  capacity  holds title to the  equipment  and  performs  certain  specified
functions.  The Company typically sells equipment  directly to an investor.  The
Company  sold  approximately  $21  million,  $27  million,  and $14  million  of
equipment to private  investors  during 1996, 1995 and 1994,  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.

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.  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 by 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.  In the future,  the Company  will  primarily
refocus its transportation  equipment and remarketing expertise by expanding the
number of customers within its target market.  The Company will be a transaction
intermediary  to the  Fortune  100 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.

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.

Independent outside advisers believe 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.  A number of potential  targets
have been identified and preliminary discussions have occurred.

Targeted   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.

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  and  concentration on profit centers,  the Company is expected to
establish a foundation for profitable business expansion.


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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 the
Commonwealth of Independent States ("CIS"). The opportunity to deliver equipment
leasing in an emerging  market with minimal  competition  is an important  first
step in origination  growth at Chancellor.  Also, a  transportation  remarketing
agreement  with LukOil (the second largest  petroleum  producer in the world) to
sell thousands of tractor/trailer combinations beginning in the third quarter of
1997 is currently being negotiated. Another transaction is being negotiated with
Kamaz,  the largest truck  manufacturer  in the CIS, in which  Chancellor  would
originate/remarket transportation equipment internationally.

In 1997,  the Company will launch its own division  focusing on raising debt and
equity for equipment transactions.  This operating unit is expected to lower the
cost of capital to fund  investing  activity  and sell asset  backed  securities
linked to the Company's origination efforts.

An  aggressive  mergers and  acquisition  plan seeking  vertical and  horizontal
candidates  will commence in the second quarter of 1997.  This plan will involve
members of senior  management and outside  professionals  reporting to a Mergers
and  Acquisitions  subcommittee  of the  Board of  Directors.  This  group  will
evaluate a variety of domestic and  international  leasing companies and related
opportunities, for potential involvement.

Communications and Information

The Company is also in the process of implementing a new Management  Information
System (MIS).  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.

This new MIS system will utilize  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.

Additionally,  the Company's new team has re-designed and implemented a new home
page  (http://www.chancellorfleet.com)  allows  the  Company  to  electronically
disseminate its financial services information as well as remarketing  expertise
on the Internet.

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 competitive and
price  sensitive  arena.  The Company will focus its energies  domestically  and
internationally  on the multi billion  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.


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During 1997 the Company  will expand its  origination  presence to  pro-actively
sell  origination  services.  This  physical  presence  is expected to allow the
origination  division to evaluate  and work  closely  with  thousands  of middle
market clients by providing quality  financial  services  generally  unavailable
from other sources.

In the third  quarter of 1997,  the  Company  expects to  establish  an in-house
Buy/Sell  subsidiary to execute asset arbitrage  transactions of used equipment.
The Company's management  information system based on historical pricing values,
will allow an asset to 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
establishing  a venture  leasing  activity  during the next 12 months which will
secure   equipment   for  high  growth   companies.   This  division  will  seek
relationships  with rapidly growing venture capital backed  enterprises that may
not  qualify for bank or other  conventional  financing  at this time.  As these
relationships  grow,  the  Company  envisions  maintaining  exclusive  equipment
leasing contracts for their future equipment requirements.

The move away from Fortune 100  customers  carries a  risk/reward  profile which
will be evaluated  on a  transaction  by  transaction  basis by the  Transaction
Review Committee composed of senior management and independent  directors.  This
accountability is expected to result in the protection of shareholder assets and
a return to profitability.

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  an
originator/remarketer of transportation and non-transportation equipment outside
the United States. These additional international revenue streams, where margins
are  significantly  higher than the domestic market,  should help facilitate the
Company's goals of returning to break-even and  expectations  of  profitability.
Exposure  on these  transactions  will be  mitigated  through  the use of credit
enhancement and letter of credit instruments.

The Company has had preliminary  discussions with companies needing equipment in
regions such as the  Commonwealth of Independent  States (CIS),  Eastern Europe,
South America, Africa and the Pacific Rim.

In conjunction  with Kent  International,  an international  business  developer
having a primary focus of operating  companies in the CIS, the Company completed
its first CIS based transaction in 1997.  Negotiations are currently underway to
originate/remarket equipment and establish strategic partnerships with Sberbank,
second largest Russian retail bank;  LukOil,  the largest petroleum  producer in
the CIS;  and  Kamaz,  the  largest  Russian  truck  manufacturer.  These  three
negotiations  represent the beginning of the Company's  presence in the emerging
CIS market.

In Africa,  the Company is negotiating  numerous  transactions  with a financial
institution  to  deliver a variety of  infrastructure  related  equipment.  This
equipment will be funded  through the Overseas  Private  Investment  Corporation
("OPIC") as part of their efforts on the continent.  A separate  transaction may
deliver  transportation  equipment  to  thousands  of truck  operators  in South
Africa.  The integration of a leasing and support  service package  provides the
Company with a unique  deliverable in this emerging  market and other  potential
joint ventures with United States/South African investors may occur.

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.



                                        8

<PAGE>



Operating Facility

The Company's fully integrated sales and marketing departments are headquartered
in Boston,  Massachusetts.  Two additional  satellite  operations are located in
Boca  Raton,  Florida  and New York City,  New York.  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 quarter of the
calender year.

EMPLOYEES.

As of May 15, 1997, the Company employed 26 persons on a full time basis.

ITEM 2.   PROPERTIES.

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 ten years, with
three years  remaining  in the term,  and with a base rent,  as of December  31,
1996, of  approximately  $32,000 per month. 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 $7,200 per month.

In connection with the December 1993 amendment to the Company's corporate office
lease,  the Company  executed a promissory note in favor of its landlord,  Aetna
Casualty and Surety Company  ("Aetna"),  in the principal amount of $796,000 due
January 1999. The note, which does not bear interest,  will be fully canceled if
the Company fulfills its remaining lease  obligations  without  default.  If the
Company  defaults under the lease,  the note will be accelerated  and a $100,000
security deposit will be forfeited.

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 seeks
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,  have  answered  the  complaint  (denying  its
allegations),  and  have  filed a  counterclaim  against  Chancellor,  and  have
commenced a third-party  action against Brian M. Adley,  Vestex  Corporation and
Vestex Capital  Corporation.  The counterclaim alleges 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 seeks  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 seeks
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 the third-party



                                        9

<PAGE>


complaint, Chancellor and the third-party defendant have denied the defendants'
allegations.


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.






                                       10

<PAGE>



                                     PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON STOCK 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.

1997                                     High              Low
----                                     ----              ---
Second quarter (through May 15, 1997)    .15               .09
First quarter                            .10               .04

1996                                     High              Low
----                                     ----              ---
Fourth quarter                           .281              .06
Third quarter                            .313              .188
Second quarter                           .313              .188
First quarter                            .313              .188

1995                                     High              Low
----                                     ----              ---
Fourth quarter                           .3125             .0625
Third quarter                            .25               .03125
Second quarter                           .1875             .09375
First quarter                            .21875            .09

On May 15, 1997, there were approximately 700 beneficial owners of the Company's
common stock.

No cash dividends were paid during the periods indicated.  Under the terms of a
previous intercreditor agreement the Company was prohibited from paying any cash
dividends. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.")





                                       11

<PAGE>



ITEM 6.   SELECTED FINANCIAL DATA:

The table on the following page sets forth selected consolidated  financial data
for the periods  indicated  derived from the  Company's  consolidated  financial
statements.  The data should be read in  conjunction  with Item 7,  Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's   consolidated   financial  statements  and  notes  thereto  appearing
elsewhere herein.





                                       12

<PAGE>
<TABLE>
<CAPTION>

                                     CONSOLIDATED STATEMENTS OF OPERATIONS DATA
                                        (in thousands, except per share data)


                                                     Year Ended December 31,
                                                     -----------------------                
                                       1996        1995       1994        1993        1992
                                       ----        ----       ----        ----        ----
<S>                                <C>         <C>         <C>         <C>         <C>

Revenues:
 Rental income                      $  1,933    $  4,391    $  7,630    $ 12,088    $ 16,882 
                                    
 Lease underwriting  income              504         749         499         857       1,938
                                    
Total revenues                         5,513       8,491      10,587      14,910      21,838
                                    
Loss from continuing                
operations before change            
in accounting principle*              (6,804)     (1,221)     (3,343)     (6,596)     (1,878)
                                    
Net loss*                             (6,804)     (1,221)     (3,343)     (5,996)     (1,878)
                                    
Loss per share from                 
 continuing operations              
 before change in                   
 accounting principle               ($  1.32)   ($   .22)   ($   .52)   ($  1.07)   ($   .33)
                                    ========    ========    ========    ========    ========
                                    
Net loss per share                  ($  1.32)   ($   .22)   ($   .52)   ($   .97)   ($   .33)
                                    ========    ========    ========    ========    ========
                                    
Weighted average common and         
 common equivalent shares              5,136       5,634       6,373       6,174       5,709
                                    ========    ========    ========    ========    ========
<FN>
                              
* The losses include the following unusual costs (in thousands) which materially
affect the comparability of the information above:

                                 1996      1995     1994     1993      1992
                                 ----      ----     ----     ----      ----

     Residual value
      estimate reductions        $2,384      -        -    $2,524         -

     Organizational res-
      tructuring costs           $  524      -        -         -      $154
</FN>
</TABLE>




                                       13

<PAGE>



                         CONSOLIDATED BALANCE SHEET DATA
                                 (in thousands)

                                        Year Ended December 31,
                                        -----------------------
                            1996       1995       1994       1993        1992
                            ----       ----       ----       ----        ----
Operating leases, net   $    497    $  1,683   $  7,495    $ 16,792   $ 28,649

Total assets              10,462      16,088     23,165      39,741     65,548

Indebtedness:
   Recourse                3,432       4,314     11,225      15,069     17,948

   Non-recourse            1,188       3,167      5,205      12,390     29,433

Stockholders' equity
 (deficit)                (4,418)      1,365     (1,421)      1,922      6,943




              CONSOLIDATED QUARTERLY STATEMENTS OF OPERATIONS DATA
                                 (in thousands)

                                  1996 Quarters
                                  -------------
                       First     Second     Third     Fourth
                       -----     ------     -----     ------
Revenues             $ 1,340    $ 1,521    $ 1,131    $ 1,521

Costs and expenses     1,743      1,761      1,757      7,295

Net profit (loss)       (403)      (240)      (626)    (5,535)

                                  1995 Quarters
                                  -------------
                       First     Second     Third     Fourth
                       -----     ------     -----     ------
Revenues             $ 2,334    $ 1,957    $ 2,098    $ 2,102

Costs and expenses     3,043      2,634      2,087      1,948

Net profit (loss)       (709)      (677)        11        154

For a discussion of the Company's  dividend policy,  see Item 5, "Market for the
Company's Common Equity and Related Stockholder Matters."

For a  discussion  of  indebtedness,  see Note G of the  Company's  Consolidated
Financial Statements.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

Results of Operations

Revenues  for the year ended  December  31, 1996  decreased  to $5.5  million as
compared to $8.5 million and $10.6 million for the years ended December 31, 1995
and 1994,  respectively.  The Company reported a net loss of $6.8 million ($1.32
per  share)  for 1996 as  compared  with a net loss of $1.2  million  ($0.22 per
share) for the year ended December 31, 1995 and a net loss of $3.3 million ($.52
per share) for the year ended December 31, 1994.


Rental Income

Rental income,  primarily from the Company's portfolio of leased equipment,  was
$1.9 million for the year ended December 31, 1996,  versus $4.4 million and $7.6
million  for the years ended  December  31,  1995 and 1994,  respectively.  Most
rental income is used to service non-recourse debt secured by leases. The



                                       14

<PAGE>



Company had no additions of equipment in 1996,  added  $276,000 of equipment (at
cost) to its portfolio in 1995,  and had no additions in 1994.  During 1996, the
Company  disposed  of $11.4  million  of  equipment  from its  portfolio  in the
aggregate  as measured by its  original  cost,  which  coupled  with the lack of
additions to the portfolio contributed to the decline in rental revenues.

In 1996, the Company  voluntarily sold $1.1 million of equipment under one lease
from its  portfolio  prior to lease  expiration  (as  measured  by the  original
equipment  cost).  There  were no  voluntary  sales  of  leases  prior  to lease
expiration  in 1995.  In 1994,  the  Company  voluntarily  sold $3.9  million of
equipment under six leases from its portfolio prior to lease  expiration (all as
measured by the original  equipment  cost).  The voluntary  portfolio sales were
made in order to generate cash to meet the Company's  operating and debt service
requirements. The sale of assets from the portfolio reduces future rental income
and the associated future profits which may be derived from continued  ownership
thereof.  These portfolio  reductions are expected to continue as the Company is
presently  unable  to add  significantly  to its  portfolio  due to the  lack of
capital necessary to finance the required investment in leased equipment.

Lease Underwriting Income

Lease underwriting income was approximately $504,000 for the year ended December
31,  1996,  $749,000  for the year ended  December 31, 1995 and $499,000 for the
year ended  December  31,  1994.  These  revenues  were derived from the sale to
investors of $21 million of leased  equipment  in 1996,  as compared to sales of
$27 million in 1995 and $14  million in 1994.  Net profit  margins  (cash net of
interest  carrying  costs)  derived  from  these  sales  were 1.1% for 1996,  as
compared to .5% for 1995 and 1.4% for 1994. When including  residual fee income,
overall  profit  margins  were  2.43%,  2.67% and 3.68% in 1996,  1995 and 1994,
respectively.  The  decrease  in  lease  equipment  volume  in 1996 was due to a
reduction in the origination sales efforts.  Competitive  factors in origination
sales has continued to keep margins at historically low levels.

At December 31, 1996 the Company held in its  inventory  $1.2 million  (original
cost)  of lease  transactions  for sale to third  parties  as  compared  to $1.9
million at  December  31,  1995.  Management  believes  that the  Company is not
limited in its capacity to originate and sell equipment  lease  transactions  by
lack of lessee  transaction  opportunities  or institutional  investors  seeking
transactions in which to invest.

Residuals. Lease underwriting income includes the present value of the Company's
share of the estimated future residual values expected to be realized from lease
transactions  sold to  investors.  For the year ended  December  31,  1996,  the
Company  recognized as residual fee income $268,000 derived from the sale of $21
million of equipment to investors.  By comparison,  for the years ended December
31,  1995 and 1994,  the Company  recognized  as  residual  fee income  $605,000
derived  from the sale of $27 million of equipment  to  investors,  and $300,000
derived from the sale of $14 million of equipment.  As of December 31, 1996, the
Company's  share of  residual  values  which it expects to receive in the future
from the  disposition  of  equipment  owned by  investors  was $.75  million  as
compared to $3.3 million at December 31, 1995.

The Company engages in a continuing  review of its valuation of all equipment in
its portfolios or under management.  It monitors the relative performance of its
disposal  methods  including  both the  release  and sale of assets on a monthly
basis comparing results to established residual accounting policies. Every asset
is tracked to its ultimate  disposition and all  out-of-pocket  costs are netted
against gross revenues  realized.  Through fiscal 1995, the Company  established
its accounting residual values based on a number of criteria including: (1) long
term (generally 10 years)  variances from mean value in the used fleet equipment
market; (2) specific asset  characteristics  including  specifications,  use and
cost;  (3) the Company's own asset  disposition  experience  which includes over
10,000  units;  and (4) external  assessor of fleet assets  including  the "Blue
Book" guide,  auction results, and retail classified  advertisements.  In fiscal
1996, as a result of changes in market  conditions as they relate to these fleet
assets,  the  Company  placed  additional  emphasis  on reports  by a  qualified
external assessor.  Accordingly,  the Company periodically  monitors performance
against these measures in order to determine if  adjustments in residual  values
are necessary.



                                       15

<PAGE>



During the  fourth  quarter  of 1996,  the  Company  recognized  a $2.4  million
reduction in  estimated  future  residual  values of certain  assets,  primarily
relating  residuals.  The residual  adjustment  was the result of changes in (i)
current  market   conditions  for  used   equipment,   and   particularly   used
transportation  equipment,  resulting from regulatory and technological changes,
use patterns,  maintenance  costs and  competitive  margins  associated with the
revenue-generating capability of such assets and (ii) factors affecting the used
transportation  equipment market and the economy  generally  leading to dramatic
variances  in rates of  inflation  on new  equipment.  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.  The  Company  effected  no
reductions in its estimated future residuals during 1995 or 1994.

The Company continues to build a remarketing distribution system relying on used
truck dealers to supplement the Company's own sales and telemarketing group. The
remarketing  operation  is  generally  unaffected  by  the  Company's  financial
difficulties.

Gains from Portfolio Remarketing.  Gains from portfolio remarketing are realized
when equipment  initially  subject to a lease in the Company's direct finance or
operating  lease  portfolio is sold at a price above its book value.  Gains from
portfolio  remarketing  fluctuate  principally because of the value of equipment
which  becomes  available  each year at lease  expiration,  changes  in the used
equipment market,  particularly for fleet assets, and the Company's  performance
in remarketing the equipment.

In 1996,  gains  decreased 36% versus the prior year to $1.4 million on sales of
equipment with an original cost of $11.4 million,  a 120%  performance  increase
based on original  cost as  compared  to 1995 where  gains were $2.2  million on
sales of equipment with an original cost of $22.9 million.  The 1995 performance
represented  a 254%  increase  compared  with 1994 gains of $633,000 on sales of
equipment with an original cost of $17.4 million.

Fees from Remarketing Activities.  Fees from remarketing activities are realized
when  the  Company  releases  or sells  equipment  owned  by  others,  including
equipment under leases  previously sold by the Company to investors.  Gross fees
are netted by any residual values previously  booked by the Company.  Gains from
remarketing activities fluctuate because of the value of equipment which becomes
available each year from leases previously sold by the Company, the terms of new
contracts  to  remarket  equipment  on behalf  of  others,  changes  in the used
equipment market, and the Company's remarketing performance.

In 1996, fees from this source were $820,000,  an increase of 23% as compared to
1995.  The increase is due to slightly  higher volume of activity and values for
the equipment.  In 1995, fees from this source were $668,000,  a decrease of 42%
as  compared  to 1994 when fees were  $1,160,000.  The decline is due to a lower
volume of activity as well as lower values for the equipment.

TruckScan - Results from Operations.  During 1996, the Company invested $350,000
in TruckScan,  a 50/50 joint venture initiative.  Chancellor executed a $300,000
non-interest  bearing  loan  agreement  pursuant  to which  $107,000  of working
capital was  advanced.  Chancellor's  total  investment  in this joint  venture,
including  expenses  incurred   monitoring  the  investment  and  administrative
support,  was approximately $1.2 million.  For the year ended December 31, 1996,
Truckscan  had  gross   revenues  of   approximately   $26,000  with  losses  of
approximately  $420,000. On May 1, 1997, the Company divested itself of this 50%
joint venture.

Expenses.  Selling,  general  and  administrative  expenses  for the year  ended
December  31, 1996  amounted to $8.6  million  versus $5.2  million for the year
ended  December 31, 1995 and $5.3 million for the year ended  December 31, 1994.
The  significant  increase  in  1996  expenses  is  attributable   primarily  to
consulting  and  financing  expenses  of $2.2  million  payable  to  Vestex.  In
addition,  $524,000 was recorded pursuant to a restructuring  plan as adopted by
the  Company's  Board of  Directors  in  December  1996.  Restructuring  charges
recorded as of December 31, 1996 include costs to exit the current  facility and
other costs to implement the restructuring plan.



                                       16

<PAGE>


Interest expense for the year ended December 31, 1996 was $480,000 versus $1.0
million  and $2.1  million,  for the years  ended  December  31,  1995 and 1994,
respectively.  These  decreases have resulted  largely from the reduction in the
size of the Company's portfolio and the corresponding  substantial  reduction in
non-recourse  debt, as well as the  elimination of $3.5 million of  subordinated
recourse debt as part of the July 1995 recapitalization transaction described in
"Liquidity and Capital Resources."

Depreciation  and  amortization  expenses  decreased to $1,042,000  for the year
ended December 31, 1996 from $3.4 million and $6.4 million,  for the years ended
December 31, 1995 and 1994, respectively.  The decrease is directly attributable
to the decrease in the size of the Company's operating lease portfolio.

Income  Taxes.  The Company  accounts  for income taxes in  accordance  with the
Statement of Financial  Accounting  Standards ("SFAS") No. 109,  "Accounting for
Income  Taxes."  This  statement  requires  recognition  of deferred  assets and
liabilities  for the expected  future tax  consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
assets and  liabilities  are  determined  based on the  differences  between the
financial  statements and the tax basis of assets and liabilities  using enacted
tax rates.  During  1996,  income tax benefit of $239,000 was  recognized  which
resulted  from  deferred tax benefit of $400,000 and current tax  provisions  of
$161,000.  There was no provision  for income taxes for the year ended  December
31, 1995. During 1994, a state tax provision of $9,000 was recognized.

Summary. The net after-tax losses incurred by the Company are the result of many
of the items discussed in the preceding paragraphs.  In order for the Company to
regain and maintain profitability and to generate positive cash flow, costs must
continue to be managed;  the volume of leased  equipment  underwritten  and sold
must grow;  margins obtained from those sales must remain  relatively  stable or
increase;  residual  realization must be sustained  relative to recorded values;
warehouse financing must be sufficient to permit the Company to meet its current
operating  requirements;  and the  Company  must  generate  brokerage  and other
service fees by capitalizing on its remarketing strengths.  Steps continue to be
taken to address  each of these  requirements,  and  management  believes  that,
assuming the addition of new capital for  investment in the Company's  portfolio
and for investment in certain  remarketing  and other business  operations,  the
Company  will be able to make  progress  in 1997  toward an  eventual  return to
sustained profitability.

Liquidity and Capital Resources

The Company has four principal sources of financing:  (1) an intercreditor loan,
(2) a secured  inventory loan, (3) a non-recourse  inventory loan facility,  and
(4) a subordinated loan.

The intercreditor loan had a balance of approximately  $1,000,000 as of December
31,  1996.  Repayment  of the loan is  secured  by  virtually  all assets of the
Company not otherwise encumbered.  The intercreditor loan was renewed on January
7, 1997  (subsequent  to a $500,000 cash infusion by Vestex) and  represents the
final term-out of the intercreditor  loan and provides for the full repayment of
the debt as a term loan in fixed monthly principal payments through November 25,
1997.  During each  renewal  period,  the  intercreditor  lender group agreed to
refrain from  exercising  certain  rights under their original  individual  loan
agreements  in exchange for the Company's  agreements to (a) make  principal and
interest payments as agreed,  (b) secure the continued  subordination by another
lender,  and  (c)operate  within  other  covenants  typical  for  this  type  of
financing,  including a prohibition on payment of dividends and  restrictions on
capital spending.  Interest rates under the current renewal agreement are all at
a floating rate of prime plus 2%.

A secured  inventory loan of $1.7 million as of December 31, 1996 is provided by
the  same   intercreditor   lender  group.   Although  the  inventory  loan  has
historically  been renewed on the same basis as the term loan  described  above,
the current renewal requires that the inventory loan be fully repaid by November
25, 1997. This inventory loan is secured by either cash or equipment  subject to
leases.  This  facility  allows the Company to purchase  equipment  subject to a
lease before selling the transaction to an investor.  The interest rate is prime
plus 2%.


                                       17

<PAGE>


In April 1997,  the Company's CEO 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;  (2) Release in favor of the principal recourse lenders to
be given by Vestex and Brian  Adley  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.

In April 1997, both the  intercreditor  loan and the secured inventory loan were
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 Company paid  approximately  $22,000 in legal and bank fees to complete this
transaction.

The Company also has a non-recourse  loan facility which supplements the secured
inventory loan described above. The non-recourse  loan facility provides for the
financing of the discounted  lease stream and a portion of the residual value of
the equipment subject to those leases.  Loans under this facility are subject to
the  lender's   approval  of  the   lessees'   credits  and   collateral   lease
documentation,  bear interest at 2% over the prime rate,  and are payable within
180 days of each  borrowing,  unless the lender  extends  the  maturity  date or
exercises its right to convert the loan into a long-term non-recourse loan. This
credit line provides a maximum financing capacity of $10 million. As of December
31, 1996, there was no outstanding balance under this facility.

In February  1997,  the Board of  Directors  approved  the issuance of 3,000,000
shares  of the  Company's  preferred  stock  at $.30  per  share  to  Vestex  in
consideration of $900,000 of consulting fees due Vestex.  In addition during the
first  quarter of 1997,  the Company  received  loans from VCC of  approximately
$250,000 which are due on demand.

The Company's  ability to underwrite  equipment  lease  transactions  is largely
dependent  upon the continuing  availability  of short-term  warehouse  lines of
credit.  Management is engaged in a continuing  dialogue  with several  possible
alternative  inventory  lenders  which appear to be  interested in providing the
Company  with  warehouse  financing.  If the Company  were to lose either of its
existing credit lines, or if their availability were reduced,  the Company would
take  immediate  steps  to  replace  either  or both of  them  with  one or more
alternative warehouse facilities.  If the Company experienced  unexpected delays
in putting a new warehouse  facility in place, it would temporarily  disrupt the
Company's  ability to underwrite  new  equipment  leases until the new warehouse
financing was secured.

The Company also has a subordinated  loan of $200,000 due to its former majority
stockholder   ("Bruncor")  and  a  $500,000  loan  from  its  current   majority
stockholder, Vestex.


On May 19, 1997 the Company  issued a $1.5 million  promissory  note to the Vice
Chairman of the Board which was also  guaranteed  by the  Chairman of the Board.
The promissory note bears interest at the prime rate plus 2 1/8% (10 3/8% at May
19, 1997).  The Company is also in the process of negotiating an additional $2.5
million loan with a bank which will be  guaranteed  by the Chairman of the Board
and Vestex,  and an additional  $2.5 million  warehouse  credit  facility with a
financing  institution  owned by the Vice Chairman of the Board.  Although there
can be no assurance that such financing will occur, management is confident that
these additional financing transactions can be closed by June 1997.

The Company's operating lease portfolio is principally  responsible for enabling
the  Company to sustain its  operations  from 1990 to the present in that it has
provided a source of collateral  security and,  through lease sales and residual
disposition,   liquidity  to  meet  the  demands  of  its  lenders   while  also
contributing  towards the Company's  working capital  requirements.  The Company
believes  that its  financial  crisis from 1990 through 1996  resulted  from the
withdrawal of financial  support by the Company's  former majority  shareholder,
Bruncor, and the inability to properly allocate capital resources and adjust and
contain general and administrative costs to levels commensurate with the decline
in revenues.


                                       18

<PAGE>


Since 1990, the Company's ability to sustain its operations and meet its ongoing
working capital  requirements has been exclusively  dependent upon the continued
availability  of  internally   generated  cash  arising   primarily  from  lease
underwriting and brokerage fees and residual value realization.

The  remarketing  of equipment has played and will continue to play a vital role
in these  activities.  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  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.

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 has
also enjoyed success  selling fleet equipment  through its retail sales centers,
which the  Company  plans to  further  develop.  The  Company  is also  devoting
resources to the development of international remarketing capabilities.

Prior  to  1996,  the  net  result  of  these  improvements  in its  remarketing
activities  has been an  improvement  in the  residual  values  that the Company
actually  realizes  for the benefit of itself and its  investors  from its fleet
equipment dispositions. During 1996, the Company realized reduced cash flows due
to  declining  volumes of  equipment  reaching  lease  expiration  in 1996.  The
historical volume and cash flow from this activity follows:

                  Cash Flow to the Company from Remarketing
                       (in millions except unit numbers)

                                             Company's
Year    Units Remarketed  Original Cost      Portfolio  Trusts*  Total
----    ----------------  -------------      ---------  -------  -----
1996         1,540            $71.4            $1.4      $1.3    $2.7
1995         2,265            $87.7            $5.7      $1.1    $6.8
1994         3,063            $89.4            $3.0      $2.3    $5.3
1993         1,817            $60.5            $2.0      $1.8    $3.8
1992         1,997            $44.5            $2.6      $ .5    $3.1
1991         1,332            $44.7            $3.6      $ .5    $4.1
1990           974            $43.0             n.a.      n.a.    n.a.

-----------------------------
*The Company shares in the benefits of remarketing activities with the investors
in these trusts as described under "Lease Underwriting Income",  "Residuals" and
"Fees from Remarketing  Activities"  above. The amounts  reflected in the Trusts
column  represent  net fees and  residual  sharing  paid to the  Company  by the
trusts.

Due to declining  volumes of equipment  reaching  lease  expiration in 1997, the
Company estimates, based on various assumptions including its ability to sustain
recent levels of  performance,  that cash flow from  remarketing  assets will be
approximately  $900,000 less in 1997 than the  $2,700,000  realized in 1996. The
Company anticipates continuing to dedicate substantial resources toward the



                                       19

<PAGE>



further development and improvement of its remarketing capabilities and believes
that remarketing will increasingly  become 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 re-sell fleet equipment.  The Company is also implementing
a plan to expand its  brokerage  activities  through the Internet and the use of
other information technologies. In addition to dedicating existing personnel and
resources to this activity, the Company recently hired an experienced used fleet
equipment  buyer  to  oversee  this  dealer  function,   including   identifying
attractive used equipment purchase and sale opportunities.

While external  funds such as short-term  warehouse  financing and  non-recourse
debt to finance the  discounted  present  value of the lease  payments have been
consistently  available to finance  equipment,  other sources of funds  (notably
investment  capital to fund the equity portion of its leases) were inadequate to
meet the  Company's  needs from 1988  through  early 1990.  In April  1990,  the
Company  and  most  of  its  unsecured  recourse  lenders  signed  a  four-month
intercreditor  agreement  which  restructured  approximately  $25.9  million  of
outstanding loans. This intercreditor  agreement called for granting of security
interests  in  the  Company's  unencumbered  assets,  collateralization  of  the
outstanding balances of the restructured credit facilities,  and the forbearance
of the loan  balances.  Since April 1990, the  intercreditor  agreement has been
amended and extended 26 times, most recently for an eleven-month period expiring
November  25,  1997,  which will fully  amortize  the  intercreditor  loan.  The
extension  agreements  have included  negotiated  monthly debt service terms and
working capital  allotments  available to the Company according to the projected
revenues  and cash  requirements  of the Company  during the periods  covered by
these  agreements.  The Company  reduced the  principal  balance of the forborne
indebtedness by $1.3 million during 1996 to $995,000 as of December 31, 1996. On
April 1997,  the  intercreditor  loan and secured  inventory loan were repaid in
advance of their terms  through the payment of $976,000 in cash and  forgiveness
of the remaining debt in the amount of $930,000.

On April 12, 1996, the Company closed a restructured preferred stock transaction
with Vestex whereby it issued 5,000,000  shares of a newly authorized  Series AA
Convertible  Preferred  Stock to Vestex Capital  Corporation in exchange for the
infusion of $1.35 million of new capital into the Company, less reimbursement of
approximately  $312,500 of due diligence and other  transactional costs pursuant
to Amendment No. 4 to the  Recapitalization and Stock Purchase Agreement entered
into by the  Company and  Vestex.  Additionally,  Vestex  forgave  proposed  but
undeclared dividends of $1,150,000.

The Company's Board and management continue to believe that the Company requires
new equity capital in order to resume a strategy of portfolio  investment  which
it had  successfully  pursued  during the 1980's as well as to invest in certain
remarketing  and other  business  operations.  The Company is actively  pursuing
negotiations with various financing sources, including an investment banker, for
purposes of raising the needed equity capital.

A significant  portion of the Company's  assets is pledged as collateral for the
Company's non-recourse indebtedness. As of December 31, 1996, approximately $3.4
million  (or  74.3%)  of  indebtedness  represented  a direct  liability  of the
Company; the remainder, approximately $1.2 million (or 25.7%), was non-recourse.
Amounts due under  non-recourse  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  significant  near-term
maturities  of  this  non-recourse  debt  (see  Note G to the  Footnotes  to the
Financial Statements) are not expected to affect the Company's liquidity because
the debt is expected to be fully  amortized by the  assignment of the collateral
leases and  payment by the  related  lessees of lease  rentals  directly  to the
non-recourse  lenders.  The availability of the leased equipment for remarketing
following  termination of the leases and retirement of the non-recourse  debt is
expected to produce residual income which would improve the Company's liquidity.

Cash and cash  equivalents  amounted to $21,000 at December 31, 1996 as compared
to $185,000 at December 31, 1995. Cash restricted and escrowed  amounted to $3.6
million at December 31, 1996 and $4.5 million at December 31, 1995.  Withdrawals
of restricted cash balances are confined to debt service and working capital



                                       20

<PAGE>



allotments, whereas the use of escrowed balances is confined to debt service
payments.

Restricted  balances represent funds collected by the Company on behalf of trust
investors  consisting of rental income and sales  proceeds  related to leases in
which they have an equity  interest.  A related  liability exists on the balance
sheet until the funds have been  distributed to the appropriate  investors.  The
related liability of approximately $2.6 million is included in "Accounts Payable
and Accrued  Expenses" as of December 31, 1996. A sum of approximately  $900,000
is confined to debt service, working capital allotments and equipment purchases.

In December 1993, in connection with the  consolidation  of its office space and
renegotiation  and amendment of its corporate  office lease,  the Company paid a
$100,000  security  deposit  and  executed  a  promissory  note in  favor of its
landlord in the principal amount of approximately $800,000 due January 1999. The
note,  which  does not bear  interest,  will be fully  canceled  if the  Company
fulfills  its  remaining  lease  obligations  without  default.  If the  Company
defaults under the lease,  the note will be accelerated and the security deposit
will be forfeited.  In connection  with the  Restructuring,  which  includes the
Company's plans to relocate to a more economical facility, these costs have been
charged as  restructuring  costs.  While no assurances can be given,  management
believes  that the Company will continue to perform its  obligations,  including
the timely  payment of rent,  under its amended lease  throughout  the remaining
term,  provided  that the Company will return to  profitable  operations  in the
future.

Recent Accounting Pronouncements

On January 1, 1996,  the  Company  adopted  Statement  of  Financial  Accounting
Standards ("SFAS") No. 121,  "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." This standard requires that long-lived
assets  and  certain  identifiable  intangibles  held and used by an  entity  be
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that the carrying amount of an asset may not be  recoverable.  Adopting SFAS No.
121 had no significant impact on the 1996 consolidated financial statements.

In June 1996,  Statement of Financial  Accounting Standards No. 125, "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities"  (SFAS  125),  was  issued.  SFAS 125  establishes  accounting  and
reporting  standards for  distinguishing  transfers of financial assets that are
sales from  transfers  that are secured  borrowings.  SFAS 125 is effective  for
transfers of financial assets and extinguishments of liabilities occurring after
December 31, 1996. In December 1996, Statement of Financial Accounting Standards
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No 125," (SFAS 127) was issued.  This  statement  changes the effective  date of
certain  provisions of SFAS 125 to transfers  occurring after December 31, 1997.
The  Company  is  currently  evaluating  the  impact  of SFAS 125 and 127 on the
consolidated financial statements.

In February 1997, the Financial  Accounting  Standards Board issued SFAS No. 128
"Earnings  per  Share".  SFAS 128  specifies  required  disclosures  relating to
earnings per share data. SFAS No. 128 is effective for fiscal years ending after
December 15, 1997 and earlier  application is not permitted.  The implementation
of this standard is not expected to materially affect the Company's consolidated
financial statements.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

The financial  statements and financial  statement schedules are incorporated in
this report on Pages F-1 through F-22.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
               FINANCIAL DISCLOSURES:

On December 26, 1996,  the Company  received a letter from Deloitte & Touche LLP
(Deloitte & Touche)  indicating  that the  client-auditor  relationship  between
Chancellor  Corporation  and Deloitte & Touche had ceased.  The  appointment  of
Reznick Fedder & Silverman was effective on February 18, 1997.


                                       21

<PAGE>



The  reports  of  Deloitte  & Touche  on the  Company's  Consolidated  Financial
Statements for the past two years expressed an unqualified  opinion and included
an  explanatory  paragraph  relating to the  Company's  ability to continue as a
going concern.

In connection with the audits of the Company's consolidated financial statements
for each of the two years ended December 31, 1995, and in the subsequent interim
period,  there were no  disagreements  with  Deloitte & Touche on any matters of
accounting principles or practices, financial statement disclosures, or auditing
scope and procedures  which,  if not resolved to the  satisfaction of Deloitte &
Touche, would have caused Deloitte and Touche to make reference to the matter in
its report.

During the Company's two most recent completed years and the subsequent  interim
period  preceding  the  engagement  of Reznick  Fedder &  Silverman  through the
present  date,  there  were no  reportable  events  (as  defined  in item 304 of
Regulation  S-K) with  Deloitte & Touche and during such periods the Company did
not  consult  with  Reznick  Fedder & Silverman  regarding  the  application  of
accounting principles to a specified transaction,  either completed or proposed,
or  the  type  of  audit  opinion  that  might  be  rendered  on  the  Company's
consolidated financial statements.



                                       22

<PAGE>



                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

Executive Officers and Directors

The executive officers and directors of the Company are as follows:

      Name           Age   Position(s) Held

John J. Powell       55    President, Chief Executive Officer and Treasurer
Brian M. Adley       34    Director; Chairman of the Board
Ernest Rolls         72    Director; Vice Chairman of the Board
Rudolph Peselman     52    Director
Michael Marchese     49    Director

The directors are elected at each annual  meeting of the  stockholders  to serve
for a term  of one  year  and  until  their  successors  are  elected  and  have
qualified.

There are no family  relationships  between any director,  executive  officer or
person nominated or chosen to become a director or executive officer.

Business Experience of Executive Officers and Directors

Mr. Powell joined the Company in December 1996 as President and Chief  Executive
Officer.  Prior to joining the Company, Mr. Powell was the President and Founder
of  EBEC  Financial  Corporation,   a  privately  held  equipment  leasing  firm
specializing in medium to large lease financial transactions. From 1971-1980 Mr.
Powell was with ITEL  Corporation  (NYSE)  where he became the  president of the
Computer Finance Division. This division of ITEL originated over $300 million of
lease finances  annually and Mr. Powell managed a sales and support staff of 150
people responsible for origination,  municipal finance and portfolio  management
and  remarketing.  Mr  Powell  began  his  business  career in 1967 with the IBM
Corporation  serving  in various  marketing  positions  for the Data  Processing
Division.

Mr. Adley has been Chairman and Chief Executive Officer of Vestex Corporation, a
private  financial  services  firm,  since  its  inception  in 1994.  Mr.  Adley
previously  served as  Treasurer,  Chief  Financial  Officer  and a director  of
Sanborn,  Inc.,  a  publicly  held  company  involved  in the  manufacturing  of
environmental  separation systems recycling oils and coolants, from 1990 through
1993,  having  previously  been acting Chief  Financial  Officer of that company
since 1989.  Sanborn filed for protection from creditors  under U.S.  bankruptcy
laws in January 1994.  From 1985 to 1989,  Mr. Adley was a Senior  Consultant at
Price  Waterhouse.  Mr.  Adley was elected a director of the Company on July 25,
1995 and elected  Chairman of the Board of  Directors  on December 3, 1996.  Mr.
Adley has several  undergraduate  degrees in accountancy and  management,  and a
Masters of Business Administration and a Juris Doctorate.

Mr.  Rolls was  elected a  director  in  December  1996.  Since 1973 he has been
President and Director of Asset Funding Group,  Inc., a company that invests and
directs joint ventures with national corporations.  From 1960 to 1973, Mr. Rolls
was  President of Diamond  Lighting and was Founder and Chairman of the Board of
Wright Airlines from 1966 to 1968.

Mr.  Peselman was elected a director in December 1996. He has been President and
Director  of Kent  International,  an  international  business  development  and
consulting  company  since  1989.  Mr.  Peselman  was  Vice  President  of  Eric
Management,  a real estate development and management company, from 1976 to 1989
and had served as a director of Engineering Firm, a firm which managed technical
reconstruction of a furniture  manufacturing  facility in the Ukraine, from 1970
to 1988.

Mr. Marchese was elected a director in December 1996. He has extensive  domestic
and international  leasing and bank experience.  From 1996 to the present he has
been  President  and Founder of Long River  Capital;  from 1993 to 1996 he was a
Consultant  for  Marchese & Company;  from 1979 to 1993 he was with SNET Credit,
Inc. in a variety of analyst and management positions; and prior to 1979 he



                                       23

<PAGE>

served in a variety  of staff  and  management  positions  with  various  trust,
leasing  and bank  companies.  Mr.  Marchese  has an  undergraduate  degree from
Providence College.

Certain Exchange Act Reporting Matters

Vestex  Corporation filed a Form 4 on August 19, 1996 disclosing the transfer of
1,600,000 shares of the Company's common stock. Vestex Capital Corporation filed
a Form 3 on August 19, 1996  disclosing the  acquisition of 1,600,000  shares of
the  Company's  common stock and  5,000,000  shares of the  Company's  Series AA
Convertible  Preferred  Stock.  Brian M. Adley filed a Form 4 on August 19, 1996
disclosing that he is the controlling stockholder of Vestex Capital Corporation,
the direct  beneficial  owner of 1,600,000  shares of the Company's common stock
and 5,000,000  shares of the Company's  Series AA Convertible  Preferred  Stock.
John J.  Powell  filed a Form 3 that he had become an  executive  officer of the
Company on November 22, 1996. Rudolph Peselman and Michael Marchese each filed a
Form 3 on May 22, 1997 disclosing that they are directors of the Company.

ITEM 11.          EXECUTIVE COMPENSATION:

The annual and long-term remuneration paid to or accrued for the Chief Executive
Officer and each of the other five most highly compensated executive officers of
the Company for services  rendered  during the year ended December 31, 1996, and
the annual and long-term  remuneration paid to or accrued for the benefit of the
same individuals,  for services as executive  officers of the Company during the
years ended December 31, 1995 and 1994, was as follows:
<TABLE>
<CAPTION>
                                                    SUMMARY COMPENSATION TABLE

                                                                       Long Term
                                                                     Compensation
                                                                         Awards
                                                                       Securities
                                           Annual Compensation         Underlying       All Other
Name and Principal                             Salary     Bonus(1)      Options        Compensation
   Position                           Year       $            $           (#)              ($)
------------------                    ----    --------    --------    ------------    --------------
<S>                                  <C>      <C>          <C>            <C>         <C>   
John J. Powell(2)(10)                 1996      15,000            -              -      500   (3)
 Chief Executive Officer              1995           -            -              -      -
                                      1994           -            -              -      -

Stephen G. Morison(4)(10)1996                  423,275            -              -      1,100 (5)
 Chief Executive Officer              1995     225,000       32,250        435,500      1,036 (-) (5)
                                      1994     225,000       14,900              -      1,419 (3) (5)

Michael DeSantis, Jr.(6)              1996     174,772       30,744              -      1,165 (3) (5)
 Senior Vice President(10)            1995     130,000       43,389        175,000      1,108 (3) (5)
                                      1994     130,000       44,209              -      1,042 (3) (5)

William J. Guthlein(7)(10)            1996     134,152            -              -      1,155 (3) (5)
 Vice President                       1995     125,660        9,300        110,000      1,076 (3) (5)
                                      1994     125,660        7,540              -      996   (3) (5)

David W. Parr(8)(10)                  1996      99,300        -                  -      1,108 (3) (5)
 Vice President                       1995     111,300        9,350        110,000      1,262 (3) (5)
                                      1994     111,300        6,678              -      1,198 (3) (5)

Gregory S. Harper(6)                  1996     132,287       14,173              -      1,133(3)(5)
 Vice President(10)                   1995      90,000       24,490        110,000      1,053(3)(5)
                                      1994      90,000       10,385              -        965(3)(5)

Kevin Kristick(9)                     1996     173,889       32,111              -        500(3)
 Vice President(10)                   1995      86,154       93,758         15,000        500(3)
                                      1994      36,615       29,605              *        500(3)

------------------------
<FN>

* see 1996 proxy for previous information


                                                        24

<PAGE>





(1)  Includes  commissions paid under the Company's  incentive program for sales
     personnel.

(2)  Employment commenced November 22, 1996.

(3)  Includes  $500 paid by the Company  during the fiscal year with  respect to
     the Company's 401-K plan.

(4)  Employee resigned effective December 3, 1996.

(5)  Except as otherwise  indicated for those  individuals  covered by note (3),
     this amount is the dollar value of insurance  premiums  paid by the Company
     during the fiscal year with respect to term life  insurance for the benefit
     of the named executive  officer.  This amount excludes  amounts paid by the
     Company with respect to group life policies.

(6)  Employment contract expired January 24, 1997 and not renewed.

(7)  Employment terminated January 10, 1997.

(8)  Employee resigned September 13, 1996.

(9)  Employment contract expired December 31, 1996 and not renewed.

(10) Represents  the  amount  paid  as  Salary  in  1996  as  reflected  on  the
     individual's   1996  W-2  statement   filed  with  the  Department  of  the
     Treasury-IRS
</FN>
</TABLE>













                                       25

<PAGE>




                        OPTION GRANTS IN LAST FISCAL YEAR

Table not included because no options were granted during 1996.


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

                                      Number             Value of
                                   Of Securities       Unexercised
                 Shares             Underlying Unex-     In-the-Money
                Acquired            Exercised Options      Options
               On       Value       At FY-End(1)       At FY-End ($)
             Exercise  Realized   Exer-    Unexer-    Exer-    Unexer-
Name            (#)      ($)     cisable   cisable   cisable   cisable
----         --------  --------  -------   -------   -------   -------

John J.
 Powell          0        0         -         -         -          -

Stephen G.
 Morison         0        0      435,500      -         -          -

Michael
 DeSantis, Jr.   0        0      175,000      -         -          -

William J.
 Guthlein        0        0       55,319    54,681      -          -

David W.
 Parr            0        0          -         -        -          -

Gregory S.
 Harper          0        0      110,000       -        -          -

Kevin
 Kristick        0        0        7,543       -        -          -

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

(1)  Adjusted to reflect the  inclusion  of a dividend  declared on December 17,
1994 on the Company's  outstanding Common Stock payable on shares held of record
on  January  6, 1995 in the form of shares of such  Common  Stock at the rate of
0.475 new shares for each outstanding share.

Directors'  fees in the aggregate  amount of $18,750 were paid to or accrued for
the directors with respect to services  rendered  during the year ended December
31,  1996,  excluding  $4,250 of  directors'  fees accrued with respect to prior
fiscal periods that were paid during the year ended December 31, 1996. Directors
no longer  receive  any cash fees with  respect to services  rendered.  The only
compensation  that  directors of the Company  currently  receive is the grant of
stock options pursuant to the Company's 1994 Director's Stock Option Plan. Under
that plan, as amended, non-employee directors elected prior to December 31, 2004
may be granted  options at the discretion of the Option  Compensation  Committee
subject to the  availability  of an  adequate  number of shares of Common  Stock
reserved  for  issuance  under the Plan.  There are  currently  235,500  options
available for issuance.

In January 1995, the shareholders,  at a special meeting,  approved the adoption
of an  18  month  severance  policy  for  key  employees.  The  Company's  prior
management  and the previous  board  further  extended this policy to January 1,
1997.

Effective  January 1, 1997, the Company's  severance benefit policy covering the
Company's  executive  officers and other  employees was  terminated.  Employment
agreements  between the Company and Messrs.  Morison,  DeSantis and Harper which
were entered into in connection with the July 1995 Vestex transaction expired
on January 24, 1997 and none of the agreements were renewed.


                                       26

<PAGE>



The  information  required by Item 402(i),  (j), (k) and (l) of  Regulation  S-K
regarding  executive  compensation  will be set forth in the Proxy Statement for
the Annual Meeting of  Stockholders is expected to be held on August 29, 1997 at
2:00 p.m., and is incorporated herein by this reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

The  number of  shares of Common  Stock  beneficially  owned by the  persons  or
entities known by management to be the beneficial  owners of more than 5% of the
outstanding  shares,  the number of shares  beneficially owned by each director,
each  nominee  for  election or  re-election  as a director  and each  executive
officer,  and the  number  of shares  beneficially  owned by all  directors  and
officers as a group,  as of May 15, 1997,  as  "beneficial  ownership"  has been
defined under rules promulgated by the Securities and Exchange  Commission,  and
the actual sole or shared voting power of such persons,  as of May 15, 1997, are
set forth in the following table:




   Name and           Common Stock      Percentage
   Address of         Beneficially      of Shares          Voting Power(1)
Beneficial Owner         Owned          Outstanding     Shares     Percentage
----------------      ---------------   -----------     ------     ----------
Vestex Capital        9,600,000(3)        73.1      9,600,000(3)     73.1
 Corporation(2)(10)

Brian M. Adley(2)     9,775,000(3)(4)(5)  73.4      9,600,000(3)(4)  73.1

John J. Powell(6)             0             *               0          *

Rudolph Peselman(7)     100,000(5)          *               0          *

Michael Marchese(8)     100,000(5)          *               0          *

Ernest Rolls(9)(10)     100,000(5)          *               0          *

Directors and
 Executive
 Officers as a
 Group (5 persons) 10,075,000(3)(4)(5)  74.0     9,600,000(3)(4)  73.1
---------------

*Less than one percent (1.0%)

(1)  Number of votes which each person is entitled to cast expressed as a number
     and as a  percentage  of all votes which all  stockholders  are entitled to
     cast at the Meeting; assumes no exercise of stock options.

(2)  This stockholder's address is 12 Waltham Street, Lexington, MA 02173.

(3)  Assumes  conversion of 8,000,000 shares of Outstanding  Series AA Preferred
     into a like number of shares of Common Stock.

(4)  Includes all shares owned by Vestex Capital Corporation reported above. Mr.
     Adley has sole or shared voting power as to all such shares.

(5)  Includes 175,000, 100,000, 100,000, and 100,000 shares which Mr. Adley, Mr.
     Peselman, Mr. Marchese and Mr. Rolls, respectively, are entitled to acquire
     through the exercise of outstanding stock options prior to December 1997.

(6)  This person maintains a business address c/o the Company.

(7)  This person maintains a business address c/o Kent International,  II Newton
     Place, Suite 150, Brookline, MA 02158.

(8)  This person maintains an address at 5 Hill Circle, Trumbull, CT 06611.



                                       27

<PAGE>




(9)  This person  maintains  an address at 5760 NW 22nd Avenue,  Boca Raton,  FL
     33496.

(10) Approximately  3,500,000  shares are  subject to an  agreement  pursuant to
     which the shares may be  transferred  to a company  controlled by Ernest L.
     Rolls, Vice Chairman of the Company.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

         The  information  required  by Item 404 of  Regulation  S-K will be set
forth in the Proxy  Statement for the Annual Meeting of  Stockholders to be held
on August 29, 1997 at 2:00 p.m., and is incorporated herein by this reference.




                                       28

<PAGE>



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:

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

         (1)                  Financial Statements:                   Page No.

                  Independent Auditors' Report                           F-1

                  Independent Auditors' Report                           F-2

                  Consolidated Balance Sheets as of
                  December 31, 1996 and 1995                             F-3

                  Consolidated Statements of Operations for the
                  years ended December 31, 1996, 1995 and 1994           F-4

                  Consolidated Statements of Stockholders' Equity
                  (Deficit) for the years ended December 31, 1996,
                  1995 and 1994                                          F-5

                  Consolidated Statements of Cash Flows for the
                  years ended December 31, 1996, 1995 and 1994           F-6

                  Notes to Consolidated Financial Statements             F-7


         (2)      Financial Statement Schedules:

                  None

                  All schedules are omitted because they are not applicable, not
                  required,  or because the required  information is included in
                  the consolidated financial statements.

         (3)      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).

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 10M 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).




                                       29

<PAGE>


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 10-K, 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 8-K
         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  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
         and  dated  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 the  Securities  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
         24, 1994 and dated December 8, 1993), Second Moratorium Amendment dated
         as of March 25,  1994  between  Agent and  Borrowers  (incorporated  by
         reference  from  Exhibit 1 to the  Company's  Form 8-K  filed  with the

                                       30
<PAGE>

         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,
         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 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 Term-Out  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).

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

                                       31
<PAGE>

         Company's Form 8-K filed with the Securities and Exchange Commission on
         February  16, 1993 and 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
         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).


                                       32

<PAGE>

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  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,  Form 10-K, for the year ended December
         31, 1995).

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

23(b)    Independent Auditors' Consent - Deloitte & Touche LLP

-------------------
*        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: Kimberlee
R.  Coleman,  Assistant  Clerk,  Chancellor  Corporation,  745 Atlantic  Avenue,
Boston, MA 02111.

         (b)      Reports on Form 8-K:

During the fourth  quarter of 1996, the Company filed a Form 8-K Report (Item 1)
dated December 3, 1996 and a Form 8-K Report (Item 4) dated December 31, 1996.





                                       33

<PAGE>


                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
Stockholders of Chancellor Corporation

We have  audited  the  accompanying  consolidated  balance  sheet of  Chancellor
Corporation   and   subsidiaries  as  of  December  31,  1996  and  the  related
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these  financial  statements  based on our audit.  The  financial  statements of
Chancellor  Corporation and subsidiaries as of December 31, 1995 and for each of
the two years in the  period  ended  December  31,  1995 were  audited  by other
auditors whose report dated April 1, 1996  expressed an  unqualified  opinion on
those  statements  and  contained  an  emphasis  paragraph  for a going  concern
consideration.

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

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





/s/ Reznick Fedder & Silverman

Boston,  Massachusetts 
April 11, 1997 (except for Note Q 
which is as of May 19, 1997)



                                       F-1

<PAGE>



                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
Stockholders of Chancellor Corporation:

We have  audited  the  accompanying  consolidated  balance  sheet of  Chancellor
Corporation  and   subsidiaries  as  of  December  31,  1995,  and  the  related
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows for each of the two years in the period ended  December  31,  1995.  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, such 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, 1995,  and the results of
their  operations  and their  cash flows for each of the two years in the period
ended  December 31, 1995,  in  conformity  with  generally  accepted  accounting
principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations that raise  substantial doubt about its ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note A. The consolidated  financial statements do not include any adjustments
that might result from the outcome of this uncertainty.












/s/ Deloitte & Touche LLP

Boston, Massachusetts
April 1, 1996


                                       F-2

<PAGE>

                     CHANCELLOR CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (In Thousands, Except Share Amounts)

                                                      December 31,
ASSETS                                              1996        1995
------                                              ----        ----

Cash and cash equivalents                        $     21    $    185
Cash restricted and escrowed                        3,553       4,513
Receivables, net                                    2,563       1,889
Leased equipment held for underwriting              1,231       1,859
Net investment in direct finance leases               748       1,421
Equipment on operating lease, net of
 accumulated depreciation of $7,825
 and $17,020                                          497       1,683
Residual values, net                                  748       3,340
Furniture and equipment, net of accumulated
 depreciation of $2,655 and $2,453                    121         179
Security deposits                                     897         897
Other assets                                           83         122
                                                 --------    --------
                                                 $ 10,462    $ 16,088
                                                 ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable and accrued expenses            $ 10,260    $  6,842
(including $2.2 million payable to a related
party as of December 31, 1996)
Indebtedness:
 Nonrecourse                                        1,188       3,167
 Recourse                                           3,432       4,314
Deferred income taxes                                --           400
                                                 --------    --------

  Total liabilities                                14,880      14,723
                                                 --------    --------

Commitments and contingencies                        --          --

Stockholders' equity (deficit)
 Preferred stock Series AA,
 Convertible - $.01 par value,
  Authorized: 10,000,000 shares;
  Issued: 5,000,000 and none                           50        --
 Common stock - $.01 par value,
  Authorized: 30,000,000 shares;
  Issued 6,567,302                                     65          65
 Additional paid-in capital                        24,609      23,638
 Accumulated deficit                              (28,606)    (21,802)
                                                 --------    --------
                                                   (3,882)      1,901

 Less treasury stock - 1,430,911
  shares at cost                                     (536)       (536)
                                                 --------    --------
 Total stockholders' equity (deficit)              (4,418)      1,365
                                                 --------    --------
                                                 $ 10,462    $ 16,088
                                                 ========    ========

                                              
                 See notes to consolidated financial statements.


                                       F-3

<PAGE>


                     CHANCELLOR CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (In Thousands Except Per Share and Share Amounts)

                                             Year Ended December 31,
                                           1996       1995        1994
                                           ----       ----        ----
Revenues:
 Rental income                          $  1,933    $  4,391    $  7,630
 Lease underwriting income                   504         749         499
 Direct finance lease income                 191         191         260
 Interest income                              60          72         140
 Gains from portfolio remarketing          1,391       2,242         633
 Fees from remarketing activities            820         668       1,160
 Other income                                614         178         265
                                        --------    --------    --------
                                           5,513       8,491      10,587
                                        --------    --------    --------

Costs and expenses:
 Selling, general and administrative       8,650       5,239       5,288
 (including $2.55 million incurred to
  related parties during 1996)
 Interest expense                            480       1,041       2,102
 Depreciation and amortization             1,042       3,432       6,368
 Residual value estimate reduction         2,384        --          --
 Lease rental                               --          --           163
                                        --------    --------    --------
                                          12,556       9,712      13,921
                                        --------    --------    --------

Loss before income tax (benefit)
provision                                 (7,043)     (1,221)     (3,334)

Income tax(benefit)provision                (239)       --             9
                                        --------    --------    --------

Net loss                                ($ 6,804)   ($ 1,221)   ($ 3,343)
                                        ========    ========    ========

Net loss per share                        ($1.32)     ($ .22)     ($ .52)
                                        ========    ========    ========

Weighted average common and
common equivalent shares               5,136,391   5,634,439   6,373,161
                                       =========   =========   =========





                 See notes to consolidated financial statements.



                                       F-4

<PAGE>

<TABLE>
<CAPTION>


                    CHANCELLOR CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                      (In Thousands, Except Share Amounts)

                                                                     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, 12/31/93                   -     $  -    4,503,402     $45    $19,495   ($17,238)     184,635  ($380)    $1,922

Exercise of stock options                             8,100       -          -                                         -

1.475-for-1 common stock
 split effected In the
 form of a 47.5% stock
 dividend                                         2,055,210      20        (20)         -                              -

Net loss                                                                           (3,343)                        (3,343)
                            ---------    -----    ---------     ---    -------   --------     --------  -----    -------

BALANCE, 12/31/94                   -        -    6,566,712      65     19,475    (20,581)     184,635   (380)    (1,421)

Capital contribution by
 related party                                                           4,148               3,870,015   (484)     3,664

Stock issued,
 net of expenses of
 approximately $185                                                         15              (1,600,000)   200        215

Stock grant                                                                                 (1,023,739)   128        128

Exercise of stock options                               590       -                                                    -

Net loss                                                                            (1,221)                       (1,221)
                               ------   -------   ---------      --     ------    --------   ---------   ----     ------

BALANCE, 12/31/95                   -        -    6,567,302      65     23,638     (21,802)  1,430,911   (536)     1,365

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

Net loss                                                                           (6,804)                        (6,804)
                            ---------    -----    ---------     ---    -------   --------     --------  -----    -------

BALANCE, 12/31/96           5,000,000   $   50    6,567,302     $65    $24,609   ($28,606)   1,430,911  ($536)   ($4,418)
                            =========   ======    =========     ===    =======   ========    =========  ======   =======

</TABLE>





                 See notes to consolidated financial statements.



                                       F-5

<PAGE>
<TABLE>
<CAPTION>
                     CHANCELLOR CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in Thousands)

                                                                     Year Ended December 31,
                                                              --------------------------------
                                                               1996         1995        1994
                                                               ----         ----        ----
<S>                                                         <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                   ($ 6,804)   ($ 1,221)   ($ 3,343)
                                                             --------    --------    --------
  Adjustments to reconcile net loss to net cash (used in)
    provided by operating activities:
      Depreciation and amortization                             1,042       3,432       6,368
      Deferred income taxes (benefit)                            (400)         --          --
      Compensation expense recognition on stock grant              --         128          --
      Changes in assets and liabilities:
        Receivables                                              (674)       (205)        954
        Residual values, net                                    2,592        (245)      1,183
        Other assets                                               39         (34)        (51)
        Accounts payable and accrued expenses                   3,418        (194)     (2,204)
                                                             --------    --------    --------
          Total Adjustments                                     6,017       2,882       6,250
                                                             --------    --------    --------
   Net cash (used in) provided by operating activities           (787)      1,661       2,907
                                                             --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Leased equipment held for underwriting                          628         698         240
  Net investment in direct finance leases                         673         589         709
  Equipment on operating lease                                    302       2,421       3,007
  Net change in cash restricted and escrowed                      960         555       4,048
  Disposals of (additions to) furniture and equipment, net       (100)        (28)         23
                                                             --------    --------    --------
    Net cash provided by investing activities                   2,463       4,235       8,027
                                                             --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Additions to indebtedness - recourse                            570          --          --
  Additions to indebtedness - nonrecourse                          --      11,797       2,874
  Repayments to indebtedness - nonrecourse                     (1,979)    (13,835)    (10,059)
  Repayments of indebtedness - recourse                        (1,452)     (3,967)     (3,844)
  Sale of common stock, net of expenses                            --         215          --
  Sale of preferred stock, net of expenses                      1,021          --          --
                                                             --------    --------    --------
    Net cash used in financing activities                      (1,840)     (5,790)    (11,029)
                                                             --------    --------    --------

NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                                     (164)        106         (95)

CASH AND CASH EQUIVALENTS, BEGINNING OF
  YEAR                                                            185          79         174
                                                             --------    --------    --------

CASH AND CASH EQUIVALENTS, END OF YEAR                       $     21    $    185    $     79
                                                             ========    ========    ========

Non-Cash Activity
  Capital contribution by a related party in the form of
    debt forgiveness                                         $     --    $  4,148    $     --
                                                             ========    ========    ========

Acquisition of treasury stock                                $     --    $    484    $     --
                                                             ========    ========    ========
</TABLE>



                 See notes to consolidated financial statements.


                                       F-6

<PAGE>



                     CHANCELLOR CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.       Business Organization and Significant Accounting Policies:

         Business

         Chancellor  Corporation and Subsidiaries (the "Company") are engaged in
originating  and selling  equipment  leasing  transactions  involving  primarily
transportation,   material   handling,   construction  and  occasionally   other
equipment.

         Basis of Presentation

         The accompanying  consolidated financial statements for the years ended
December 31, 1995 and 1994 have been  prepared on a going concern  basis,  which
contemplates  the  realization of assets and the  satisfaction of liabilities in
the  normal  course  of  business.  As  shown  in  the  consolidated   financial
statements,  during the years  ended  December  31,  1995 and 1994,  the Company
incurred net losses of $1,221,000, and $3,343,000,  respectively. These factors,
among others  indicated that as of December 31, 1995 the Company might be unable
to continue as a going concern for a reasonable period of time.

         During  1996  and 1997  the  Company  completed  certain  steps  toward
improving the Company's  consolidated  financial position and liquidity.  First,
the Company  approved and put into place a  restructuring  plan in December 1996
which  included  replacement of the  management  team,  downsizing of staff to a
level necessary to execute the restructuring plan, and sale of certain assets to
generate additional cash flow. Next, the Company's majority stockholder,  Vestex
Capital Corporation and the Company extinguished approximately $1.9 million to a
lender group. In addition, the Company issued a promissory note in the amount of
$1.5 million (see Note G).

         Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
Company, its wholly owned subsidiaries, and a 50% owned subsidiary (see Note M).
All significant intercompany accounts,  transactions and profits and losses have
been eliminated in consolidation.

         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 sale 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.  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 which 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.




                                       F-7

<PAGE>



         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.

          Residual Values

         The  Company   reviews   recorded   residual   values  and  performs  a
recoverability  study on an  annual  basis.  Writedowns  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.

         Initial Direct Lease Costs

         The Company  capitalizes  and defers  initial  direct costs incurred in
originating  operating and direct finance leases at lease commencement.  Initial
direct costs are included in other assets and are amortized over the term of the
leases using a straight-line  method.  Initial direct costs were fully amortized
as of December 31, 1994.

         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 and Escrowed

         Restricted  and escrowed cash balances are available  only for specific
purposes related to payments to investors, payment of taxes related to equipment
owned by  investors,  debt  service  payments,  and working  capital  allotments
permitted by the Company's loan agreements.

         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 and Equipment

         Furniture and equipment are recorded at cost.  Depreciation is computed
using a straight-line method over 5 years based on the estimated useful lives of
the related assets. Leasehold improvements are amortized over the lease term.

         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 carryforwards,  are recognized to the extent
realization of such benefits is more likely than not.

         Stockholders' Equity (Deficit)

         Effective April 12, 1996, the Company issued and sold to Vestex Capital
Corporation 5,000,000 shares of its Series AA Convertible Preferred Stock for


                                       F-8

<PAGE>



$1,350,000 in cash,  less  reimbursement  of $312,500 of due diligence  costs to
Vestex  Capital   Corporation  and  $17,000  of  other  transaction  costs  (the
"Preferred  Stock  Placement").  Each share of Series AA  Convertible  Preferred
Stock is entitled to the number of votes equal to the number of whole  shares of
Common Stock into which the shares of Series AA  Preferred  Stock held by Vestex
are then  convertible.  The holders of shares of Series AA Preferred Stock shall
be entitled to receive  cash  dividends  only to the same extent and in the same
amounts as  dividends  are  declared and paid with respect to Common Stock as if
the Preferred  Stock had been  converted to Common Stock in accordance  with the
provision related to conversion.

         On  July   25,   1995,   the   Company   simultaneously   completed   a
recapitalization  of its balance sheet,  the sale of 1,600,000  shares of Common
Stock to Vestex,  Inc., and an award of 1,023,739  shares of Common Stock to the
Company's employees.  The impact of these transactions  included the elimination
of $720,000 of accrued  interest  included in accounts payable and $3,494,000 of
subordinated  recourse  debt; an increase of  $4,163,000  of additional  paid-in
capital;  and an  increase in treasury  stock of  $156,000  (1,246,276  shares),
including the  recognition of $128,000 of  compensation  expense  related to the
stock grant.

     On January 20, 1995, the Company  effected a 1.475-for-1  split in the form
of a 47.5%  Common  Stock  dividend.  On the same  day,  the  stockholders  also
approved an amendment to the Articles of  Organization  in order to increase the
number of shares of Common Stock from  10,000,000 to 30,000,000  and  authorized
10,000,000 shares of preferred stock ($0.01 par value). Stockholders' equity has
been restated to give retroactive recognition to the stock split for all periods
presented by reclassifying  from additional  paid-in capital to Common Stock the
par value of the  additional  shares  arising from the split.  In addition,  all
references in the financial  statements to number of shares,  per share amounts,
stock option  data,  and market  price of the  Company's  Common Stock have been
restated.

         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".

         Net Loss per Share

         Net loss per share amounts are computed  based on the weighted  average
number of common  and  common  equivalent  shares,  when  dilutive,  which  were
outstanding during the period.

         Reclassifications

         Certain amounts in previous years'  consolidated  financial  statements
have been reclassified to conform with the 1996 presentation.

         Supplemental Cash Flow Information

         Cash paid for income  taxes  during  1996,  1995 and 1994 was  $29,000,
$41,000, and $29,000, respectively.

         Interest paid during 1996,  1995 and 1994 was $903,000,  $1,257,000 and
$2,162,000, respectively.

         Other Assets

         In  connection  with  the  December  1993  amendment  to the  Company's
corporate  office lease,  the Company executed a promissory note in favor of its
landlord in the  principal  amount of $796,000  due  January  1999.  The note is
included in accounts payable and accrued expenses and a related asset, including
a $100,000 security deposit, is included in deposits.  The security deposit will
offset the note in 1999 provided that the Company does not


                                       F-9

<PAGE>



default on its lease.  In the event of default by the  Company  under the lease,
the security deposit will be forfeited and the note will be accelerated.

         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.

         Recent Accounting Pronouncements

         On  January  1,  1996,  the  Company  adopted  Statement  of  Financial
Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of Long- Lived
Assets and for Long-Lived Assets to be Disposed of." This standard requires that
long-lived  assets  and  certain  identifiable  intangibles  held and used by an
entity be reviewed for impairment  whenever  events or changes in  circumstances
indicate that the carrying amount of an asset may not be  recoverable.  Adopting
SFAS  No.  121 had no  significant  impact  on the 1996  consolidated  financial
statements.

In June 1996,  Statement of Financial  Accounting Standards No. 125, "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities"  (SFAS  125),  was  issued.  SFAS 125  establishes  accounting  and
reporting  standards for  distinguishing  transfers of financial assets that are
sales from  transfers  that are secured  borrowings.  SFAS 125 is effective  for
transfers of financial assets and extinguishments of liabilities occurring after
December 31, 1996. In December 1996, Statement of Financial Accounting Standards
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No 125," (SFAS 127) was issued.  This  statement  changes the effective  date of
certain  provisions of SFAS 125 to transfers  occuring  after December 31, 1997.
The  Company  is  currently  evaluating  the  impact  of SFAS 125 and 127 on the
consolidated financial statements.

In February 1997, the Financial  Accounting  Standards Board issued SFAS No. 128
"Earnings per Share".  SFAS No 128 specifies  required  disclosures  relating to
earnings per share data.  SFAS No. 128  effective  for fiscal years ending after
December 15, 1997 and earlier  application is not permitted.  The implementation
of  these  standards  is  not  expected  to  materially   affect  the  Company's
consolidated financial statements.


         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.

B.   Receivables:

                                         December 31,
                                     -------------------
                                      1996         1995
                                     -----        ------
                                         (In Thousands)

     Notes receivable               $    -        $   37
     Receivables from trusts            96            45
     Accrued rents                      94           287
     Lease underwriting receivable   2,327         1,499
     Other                              46            21
                                     -----        ------
                                     2,563         1,889
                                     =====        ======


         Notes receivable arise principally from investor equity investments and
obligations to the Company  relating to sales of leased  equipment.  These notes
were non-interest bearing and were written off in 1996.


                                      F-10

<PAGE>



         Receivables  from  trusts  represent  amounts  due the Company for cash
outlays  associated  with the  remarketing  of equipment.  These amounts will be
collected upon successful remarketing of such equipment.

         Lease   underwriting   receivable   relates  to  the  Company's   lease
origination, underwriting and syndication business.

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.  This type of consideration (residual values) will be
realized by the Company upon  remarketing  of the  equipment at  termination  or
expiration  of the  related  leases.  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.
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 an industry professional,  in addition to the already
established criteria used in the benchmark/matrices methodology previously used.

                                                               December 31,
                                                           ------------------
                                                            1996        1995
                                                           ------      ------
                                                            (In Thousands)


         Residual values, beginning of year, net           $3,340      $3,095
         Residual fees recorded                                268        605
         Realization                                         (477)      ( 360)
         Residual value estimate reduction                 (2,383)        -
                                                           -------     ------
         Residual values, end of year, net                 $  748      $3,340
                                                           ======      ======


         Residual value  estimate  reductions  represent  reductions in expected
future  residual  values  on  certain   equipment,   the  residuals  which  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 F for additional information on the review and valuation.  For
the years ended December 31, 1996, 1995 and 1994, the Company realized income of
approximately $820,000, $668,000 and $1,160,000,  respectively,  relating to the
remarketing  of  equipment  for which no  residuals  were  recorded  or realized
amounts exceeded the booked residual.

     Aggregate  residual  value fees  expected to be realized as of December 31,
1996 are as follows (in thousands):

              Year ending December 31:

                       1997                      $330
                       1998                        72
                       1999                       224
                       2000                        81
                       Thereafter                  41
                                                 ----
                                                 $748
                                                 ====






                                      F-11

<PAGE>

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

         Net investment in direct finance leases consisted of:

                                                December 31,
                                                ------------
                                              1996       1995
                                             ------     ------
                                               (In Thousands)

Minimum lease payments receivable           $   703    $ 1,061
Estimated unguaranteed residual values of
  leased equipment, net
                                                150        526
Less unearned income                           (105)      (166)
                                            -------    -------
                                            $   748    $ 1,421
                                            =======    =======


         The cost of equipment on operating lease by category of equipment is as
follows:
                                                December 31,
                                                ------------
                                              1996        1995
                                             ------      ------
                                               (In Thousands)
Transportation equipment                    $  3,714    $ 11,814 
Other equipment                                4,518       6,889
                                            --------    --------
                                               8,232      18,703
Less accumulated depreciation                 (7,735)    (17,020)
                                            --------    --------
                                            $    497    $  1,683
                                            ========    ========
                                

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

                                           Direct Finance     Operating  
                                           --------------     ---------
          Year ending December 31:                 (In Thousands)
                   1997                        $457               $327
                   1998                         179                173
                   1999                          36                 79
                   2000                          17                 74
                   2001 and thereafter           14                 77
                                               ----               ----
                                               $703               $730
                                               ====               ====
                                       
         Included in the operating lease and direct finance lease portfolios are
approximately $52,000 and $106,000 of equipment held for remarketing,  stated at
net book value, as of December 31, 1996 and 1995, respectively.

E.       Accounts Payable and Accrued Expenses:

         Accounts payable and accrued expense consists of:

                                                         December 31,
                                                         ------------
                                                       1996        1995
                                                      ------      ------
                                                         (In Thousands)
          Trade accounts payable
              (including $2.2 million payable to
              a related party as of December 31,
              1996)                                   $6,177    $2,348
          Payables to trusts                           2,569     2,712
          Accrued interest payable                        40        24
             Restructuring costs                         524       -
          Other                                          950     1,758
                                                     -------    ------
                                                     $10,260    $6,842
                                                     =======    ======

                                      F-12
<PAGE>




F.       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. In 1994 and 1995, continued review
of the  estimated  values  resulted  in no  changes  to the  Company's  recorded
residual values.

         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 an industry professional,  in addition to the already
established criteria used in the benchmark/matrices methodology previously used.
The Company  recognized a $2.4 million  reduction  in trust  residual  values in
1996.  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.

G.       Indebtedness:

         The  Company  has  four   principal   sources  of  financing:   (1)  an
intercreditor  loan, (2) a secured  inventory loan, (3) a nonrecourse  inventory
loan facility, and (4) two subordinated loans.

     The  intercreditor  loan had a balance of $995,000 as of December 31, 1996.
Repayment  of the loan is secured by  virtually  all assets of the  Company  not
otherwise  encumbered.  Since April 1990, when the intercreditor loan was formed
through the restructuring of most of the Company's  unsecured recourse debt, the
intercreditor  loan has been  renewed 28 times,  most  recently in the form of a
Loan Term-Out  Agreement  entered into on January 7, 1997 for the period through
November  25, 1997,  during  which the entire loan  balance  will be  amortized.
During each renewal period,  the  intercreditor  group lenders agreed to forbear
from exercising  certain rights under their original  individual loan agreements
in exchange for the  Company's  agreements  to (a) make  principal  and interest
payments as agreed,  (b) secure the continued  subordination  by another lender,
and (c) operate  within  other  covenants  typical  for this type of  financing,
including a  prohibition  on payment of dividends  and  restrictions  on capital
spending.  Since the January 31, 1996 term-out of the loan, the interest rate is
prime plus 2% (10.25% as of December 31, 1996).

         A secured  inventory loan of $1.7 million as of December 31, 1996 ($1.8
million as of December  31,  1995) is  provided  by the same lender  group which
provides the intercreditor  loan. The facility will expire on November 25, 1997.
This  inventory  loan is secured by either cash or equipment  subject to leases.
This facility allows the Company to purchase equipment subject to a lease before
selling the  transaction  to an investor.  The interest  rate was 3.5% above the
prime rate until  January 31, 1996.  The new rate is prime plus 2% (10.25% as of
December 31, 1996).

     The Company also has a  non-recourse  loan facility which  supplements  the
secured  inventory loan described above. The nonrecourse loan facility  provides
for the financing of the  discounted  lease stream and a portion of the residual
value of the equipment subject to those leases.  Fundings under this $10 million
facility are subject to the lender's credit approval of the lessee. The interest
rate on amounts  borrowed is 2% above the prime rate.  At December 31, 1996,  no
balance was outstanding. The nonrecourse loan facility does not include $944,000
and $1.8 million as of December 31, 1996 and 1995, respectively,  of nonrecourse
debt which was  borrowed  in prior years by  directly  assigning  rentals to the
nonrecourse  lenders.  The Company has not required this type of financing since
1989 because of the  unavailability of capital to finance the difference between
the equipment purchase price and the present value of the rental stream advanced
by the nonrecourse lender.

     The  intercreditor  loan of $995,000,  the secured  inventory  loan of $1.7
million, a $500,000 subordinated loan from Vestex, Inc., $70,000 equipment loan,
and a $200,000  subordinated  loan from Bruncor,  Inc. together make up the $3.4
million of recourse  debt  outstanding  at December  31,  1996.  Loan payable to
Vestex bears interest at 2% above the prime rate and is due in November


                                      F-13

<PAGE>



1997. Loan payable to Bruncor,  Inc. bears interest at 1% over the base rate (as
defined in the agreement) and is due in July 2000. The equipment loan is payable
in monthly interest and principal amount of $1,680 and is due in November 2000.

         In April 1997, both the  intercreditor  loan and the secured  inventory
loan were repaid in advance of their  respective  terms. The aggregate amount of
this 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.

         Aggregate  annual  commitments  under  recourse  debt as  adjusted  for
extinguishment  of the  intercreditor  loan  discussed  above are as follows (in
thousands):

                  Year ending December 31:

                           1997               $3,183
                           1998                   14
                           1999                   16
                           2000                  219
                                              ------
                                              $3,432
                                              ======

         In connection with an extension agreement  negotiated in February 1993,
the  Company  granted  the lender  group  warrants  to purchase up to 10% of the
Common Stock of the Company  (513,639 shares as of December 31, 1995) on a fully
diluted  basis  for  $1.09  per share in  consideration  of the  lenders  having
accommodated  several loan modifications  requested by the Company,  including a
limited amount of buy-sell remarketing financing  capability.  In December 1996,
the lenders  sold to VCC their  warrants to purchase up to 10% of the  Company's
capital  stock  (approximately  1,160,000  shares as of December  31, 1996) on a
fully-diluted basis for $.27 per share in consideration of VCC subordinating its
$500,000 loan to that of the intercreditor loan and secured inventory loan.

         Maximum amounts of recourse indebtedness outstanding were approximately
$4.0  million and $11.0  million  during the years ended  December  31, 1996 and
1995,  respectively,  and the  weighted  average  interest  rates were 10.3% and
11.8%,respectively, for these same periods.

         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  sold to investors  and its net  investment  in equipment  for its own
portfolio in the event of a lessee default.










                                      F-14

<PAGE>



         Aggregate future maturities of nonrecourse  indebtedness as of December
31, 1996 are as follows (in thousands):

                  Year ending December 31:
                       1997                       $  620
                       1998                          305
                       1999                           97
                       2000                           79
                       2001 and thereafter            87
                                                  ------
                                                  $1,188
                                                  ======




H.       Income Taxes:

         The provision (benefit) for income taxes consists of:

                                      1996        1995         1994
                                      ----        ----         ----

              Current:
                  Federal         $  90,000      $   --      $      --  
                  State              71,000          --          9,000
              Deferred:                                       
                  Federal          (400,000)         --             --
                  State                  --          --             --
                                  ---------      ------      ---------
              Total               ($239,000)     $   --      $   9,000
                                  =========      ======      =========
                                                           

         A  reconciliation  of the rate  used for the  provision  (benefit)  for
income taxes is as follows:

                                      1996        1995         1994
                                      ----        ----         ----

Tax benefit at statutory rate         34.0%       34.0%        34.0%
Net operating loss carry forward
benefit for which utilization
is not assured and other items       (37.4)      (34.0)       (33.7)
                                     ------      ------       ------
 Total                               (3.4%)        0.0%         0.3%
                                     ======      ======       ======

       The Company files consolidated federal income tax returns with all of its
subsidiaries.  As of December  31,  1996,  the Company  has net  operating  loss
carryforwards of approximately $28.5 million available for federal tax purposes,
which expire in the years 2001 through 2010. In addition,  at December 31, 1996,
the Company  has  investment  tax credit  carryforwards  for federal  income tax
purposes  available to offset future taxes of $2.5 million expiring in the years
1997 through 2001. The July 1995 recapitalization transaction was a greater than
50% change in ownership for Federal tax purposes.  Accordingly,  utilization  of
net operating loss and tax credit carryforwards will be limited in future years.

     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-15

<PAGE>



The tax effects of significant  items  comprising the Company's net deferred tax
liability are as follows:

                                                   December 31,
                                                   ------------
                                                 1996       1995
                                                 ----       ----
                                                 (In Thousands)
Deferred tax liabilities:
         Differences between book and tax
                  basis of property           $  1,180    $  2,984
                                              --------    --------
Deferred tax assets:
      Accrued lease rents                           26         220
         Reserves not currently deductible         159         827
         Net operating loss carryforwards       11,434       8,778
         Tax credit carryforwards                2,556       2,556
         Other                                       8         160
                                              --------    --------
                  Total deferred tax assets     14,183      12,541

Valuation allowance                            (13,003)     (9,957)
                                              --------    --------
Net deferred tax liability                    $   --      $    400
                                              ========    ========

         All deferred tax liabilities and deferred tax assets (except tax credit
carryforwards)  are tax  effected  at a combined  40% rate 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  increased  by  $3,046,000  in 1996.  For the  years  ended
December 31, 1995 and 1994,  the valuation  allowance  decreased by $935,000 and
increased by $2,915,000, respectively.

         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 $1.2 million
and $3 million as of  December  31,  1996 and 1995,  respectively.  Because  the
deferred tax asset can be used to directly  offset the  deferred tax  liability,
the  Company  has  determined  there  is no need  to  provide  a full  valuation
allowance for the deferred tax asset.

I.       Stock Option Plans and Stock Purchase Plan:

The Company has three stock  option  plans:  a 1994 Stock  Option  Plan,  a 1994
Directors'  Stock Option Plan,  and a 1983 Stock Option Plan,  which has expired
but under which certain granted options are outstanding.

The Company's stock option plans provide that incentive and  nonqualified  stock
options to purchase up to an aggregate of 2,872,500 (which includes 1,100,500 of
options  related to the 1983 stock option plan which has expired)  shares of the
Common Stock of the Company may be granted to key  contributors  to the Company,
including  officers,  directors and  employees.  Options are granted at the fair
market value of the Common Stock as of the date of grant,  as  determined by the
Board of Directors.  Options  currently  expire no later than ten years from the
grant date and generally become  exercisable  ratably over one to two years from
the grant date except  options  issued to  directors,  which become  exercisable
immediately.








                                      F-16

<PAGE>


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


                                      1994
                                    Directors
                     1994 Stock   Stock Option   Expired Stock  Weighted Average
                    Option Plan      Plan        Option Plan     Exercise Price
                    -----------   ------------   -------------  ----------------
Outstanding
December 31, 1993         --            --            394,414    $    .71  
Options granted           --            --               --
Options exercised         --            --            (11,948)        .71
Options canceled          --            --            (24,496)        .71
                    ----------    ----------       ----------    --------
                                                  
Outstanding,                                      
December 31, 1994         --            --            357,970         .71
                                                  
Options granted      1,207,000        95,000             --           .16
Options exercised         --            --               (590)        .71
Options canceled          --            --           (353,399)        .71
                    ----------    ----------       ----------    --------
                                                  
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
                    ==========    ==========       ==========    ========
                                              


Additional  information regarding options outstanding as of December 31, 1996 is
as follows:

                               Options Outstanding
                               -------------------
                                      Number     Weighted Average   Exercisable
         Exercise Price            Of Shares     Contractual Life      Options
         --------------            ---------     ----------------      -------
         $.0067                        3,244         6.1               3,244
         $.1250                      605,743         8.5             605,743
         $.1875                      528,542         8.5               -
         $.2500                      329,500         8.5             329,500
                                     -------                         -------

         Total                     1,467,029                         938,487
                                   =========                         =======



The weighted average  exercise price of the options  outstanding at December 31,
1996 was $.18.

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


                                      F-17
<PAGE>



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 pricing model
with the  following  weighted  average  assumptions:  expected  life,  12 months
following  vesting- stock  volatility  100% in 1996 and 1995, risk free interest
rate,  10% in 1996 and in 1995 and no dividends  during the expected  term.  The
Company's  calculations  are based on a multiple option  valuation  approach and
forfeitures  are  recognized  as they occur.  If the computed fair values of the
1995 and 1996 awards had been  amortized to expense  over the vesting  period of
the awards,  pro forma net loss would have been  $1,244,000  ($.22 per share) in
1995 and  $6,842,000  ($1.33  per  share)  in 1996.  The  effects  on pro  forma
disclosures of applying SFAS No. 123 are not likely to be  representative of the
effects on pro forma disclosures of future years.

         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.  This plan was
authorized  by the Company's  stockholders  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
which may be offered to employees under this plan.

J.       Commitments and Contingencies:

         The Company rents its corporate offices under a ten-year non-cancelable
lease. The future minimum rental commitments are as follows:

         Year ending December 31:
                  1997              $353,000
                  1998               353,000
                  1999                29,000


Of  these  future  minimum  rental  payments,  $524,000  has been  accrued  as a
restructuring  charge as of  December  31,  1996,  as a result of the  Company's
intention to relocate its corporate offices in mid-1997.  Rental expense for the
years ended December 31, 1996, 1995 and 1994 amounted to $182,000,  $247,000 and
$287,000, respectively.

         In  connection  with  the  December  1993  amendment  to the  Company's
corporate  office lease,  the Company executed a promissory note in favor of its
landlord, Aetna Casualty and Surety Company, in the principal amount of $796,000
due January 1999. The note, which does not bear interest, will be fully canceled
if the Company fulfills its remaining lease obligations  without default. If the
Company  defaults under the lease,  the note will be accelerated  and a $100,000
security deposit will be forfeited. The note is included in accounts payable and
accrued expenses.

         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 seeks
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, have answered the complaint (denying its


                                      F-18

<PAGE>



allegations), have filed a counterclaim against Chancellor, and have commenced a
third-party action against Brian M. Adley, Vestex Corporation and Vestex Capital
Corporation.  The  counterclaim  alleges 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 seeks
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 seeks 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  the  third-party  complaint,  Chancellor  and  the
third-party defendant have denied the defendants' allegations.

         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  as noted  above  will  have a  material  adverse  impact  on the
Company's consolidated financial position or results of operations.

K.       Major Customers:

         The Company is engaged principally in originating and selling equipment
leasing transactions. 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. During 1995, 41%, 15% and 12% (based on original
equipment  cost) of the new lease  transactions  originated  by the Company were
with the three  largest  lessees.  In addition,  approximately  24%, 17% and 16%
(based on original  equipment  cost) of equipment sold to investors in 1995 were
purchased by the three largest  investors.  During 1994, 36%, 12% and 12% (based
on original equipment cost) of new lease transactions  originated by the Company
were with the three largest lessees. In addition, approximately 27%, 23% and 19%
(based on original  equipment  cost) of equipment sold to investors in 1994 were
purchased by the three largest investors.
[GRAPHIC OMITTED]


L.       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 $19,000, $18,000 and $19,000 in 1996, 1995 and 1994, respectively.

M.       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  exercises  over the  operation  of  TruckScan,  TruckScan's
financial  statements  are  consolidated  with the  financial  statements of the
Company and its other subsidiaries.

         TruckScan  had a  $422,000  loss  from  June 21,  1996 (the date of its
inception)  through  December 31, 1996. The minority  owner's share of this loss
exceeded  its equity by  $211,000.  As a result,  the entire loss of $422,000 is
recognized by the Company. (See Note Q)

N.       Concentration of Credit Risk

         The Company  maintains its cash balances in two banks. The balances are
insured by the  Federal  Deposit  Insurance  Corporation  up to $100,000 by each
bank. As of December 31, 1996,  the uninsured  portion of the cash balances held
at one of the banks was approximately $1,595,000.

O.       Restructuring

         In order to improve the Company's  liquidity,  return to  profitability
and create  growth  opportunities,  management  initiated a plan during the year
ended


                                      F-19

<PAGE>



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 subsequent
to December  31, 1996 as described  in Note G. 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.

P.       Related Party Activity

The Company  entered into an agreement  with Vestex,  Inc.,  an affiliate of the
majority stockholder,  whereby Vestex provides specified services related to the
Company's  operations,  equity raising efforts,  financing  activities and other
matters. Under the agreement,  Vestex earns a fee for consummating any equity or
debt transaction that exceeds $2.5 million. The fee related to debt transactions
equals 1.5% 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 expires in June 1997.

During  1996,  Vestex  charged the  Company  fees for  certain  transactions  it
determined were  consummated  during the year and were covered by the agreement.
The Company  disputed a certain  portion of these charges.  The parties  settled
this  dispute by agreeing  that $2.2 million  dollars was  incurred  relating to
services  performed in 1996.  This amount is included in selling,  general,  and
administrative expenses on the consolidated statement of operations.  The entire
amount was unpaid as of December  31,  1996 and is included in accounts  payable
and accrued expenses on the balance sheet. Per the agreement, the payment is due
on demand,  however,  Vestex 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.


In April 1996,  the Company  issued  5,000,000  shares of Series AA  Convertible
Preferred  Stock to Vestex  Capital  Corporation,  an  affiliate of the majority
stockholder for $1,350,000.  In accordance with an agreement between the Company
and Vestex,  Vestex,  Inc. charged a fee equal to $312,500 for  reimbursement of
due diligence,  negotiations, and closing costs related to the transaction. This
amount  was  paid  in full  during  1996  and is  included  in the  consolidated
statement  of  stockholder's  equity as a reduction  of the  additional  paid in
capital.  Additionally,  Vestex  forgave  proposed but  undeclared  dividends of
$1,150,000.

During 1996 the Company's 50% owned  subsidiary,  Truckscan LLC,  entered into a
consulting  agreement with the other 50% owner.  Under the agreement,  the other
50%  owner  provided   consulting  services  on  technical  matters  related  to
Truckscan's product. Truckscan incurred and paid $350,000 during 1996 under this
agreement.  This  amount is included in  selling,  general,  and  administrative
expenses on the consolidated statement of operations.

As of December  31,  1996,  the Company  owes Vestex  Capital  Corporation,  the
majority stockholder, $500,000 under a loan agreement as described in Note G.

Q. Subsequent Events

         On May 19, 1997 the Company  issued a $1.5 million  promissory  note to
the Vice  Chairman  of the Board  which was  guaranteed  by the  Chairman of the
Board. The promissory note bears interest at the prime rate plus 2 1/8% (10 3/8%
at May 19,  1997).  The  Company  is  also  in the  process  of  negotiating  an
additional  $2.5 million loan with a bank and a $2.5 million  warehouse  line of
credit facility with a financing  institution  owned by the Vice Chairman of the
Board.  Although  there can be no  assurance  that such  financing  will  occur,
management is confident  that these  additional  financing  transactions  can be
closed by June 1997.


                                      F-20

<PAGE>


         In February  1997,  the Board of  Directors  approved  the  issuance of
3,000,000 shares of the Company's preferred stock at $.30 per share to Vestex in
consideration  of $900,000 of the $2.2 million of consulting  fees due to Vestex
as of December 31,  1996.  In addition,  during the first  quarter of 1997,  the
Company  received  loans  from VCC of  approximately  $250,000  which are due on
demand.

         In April  1997,  the  Board  of  Directors  approved  the  issuance  of
2,000,000  shares of Common Stock for new management and employees.  Vestex will
contribute  500,000  shares of Common  Stock  that it  currently  owns into this
incentive  program  for a total of  2,500,000  new shares  available  under this
program.

         On May 1, 1997 the Company  sold its 50%  investment  in  Truckscan  to
Telescan a party unrelated to the Company.  In  consideration  for the sale, the
Company received certain assets from Telescan with an estimated value of $35,000
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.


                                      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: May 30, 1997


                                            By: /s/ John J. Powell
                                            John J. Powell
                                            President and Chief Executive
                                            Officer

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



Dated: May 30, 1997                         By: /s/ John J. Powell
                                            John J. Powell
                                            President, Chief Executive
                                            Officer, Principal Financial
                                            Officer and Principal Accounting
                                            Officer

Dated: May 30, 1997                         By: /s/ Brian M. Adley
                                            Brian M. Adley
                                            Chairman of the Board and Director



Dated: May 30, 1997                         By: /s/ Ernest Rolls
                                            Ernest Rolls
                                            Director



Dated: May 30, 1997                         By: /s/ Rudolph Peselman
                                            Rudolph Peselman
                                            Director



Dated: May 30, 1997                         By: /s/ Michael Marchese
                                            Michael Marchese
                                            Director