SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

    Annual report under Section 13 or 15(d) of the Securities Exchange Act of
                1934 for the fiscal year ended December 31, 2001

                             Commission File Number
                                     0-17832

                        Harbourton Financial Corporation
                 (Name of Small Business Issuer in Its Charter)

          Delaware                                 54-1208450
---------------------------------------     ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization


8180 Greensboro Drive, McLean, VA                     22102
---------------------------------------               -----
(Address of principal executive offices)           (Zip Code)


         Issuer's telephone number, including area code: (703) 883-9757

Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value

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

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

Revenues for year ended December 31, 2001 were  $4,307,097

The aggregate market value of 1,665,155 shares of common stock held by non
affiliates as of March 20, 2002 was $ 1,398,720, computed by reference to the
average bid and ask price of $0.84 per share at which the stock was traded on
the OTC Bulletin Board (Symbol: HBTN).

The number of shares outstanding of the issuer's common stock, as of March 20,
2002 was 15,184,164

                      DOCUMENTS INCORPORATED BY REFERENCE.
                  Portions of the Proxy Statement for the 2001
                    Annual Meeting of Stockholders (Part III)

      Transitional Small Business Disclosure Format (check one): Yes _ No X

                                       1

<PAGE>


Part I

This Form 10-KSB may contain certain "forward-looking statements" relating to
the Company (defined in Item 1 below) that represent the Company's current
expectations or beliefs, including, but not limited to, statements concerning
the Company's operations, performance, financial condition and growth. For this
purpose, any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed forward-looking statements. Without limiting the
generality of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "estimate", or "continue", or the negatives or
other variations thereof, or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, such as credit losses, dependence on management and key
personnel, seasonality, and variability of quarterly results, ability of the
Company to continue its growth strategy, competition, and regulatory
restrictions relating to potential new activities, certain of which are beyond
the Company's control. Should one or more of these risks or uncertainties
materialize or should the underlying assumptions prove incorrect, actual
outcomes and results could differ materially from those indicated in the
forward-looking statements.

Item 1.  Description of Business

Business Development

Harbourton Financial Corporation "formerly known as Allstate Financial
Corporation" (the "Company") was formed in 1982 as a Virginia corporation. In
2000, the Company changed its state of incorporation to Delaware and, on
November 30, 2000, acquired Harbourton Financial Corporation ("Harbourton") by
merger. On May 1, 2001, Allstate changed its name to Harbourton Financial
Corporation. The Company is a diversified financial institution principally
providing financing to the residential building and development community, for
residential single-family houses, townhouses, and condominiums. On October 5,
2001, Harbourton Mortgage Investment Corporation ("HMIC") was incorporated in
Delaware as a wholly owned subsidiary of the Company. HMIC commenced
mortgage-banking operations on January 2, 2002 and is headquartered in Santa
Rosa, California. HMIC's primary business consists of originating and purchasing
both conforming and non-conforming mortgage loans and the subsequent sale of
these loans to Freddie Mac ("FHLMC") and the Government National Mortgage
Association ("GNMA") or other investors in the secondary market. Although it is
no longer active in these business lines, the Company has a portfolio of
commercial finance loans to small businesses secured by accounts receivable,
inventory, machinery and equipment. In October 1999, the Company sold its
factoring business, the portion of the business that purchased discounted
invoices with recourse. The Company will continue to receive revenue from this
sale for the foreseeable future, under an agreement with the purchaser to pay
the Company part of the purchaser's net revenue earned from new factoring
activities with the borrowers acquired from the Company. The Company's
subsidiary Lifetime Options, Inc. manages a portfolio of life insurance policies
it purchased from individuals facing life-threatening illnesses. During 1997,
Lifetime Options ceased purchasing policies.

On October 5, 2000, the Company and the holders of its 10% convertible
subordinated notes due September 30, 2003, on which the Company was in default
as to the payment of interest and certain financial covenants, filed a plan of
arrangement with the Delaware Court of Chancery that proposed a conversion of
$4.3 million of notes, together with accrued but unpaid interest calculated at a
rate of 12.5%, into common stock of the Company at a price of $0.95 per share of
common stock (the "Notes Conversion"). The Delaware court approved the Notes
Conversion on October 6, 2000; minor changes were made to the approval order on
October 11, 2000. The conversion of the notes (plus accrued and unpaid interest
thereon) occurred on October 26, 2000. Of the $4.6 million of principal
outstanding on the notes, $4.3 million, together with $579 thousand of accrued
but unpaid interest, was converted into 5,168,388 shares of newly issued common
stock. Value Partners, Ltd. ("Value Partners") held notes with a principal
balance of $4.2 million plus accrued interest, at 12.5%, of $561 thousand, and
received 5,008,481
<PAGE>

                                       2

shares of common stock as a result of the Notes Conversion.
Value Partners owned approximately 27% of the Company's common stock as well as
94% of the Notes before the exchange. As a result of the exchange, Value
Partners owned 74.0% of the Company's common stock. As of that date, Value
Partners acquired a controlling interest in the Company. Holders of the
remaining $266,000 of notes waived default interest and received interest at the
10% note rate on the same day. The remaining holders retained their right to
convert their notes into common stock of the Company at $6.50 per share.

On November 30, 2000, the Company acquired Harbourton. Harbourton had total
assets of $11.9 million and liabilities of $2.7 million at the date of the
merger, giving it net shareholders' equity of $9.2 million. The Company issued
7,516,160 new common shares and paid $2.1 million in cash to Harbourton's
shareholders. Harbourton was merged into the Company and the Company was the
surviving entity. The Company's majority shareholder, Value Partners, was the
holder of 95.7% of Harbourton's common shares and received 7,191,414 shares of
stock and $2 million. Following the merger transaction, Value Partners owned
approximately 84.8% of the Company's common stock.

On October 5, 2001, the Company incorporated HMIC as a wholly owned subsidiary
and provided an initial capital contribution of $1.0 million, consisting of $.25
million of cash and $.75 million of contributed assets. HMIC officially
commenced mortgage-banking operations on January 2, 2002.

Unless the context requires or otherwise permits, all references to the
"Company" include Harbourton Financial Corporation and its wholly owned
subsidiaries.

The Company's corporate offices in McLean, Virginia house its executive offices
and borrower administration activities. Its Hanover, Maryland office is
responsible for accounting and all aspects of servicing and administration of
loans.

Business of Issuer

Principal Products

The Company's primary business is originating loan financing for
builders/developers of residential projects. Typically, a participation in each
loan is sold to another financial institution. The Company originates loans
primarily in its market area of the Mid-Atlantic and Southeastern states
including Maryland, Virginia, District of Columbia, Delaware, Pennsylvania,
North Carolina and Florida.

The primary product offered by the Company is one developed to serve a specific
market niche, a loan for acquisition, development and construction ("AD&C"
loan). In the AD&C loan, the Company provides higher amounts of funding based on
loan to costs than traditional bank lenders. Yields to the Company on the
structure provide returns that may approach those traditionally earned by equity
investments, with control and rights typically held by a first trust lender. The
loan is structured as a revolving credit secured by a first mortgage or deed of
trust and provides funding for land acquisition, development of infrastructure,
and construction of units as necessary. Typically, personal guarantees are also
obtained. The Company relates equity requirements to a percentage of the maximum
outstanding balance of the AD&C loans, with most requiring between 10% and 15%
of the maximum outstanding loan balance as equity at closing. The equity
calculation relates to the Company's established underwriting criteria requiring
a minimum of 10% of total costs funded in equity in the project at all times.
This equity, coupled with restriction on starts of new units ahead of sales of
finished units, minimizes risk found in loans based solely on loan-to-value. The
target customer base is regional builders/developers, usually with production
levels less than $50 million annually, with financial resources to support the
loan request. The Company's AD&C structure allows continued growth for the
builders /developers, with a more efficient use of its own equity or the ability
to spread limited third party equity into multiple projects. Interest rates on
the Company's AD&C loans are

                                       3

<PAGE>

prime based and fees are based upon the committed amount, with the majority
collected at closing. Loan terms range from 12 to 36 months with the average
being 12 months at December 31, 2001.

A companion product to the Company's AD&C financing is mezzanine or "gap" loan
financing in residential for-sale homebuilding and land development projects,
with AD&C financing provided by traditional banking sources. The loan is
structured as a term credit secured by a second mortgage or deed of trust.
Traditionally, financing of this type has been provided by local investors in a
highly fragmented fashion, with the builders/developers forced to raise equity
on an individual transaction basis from investors with little working knowledge
of the business. Careful selection of builder/developer partners and active,
hands-on asset management functions are the key elements of minimizing risk and
investment exposure in this product. In general, the Company seeks "in-fill"
projects (sites situated in established communities) which are less susceptible
to nearby competition and market swings. Builder/developer partners are selected
based on successful records of accomplishment and reputations for integrity and
performance. A key element in project selection is that builder/developer
partners invest at least 5% to 10% of the equity requirement and provide
personal guarantees on bank AD&C debt. The financing by the Company usually is
structured as mezzanine debt in a development entity, subordinate to the first
trust lender providing AD&C financing. Project underwriting entails similar
analysis and asset management functions developed for AD&C lending, with
extensive reporting and performance requirements from the borrowers, which, if
not achieved, trigger additional input and control by the Company.

HMIC originates conforming and non-conforming residential mortgage loans and
subsequently sells these loans to investors in the secondary market. HMIC also
originates residential mortgage loans to individuals who do not typically
qualify for loans from traditional mortgage lenders and subsequently sells these
loans to various investors in the secondary market. As of January 2, 2002, the
date it began mortgage-banking operations, HMIC was licensed in the states of
California, Florida, Nevada and Arizona and is an approved lender for the GNMA
and FHLMC.

The Company's commercial finance products consisted of financing for small
businesses, usually those with annual sales of $1 million to $10 million per
year. Through its offering of advances secured by accounts receivable,
inventory, and machinery and equipment ("Asset-Based Lending" or "ABL"), the
Company provided its borrowers with the ability to expand their working capital
and acquire productive business assets. As a result of the merger transaction,
the Company elected to cease making new loans in the ABL area and to focus on
the residential building and development lending.

During October 1999, the Company sold its portfolio of factoring borrowers. The
Company will receive a premium over time based on an agreement with the
purchaser to pay the Company part of the net revenue earned from new factoring
activities with these borrowers. The Company does not intend to re-enter the
factoring business.

Distribution Methods

The Company relies principally on direct management contacts with prospects for
the origination of new loans. Management has extensive experience in the real
estate industry and has developed relationships with a significant group of
existing and potential borrowers in the Company's markets. The Company achieves
a high degree of repeat transactions with its existing borrowers. Referrals are
also received from professional contacts with attorneys, engineers, and
architects. HMIC has developed and will continue to develop a network of
approved mortgage loan brokers that source loans to HMIC. HMIC utilizes internal
broker account managers to solicit new brokers and provide customer service to
existing brokers.

                                       4

<PAGE>

Competition

The Company, because of its ability to offer customized loan products to
builders/developers, operates in a niche market that is generally served by
private investors. The market for AD&C loans is highly fragmented, with few
sources of capital beyond traditional bank financing available for the Company's
target market of regional builders/developers. The Company achieves a
significant competitive advantage when competing with traditional bank financing
since its AD&C product is designed to be structured to fit the specific needs of
each borrower, including the ability to provide higher amounts of funding based
on loan to costs. The Company competes with many sources of financing, including
traditional bank lenders and private investors. Many of these competitors have
significant financial, marketing and operational resources, and may have access
to capital at lower costs than the Company can obtain.

Sources of Capital

The Company's requirement for capital is a function of the level of its
generation of and investment in receivables. The Company funds this investment
through participations, shareholders' equity, its bank line of credit,
convertible subordinated notes, and internally generated funds. The Company
expects an increase in the cash flow generated from operating activities. The
cash flow is positively impacted by the ability to use the net operating loss
carryforward to offset the payment of income taxes.

The Company sells participation interests in its loans in a structure designed
to provide credit enhancement to participants as well as incentives for the
Company to efficiently service and administer loans. The Company retains an
interest in each loan, with repayment on a pro rata basis with the participant.
Since the interest retained by the Company is subordinate to that of the
participant, the Company assumes the risk of loss up to the amount of the
retained interest in the loan. Each transaction is treated as an individual loan
with no cross collateralization and no blanket subordination. Loan to value to
the participant will range from 50% to 70% after giving consideration to the
Company's subordinated interest. This structure provides the participant with an
investment with reduced risk, and without the cost of origination and servicing.
All loans and subsequent participations are structured to meet the requirements
of applicable law and regulatory guidelines. The Company currently has
participations with four sources including banks and a major non-bank financial
services company. The largest of these facilities is an agreement wherein the
Company may offer up to $55 million in participation interests to the
participant. The Company may seek to establish relationships with new
participants or increase the level of existing agreements.

The Company has available a secured line of credit in the amount of $3.0
million. The facility carries an interest rate equal to the prime rate plus
1.5%, and expires December 31, 2002. The lender has been granted a collateral
security interest in two mezzanine loans having a combined original principal
indebtedness of $4.0 million and a balance at December 31, 2001 of $3.1 million
(net of a participation sold of $839 thousand). In addition, the lender has been
granted a general assignment of the Company's right to all collections from
notes. The loan agreement contains financial covenants of the type usually
required in such an agreement, including a prohibition on the payment of
dividends. The Company may seek to expand this facility on similar terms.

HMIC has available a secured warehouse line of credit in the amount of $12.0
million. The facility is guaranteed by the Company, carries an interest rate
that adjusts to 275 basis points above the greater of one-month LIBOR or 3% per
annum, and has an initial maturity date of August 1, 2002, which is subject to
extension by the lender. HMIC anticipates requesting the lender to increase the
size of the facility and extend the maturity date in the ordinary course of
business. HMIC has granted the lender a security interest in the mortgages
funded through the line. The line contains the normal and customary covenants,
including maintenance of specified levels of net worth, liquidity, restrictions
on new indebtedness and transactions with affiliates and compliance with
applicable laws and regulations.

                                       5

<PAGE>

At December 31, 1999, the Company had $4.6 million of 10% convertible
subordinated notes ("Notes") due September 30, 2003 convertible into common
stock of the Company at $6.50 per share. The notes are unsecured and
subordinated in payment to all other senior debt of the Company. The Company was
in default on the interest payments due December 31, 1999 through September 30,
2000 and on certain financial covenants as well. On October 26, 2000, the
Company converted $4.3 million of the Notes (plus accrued and unpaid interest
thereon calculated at a rate of 12.5%), into common stock of the Company at a
price of $0.95 per share. Of the $4.6 million of principal outstanding on the
Notes, $4.3 million, together with $579 thousand of accrued but unpaid interest,
was converted into 5,168,388 shares of newly issued common stock. Value Partners
held Notes with a principal balance of $4.2 million, plus accrued interest, of
$561 thousand, and received 5,008,481 shares of common stock as a result. As of
that date, Value Partners acquired a controlling interest in the Company.
Holders of the remaining $266,000 of notes waived default interest and received
interest at the 10% note rate on the same day. The remaining holders retained
their right to convert their notes into common stock of the Company at $6.50 per
share. At December 31, 2001, $266 thousand of Notes remained outstanding.

Borrower Base

The Company's borrowers consist of regional and local residential
builders/developers that have established histories of successful project
development and home construction. The borrowers have demonstrated financial
capability with annual sales revenue of $10 to $75 million. The borrowers
actively manage and participate in each of their projects.

The Company's ABL borrowers are small growth and turnaround companies with
annual revenues typically between $.5 million and $5 million. The Company's
borrowers have not typically qualified for traditional bank financing because
they are either too new, too small, undercapitalized (over-leveraged),
unprofitable or otherwise unable to satisfy the requirements of a bank lender.
Accordingly, there is a significant risk of default and borrower failure
inherent in the Company's ABL business. The Company ceased originating ABL loans
in 1999.

The purchased receivables are due primarily from major insurance companies.

The following table indicates the composition of the Company's portfolio, net of
deferred income, by loans receivable and purchased receivables, as of December
31, 2001 and 2000 (Dollars in thousands).
<TABLE>
<CAPTION>

         Composition of the Company's Portfolio (Net of Deferred Income)
         ---------------------------------------------------------------

                                             2001                     2000
                                             ----                     ----
                                     Amount          %         Amount       %
                                     ------          -         ------       -
<S>                                 <C>            <C>        <C>        <C>
Loans receivable                    $14,054         90.3%     $12,838    89.0%
Purchased receivables                 1,518          9.7%       1,589    11.0%
                                    -------        ------     -------    -----
Total portfolio                     $15,572        100.0%     $14,427    100.0%
                                    =======        ======     =======    ======

</TABLE>

                                       6

<PAGE>


The following table indicates the composition of the Company's retained loan
portfolio, net of deferred income, by loan product, as of December 31, 2001 and
2000 (Dollars in thousands).
<TABLE>
<CAPTION>

            Loans Receivable, Net of Deferred Income, by Loan Product
            ---------------------------------------------------------

Loan Product                                           2001                    2000
                                                       ----                    ----
                                                Amount       %          Amount       %
                                                ------       -          ------       -
<S>                                            <C>         <C>         <C>        <C>
Mezzanine                                      $6,779      48.3%       $5,059     39.4%
Acquisition, development and construction       6,582      46.8%        6,516     50.8%
Asset-based                                       583       4.1%        1,146      8.9%
Other                                             110        .8%          117      0.9%
                                              -------     ------      -------     -----
All products                                  $14,054     100.0%      $12,838     100.0%
                                              =======     ======      =======     ======

</TABLE>

The following table indicates the composition of the Company's retained loan
portfolio, net of deferred income, by type of borrower business as of December
31, 2001 and 2000 (Dollars in thousands).
<TABLE>
<CAPTION>

         Loans Receivable, net of Deferred Income, by Borrower Business

Business of Borrower             2001                   2000
                                 ----                   ----
                          Amount       %         Amount        %
                          ------       -         ------        -
<S>                      <C>         <C>        <C>         <C>
Builders/developers      $13,361     95.1%      $11,575      90.2%
Apparel manufacturer           -      0.0%            2       0.0%
Construction supply          412      2.9%          464       3.5%
Food distributor               9      0.1%           34       0.3%
Printing, direct mail          -      0.0%          126       1.0%
Trucking                       -      0.0%          151       1.2%
Video distributor            162      1.1%          369       2.9%
Other                        110      0.8%          117       0.9%
                         -------    ------      -------     ------
                Totals   $14,054    100.0%      $12,838     100.0%
                         =======    ======      =======     ======
</TABLE>

The following table indicates the composition of the Company's retained loan
portfolio, net of deferred income, by state of the borrower's operation, as of
December 31, 2001 and 2000 (Dollars in thousands).
<TABLE>
<CAPTION>

    Loans Receivable, net of Deferred Income, by State of Borrower Operation
    ------------------------------------------------------------------------

                              2001                           2000
                              ----                           ----
State                 Amount           %             Amount            %
-----                 ------          ---            ------           ---
<S>                   <C>           <C>             <C>             <C>
North Carolina        $5,307         37.8%           $3,188          24.8%
Florida                3,218         22.9%            4,420          34.4%
Virginia               3,187         22.7%            1,594          12.4%
Maryland               1,649         11.7%            2,373          18.5%
New Jersey               412          2.9%              617           4.8%
California               162          1.2%              369           2.9%
Wisconsin                110          0.8%              117           0.9%
New York                   9          0.0%               84           0.7%
Delaware                   -          0.0%               76           0.6%
                     -------         -----         --------         ------
            Total    $14,054         100.0%         $12,838         100.0%
                     =======         ======        ========         ======
</TABLE>

                                       7

<PAGE>

From time to time, a single borrower or single industry may account for a
significant portion of the Company's loans receivable. At December 31, 2001,
four borrowers each accounted for more than 10% of loans receivable, net of
deferred income, for a total of 47.7%. At December 31, 2000, four borrowers each
accounted for more than 10% of loans receivable, net of deferred income, for a
total of 61.5%.

For the year ended December 31, 2001, two borrowers accounted for greater than
10% of the Company's total revenue, at 44.8%. These loans were performing at
December 31, 2001. For the year ended December 31, 2000, one borrower accounted
for greater than 10% of the Company's total revenue, at 20.2%.

There is very little turnover among the Company's builder/developer borrowers.
The borrowing relationship is extended because of the term of each transaction
and the Company's ability to maintain a relationship with the borrowers in
subsequent projects.


Government Regulation

State usury laws generally limit the amount of interest that a creditor may
contract for, charge or receive in connection with the lending of money. In
Virginia, where the Company's principal offices are located, there are no
restrictions on the rates of interest and fees that may be charged by the
Company to borrowers.

Employees

As of February 28, 2002, the Company had 29 employees, including 22 employees of
HMIC. None of the Company's employees is a party to any collective bargaining
agreement.

Item 2.  Description of Property

The Company's principal offices occupy approximately 2,400 square feet of space
in an office building in McLean, Virginia. The Company's lease on this property
expires in May 2003. The cost of renting this office space was approximately $88
thousand in 2001. The accounting and loan administration functions of the
Company are housed in Hanover, Maryland, in a leased facility of approximately
1,950 square feet. The lease expires in May 2003. The rent paid on this lease
during 2001 was approximately $41 thousand.

Item 3.  Legal Proceedings

The Company is a party in various routine legal proceedings arising out of its
ordinary course of business, which in the aggregate are believed by management
to be immaterial to the financial condition of the Company.

Item 4.  Submission of Matters to a Vote of Security Holders
Not applicable

Part II

Item 5. Market for Common Equity and Related Stockholder Matters

The Company's common stock is traded on the OTC Bulletin Board (Symbol HBTN).
Before October 18, 1999, the Company's common stock was traded on the Nasdaq
Stock Market.

                                       8

<PAGE>

The following table sets forth the range of high and low bids for the Company's
common stock in the over the counter market for the periods indicated, as
furnished by the National Association of Securities Dealers, Inc. These bids
represent prices among dealers, do not include retail markups, markdowns or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>

                               Fiscal Years Ended December 31,
                            2001                                 2000
                            ----                                 ----
                   High               Low               High               Low
                   ----               ---               ----               ---
<S>                <C>              <C>                <C>               <C>
First Quarter      $1.00             $0.59              $1.31             $0.36
Second Quarter     $0.80             $0.59              $0.81             $0.19
Third Quarter      $0.88             $0.66              $0.75             $0.44
Fourth Quarter     $0.80             $0.67              $0.75             $0.41
</TABLE>


On March 1, 2002, there were approximately 40 stockholders of record based on
information provided by the Company's transfer agent. The number of stockholders
of record does not reflect the actual number of individual or institutional
stockholders of the Company because a significant portion of the Company's stock
is held in street name. Based on the best information made available to the
Company by the transfer agent, there are approximately 530 beneficial holders of
the Company's common stock.

Dividends

The Company has not paid a dividend and does not anticipate paying cash
dividends to holders of its common stock for the foreseeable future. The payment
of dividends is restricted under the Company's line of credit agreement with its
bank. The Company currently intends to retain any earnings for future capital
requirements and growth.

Item 6.  Management's Discussion and Analysis or Plan of Operation

Year ended December 31, 2001 vs. year ended December 31, 2000

Overview

On November 30, 2000, the Company acquired Harbourton, which was merged into the
Company; the Company was the surviving entity. The portion of the net Harbourton
assets acquired from the majority shareholder, Value Partners, was recorded at
historical cost, in a manner similar to a pooling of interests accounting. The
portion of the Harbourton assets acquired from the minority shareholders was
recorded at market value. The financial statements have been restated back to
the date that the two companies came under common control due to the Notes
Conversion. Thus, the operations for the year ending December 31, 2000 include
the results of Harbourton for only the months of November and December 2000. The
results for the year ended December 31, 2001 include the operations of the
merged companies.

The following discussion should be read in conjunction with the accompanying
consolidated financial statements and notes thereto and other information in
this Annual Report on Form 10-KSB. Historical results and trends which might
appear should not be taken as indicative of future operations.

Total assets increased by $2.0 million to $19.7 million at December 31, 2001, or
11.6%, as compared with total assets of $17.6 million at December 31, 2000.
Shareholders' equity increased to $17.2 million at December 31, 2001, an
increase of $2.0 million or 13.9% as compared with $15.1 million as of December
31, 2000.

                                       9

<PAGE>


Total loans receivable (net of deferred fees) increased to $14.1 million at
December 31, 2001 compared to $12.8 million at December 31, 2000, primarily
related to a net increase of the mezzanine loans during the year. The December
31, 2001 balance of asset-based and other loans was $.7 million, vs. $1.3
million at December 31, 2000, a decline of $.6 million due to principal
reductions in the portfolio and the Company's prior decision not to make
additional loans of this type. Purchased receivables, net of deferred income and
allowances, dropped to $1.5 million at December 31, 2001 from $1.6 million at
December 31, 2000, due primarily to the collection of $57 thousand in life
insurance proceeds, with the balance in collections of litigation claims
receivable.

Securities available for sale represents an equity investment in a former
asset-based borrower. The Company acquired the securities in 2000 in partial
settlement of a non-performing loan through the exercise of an option to
purchase the securities for consideration of $4 thousand.

At December 31, 2001 and 2000, the Company had $3.2 million and $3.1 million in
deferred income taxes receivable (net of valuation allowances of $4.4 million
and $5.4 million), respectively. The deferred income taxes represent projected
decreases in taxes payable in future years as a result of carryforwards at the
end of each year. During 1999, the Company established a $9.2 million allowance
against deferred income taxes of the same amount since it appeared to be
unlikely that the Company would realize these tax savings in the near future.
Because of the Harbourton merger, the Company reevaluated its consolidated tax
position and determined that the recovery of at least a portion of the deferred
tax asset was likely. See note 6 to the Financial Statements-Income Taxes in
this Form 10-KSB.

Other assets increased to $167 thousand from $154 thousand, primarily because of
an increase in prepaid expenses and other general business matters.

Total liabilities decreased to $2.4 million at December 31, 2001 from $2.5
million at December 31, 2000.

Total notes payable increased to $1.7 million at December 31, 2001, as compared
to $1.4 million, which was used to fund the increase in loans receivable.

Convertible subordinated notes remained unchanged at $266 thousand at December
31, 2001 and December 31, and 2000.

Accounts payable and accrued expenses decreased to $448 thousand at December 31,
2001 from $794 thousand at December 31, 2000. The decrease is due primarily to a
reduction in the amount of accrued legal and accounting fees that resulted from
the restructure of the Company's Notes and the merger with Harbourton in the
fourth quarter of 2000.

Shareholders' equity increased to $17.2 million at December 31, 2001, an
increase of $2.1 million or 13.9% as compared with $15.1 million as of December
31, 2000. The increase related solely to the net income of the Company during
the year of $2,154,328, including the net positive impact of $649 thousand from
the NOL carryforward, partially offset by the $60 thousand decline in securities
available for sale.

At December 31, 2000, the Company retired 781,212 shares of common stock held in
the treasury. The balance of treasury stock was $0 at December 31, 2000 and
2001.

The statements of operations for the Company report the results of the Company
and Harbourton on a combined basis for the two months ended December 31, 2000
and the twelve months ended December 31, 2001.

                                       10

<PAGE>


The following table breaks down total revenue by type of transaction for the
periods indicated and the percentage relationship of each type of transaction to
total revenue (Dollars in thousands).
<TABLE>
<CAPTION>

                                                                 Revenue by Type of Transaction
                                                                 For the Years Ended December 31,
                                                                 --------------------------------
                                                                2001                         2000
                                                                ----                         ----
                                                       Amount             %          Amount         %
                                                       ------             -          ------         -
<S>                                                    <C>               <C>          <C>          <C>
Interest, discount, and loan fees                      $2,332            54.2%        $ 775        52.9%
Administrative, inspection  fees and other revenue      1,746            40.5%          644        44.0%
Profit participations                                     229             5.3%           46         3.1%
                                                        -----           ------       ------        -----
Total revenue                                          $4,307           100.0%       $1,465        100.0%
                                                       ======           ======       ======        ======
</TABLE>

Total revenue increased by 194% in 2001 versus 2000, to $4.3 million from $1.5
million. The increase is principally due to the impact of the acquisition of
Harbourton Financial Corp. by the Company in 2000 and the inclusion of the full
year's revenues in 2001, as compared to only two months of revenues in 2000.

Within total revenue, interest, discounts, and loan fees increased 200.9%, to
$2.3 million from $775 thousand, in 2001 as compared to 2000. The Company sold
its factoring portfolio in October 1999, and reduced its asset-based loan
portfolio in 2000 to pay down senior debt. Administrative fees and other revenue
increased by 171.1% to $1.7 million from $644 thousand. Included in other
revenue during 2001 was a one time gain from the sale of intellectual property
by the Company. Administrative fees, along with project profits, are an
important component of the Company's revenue stream from its residential
building and development lending. Profit participations increased 397.8% to $229
thousand from $46 thousand.

HMIC
The results of operations for the Company include $205 thousand of interest and
other revenue from HMIC operations and $148 thousand of compensation and
administrative expense. The revenue includes a one-time gain from a management
services arrangement. Management anticipates HMIC will report negative results
of operation for the first part of 2002.

The following table sets forth certain items of expense for the periods
indicated and the percentage relationship of each item to total expenses in the
period (Dollars in thousands).
<TABLE>
<CAPTION>

              Expense Categories as a Percentage of Total Expenses

                                                          For the Years Ended December 31,
                                                          --------------------------------
                                                        2001                               2000
                                                        ----                               ----
                Type of Expense               Amount             %              Amount             %
                ---------------               ------             -              ------             -
<S>                                           <C>               <C>             <C>              <C>
Compensation and fringe benefits              $1,292            57.1%            $ 727           44.0%
General and administrative                       856            37.9%            1,169           70.8%
Interest expense                                 114             5.0%              594           36.0%
Provision for credit losses (Recoveries)           0             0.0%             (839)         -50.8%
                                             -------           ------           ------          ------
Total expenses                                $2,262           100.0%           $1,651          100.0%
                                             =======           ======           ======          ======
</TABLE>


Total expenses increased $611 thousand, or 37%. Compensation and fringe benefits
increased $565 thousand, or 77.7%. These increases are principally attributable
to the inclusion of the full twelve months of operations for the merged
companies as compared to only two months the period ended December 31, 2000.
General and administrative expense, in total, decreased $313 thousand, or 26.8%,
principally related to a decrease in professional fees, directors fees and
depreciation associated with the Company's restructure in October of 2000.

                                       11

<PAGE>

Interest expense decreased $480 thousand, or 80.8%, which was primarily
attributable to the conversion of the 10% convertible notes on October 26, 2000
to common equity and the repayment of the convertible notes due September 30,
2000.

The following chart details activity in the Company's allowance for losses for
the years ending December 31, 2001 and 2000 (Dollars in thousands).

                 Allowance for Losses
                 --------------------

Balance December 31, 1999                $4,317
                                         ------
Provision for credit recoveries            (839)
Charge-offs                              (3,661)
Recoveries                                  736
                                          -----
Balance December 31, 2000                   553
                                          -----
Charge-offs                                 (12)
Recoveries                                   80
                                          -----
Balance December 31, 2001                 $ 621
                                          =====

During the year ended December 31, 2001, the Company charged-off $12 thousand in
purchased receivables. Recoveries totaled $80 thousand, principally related to
the receipt of the insurance proceeds from a client in the LOI portfolio,
recovering an amount previously charged off. At December 31, 2001, the allowance
for losses on retained loans, net of the amount allocated to non-performing
accounts, was $274 thousand. This represents 1.9% of the retained loan portfolio
at December 31, 2001, as compared to 2.7% of the retained portfolio at December
31, 2000. The Company believes that the allowance for credit losses is adequate
in light of the risks inherent in the portfolio at year-end 2001.

In 2000, the Company charged-off $3.7 million directly attributable to the prior
Allstate business, while recovering $736 thousand. The recoveries related
primarily to borrowers that filed bankruptcy in 1998.

Liquidity and Capital Resources

The Company's requirement for capital is a function of the level of its
generation of and investment in receivables. The Company funds this generation
and investment through participations, shareholders' equity, bank lines of
credit, convertible subordinated notes, and internally generated funds. The
Company believes its internal and external sources of liquidity are adequate.

The Company sells participation interests in its loans in a structure designed
to provide credit enhancement to participants as well as incentives for the
Company to efficiently service and administer loans. The Company retains an
interest in the loans, with repayment on a pro rata basis with the participant.
In the event of borrower default, repayment is subordinate to the participant.
Each transaction is treated as an individual loan with no cross
collateralization and no blanket subordination. The Company currently has
participations with four sources including banks and a major nonbank financial
services company. The largest of these facilities is an agreement with
Residential Funding Corporation ("RFC,") a subsidiary of General Motors
Acceptance Corporation, wherein the Company may offer up to $55 million in
participation interests to RFC. The Company may seek to establish relationships
with new participants or increase the level of existing agreements.

                                       12

<PAGE>


At December 31, 2001, the Company has available a secured line of credit for
$3.0 million. The facility carries an interest rate of the lender's prime rate
plus a premium, and expires December 31, 2002. The lender has been granted a
collateral security interest in two mezzanine loans having a combined original
principal indebtedness of $4.0 million and a balance at December 31, 2001 of
$3.1 million (net of participation sold of $839 thousand). In addition, the
lender has been granted a general assignment of the Company's right to all
collections from notes. The loan agreement contains financial covenants of the
type usually required in such an agreement, including a prohibition on the
payment of dividends. The Company may seek to expand this facility on similar
terms.

HMIC has available a secured warehouse line of credit in the amount of $12.0
million. The facility is guaranteed by the Company, carries an interest rate
that adjusts to 275 basis points above the greater of one-month LIBOR or 3% per
annum, and has an initial maturity date of August 1, 2002, which is subject to
extension by the lender. HMIC anticipates it will request the lender to increase
the size of the facility and extend the maturity date in the ordinary course of
business. HMIC has granted the lender a security interest in the mortgages
funded through the line. The line contains the normal and customary covenants,
including maintaince of specified levels of net worth, liquidity, restrictions
on new indebtedness and transactions with affiliates, and compliance with
applicable laws and regulations. HMIC will use the warehouse line of credit to
fund the mortgage loans originated or purchased, and then sell the loans to
secondary market investors, at which time the lender will be repaid.

As of December 31, 1999, the Company had two issues of convertible subordinated
notes outstanding of $5.0 million. The first issue was due September 30, 2000,
convertible into common stock of the Company at $7.50 per share and bearing an
adjustable interest rate equal to the prime rate plus 1.25% outstanding, with an
aggregate principal balance of $357 thousand. The entire amount of these notes
was paid at maturity on September 30, 2000.

The second issue was $4.6 million of 10% notes due September 30, 2003
convertible into common stock of the Company at $6.50 per share. The notes are
unsecured and subordinate in payment to all other senior debt of the Company.
The Company was in default on the interest payments due December 31, 1999
through September 30, 2000 and on certain financial covenants as well. On
October 26, 2000, the Company converted $4.3 million of the notes (plus accrued
and unpaid interest thereon calculated at a rate of 12.5%), into common stock of
the Company at a price of $0.95 per share. Of the $4.6 million of principal
outstanding on the Notes, $4.3 million, together with $579 thousand of accrued
but unpaid interest, was converted into 5,168,388 shares of newly issued common
stock. Value Partners held notes with a principal balance of $4.2 million, plus
accrued interest of $561 thousand, and received 5,008,481 shares of common stock
as a result. As of that date, Value Partners acquired a controlling interest in
the Company. Holders of the remaining $266,000 of notes waived default interest
and received interest at the 10% note rate on the same day. The remaining
holders retained their right to convert their notes into common stock of the
Company at $6.50 per share. At December 31, 2001, $266 thousand of notes
remained outstanding.

The Company expended a nominal amount on furniture, fixtures and equipment in
2001 and 2000, respectively, principally in connection with upgrades to computer
equipment and software and office equipment. The Company funded such
expenditures from internally generated funds or borrowings under its line of
credit. The Company does not believe it will need to further enhance its
management information systems in the near future.

HMIC received as part of a management services contract to assist in the
liquidation of an unrelated mortgage banking company, significant furniture,
equipment and software to initiate its mortgage banking operations in November
2001.

                                       13

<PAGE>


Impact of Inflation

Management believes that inflation has not had a material effect on the
Company's income, expenses or liquidity during the past two years. The Company's
loans bear interest at primarily floating (prime base) rates. Its line of credit
also bears interest at a floating prime based rate. The convertible subordinated
notes bear a fixed rate of interest and the balance of the Company's funds are
derived from equity. Therefore, an environment of falling interest rates could
have adverse affects on the Company's net interest spread.

Item 7.  Financial Statements

See pages 17 to 35.

Item 8.  Changes In And Disagreements With Accountants On Accounting And
         Financial Disclosure

Not Applicable

Part III

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

A definitive proxy statement is expected to be filed with the Securities and
Exchange Commission within 120 days of December 31, 2001. The information
required by this item will be set forth under the caption "Election of
Directors", under the caption "Executive Officers" and under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive
proxy statement, which information is incorporated herein by reference thereto.

Item 10.  Executive Compensation

The information required by this item will be set forth under the caption
"Executive Compensation" in the definitive proxy statement, which information is
incorporated herein by reference thereto.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

The information required by this item will be set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
definitive proxy statement, which information is incorporated herein by
reference thereto.

Item 12.  Certain Relationships and Related Transactions

This information required by this item will be set forth under the caption
"Certain Transactions" in the definitive proxy statement, which information is
incorporated herein by reference thereto.

                                       14

<PAGE>


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

(a) The following documents are filed herewith or incorporated by reference:

1.        Financial Statements:

The following financial statements are submitted for the Company:

Financial Statements as of December 31, 2001 and 2000, and for the Years Ended
December 31, 2001 and 2000, together with Auditors' Report
<TABLE>
<CAPTION>

                                                                                                   Page Number
<S>                                                                                                    <C>
Independent Auditors' Reports on Consolidated Financial Statements and Schedules........................17
Consolidated Balance Sheets.............................................................................18
Consolidated Statements of Operations...................................................................19
Consolidated Statements of Comprehensive Income.........................................................19
Consolidated Statements of Shareholders' Equity.........................................................20
Consolidated Statements of Cash Flows...................................................................21
Consolidated Statements of Cash Flows (continued).......................................................22
Notes to Consolidated Financial Statements..............................................................23
</TABLE>

2.  Financial Statement Schedules

The following financial statement schedule is filed as part of this report:
                           Page Number

Schedule IV Indebtedness to Related parties
 for the years ended December 31, 2001 and 2000............35

Schedules other than those listed above have been omitted since they are either
not required or the information is included elsewhere in the financial
statements or notes thereto.

3         Exhibits
     The following exhibits are filed as part of this Form 10-KSB, and this list
includes the Exhibit Index.

 3.1      Certificate of Incorporation of the Company as filed with the State
          of Delaware on July 7, 2000, incorporated by reference to the
          Company's Definitive Proxy Statement Filed July 11, 2000.

3.2       Amended and restated bylaws of the Company as adopted by the board of
          directors on September 12, 2000, incorporated by reference to the
          Company's Form 10-KSB filed April 2, 2001.

4.1       Restrictions on reverse side of common stock certificate, incorporated
          by reference to the Company's Form 10-KSB filed April 2, 2001.

10.1      Participation Agreement by and between Harbourton Residential Capital
          Co., L.P. and Residential Funding Corporation dated as of February 23,
          1996 and as amended, incorporated by reference to the Company's Form
          10-KSB filed April 2, 2001.

                                       15
<PAGE>


10.2      Credit and Security Agreement between Greater Atlantic Bank and
          Harbourton Financial Corp. dated May 11, 2000 and as amended,
          incorporated by reference to the Company's Form 10-KSB filed April 2,
          2001.

10.3      Amendment to the Credit and Security Agreement between Greater
          Atlantic Bank and Harbourton Financial Corp. dated June 21, 2001.

10.4      2000 Restricted Stock Plan for Non-Employee Directors incorporated by
          reference to the Company's Definitive Proxy Statement Filed July 11,
          2000.

10.5      Harbourton Financial Corporation 2000 Stock Option Plan incorporated
          by reference to the Company's Definitive Proxy Statement Filed July
          11, 2000.

10.6      Agreement and Plan of Merger dated as of October 24, 2000, by and
          between Harbourton Financial Corporation and Harbourton Financial
          Corporation, incorporated by reference to the Company's Definitive
          Information Statement Filed November 9, 2000.

10.7      Employment Agreement dated October 24, 2000 with J. Kenneth McLendon,
          incorporated by reference to the Company's Form 10-KSB filed April 2,
          2001.

10.8      Employment Agreement dated October 24, 2000 with James M. Cluett,
          incorporated by reference to the Company's Form 10-KSB filed April 2,
          2001.

10.9      Employment and Compensation Agreement dated September 1, 1998 with C.
          Fred Jackson incorporated by reference to the Company's filing on
          Form 10-QSB for the quarter ended September 30, 1998.

10.10     Amendment dated January 10, 2001 to Employment and Compensation
          Agreement dated September 1, 1998 with C. Fred Jackson, terminating
          the Agreement effective January 10, 2002, incorporated by reference to
          the Company's Form 10-KSB filed April 2, 2001.


21.1      Subsidiaries of the Registrant


  (b)     Reports on Form 8-K

          The Company did not file any reports on Form 8-K during the quarter
          ended December 31, 2001.


99.1      Confirmation of receipt from Arthur Andersen LLP a letter, dated
          March 28, 2001, providing certain representations pertaining to the
          audit,.

                                       16

<PAGE>


  Letterhead of Arthur Andersen LLP




To the Board of Directors of
Harbourton Financial Corporation:


We have audited the accompanying consolidated balance sheets of Harbourton
Financial Corporation and subsidiaries (a Delaware Corporation, the "Company")
as of December 31, 2001 and 2000, and the related consolidated statements of
operations, comprehensive income, shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harbourton Financial
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.


Arthur Andersen LLP
Vienna, Virginia

February 1, 2002

                                       17

<PAGE>


                Harbourton Financial Corporation and Subsidiaries
                           Consolidated Balance Sheets

                                                           December 31,
                                                      2001             2000
                                                  -----------       ----------
Assets
Cash and cash equivalents                         $ 1,199,924        $ 447,184
Loans receivable, net                              13,426,318       12,199,912
Purchased receivables, net                          1,518,454        1,575,969
Securities available for sale                              16           60,000
Deferred income taxes, net                          3,151,157        3,126,714
Furniture, fixtures and equipment, net                191,277           55,617
Other assets                                          167,724          154,328
                                                  -----------      -----------
Total assets                                      $19,654,870      $17,619,724
                                                  ===========      ===========
Liabilities and shareholders' equity
Liabilities
Notes payable                                      $1,725,000       $1,420,000
Convertible subordinated notes                        266,000          266,000
Accounts payable and accrued expenses                 448,236          793,867
Income taxes payable                                    5,622           24,189
                                                  -----------       ----------
Total liabilities                                   2,444,858        2,504,056
                                                  -----------       ----------
Shareholders' equity:


Common stock, $.01 par value, authorized
 20,000,000 shares; 15,184,164 issued and
 outstanding at December 31, 2001
 and December 31, 2000                                151,841          151,841

Additional paid-in-capital                         24,612,674       24,612,674
Accumulated deficit                                (7,550,519)      (9,704,847)
Accumulated other comprehensive income:
 unrealized (loss) gain on  investment securities      (3,984)          56,000
                                                   ----------       ----------

Total shareholders' equity                         17,210,012       15,115,668
                                                   ----------       ----------

Total liabilities and shareholders' equity        $19,654,870      $17,619,724
                                                  ===========      ===========

                 See Notes to Consolidated Financial Statements

                                       18

<PAGE>

                Harbourton Financial Corporation and Subsidiaries
                      Consolidated Statements of Operations


                                                      Years Ended December 31,
                                                      2001              2000
                                                   ----------       ----------
Revenues
Interest, discounts, and loan fees                 $2,332,097         $774,399
Loan administration fees and other revenue          1,746,040          644,327
Profit participations                                 228,960           46,389
                                                   ----------        ---------
Total Revenues                                      4,307,097        1,465,115
                                                   ----------        ---------
Expenses
Compensation and fringe benefits                    1,291,528          727,113
General and administrative                            856,356        1,168,823
Interest expense                                      113,878          594,128
Provision for credit recoveries                             -         (839,319)
                                                   ----------        ---------
Total Expenses                                      2,261,762        1,650,745
                                                   ----------        ---------
Income (loss) before income tax benefit             2,045,335         (185,630)
Income tax benefit                                   (108,993)      (3,031,311)
                                                   ----------       ----------
Net income                                         $2,154,328       $2,845,681
                                                   ==========       ==========
Net income per common share
Basic and  diluted                                   $   0.14          $  0.62
                                                   ==========       ==========
Weighted average number of shares outstanding

Basic and  diluted                                 15,184,164        4,569,949
                                                   ==========        =========




                Harbourton Financial Corporation and Subsidiaries
                 Consolidated Statements of Comprehensive Income

                                                     Years Ended December 31,
                                                      2001             2000
                                                   ----------       ----------
Net income                                         $2,154,328       $2,845,681
Other comprehensive income:
Unrealized (loss) gain
 on securities available for sale                     (59,984)          56,000
                                                    ---------       ----------
Comprehensive income                               $2,094,344       $2,901,681
                                                   ==========       ==========

                 See Notes to Consolidated Financial Statements

                                       19

<PAGE>

<TABLE>
<CAPTION>
                Harbourton Financial Corporation and Subsidiaries
                 Consolidated Statements of Shareholders' Equity


                                                                                   Retained      Accumulated
                                                      Additional                   Earnings      Other
                                            Common    Paid-in-      Treasury       (Accumulated  Comprehensive
                                             Stock    Capital       Stock          Deficit)      Income                Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>        <C>            <C>           <C>                   <C>         <C>
Balance-December 31, 1999                  $40,000   $18,874,182   $(4,967,472)    $(13,604,281)           -          $ 342,429
Amortization of treasury
 stock acquisition costs                         -             -        13,449                -            -             13,449

Unrealized gains on investment securities        -             -             -                -       56,000             56,000
Issuance of restricted stock                     -        89,250             -                -            -             89,250
Conversion of no par value Virginia
 shares to $.01 par value Delaware shares   (7,192)        7,192             -                -            -                  -

Issuance of 5,168,388 shares in exchange
 for convertible subordinated notes         51,684     4,688,415             -                -            -          4,740,099

Issuance of 7,516,160 shares
 in exchange for common
 stock of Harbourton Financial Corp.        75,161     7,931,878             -        1,053,753            -          9,060,792

Return of capital                                -    (2,024,220)            -                -            -        (2,024,220)
Retirement of 781,212
 shares of treasury stock                   (7,812)   (4,954,023)    4,954,023                -            -            (7,812)
Net income                                       -             -             -        2,845,681            -          2,845,681
-------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 2000                  151,841    24,612,674             -       (9,704,847)      56,000         15,115,668

Unrealized gains
 on investment securities                        -             -             -                -      (59,984)          (59,984)
Net income                                       -             -             -        2,154,328            -          2,154,328
-------------------------------------------------------------------------------------------------------------------------------

Balance-December 31, 2001                 $151,841   $24,612,674         $   -      ($7,550,519)     ($3,984)       $17,210,012
===============================================================================================================================

                 See Notes to Consolidated Financial Statements
</TABLE>

                                       20

<PAGE>

<TABLE>
<CAPTION>

                Harbourton Financial Corporation and Subsidiaries
                      Consolidated Statements of Cash Flows

                                                                      Years Ended December 31,
                                                                       2001            2000
-----------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                                 <C>               <C>
Net income                                                          $2,154,328       $2,845,681
Adjustments to reconcile net income
 to  net cash provided by (used in) operating activities:
Depreciation                                                            39,777          109,317
Contributed property, for management services                         (166,351)               -
Gain on disposition of furniture, fixtures, and equipment                    -           (5,988)
Amortization of valuation allowance                                    (90,588)          (7,547)
Provision for credit recoveries                                              -         (839,319)
Deferred income taxes                                                  (24,443)      (3,126,714)
Changes in operating assets and liabilities:
(Increase) decrease in other assets                                    (13,396)          27,599
(Decrease) increase in accounts payable and accrued expenses          (345,631)         109,112
Decrease in income taxes receivable                                          -          (81,051)
(Decrease) increase in income taxes payable                            (18,567)          24,189
                                                                     ---------        ---------
Net cash provided by (used in ) operating activities                 1,535,129         (944,721)
                                                                     ---------        ---------

Cash flows from investing activities:
Changes in receivables, net                                         (1,158,653)       3,669,520
Recoveries of charged off assets, net                                   80,350          736,448
Purchase of securities held for sale                                         -           (4,000)
Purchase (sale) of furniture, fixtures and equipment                    (9,086)           4,101
Payment for stock of HFC, net of cash acquired                               -       (1,517,457)
                                                                    ----------       ----------
Net cash (used in)  provided by  investing activities               (1,087,389)       2,888,612
                                                                    ----------       ----------

Cash flows from financing activities:
Principal borrowings (payments) on lines of credit, net                305,000       (1,286,051)
Principal payments on  convertible subordinated notes                        -         (357,000)
Treasury stock acquisition costs                                             -           13,449
Interest paid in note conversion transaction                                 -          (28,448)
Expenses of note conversion transaction                                      -         (192,619)
                                                                    ----------       ----------
Net cash provided by (used in) financing activities                    305,000       (1,850,669)
                                                                    ----------       ----------

Net increase in cash                                                   752,740           93,222

Cash, beginning of period                                              447,184          353,962
                                                                    ----------       ----------
Cash, end of period                                                 $1,199,924        $ 447,184
                                                                    ==========       ==========

Supplemental disclosure of cashflow information:
     Cash paid for interest                                          $ 131,667         $ 98,953
                                                                     ---------         --------
     Cash paid for income taxes                                      $       -         $152,265
                                                                     ---------         --------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       21

<PAGE>


<TABLE>
<CAPTION>

                Harbourton Financial Corporation and Subsidiaries
                Consolidated Statements of Cash Flows (continued)

                                                                       Years Ended December 31,
                                                                        2001            2000
-----------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>
Supplemental schedule of noncash activities
Conversion of convertible subordinated notes to common stock           $     -       $4,740,099
                                                                       -------      -----------
Issuance of common stock as directors' fees                            $     -        $  89,250
                                                                       -------      -----------
Issuance of common stock in
 payment for stock of Harbourton Financial Corp.                       $     -      $ 7,036,572
                                                                       -------      -----------
Unrealized (loss) gain on securities available
 for sale received in setlement of non-performing advance            $ (59,984)        $ 56,000

                 See Notes to Consolidated Financial Statements
-----------------------------------------------------------------------------------------------
</TABLE>

                                       22

<PAGE>



                Harbourton Financial Corporation and Subsidiaries


Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001 and 2000

1. Summary of Significant Accounting Policies:

A. General
The accounting and reporting policies of Harbourton Financial Corporation and
its subsidiaries (collectively, the "Company") conform to accounting principles
generally accepted in the United States ("GAAP") and general practices within
the financial services industry. Those policies that materially affect the
determination of financial position, results of operations, and cash flows are
summarized below.

B. Background
Harbourton Financial Corporation "formerly known as Allstate Financial
Corporation" was formed in 1982 as a Virginia corporation. In 2000, the Company
changed its state of incorporation to Delaware and, on November 30, 2000,
acquired Harbourton Financial Corporation ("Harbourton") by merger. On May 1,
2001, Allstate changed its name to Harbourton Financial Corporation. The Company
is a diversified financial institution principally providing financing to the
residential building and development community, for residential single-family
houses, townhouses, and condominiums. On October 5, 2001, Harbourton Mortgage
Investment Corporation ("HMIC") was incorporated in Delaware as a wholly owned
subsidiary of the Company.

C. Use of Estimates
In preparing its financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
from those estimates. In the normal course of business, the Company encounters
economic risk. Economic risk is comprised of interest rate risk, credit risk,
and market risk. Interest rate risk is the risk that unfavorable discrepancies
will occur between the rates of interest earned by the Company on its receivable
portfolio and its costs of borrowing funds in the market. Credit risk is the
risk of default on the Company's loan and purchased receivable portfolios that
results from the borrowers' inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value of collateral
underlying loans and purchased receivables and the valuation of the Company's
owned real estate, if any.

The determinations of allowances for credit losses and valuation allowances are
based on estimates that are susceptible to significant changes in the economic
environment and market conditions. Management believes that, as of December 31,
2001, the allowances are adequate based on the information currently available.
A worsening in the state of the general economy or a protracted economic decline
could increase the likelihood of additional losses due to credit and market
risks.

D. Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Harbourton Mortgage Investment Corporation,
Lifetime Options Inc., Settlement Solutions Inc. and Receivable Financing
Corporation, after elimination of all material intercompany transactions. See
Note 8.

E. Loans Receivable/ / Allowances for Credit Losses/ Purchased Receivables
When any receivable becomes doubtful as to collection of interest or discount
income, the account is placed on non performing status and, in accordance with
the Financial Accounting Standards Board ("FASB")

                                       23
<PAGE>

Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure, is
considered by management to be "impaired". When a receivable becomes non
performing, the Company discontinues the accrual of earnings for financial
statement purposes. If the Company determines that it is not likely to recover,
from any source, the amount of its initial advance and the earned but unpaid
interest or discount thereon, then the Company increases the allowance for
credit losses or reduces the carrying value of the non performing receivable to
its estimated fair value and makes a charge to the allowance for credit losses
in an amount equal to the difference between the Company's investment in the non
performing receivable and its estimated fair value.

Allowances for credit losses are maintained at a level that, in management's
judgment, is sufficient to absorb losses inherent in the respective portfolios.
Factors considered in the establishment of the allowances include management's
evaluation of the adequacy of underlying collateral, historical loss experience,
expectations of future economic conditions and their impact on particular
industries and individual borrowers, and other discretionary factors. The
allowances for credit losses are based on estimates, and ultimate losses may
vary from the current estimates. These estimates are reviewed quarterly and, as
adjustments become necessary, the effects of the changes are included in the
statement of operations in the period in which they become known.

Purchased receivables consist of litigation claims and life insurance policies,
which have been purchased without recourse to the seller. Litigation claims are
stated at the agreed amount of the settlement assigned to the Company, net of
unearned discounts and an allowance for credit losses. Life insurance policies
are stated at the policy amount net of a valuation allowance based on
management's estimate of the discounted present value of the policies. The
valuation allowance is adjusted based upon actual policy collections and changes
in management's estimates of the timing of future collections. Because most of
the purchased life insurance policies are underwritten by highly-rated insurance
companies (and, in many cases, backed by state guaranty funds), management has
not provided an allowance for credit losses.

Loans are fully charged-off against the allowance for credit losses when the
Company has exhausted its efforts against the borrower, guarantors, other third
parties and any additional collateral retained by the Company.

F. Securities available for sale
Securities available for sale are reported at fair market value, with unrealized
gains and losses excluded from earnings and reported in a separate component of
shareholders' equity.

G. Revenues

i.    Interest, Discounts, and Loan Fees

The Company receives two forms of interest income, current and deferred. The
current portion is recognized in income monthly based on the outstanding amount
of the investment in the loan at a market rate of interest. In addition, on
certain loans, the Company is entitled to an additional deferred return based on
the outstanding amount of the investment in the loan times the deferred rate.
The deferred return is recognized in income on a pro rata basis as the borrower
conveys title to each third party purchaser. Loan fees and certain direct loan
origination costs related to retained interests are deferred and recognized over
the life of the loan on a straight-line basis. Loan fees received and certain
direct loan origination costs allocated to the participation interest sold are
deferred and recognized as advances are made to borrowers and funded by the
participants.
                                       24

<PAGE>


ii.   Loan Administration Fees and Other Revenue

Loan administration fees are received from certain borrowers on a monthly basis
or as the borrower conveys title to third party purchasers, and are recognized
as earned.

The Company receives a fee from the purchaser of the Company's previous
factoring portfolio. The amounts due the Company are calculated by the purchaser
as a percentage of the purchaser's adjusted net revenues on the factoring
accounts purchased.

iii.  Profit Participations

In certain lending arrangements, the Company is entitled to a percentage share
of underlying project profits in addition to interest and fees. The Company
recognizes this income as the borrower conveys title to third party purchasers.

H.    Furniture, Fixtures and Equipment

Furniture, fixtures, and equipment are recorded at cost. Major additions are
capitalized while routine replacements, maintenance and repairs are charged to
expense. Depreciation is computed using the straight-line method over estimated
useful lives of the assets ranging from 3 to 7 years. The cost and accumulated
depreciation for the property and equipment retired, sold, or otherwise disposed
of are removed from the accounts, and any resulting gains or losses are
reflected in income.

I.    Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, the Company considers cash and
overnight investments with an original maturity of 90
days or less to be cash and cash equivalents.

J.    Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amount of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.


2.    Receivables:

A.    Loans

The Company originates loans to builders/developers and, in certain instances,
sells a participation interest in those loans. The participant is required to
fund advances on these loans based upon its participation interest and the
Company funds the remainder. The interest retained by the Company is subordinate
to that of the participant, such that the Company assumes the risk for any
credit losses up to the amount of the retained interest in the loan. Currently,
the Company has participation agreements with four entities. The Company passes
through interest to the participants based on their participation interest
amounts. The Company's participations in asset based loans require monthly
amortization.

                                       25

<PAGE>

The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The statement requires transferred financial
assets to be accounted for on a financial-component basis. After a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
The transferor has surrendered control over transferred assets if and only if
the transferred assets have been isolated from the transferor, the transferee
obtains the right to pledge or exchange the transferred assets, and the
transferor does not maintain effective control over the transferred assets. Due
to the nature of the financial assets transferred, it is not practical to
estimate the fair value of the residual interest assets, or the fair value of
the liability representing the limited recourse obligation. The Company
recognizes no gain or loss at the time of the transfer.

At December 31, 2001 and 2000, loans receivable, net, comprises the following:

                                                         2001         2000
                                                     -----------   -----------

Loans receivable - gross                             $51,824,734   $55,651,303

Portion sold to participants                         (36,577,307)  (41,833,057)

Deferred interest and fees                            (1,192,984)     (979,971)

Amount allocated from purchase of minority interest       (7,549)      (98,137)

Allowance for  credit losses                            (620,576)     (540,226)
                                                     -----------   -----------

Loans, net                                           $13,426,318   $12,199,912
                                                     ===========   ===========

B.   Purchased Receivables
Subsidiaries of the Company service portfolios of purchased receivables, which
consist of litigation claims and life insurance policies, which have been
purchased without recourse to the seller.

At December 31, 2001 and 2000, purchased receivables, net, is as follows:

                                                         2001          2000
                                                      ----------    ----------
Life insurance policies                               $2,814,868    $2,914,868
                                                      ----------    ----------
Valuation allowance                                   (1,336,560)   (1,386,045)
                                                      ----------     ---------
Life insurance policies, net                           1,478,308     1,528,823
                                                      ----------     ---------
Litigation claims, net of unearned discount               40,146        59,872
                                                      ----------     ---------
Allowance for credit losses                                    -       (12,726)
                                                      ----------     ---------

Litigation claims, net                                    40,146        47,146
                                                      ----------     ---------

Total purchased receivables,  net                     $1,518,454    $1,575,969
                                                      ==========    ==========

                                       26
<PAGE>


C.  Allowance for Losses
Activity in the allowance for losses accounts for the years ending December 31,
2001 and 2000 was as follows:

                                                          2001          2000
                                                       ---------    ----------
Beginning Balance                                      $ 552,954    $4,316,399
Provision for credit recoveries                                -      (839,319)
Charge-offs                                              (12,728)   (3,660,574)
Recoveries                                                80,350       736,448
                                                       ---------    ----------
Ending Balance                                         $ 620,576     $ 552,954
                                                       =========    ==========

There have been no charge-offs or recoveries related to the real estate lending
operations.

D. Impaired Loans
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.

Information regarding impaired loans at December 31, 2001 and 2000 follows:

                                                         2001          2000
                                                      ----------     ---------
Total recorded investment in impaired loans           $2,194,723     $ 463,746
                                                      ==========     =========

Amount of recorded investment in impaired
 loans for which there is a related allowance         $2,194,723     $ 463,746

Related allowance for impaired loans                     620,576       232,000
                                                      ----------     ---------
Total investment in impaired loans, net               $1,574,147      $231,746
                                                      ==========     =========


The average recorded investment in impaired loans during 2001 and 2000 was
$1,266,053 and $1,833,818, respectively.

3.       Commitments and Contingencies:

The Company leases office space and equipment under non-cancelable operating
leases. Future minimum rental commitments under existing operating leases having
initial or remaining non-cancelable lease terms in excess of one year at
December 31, 2001 is as follows:

                            Year Ended December 31,
               --------------------------------------------------
               2002                                      $118,910
               2003                                        47,517
               2004                                             -
                                                         --------
               Total                                     $166,427
                                                         ========

                                       27
<PAGE>

Rent expense totaled $129,138 and $109,373 for the years ended December 31, 2001
and 2000, respectively.

The Company is not a party to any litigation other than routine proceedings
incidental to its business, and the Company does not expect that these
proceedings will have a material adverse effect on the Company.

4. Credit Concentrations and Financial Obligations with Off-Balance Sheet Risk:
The Company originates construction and land development loans primarily in its
market area of the Mid-Atlantic and Southeastern states including Maryland,
Virginia, District of Columbia, Delaware, Pennsylvania, North Carolina and
Florida. These loans are collateralized by deeds of trust on the underlying real
property. The Company uses standard underwriting practices, which are generally
accepted in the mortgage banking industry. These underwriting practices are
designed to meet the requirements of the various mortgage agencies and attract
the best investment opportunities.

The Company also sells participation interests in certain of its loans as
discussed in Note 2 above. The Company is exposed to credit risk under these
participation agreements to the extent that the participant fails to perform
under the participation agreement. Currently, the Company has three
participants, all of which meet the credit requirements of the Company. Any
future participants will be reviewed closely by the Company to ensure they meet
credit requirements.

The Company is required to fund advances under its loan agreements. At December
31, 2001, the Company is committed to fund advances up to a maximum amount of
$93,747,838 under all loan agreements for the life of the agreements. The
Company's obligation to fund these commitments remains subject to the specific
terms and conditions contained in each borrowers loan agreement, such as pre
sale requirements, maximum loan amounts outstanding and starts ahead of sales.
Participation interests in these commitments totaled $69,842,364 at December 31,
2001. At December 31, 2001, HMIC did not have any commitments to fund mortgage
loans. The Company had no other off-balance sheet financial obligations or
commitments at December 31, 2001.

At December 31, 2001, four borrowers each accounted for more than 10% of loans
receivable, net of deferred income, for a total of 47.7%. At December 31, 2000,
four borrowers each accounted for more than 10% of loans receivable, net of
deferred income, for a total of 61.5%.

For the year ended December 31, 2001, two borrowers accounted for greater than
10% of the Company's total revenue, at 29.6% and 15.2%, respectively. These
loans were performing at December 31, 2001. For the year ended December 31,
2000, one borrower accounted for greater than 10% of the Company's total
revenue, at 20.2%. This borrower's loan was performing as of December 31, 2000.

5.  Estimated Fair Value of Financial Instruments:

The following estimated fair values of the Company's financial instruments as of
December 31, 2001 and 2000, are presented in accordance with generally accepted
accounting principles, which define fair value as the amount at which a
financial instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale. These estimated fair values,
however, may not represent the liquidation value or the market value of the
Company.

Cash and Cash Equivalents

Carrying amount approximates fair value.

                                       28

<PAGE>

Loans receivable, net and purchased receivables, net
Carrying amount of loans receivable approximates fair value as all loans are at
rates that approximate current lending rates. The carrying amount of purchased
receivables approximates fair value.

Securities available for sale
Securities held for sale are stated at the closing price of the securities in
the over the counter market where they are traded.

Notes payable and convertible subordinated notes
The revolving lines of credit and note payable carrying amounts approximate the
respective fair values because the revolving lines of credit are adjustable
rate, and are recorded at book values, while the note payable is short-term in
nature with terms not significantly different from those obtainable at closing .

Convertible subordinated notes payable are fixed rate. The carrying amount of
these notes approximates fair value because the fixed rate terms are not
significantly different from those currently obtainable.


6.  Income Taxes:

The income tax (benefit) expense for the years ended December 31, 2001 and 2000,
is summarized as follows:

                                                         2001         2000
                                                      ----------    ----------
Federal:
  Current                                             $  (71,200)      $     -
  Deferred                                               (20,584)   (2,552,683)
                                                        --------    ----------
                                                         (91,784)   (2,552,683)
                                                        --------    ----------
State:
  Current                                                (13,350)            -
  Deferred                                                (3,859)     (478,628)
                                                        --------      --------
                                                         (17,209)     (478,628)
                                                        --------      --------

Income tax benefit                                     $(108,993)  $(3,031,311)
                                                       =========   ===========


A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 2001 and 2000 is as
follows:

                                                         2001          2000
                                                       ---------    ----------
Tax (benefit) expense at statutory rate                 $715,867      $(55,646)
Change in (benefit) expense resulting from:
  Utilization of operating loss carryforward            (824,860)            -
 Change in deferred tax asset valuation allowance              -    (3,031,311)
 Other                                                         -        55,646
                                                       ---------   -----------

Income tax benefit                                     $(108,993)  $(3,031,311)
                                                       =========   ===========

                                       29

<PAGE>

Deferred income taxes result from temporary differences in the recognition of
income and expense for tax versus financial reporting purposes. The sources of
these temporary differences and the related tax effects at December 31, 2001 and
2000 are as follows:

The deferred tax asset consists of:
                                                         2001          2000
                                                      ----------    ----------
Deferred tax asset:
  Operating loss carryforwards                        $7,367,922    $8,211,304
  Allowance for credit losses                            235,819       210,122
  Valuation allowance                                      2,869        37,292
  Organization costs                                       2,956         3,236
  Deferred Interest                                      330,456       202,190
                                                      ----------    ----------
Total deferred tax asset                               7,940,022     8,664,144
                                                      ----------    ----------
Deferred tax liability:
   Equity income recognition:                           (434,095)     (110,023)
                                                       ---------    ----------
Net deferred tax assets:                               7,505,927     8,554,121
Valuation allowance                                   (4,354,770)   (5,427,407)
                                                      ----------    ----------
Total                                                 $3,151,157   $ 3,126,714
                                                      ==========   ===========

The Company adjusts the valuation allowance for the deferred tax asset based on
the projected profitability of the Company. In November of 2000, the Company
acquired Harbourton Financial Corp. ("Harbourton"), which had demonstrated
profitable operations. As a result, the Company determined that a portion of the
valuation allowance was not required and recorded a $3,031,311 reduction to the
allowance in December 2000. The reduction in the valuation allowance during 2001
primarily represents the utilization of the operating loss caryforwards during
2001.

The Company's net operating loss ("NOL") at December 31, 2001 amounted to
$19,389,268. The Company's use of the NOL's prior to the expirations of their
carry forward periods may be limited by the provisions of Section 382 of the
Internal Revenue Code of 1986 ("the Code"), if it is determined that it has
undergone a change of ownership, as defined by the section. The carry forward
period associated with the NOL expires according to the following schedule:


Year of expiration                                      Amount
------------------                                   -----------
2018                                                 $ 4,891,113
2019                                                  11,394,770
2020                                                   3,103,385
                                                     -----------
Total                                                $19,389,268
                                                     ===========

                                       30

<PAGE>


7.         Notes Payable and Convertible Subordinated Notes:


<TABLE>
<CAPTION>
Notes payable and convertible subordinated notes consist of the following at
December 31, 2001 and 2000:

                                                                     2001         2000
      -----------------------------------------------------------------------------------
<S>                                                               <C>          <C>
      Revolving line of credit; due December 31, 2002; interest
      prime plus 1.5%; secured                                    $1,725,000   $1,420,000
                                                                  ==========   ==========
      Convertible subordinated notes; due September 30,
      2003; interest  at 10% fixed; unsecured                       $266,000     $266,000
                                                                    ========     ========
</TABLE>

At December 31, 2001 and 2000, the prime rate was 4.75% and 9.5%, respectively.

The Company has available a secured line of credit in the amount of $3,000,000.
The facility carries an interest rate of the prime rate plus 1.5%, and expires
December 31, 2002. The lender has been granted a collateral security interest in
two loans having a combined original principal indebtedness of $3,978,371, and a
balance at December 31, 2001 of $3,139,772 (net of a participation sold of
$838,599). In addition, the lender has been granted a general assignment of the
Company's right to all collections from loans receivable. The loan agreement
contains financial covenants of the type usually required in such an agreement,
including a prohibition on the payment of dividends.

HMIC has available a secured warehouse line of credit in the amount of $12.0
million. The facility is guaranteed by the Company, carries an interest rate
that adjusts to 275 basis points above the greater of one month LIBOR or 3% per
annum, and has an initial maturity date of August 1, 2002, which is subject to
extension by the lender. HMIC anticipates the lender will be requested to
increase the facility and extend the maturity date in the ordinary course of
business. HMIC has granted the lender a security interest in the mortgages
funded through the line. The line contains the normal and customary covenants,
including maintenance of specified levels of net worth, liquidity, transactions
with affiliates, restrictions on new indebtedness and compliance with applicable
laws and regulations.

At December 31, 1999, the Company had $4,597,000 of 10% convertible subordinated
notes ("Notes") due September 30, 2003 convertible into common stock of the
Company at $6.50 per share. The Notes are unsecured and subordinate in payment
to all other senior debt of the Company. The Company was in default on the
interest payments due December 31, 1999 through September 30, 2000 and on
certain financial covenants as well. On October 5, 2000, the Company and the
noteholders filed a plan of arrangement with the Delaware Court of Chancery that
proposed a conversion of $4,331,000 of Notes, together with accrued but unpaid
interest calculated at a rate of 12.5%, into common stock of the Company at a
price of $0.95 per share of common stock (the "Notes Conversion"). The Delaware
court approved the Notes Conversion on October 6, 2000, and minor changes were
made to the approval order on October 11, 2000. The conversion of the Notes
(plus accrued and unpaid interest thereon) occurred on October 26, 2000. Of the
$4,597,000 of principal outstanding on the Notes, $4,331,000, together with
$578,970 of accrued but unpaid interest, was converted into 5,168,388 shares of
newly issued common stock. Holders of the remaining $266,000 of notes waived
default interest and received interest at the 10% note rate on the same day. The
remaining holders retained their right to convert their notes into common stock
of the Company at $6.50 per share. Value Partners held Notes with a principal
balance of $4,197,000, plus accrued interest, at 12.5%, of $561,057, and
received 5,008,481 shares of common stock as a result of the Notes Conversion.
Because Value Partners owned approximately 27% of the Company's common stock as
well as 94% of the Notes before the conversion, the conversion of Value
Partners' Notes was accounted for as a capital transaction. As of the date of
the Notes Conversion, Value Partners acquired a controlling interest in the
Company.
                                       31

<PAGE>


8.     Merger:

On November 30, 2000, the Company acquired Harbourton. The Company issued
7,516,160 new common shares and paid $2,115,630 in cash to Harbourton's
shareholders. Harbourton was merged into the Company and the Company was the
surviving entity. The Company's majority shareholder, Value Partners, was the
holder of 95.7% of Harbourton's common shares and received 7,191,414 shares of
stock and $2,024,220 in cash. Following the merger transaction Value Partners
owned approximately 84.8% of the Company's common stock. The portion of the
Harbourton net assets acquired from Value Partners, $8,859,182, was recorded at
historical cost, in a manner similar to a pooling of interests accounting. The
portion of the Harbourton net assets acquired from the minority shareholders was
recorded at market value. The difference between the total consideration for the
minority interest shares, $294,376, and the historical cost of the portion of
the Harbourton net assets acquired from the holders, $400,060, has been recorded
as a valuation allowance, which has been allocated to the non current portion of
loans receivable and is being amortized over the weighted average life of the
related loans.

The historical financial statements have been restated retroactively to the date
of the Notes Conversion. (See note 7). The cash portion of the consideration
given for the stock of Harbourton was recognized on the date paid, with a
corresponding adjustment of equity, in the historical financial statements. The
effect of the minority interest during the period after which the companies came
under common control but prior to the merger is not material to the financial
statements as a whole.

9.    Stock Option, Restricted Stock, and Retirement Plans:

A.    Stock Option Plans

The Company maintains three stock option plans: (1) an Incentive Stock Option
Plan ("Qualified Plan"), (2) a Non-Qualified Stock Option Plan ("Non-Qualified
Plan"), and (3) its 2000 Stock Option Plan ("2000 Plan"), which allows for
grants of both qualified and non-qualified options. No additional grants can be
made under the Qualified or Non-Qualified Plans as of February 7, 2000. The 2000
Plan was approved by the board of directors on June 13, 2000, and on August 8,
2000, the plan was approved by the shareholders.

In October 1995, FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement gives the Company the option of either: 1)
continuing to account for stock options and other forms of stock compensation
paid to employees under the current accounting rules (APB No. 25, Accounting for
Stock Issued to Employees) while providing the disclosures required under SFAS
No. 123, or 2) adopting SFAS No. 123 in its entirety. The Company continues to
account for stock options under APB No. 25 and provides the additional
disclosures as required by SFAS No. 123.

i.    Qualified Plan

The Company had reserved 275,000 shares of common stock for issuance under its
qualified stock option plan. No further grants can be made under this plan as of
February 7, 2000. Options to purchase common stock are granted at a price equal
to the fair market value of the stock at the date of grant or 110% of fair
market value of the stock at the date of grant for stockholders owning 10% or
more of the combined voting stock of the Company.

                                       32

<PAGE>


The following table summarizes qualified stock option transactions for the years
ended December 31, 2001 and 2000.

                                      Number of Options   Option Price Per Share
      --------------------------------------------------------------------------
      Outstanding, December 31, 1998         117,600            $5.00 to $7.75

      Granted                                 95,000            $4.00 to $6.54
      Forfeited or expired                  (112,000)           $4.00 to $7.75
                                           ---------            --------------
      Outstanding, December 31, 1999         100,600            $4.00 to $6.50
      Forfeited or expired                   (70,000)           $4.00 to $6.50
                                           ---------            --------------
      Outstanding, December 31, 2000          30,600            $4.00 to $6.50
      Forfeited or expired                   (30,600)           $4.00 to $6.50
                                           ---------            --------------
      Outstanding, December 31, 2001              -0-                       -0-
                                           =========            ==============

ii.   Non-Qualified Plan

The Company had reserved 150,000 shares of common stock for issuance under its
non-qualified stock option plan. No further grants can be made under this plan
as of February 7, 2000. Options to purchase shares of common stock are granted
at a price equal to the fair value of the stock at the date of grant except in
the case of options granted to directors, in which case the minimum price is the
greater of $7.00 and 110% of fair value at the time of grant. The following
table summarizes non-qualified stock option transactions for the year ended
December 31, 2000.

                                      Number of Options   Option Price Per Share
      --------------------------------------------------------------------------

      Outstanding, December 31, 1998         102,000                     $7.00
      Granted                                 30,000                     $7.00
      Forfeited or expired                   (67,000)                    $7.00
                                           ---------            --------------
      Outstanding, December 31, 1999          65,000                     $7.00
      Forfeited or expired                   (65,000)                    $7.00
                                           ---------            --------------
      Outstanding, December 31, 2000              -0-                       -0-
                                           =========            ==============


iii.  2000 Plan

The Company reserved the lesser of 450,000 or 8% of the then issued and
outstanding shares of common stock for issuance under its 2000 Plan. As of
December 31, 2001 and 2000, the amount of shares reserved was 450,000.

                                      Number of Options   Option Price Per Share
      --------------------------------------------------------------------------
      Outstanding, December 31, 2000               -                         -
      Granted                                400,000                    $ 1.00
                                           ---------            --------------
      Outstanding, December 31, 2001         400,000                    $ 1.00
                                           =========            ==============
      Exercisable, December 31, 2001         200,000                     $1.00
                                           =========            ==============

                                       33

<PAGE>


iv.        Qualified and Non-Qualified Plans

The table below summarized the option activity for all three plans for the years
ended December 31:

                                               2001                      2000
      --------------------------------------------------------------------------
      Outstanding at January 1                30,600                   165,600
      Granted                                400,000                         -
      Forfeited or expired                   (30,600)                 (135,000)
                                            --------                  --------
      Outstanding at December 31             400,000                    30,600
                                            ========                  ========

      Exercisable at December 31             200,000                    30,600
                                            ========                  ========

Weighted average option exercise price information (all plans) for years ended
December 31:

                                               2001                      2000
      --------------------------------------------------------------------------
      Per Share Outstanding at January 1       $5.01                     $5.84
      Granted                                  $1.00                         -
      Forfeited or Expired                     $5.01                     $6.16
                                               -----                     -----
      Per Share Outstanding at December 31     $1.00                     $5.01
                                               =====                     =====
      Per Share Exercisable at December 31     $1.00                     $5.01
                                               =====                     =====

Had Harbourton elected to use the fair value method of accounting for employee
stock options, net income for 2001 would have been reduced to $2,051,084 on a
pro forma basis. Net income per common share would have been unchanged.

The weighted average fair value at date of grant for options granted during 2001
was $0.52. The fair value of options at date of grant was estimated using the
Black-Scholes model with an expected option life of 3.0 years and the following
weighted average assumptions for 2001: dividend yield - none; interest rate -
5.28%; volatility - 122.7%.


B.  Restricted Stock Plan

The Board of Directors approved the Company's 2000 Restricted Stock Plan for
Non-Employee Directors on June 13, 2000. This plan reserved 175,000 shares of
common stock for issuance to non-employee directors for past services. All of
the shares were awarded on June 13, 2000, and vested immediately subject to the
approval of the plan by the shareholders. The closing price of Harbourton's
common stock as traded on the Nasdaq OTC Market on June 13, 2000 was $0.51 per
share. Compensation expense of $89,250 was recorded as of the date the shares
were awarded. Subsequently, on August 8, 2000, this plan was approved by the
shareholders, and the shares vested.

C.  Retirement Plans

Effective April 1, 1999, the Company became a participant in a nationally
managed 401(k) plan (1999 plan) for the benefit of the Company's employees. The
1999 plan provides for the deferral of up to 17% of a participant's salary in
the years ending December 31, 2001 and 2000, subject to certain annual
limitations,

                                       34
<PAGE>


and a matching contribution of up to 3% by the Company. The Company's
contributions for the years ended December 31, 2001 and 2000 were $18,890 and
$7,734, respectively.

10.    Related-Party Transactions:

Value Partners earned approximately $0 and $561,057 in 2001 and 2000,
respectively, in interest on convertible subordinated notes. Value Partners did
not hold any convertible subordinated notes at December 31, 2001 and 2000,
respectively. The Company converted Value Partners' Notes into common stock in
October 2000. See Note 7. Value Partners held 95.7% of the outstanding common
shares of Harbourton prior to its merger with the Company on November 30, 2000.
See Note 8.


11.    Net Income Per Common Share:

 For the years ending December 31, 2001 and 2000, there is no difference between
the basic and diluted earnings per share. During 2001 and 2000, respectively,
there were various options to purchase 200,000 and 30,600 shares of common stock
which were not included in the computation of the diluted EPS because the
options' exercise price was greater than the average market price of the common
shares.

The convertible subordinated notes, which are convertible into the Company's
common stock at $6.50 and $7.50 per share, were also excluded from the
computation of the diluted EPS because the conversion price was greater than the
market price at any given point during which they were outstanding for the two
years ended December 31, 2001.


12.    Treasury Stock:

On December 31, 2000, the Company retired 781,212 shares of common stock, $.01
par value, held in treasury.

SCHEDULE  IV.
<TABLE>
<CAPTION>


                         INDEBTEDNESS TO RELATED PARTIES
--------------------------------------------------------------------------------------------------------------------------
                                            Balance at                             Amounts               Balance at
                                            Beginning of                           Paid or                  End of
Name of Creditor                            Period                  Additions      Converted                Period
------------------------------------------- -------------------- ----------------- ------------------ --------------------

Year Ended December  31, 2001:
------------------------------

<S>                                            <C>                  <C>            <C>                     <C>
All directors and officers as a group          $ 100,000            $    -         $ 100,000               $    -
  Value Partners                                       -                 -                 -                    -
                                            ------------         ---------         ---------          -----------       -
Total                                          $ 100,000                 -                 -                    -
                                            ============         =========         =========          ===========

Year Ended December 31, 2000:
-----------------------------

All directors and officers as a group        $   102,000            $    -         $   2,000            $ 100,000
  Value Partners                               4,996,772                 -         4,996,772                    -
                                            ------------         ---------         ---------          -----------       -
Total                                        $ 5,098,772                 -        $4,998,772             $100,000
                                            ============         =========         =========          ===========
</TABLE>

                                       35

<PAGE>


SIGNATURES
In accordance with 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.

HARBOURTON FINANCIAL CORPORATION


By: /s/  J. Kenneth McLendon
    ------------------------
    J. Kenneth McLendon
    President and Chief Executive Officer
    Date :  March 28 , 2002

In accordance with 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.

     /s/ J. Kenneth McLendon
     -----------------------
     J. Kenneth McLendon
     President, Chief Executive Officer, Director
     Date:  March 28, 2002

     /s/ Paula M. Morgan
     -----------------------
     Paula M. Morgan
     Secretary/Treasurer, Chief Financial Officer
     Date:  March 28, 2002

     /s/ David W. Campbell
     -----------------------
     David W. Campbell
     Chairman, Director
     Date:  March 28, 2002

     /s/ Timothy G. Ewing
     -----------------------
     Timothy G. Ewing
     Director
     Date:  March 28, 2002

     /s/ William H. Savage
     -----------------------
     William H. Savage
     Director
     Date:  March 28, 2002

     /s/ Geoffrey B. Baker
     -----------------------
     Geoffrey B. Baker
     Director
     Date:  March 28, 2002

                                       36

<PAGE>