SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 1997
Commission file number 0-17832



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



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

2700 S. Quincy Street, Arlington, VA                 22206
(Address of principal executive offices)           (Zip Code)
Registrant's telephone number, including area code (703)931-2274

Securities registered pursuant to Section 12(b) of the Exchange Act:  None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock - No par value



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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,  and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. X

     Revenues for year ended December 31, 1997, were $10,005,843.

     The aggregate market value of the common stock held by non affiliates as of
March 20, 1998 was $5,169,746  computed by reference to the closing market price
at which the stock was traded on March 20, 1998.

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of the latest practicable date. 2,319,451 (March 20,
1998)

                      DOCUMENTS INCORPORATED BY REFERENCE.

                                      NONE.

                                        1

<PAGE>



                                     PART I

   This Form 10-KSB may contain certain "forward-looking statements" relating to
the  Company  (defined  in Item  1(a)  Business  -  Consolidation  below)  which
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 to be
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 negative or other variation 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. Business


(a) Consolidation

      This Form 10-KSB filing includes Allstate Financial Corporation,  Allstate
Factors (a division  of Allstate  Financial  Corporation)  and its wholly  owned
subsidiaries.  Other than Lifetime Options, Inc., a Viatical Settlement Company,
which curtailed purchasing policies in 1997, none of the Company's  subsidiaries
is currently  engaged in any business which could have a material  effect on the
Company's and its subsidiaries'  consolidated  operations or financial position.
Accordingly,  unless the context  requires or otherwise  permits,  references in
this Form 10-KSB to "Company" or "Allstate" shall be references only to Allstate
Financial Corporation.


(b) Nature of Business

      The  Company  is a  specialized  commercial  finance  company  principally
engaged in providing  small- to  medium-sized,  high risk growth and  turnaround
companies, including debtors-in-possession,  with capital through the discounted
purchase of their  accounts  receivable.  The Company also makes advances to its
clients  collateralized  by inventory,  equipment,  real estate and other assets
(collectively,  "Collateralized  Advances").  On occasion, the Company will also
provide  other  specialized   financing  structures  which  satisfy  the  unique
requirements  of the  Company's  clients.  In  addition,  the  Company  provides
financial  assistance to clients in the form of  guaranties,  letters of credit,
credit  information,  receivables  monitoring,  collection  service and customer
status information. The Company was incorporated on July 22, 1982 under the laws
of the Commonwealth of Virginia.


                                        2

<PAGE>



      In May 1997 the Company established a new division,  Allstate Factors. The
Allstate Factors division is engaged in traditional  "non-recourse" factoring of
accounts  receivable  in which the  factor  typically  assumes  the risk that an
account debtor may become insolvent.  The Company expects that Allstate Factors'
clients  typically  will have lower  risks of default and will  generate  higher
volumes of accounts  receivable  than the Company's  traditional  clients,  and,
therefore,   will  broaden  the  Company's  sources  of  revenue  and  diversify
significantly the risk profile of the Company's portfolio.

      The Company  typically  enters into an accounts  receivable  factoring and
security agreement with each client. When making a Collateralized  Advance,  the
Company  enters  into  such  additional  agreements  with  the  client  and,  if
appropriate,  third parties, as the Company deems necessary or desirable,  based
on the type(s) of collateral  securing the Collateralized  Advance.  The Company
purchases accounts receivable from its clients at a discount from face value and
usually  requires  the  client's  customer  to make  payment  on the  receivable
directly to the Company.  The Company  almost always  reserves the right to seek
payment  from the client in the event the  client's  customer  fails to make the
required payment.  To secure all of a client's  obligations to the Company,  the
Company  also  takes a lien on all  accounts  receivable  of the  client (to the
extent not purchased by the Company) and, whenever  available,  blanket liens on
all of the client's  other assets (some or all of which liens may be subordinate
to other liens). When making a Collateralized Advance, the Company almost always
takes a first  lien  on the  specific  collateral  securing  the  Collateralized
Advance.  The Company may on occasion make Collateralized  Advances secured by a
subordinate lien position, but only if management of the Company determines that
the equity  available  to the Company in a  subordinate  position is adequate to
secure the Collateralized  Advance.  The Company almost always requires personal
guaranties  (either  unlimited or limited to the validity and  collectibility of
purchased  accounts  receivable)  from each  client's  principals.  Although the
Company obtains as much collateral as possible and usually retains full recourse
rights against its clients, clients (and account debtors) may fail and there can
be no assurance that the collateral  obtained and the recourse  rights  retained
(together  with personal  guaranties)  will be sufficient to protect the Company
against loss.

      In addition to providing  clients with capital,  the Company  believes its
services enable its clients to realize improved terms on, and broader access to,
the  purchase of goods and  services.  The Company  also  believes  its services
benefit its clients by reducing  certain of their accounts  receivable,  credit,
collection and bookkeeping  responsibilities.  The Company  believes that it can
generally achieve shorter average  collection times than clients  themselves and
that the Company's  contacts with a client's customers can identify problems the
client would not have discovered and addressed  until a later time.  Through its
services,  the Company can help clients to be more responsive to their customers
and to manage their businesses more efficiently. In addition, clients can devote
less manpower and resources to monitoring and collecting the accounts receivable
purchased by the Company,  thus allowing them to redirect  their efforts  toward
the management, growth and profitability of their businesses.


  Lifetime Options, Inc., a Viatical Settlement Company

      During 1997, Lifetime Options, Inc. a Viatical Settlement Company
("Lifetime Options"), which provided financial assistance to individuals

                                        3

<PAGE>



facing life threatening illness by purchasing their life insurance policies at a
discount from face value, curtailed purchasing policies.

      See Management's Discussion and Analysis of Financial Condition and
Results of Operations -  General.

  Selected Financial Data

      The following table sets forth selected financial data for the Company and
its subsidiaries as of, and for each of the last five years ended:

<TABLE>
<CAPTION>
                                                                    December 31,
                                               -------------------------------------------------------------                    
                                                 1997           1996         1995           1994        1993
                                               --------        -------     --------        -------     -----                    
                                                            (In Thousands, Except Per Share Data)

<S>                                            <C>            <C>          <C>            <C>         <C>    
Total Revenue                                  $10,006        $12,405      $12,997        $12,030     $10,850

Net Income (Loss)                                1,034         (1,041)         481            148         457

Net Income (Loss)
   per Share (basic) 1                             .45          ( .45)         .16            .05         .15

Net Income (Loss)
   per Share (dilutive) 2                          .44          ( .45)         .16            .05         .15

Finance Receivables, net                        33,847         35,407       32,671         27,503      24,674

Total Assets                                    46,919         45,979       44,881         41,851      36,583

Shareholders' Equity 3                          23,564         22,527       25,730         28,121      27,974


<FN>

     1  Calculated  based  on  basic  weighted  average  shares  outstanding  of
2,318,092 in 1997,  2,328,308 in 1996, 2,966,330 in 1995, 3,102,328 in 1994, and
3,116,460 in 1993.

     2 Calculated  based on dilutive  weighted  average  shares  outstanding  of
2,324,624 in 1997,  2,328,308 in 1996,  2,966,337 in 1995, 3,104,728 in 1994 and
3,117,660 in 1993.

     3  Shareholder's  equity at December 31, 1995 was reduced by treasury stock
valued at $2,871,901  acquired by the Company in September  1995.  Shareholder's
equity at December 31, 1996 was reduced by additional  treasury  stock valued at
approximately   $2,100,000   acquired  by  the  Company  in  January  1996.  See
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations - Liquidity and Capital Resources.
</FN>
</TABLE>



(c) The Company's Clients

     The  Company's  clients  are small- to  medium-sized,  high risk growth and
turnaround  companies  with  annual  revenues  typically  between  $600,000  and
$100,000,000.  The Company's  clients do not typically  qualify for  traditional
bank or  asset-based  financing  because  they are  either  too new,  too small,
undercapitalized  (over-leveraged),  unprofitable or otherwise unable to satisfy
the requirements of a bank or traditional asset-based lender. Accordingly, there
is a significant  risk of default and client  failure  inherent in the Company's
business.

     The following  table  indicates  the  composition  of the  Company's  Gross
Finance  Receivables  (as defined below under "(d) The  Company's  Services") by
type of client business as of December 31, 1997 and 1996.


                                        4

<PAGE>

                                                            


<TABLE>
<CAPTION>
                                                   Gross Finance                    Gross Finance
              Business of Client                    Receivables       Percent       Receivables        Percent
              ------------------                   -------------      -------      --------------     ---------                    
                                                   (In thousands)                   (In thousands)

<S>                                 <C>                <C>              <C>            <C>                <C>  
Importer and Distributor of:
   Computer components and software 1                  $11,564          26.7%          $ 9,457            22.0%
   Plastic bags                                          4,745          11.0                --             --
   Tapes                                                 2,094           4.8                --             --
   Carpets                                               1,446           3.3                --             --
   Food industry (ice cream sandwiches)                    587           1.3                --             --
   Motor engineers                                         394           0.9                --             --
   Jewelry boxes                                           433           1.0               639             1.5
Importer, manufacturer and distri-
   butor of apparel wear, accessories
   and other durable goods                               6,318          14.6             7,461            17.4
Provider of publishing, direct mail
   and advertising                                       4,880          11.3             3,822             8.9
Life insurance contracts                                 3,456           8.0             5,368            12.5
Contractors for construction and
   construction supply                                   3,200           7.4             3,623             8.4
Provider of trucking and air freight                     1,040           2.4             3,098             7.2
Provider of uniform sales & rentals                      1,036           2.4             3,676             8.6
Legal claims receivable                                    732           1.7             1,324             3.1
Recreational and health club
   facilities                                              400           0.9              3,658            8.5
Provider of engineer and health temps                      380           0.9                233            0.5
Other                                                      606           1.4                605            1.4
                                                           ---           ---                ---            ---
         Total                                         $43,311           100%           $42,964            100%
                                                       =======           ===            =======            === 
<FN>
     1 Does not reflect  participation of others of $2,208,957 and $1,000,000 at
December 31, 1997 and December 31, 1996, respectively.
</FN>
</TABLE>




     The table above  reflects the  composition  of the Company's  Gross Finance
Receivables  by client  industry at the dates  indicated.  Because the Company's
major clients tend to change  significantly  over time (as more fully  described
below),  this table is not likely to reflect the  composition  of the  Company's
Gross Finance Receivables by client industry at other future points in time.

     From time to time,  a single  client or single  industry  may account for a
significant portion of the Company's Gross Finance  Receivables.  As of December
31, 1997 two  clients  (MGV  International,  Inc.  ("MGV")  and United  Plastics
International,  Inc.  ("UPI")) each accounted for more than 10% of the Company's
Gross Finance Receivables.  Computer components and software accounted for 26.6%
of Gross  Finance  Receivables  at December 31, 1997 and 22.0% of Gross  Finance
Receivables at December 31, 1996. One company (MGV)  accounted for more than 10%
of the  Company's  total income in 1997. In order to reduce  concentration,  the
Company has  arranged for a  participant  in the MGV  facility.  At December 31,
1997, the participation was $2,209,000 versus


                                        5

<PAGE>



$1,000,000 at December 31, 1996.  Although the Company carefully monitors client
and industry concentration,  there can be no assurance that the risks associated
with client or industry  concentration  could not have a material adverse effect
on the Company.

     Historically,   the  Company  has  not   expected  to  maintain  a  funding
relationship  with a client for more than two years;  the Company  expected that
its client  would  ultimately  qualify  for more  competitively  priced  bank or
asset-based  financing within that time period.  Therefore,  the Company's major
clients have tended to change significantly over time. Today,  however,  because
the Company is, where  necessary and  appropriate,  offering lower rates than it
has historically  and making  Collateralized  Advances,  it is possible that the
duration  of  the  Company's  funding  relationships  with  its  clients  may be
extended.  Although the Company has  historically  been  successful in replacing
major clients, the loss of one or more major clients and an inability to replace
those clients could have a material adverse effect on the Company.

(d) The Company's Services

     The Company offers an interrelated package of financial services that meets
a variety of the funding and business needs of its clients.

  Gross Finance Receivables

     The Company's  principal funding activities consist of purchasing  accounts
receivable  ("Factored  Accounts  Receivable") and the making of  Collateralized
Advances and  Overadvances  Secured by General Liens (as defined below).  "Gross
Finance  Receivables"  consist of Factored Accounts  Receivable,  Collateralized
Advances,  Overadvances  Secured by General Liens, Life Insurance  Contracts and
Non-Earning Receivables. See (f) Asset Quality.

  Factored Accounts Receivable

     The Company's  primary  funding  activity is the  discounted  purchase of a
client's  accounts  receivable,  typically  at an initial  advance to the client
equal to 70% to 90% of the face amount of the accounts receivable purchased. The
remaining 10% to 30% of the face amount of the accounts receivable  purchased is
initially  allocated  to: (i) earned but  unpaid  discount  or (with  respect to
Allstate Factors) commission  (recorded as income simultaneous with the purchase
of the  account  receivable);  (ii)  unearned  discount  (recorded  as income at
periodic intervals after the purchase of the account receivable depending on the
timing of  payment);  (iii)  (with  respect to  Allstate  Factors)  interest  on
outstanding  advances  (recorded  as  income  at the end of each  month in which
advances are outstanding) and (iv) credit balances of factoring clients.


  Collateralized Advances


                                        6

<PAGE>



     In addition  to the  purchase of  accounts  receivable,  the Company  makes
Collateralized  Advances.  Prior to making any such  advance,  the Company,  the
client  and,  where  appropriate,  third  parties,  enter  into such  additional
agreements,  and the Company makes such  additional  public filings (if any), as
the Company  deems  necessary  or desirable  based on the type(s) of  collateral
securing the Collateralized  Advance.  The Company also conducts such additional
due  diligence  as is  appropriate  with  respect  to the client and the type of
collateral  against  which an  advance  is to be  made.  Collateral  values  are
determined by independent  appraisers and are reviewed periodically to determine
whether  loan-to-value ratios have been maintained.  When making  Collateralized
Advances  against  inventory  and  certain  types  of  equipment,   the  Company
frequently  engages  a third  party,  at the  client's  expense,  to  assist  in
monitoring  the  collateral.   Collateralized  Advances  entail  different,  and
possibly  greater,   risks  to  the  Company  than  the  factoring  of  accounts
receivable.  Management believes, however, that these risks can be mitigated and
the potential  benefits to the Company  therefore  outweigh the potential risks.
See Management's  Discussion and Analysis of Financial  Condition and Results of
Operations - Provision for Credit Losses.

  Overadvances Secured by General Liens

     The Company may advance funds to selected  clients in excess of the amounts
which would be available in  accordance  with the advance  formulae set forth in
the  agreements  between the Company and its client.  Such  advances are usually
secured by equity (i.e.,  credit balances due the client and unearned discounts)
in the client's existing  portfolio of Factored Accounts  Receivable,  equity in
other of the client's assets, and other forms of collateral,  including property
pledged by the client's  principal(s) or accounts  receivable  generated through
the use of the proceeds of such secured  advances (such advances,  collectively,
"Overadvances  Secured by General  Liens").  Earned  discounts  on  Overadvances
Secured by General Liens are usually greater than on other types of advances and
are  usually  required  to be paid in cash no less  frequently  than  monthly in
arrears. The principal amount thereof is typically required to be repaid in full
(either in  installments  or in a single,  lump sum payment) in as little as one
week or as long as six months in accordance with a written agreement between the
Company and its client.

     Amounts  outstanding for various  categories of finance  receivables at the
end of the last five years are set forth in the table below.



                                        7

<PAGE>



<TABLE>
<CAPTION>

                                                             December 31,
                                                    --------------------------------------------------------------
                                                       1997         1996         1995         1994          1993
                                                     -------      -------      --------      -------       -------
                                                                           (In thousands)
<S>                                                  <C>           <C>          <C>          <C>           <C>    
Factored Accounts Receivable                         $30,417       $22,390      $25,170      $22,242       $22,275
Collateralized Advances                                7,236         8,809       10,842        7,215         2,495
Overadvances Secured by
  General Liens                                        1,373         1,850        1,407          279         1,340
Life Insurance Contracts                               3,456         5,368        5,156        6,241         2,605
Non-Earning Receivables                                  829         4,547        1,589        3,587         3,411
                                                         ---         -----        -----        -----         -----

Gross Finance Receivables                             43,311        42,964       44,164       39,564        32,126

Less: Unearned Discount                               (5,275)      (4,278)       (4,847)      (4,724)       (3,044)
Less: Allowance for Credit Losses
   (including $275,000 allocated
   to life insurance contracts
   at December 31, 1997)                              (1,980)      (2,279)       (2,351)      (2,511)       (2,120)
Less: Participation                                   (2,209)      (1,000)         -            -             -
                                                      ------       ------                                      
Finance Receivables, Net                             $33,847      $35,407       $36,966      $32,329       $26,962
                                                     =======      =======       =======      =======       =======
</TABLE>

     As reflected in the table, Gross Finance  Receivables  include  Non-Earning
Receivables.  Non-Earning  Receivables  are  classified as such when the Company
stops  accruing  earned  discounts  on Gross  Finance  Receivables  (other  than
Non-Earning Receivables).  Under certain circumstances, the Company may classify
as "Other  Receivables"  (as  defined  below  under "(f) Asset  Quality")  Gross
Finance  Receivables on which the Company has stopped accruing earned discounts.
Non-Earning  Receivables may be reclassified as "Other Assets" (as defined below
under  "(f)  Asset  Quality")  on the  Company's  balance  sheet if the  Company
repossesses (or is in the process of reposessing)  the collateral  securing such
receivables. See (f) Asset Quality.


  Credit Services

      For a fee,  the Company may use its credit  standing to assist a client by
obtaining a letter of credit from a bank or issuing its own letter of  guaranty.
These  forms of credit  enhancement  are  typically  used by  clients to acquire
finished goods to fill pre-existing orders. The Company generally provides these
services when the client:  (i) has a buyer for its products;  (ii) has taken the
required steps to sell the resulting account receivable to the Company on agreed
upon terms; and (iii) has provided  additional  collateral to the Company to the
extent  the  Company  deems  necessary.   In  the  typical  credit   enhancement
transaction, the Company maintains control over the goods from the time they are
shipped until the time they are delivered to the ultimate purchaser.

      The table below sets forth the  Company's  outstanding  commitments  under
guaranties and letters of credit as of the end of each of the last five years.


                                        8

<PAGE>



                                                December 31,
                          ----------------------------------------------------- 
                           1997       1996       1995       1994       1993
                          -----       ----     ------       ----     -------
                                               (In thousands)
Commitments under
  guaranties and
  letters of credit        $220        $336      $727       $347      $1,794


  Client/Customer Information Services

      In  addition  to its  funding  activities,  the  Company:  (i) advises its
clients as to potential problems with customers;  (ii) provides its clients with
a  monthly  portfolio  analysis  which  includes  an aging of all open  accounts
receivable by customer;  and (iii)  supplies its clients with  information as to
the  creditworthiness of customers.  Although the Company's  agreements with its
clients do not require the Company to furnish these  services,  the  information
provided  can make it easier for a client to develop an accurate  picture of its
own financial position. In addition, this information assists the Company in its
accounts receivable monitoring activities.


(e) Management Information Systems

      The Company has developed  data  processing  capabilities  tailored to the
requirements of the Company's accounting, receivables collection, monitoring and
oversight  functions.  The  system  permits  the  Company  to  generate  payment
histories  and  analyses  with  respect to  clients'  customers,  to  accumulate
accounting  information  and other data useful for credit  analysis,  to produce
information  used  in  marketing,  and to  respond  to  account  and  management
inquiries.

  Year 2000 Compliance

      The  inability  of  computers,  software  and  other  equipment  utilizing
microprocessors  to recognize and properly process data fields  containing a two
digit  year is  commonly  referred  to as the Year 2000  Compliance  issue.  The
Company  has  identified  all   significant   applications   that  will  require
modifications  to ensure Year 2000 Compliance.  Internal and external  resources
are being used to make the required modifications and test Year 2000 Compliance.
In  addition,  the Company is in the process of  communicating  with others with
whom it does significant  business,  namely its clients, to determine their Year
2000  Compliance  readiness and the extent to which the Company is vulnerable to
any third  party Year 2000  issues.  The total cost to the Company of these Year
2000 compliance activities has not been and is not anticipated to be material to
its financial position or results of operations in any given year.





                                        9

<PAGE>



(f) Asset Quality

  Factored Accounts Receivable Portfolio

      The quality of  Factored  Accounts  Receivable  is the  Company's  primary
security  against  credit  losses  from  its  accounts   receivable   purchasing
activities.  The Company  generally does not purchase  accounts  receivable that
have aged  significantly,  except when the Company  first  establishes a funding
relationship with a client.  Even in those  circumstances,  the Company will not
purchase  an account  receivable  that is more than 90 days old  unless  special
circumstances  lead the  Company to  believe  that the  receivable  will be paid
within a reasonable time, generally not more than 60 days.

      As of December 31, 1997, the Company's Gross Finance Receivables  included
$30,417,522  of  Factored  Accounts  Receivable  on  which  approximately  3,400
entities were obligated.  There is considerable  variation from period to period
in the  composition  of  account  debtors  and the  amount  of their  respective
obligations to the Company.

      If the Company has not received payment on a Factored  Account  Receivable
within 90 days  after  its  acquisition  or if at any time  prior to 90 days the
Company determines that it is unlikely to receive payment,  the Company requires
the client to repay the amount the Company has advanced on the  receivable  plus
the  amount of  discount  earned.  If after 90 days  follow up calls to  account
debtors lead the Company to believe that a Factored  Account  Receivable will be
paid  within a  reasonable  period of time,  the Company  may  "repurchase"  the
receivable.  In that event, the earned discount owed on the original purchase of
the  account  receivable  is  collected  from  the  client  at the  time  of the
repurchase and earned discounts  thereafter accrue as if the account  receivable
were a new Factored Account Receivable.

      From time to time, a single account debtor or several  account debtors may
be obligated on a significant  portion of the Company's Gross Factored  Accounts
Receivable.  As of December 31, 1997, one account debtor accounted for more than
10% of the Company's gross Factored Accounts  Receivables.  Although the Company
carefully  monitors  account debtor  concentration  and regularly  evaluates the
creditworthiness  of account  debtors,  there can be no  assurance  that account
debtor concentration could not have a material adverse effect on the Company.

  Collateralized Advances Portfolio

      As of December 31, 1997, the Company's Gross Finance Receivables  included
$7,236,040 of Collateralized Advances.  Collateralized Advances secured by fixed
assets  (e.g.,  equipment  or real  estate)  are  scheduled  to be repaid  based
typically  on  a 36  month  amortization  schedule  (although  the  amortization
schedule in certain  circumstances  may be  significantly  longer)  with a final
balloon   payment   due  not  more  than  one  year  after  the  making  of  the
Collateralized  Advance. If at the time the balloon payment is due the Company's
funding  relationship  with the client is  extended,  the Company  will  usually
continue the amortization  with a new balloon payment due not more than one year
after the renegotiated contract date. Collateralized Advances secured by current
assets (e.g.  inventory) are subject to a daily or weekly borrowing base formula
and come due in a single,  lump sum  payment  not more  than one year  after the
making of the initial advance.  If at the time such payment is due the Company's
funding relationship with the client is extended,

                                       10

<PAGE>



the Company will typically extend the maturity of the lump sum payment.  See
(d) The Company's Services - Collateralized Advances and Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Provision for Credit Losses.

  Overadvances Secured by General Liens

      As of December 31, 1997, the Company's Gross Finance Receivables included
$1,372,526 of Overadvances Secured by General Liens.  See (d) The Company's
Services - Overadvances Secured by General Liens.

  Life Insurance Contracts

      As of December 31, 1997, the Company's Gross Finance Receivables  included
Life  Insurance  Contracts  in the face  amount of  $3,455,858  as  compared  to
$5,368,266  at December  31,  1996.  The life  insurance  policies  purchased by
Lifetime Options are  underwritten by highly rated insurance  companies (and, in
many cases, backed by state guaranty funds).

  Non-Earning Receivables

      As of December 31, 1997, the Company's Gross Finance Receivables included
$828,850 of Non-Earning Receivables. See (g) Credit Loss Policy and
Experience.

  Other Receivables

      As of December  31, 1997,  included on the  Company's  balance  sheet were
$2,988,927 of "Other  Receivables"  compared to $4,094,975 at December 31, 1996.
Other Receivables  consist primarily of amounts  receivable by the Company where
the  source  of  payment  is  expected  to be from  legal  proceedings  or other
collection efforts  instituted  against a client's  customer,  guarantors and/or
other third parties. Other Receivables typically arise from the reclassification
of Gross Finance Receivables. At the time of reclassification, Other Receivables
are stated at a value estimated by management  based on management's  assessment
of the likelihood of payment or success on the merits,  the ability of the third
party(ies) to pay and other discretionary  factors. In addition,  at the time of
reclassification,  the accrual of earnings is usually  suspended or discontinued
for  financial  statement  purposes.   Write-downs,  if  any,  at  the  time  of
reclassification  are charged against the allowance for credit losses. The costs
of  carrying  and  collecting  Other  Receivables  are  generally   expensed  in
operations during the period in which they are incurred.  Management's estimates
of the value of Other  Receivables  are  typically  reviewed  quarterly,  and as
adjustments become necessary, the effects of the change in estimates are charged
against the allowance for credit losses.  Other Receivables are subject to legal
and other collection processes and contingencies over which the Company does not
have exclusive  control.  Accordingly,  the amounts which the Company ultimately
receives  in  payment  of Other  Receivables  could  differ  significantly  from
management's  estimates.  See (g) Credit  Loss Policy and  Experience  below and
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations - Provision for Credit Losses.



                                       11

<PAGE>



  Other Assets

      As of December  31, 1997,  included on the  Company's  balance  sheet were
$4,203,727 of other assets.

                                                         December 31,
                                              --------------------------------
                                                  1997               1996
                                              ----------           -----------
    Other Assets include:
      Commercial property held for sale
        and receivables secured by
        mortgages                              $3,941,160           $1,883,768
      Condominium not used in
         trade or business                        232,575              232,575
     Deferred loan costs                           29,992                 -
                                                   ------                  
                                               $4,203,727           $2,116,343
                                               ==========           ==========

    At the date of  acquisition,  Other  Assets are  recorded at fair value less
estimated  selling  costs.  Write-downs to fair value at the date of acquisition
are  charged  against  the  allowance  for  credit  losses.  Also at the date of
acquisition,  the accrual of earnings is usually  suspended or discontinued  for
financial  statement  purposes.  Subsequent  to  acquisition,  Other  Assets are
adjusted  to the lower of cost or fair  value less  estimated  costs to sell and
adjustments,  if any,  are charged  against  the  allowance  for credit  losses.
Operating expenses  pertaining to Other Assets are expensed in operations during
the period in which they are incurred.

    The amounts  ultimately  recovered  by the Company  from Other  Assets could
differ materially from the amounts used in arriving at the net carrying value of
the assets  because of future  market  factors  beyond  the  Company's  control,
adversarial  actions  taken  by the  client  or  other  owner  of  the  property
foreclosed or changes in the Company's  strategy for recovering its  investment.
See (g) Credit  Loss  Policy and  Experience  and  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations - Provision for Credit
Losses and Consolidated Statements of Cash Flow - Supplement Schedule of Noncash
Activities.

(g) Credit Loss Policy and Experience

    The Company  regularly reviews its Gross Finance  Receivables  portfolio and
other extensions of credit to determine the adequacy of its allowance for credit
losses.

    Credit loss experience,  the adequacy of underlying  collateral,  changes in
the character and size of the Company's  receivables  portfolio and management's
judgement  are factors used in  determining  the provision for credit losses and
the  adequacy  of  the  allowance  for  credit   losses.   Other  factors  given
consideration  in  determining  the adequacy of the  allowance  are the level of
related  credit  balances of factoring  clients and the current and  anticipated
impact of economic  conditions on the  creditworthiness of the Company's clients
and account  debtors.  To mitigate the risk of credit loss,  the Company,  among
other things:  (i)  thoroughly  evaluates the collateral to be made available by
each client;  (ii) usually collects its Factored  Accounts  Receivable  directly
from  account  debtors,   which  are  frequently   (though  not  always)  large,
creditworthy  companies or governmental  entities;  (iii) purchases,  or takes a
first priority security interest in, all accounts receivable of each client;

                                       12

<PAGE>



(iv) takes,  whenever  available,  blanket  liens on all of its  clients'  other
assets and,  when making  Collateralized  Advances,  it employs what  management
believes to be conservative loan-to-value ratios based on auction or liquidation
value appraisals performed by independent appraisers; (v) almost always requires
personal  guaranties  (either unlimited  guaranties or guaranties limited to the
validity and  collectibility of Factored Accounts  Receivable) from its clients'
principals;  and (vi)  actively  monitors  its  portfolio  of Factored  Accounts
Receivable,  including the  creditworthiness of account debtors and periodically
evaluates the value of other collateral securing Collateralized Advances.

    Collateralized Advances entail different, and possibly greater, risks to the
Company than the factoring of accounts  receivable.  Risks  associated  with the
making of Collateralized Advances (but not the factoring of accounts receivable)
include,   among  others,   that  (i)  certain  types  of  collateral   securing
Collateralized Advances may diminish in value (possibly precipitously) over time
(sometimes  short  periods  of  time),  (ii)   repossessing,   safeguarding  and
liquidating collateral securing  Collateralized Advances may require the Company
to  incur  significant  fees  and  expenses  some  or all of  which  may  not be
recoverable,  (iii) clients may dispose of (or conceal) the collateral  securing
Collateralized  Advances and (iv) clients or natural  disasters  may destroy the
collateral  securing  Collateralized  Advances.  The Company  attempts to manage
these risks,  respectively,  by (i) engaging  independent  appraisers  to review
periodically  the  value  of  collateral  securing  Collateralized  Advances  at
intervals  established  by  management  based  on  the  characteristics  of  the
underlying collateral,  (ii) employing  conservative  loan-to-value ratios which
management  believes  should  generally  enable  the  Company  to  recover  from
liquidation  proceeds most of the fees and expenses  incurred in connection with
repossessing,  safeguarding and liquidating collateral, (iii) using its internal
field  examiners  to inspect  collateral  periodically  and,  when  appropriate,
engaging  independent  collateral  monitoring  firms  to  implement  appropriate
collateral  control systems including bonding certain of the client's  employees
and  (iv)  requiring  clients  to  maintain  appropriate  amounts  and  types of
insurance issued by insurers acceptable to the Company naming the Company as the
party to whom loss is paid.  Although  management  believes that the Company has
(or third parties  acting on behalf of the Company have) the requisite  skill to
evaluate,   monitor  and  manage  the  risks   associated  with  the  making  of
Collateralized Advances, there can be no assurance that the Company will in fact
be successful in doing so.

    Notwithstanding  the foregoing,  clients (and account  debtors) may fail and
the collateral  available to the Company (together with personal guaranties) may
prove  insufficient to protect the Company  against loss. See Legal  Proceedings
and Management's  Discussion and Analysis of Financial  Condition and Results of
Operations - Provision for Credit Losses.


(h) Competition

    The  Company  competes  (at  least  in  part)  against  banks,   traditional
asset-based  lenders  and  small  independent  finance  companies.  The  Company
anticipates  that  competition  will remain intense  through all of 1998 and may
continue to exert downward pressure on pricing, especially in the Company's core
factoring  business.  In order to remain  competitive,  the  Company  is,  where
necessary and appropriate, offering lower rates than it has

                                       13

<PAGE>



historically.  The Company  believes that its ability to respond  quickly and to
provide specialized,  flexible and comprehensive  financial  arrangements to its
clients enables it to compete effectively. Although the Company has historically
been successful in replacing major clients, competition resulting in the loss of
one or more major clients and an inability to replace those clients could have a
material adverse effect on the Company.


(i) Expansion Strategy

    The  Company's  strategy for 1998 is to further  penetrate its target market
by: (i)  developing  additional,  active  referral  sources while  continuing to
cultivate existing sources;  (ii) identifying and marketing to new niche markets
that are currently  under-serviced  by competitors  where the Company can obtain
higher  yields  on new  business;  (iii)  expanding  its  marketing  efforts  by
establishing a direct presence in certain  geographic areas of the country which
are  under-serviced  by either  competitors or the Company;  (iv) developing and
expanding its Allstate  Factors  division;  and (v)  developing new products and
programs to meet the  changing  needs of its targeted  market.  The Company also
intends to attempt to retain  existing  clients as long as  possible by offering
new products and providing the best service possible at competitive prices.


(j) Employees

    The Company currently has 47 full-time employees, of whom 25 are employed in
providing accounts  receivable and credit services (including 3 certified public
accountants), 9 are employed in marketing (including 2 in administrative support
positions), 5 are in executive positions (including two CPA's and one attorney),
4 are in legal  (including 2 attorneys) and 4 are in general office  capacities.
The Company  believes that a substantial  increase in the volume of its business
would  require  only a  relatively  modest  increase in  personnel.  None of the
Company's  employees are unionized and  management  considers its relations with
employees to be excellent.


Item 2.  Properties

    The Company's offices occupy  approximately 8,000 square feet of space in an
office  building in Arlington,  Virginia.  The Company's  lease on this property
expires in December  2001. The cost of renting this office space was $172,000 in
1997 compared to $191,000 in 1996. The Company  believes that its present office
facilities  are  adequate  but  may  need to be  expanded  in the  near  term to
accommodate  the Company's  continued  growth.  The Company has a right of first
refusal to acquire an  additional,  contiguous  1,500 square feet at its present
site when that space becomes available.

    Commencing  November 1, 1997, the Company also occupied  approximately 2,500
square feet of space in an office  building in New York City.  The lease on this
property  expires in  October  2000.  The cost of renting  this space is $86,130
annually. The cost of renting this facility in 1997 was $14,355.




                                       14

<PAGE>



Item 3. Legal Proceedings

    See Notes to Consolidated Financial Statements - (L) Commitments and
Contingencies.


Item 4. Submission of Matters To A Vote Of Security Holders

    The Company's annual meeting of shareholders was held on November 18, 1997.


    The shareholders voted as follows:

                                 Number of           Number of          Number
                                 Votes for           of Votes          of Votes
                                 Election            Withheld          Abstained
                                 ----------          ----------        ---------

    David Campbell               2,148,828                9,890            -0-
    Leon Fishman                 1,660,460              498,258            -0-
    Craig Fishman                1,660,460              498,258            -0-
    Alan Freeman                 1,660,460              498,258            -0-
    Eugene Haskin                1,660,260              498,458            -0-
    Edward McNally               2,148,828                9,890            -0-
    William Savage               2,148,628               10,090            -0-
    James Spector                1,660,460              498,258            -0-
    Lindsay Trittipoe            2,148,828                9,890            -0-
    Lawrence Vecker              2,148,828                9,890            -0-












                      [THIS SPACE INTENTIONALLY LEFT BLANK]


                                       15

<PAGE>



                                     Part II

Item 5. Market For The Registrant's Common Stock, Related
Stockholder Matters


     The Company's  common stock is traded on the NASDAQ  National Market System
(Symbol ASFN).

     The  following  table sets forth the range of  representative  high and low
bids for the  Company's  common  stock in the over the  counter  market  for the
period  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.

                                          Common Stock Bid Prices
                                      Fiscal year ended December 31,
                                      ------------------------------
                             1997              1996                1995
                         ------------     ---------------     --------------
                         High    Low      High       Low      High     Low

     First Quarter      6 3/8   5 1/2     6 7/8     5 1/2     7 3/16  5 9/16
     Second Quarter     6 1/8   5 5/8     6 1/2     5 1/2     8       6 1/4
     Third Quarter      6       5 1/8     5 13/16   5 1/2     7 1/2   5 1/2
     Fourth Quarter     7       4 7/8     7         5 1/2     6       5 6/16

     On March 10, 1998 there were  approximately 45 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  555
holders of the Company's common stock.

   The  Company   currently  intends  to  retain  earnings  for  future  capital
requirements  and  growth.  The  Company  has not paid a  dividend  and does not
anticipate  paying  cash  dividends  to  holders  of its  common  stock  for the
foreseeable future.

     In January 1996 the Company consummated an exchange offer to holders of its
common stock.  See Management's  Discussion and Analysis of Financial  Condition
and Results of Operations - Liquidity and Capital Resources.


Item 6.  Management's Discussion And Analysis of Financial
         Condition and Results of Operations


  General

     The Company's  principal  business is the  discounted  purchase of accounts
receivable,  usually on a full  notification,  full  recourse  basis (except for
Allstate  Factors which  typically  assumes the risk that an account  debtor may
become insolvent).  In addition, the Company also makes Collateralized Advances.
On occasion, the Company will also provide other specialized

                                       16

<PAGE>



financing  structures  which  satisfy the unique  requirements  of the Company's
clients.  The Company  also  provides  its  clients  with  letters of  guaranty,
arranges  for the  issuance of letters of credit for its  clients  and  provides
other related financial services.

     During the second quarter of 1997, the Company  established a new division,
Allstate Factors,  which is engaged in traditional  "non-recourse"  factoring in
which the factor  typically  assumes the risk that an account  debtor may become
insolvent. The Company minimizes the exposure associated with assuming such risk
by  refactoring  the  receivables  purchased  by Allstate  Factors  with a large
commercial factor that assumes the insolvency risk.

     The Company's  clients are small- to  medium-sized  businesses  with annual
revenues  typically  ranging between  $600,000 and  $100,000,000.  The Company's
clients do not typically  qualify for traditional bank or asset-based  financing
because   they  are   either   too  new,   too   small,   undercapitalized   (or
over-leveraged), unprofitable or otherwise unable to satisfy the requirements of
a bank or traditional,  asset-based lender. Accordingly,  there is a significant
risk of default and client  failure  inherent in the Company's  business.  For a
description of ways in which the Company  addresses these risks,  see (g) Credit
Loss Policy and Experience.

     Historically,   the  Company  has  not   expected  to  maintain  a  funding
relationship  with a client for more than two years;  the Company  expected that
its  clients  would  ultimately  qualify for more  competitively  priced bank or
asset-based  financing within that time period.  Therefore,  the Company's major
clients have tended to change significantly over time. Today,  however,  because
the Company is, where necessary and appropriate, offering lower rates and making
Collateralized  Advances,  it is possible  that the  duration  of the  Company's
funding  relationships with its clients may be extended. If the Company succeeds
in extending the duration of its funding  relationship  with its clients,  there
will not be a  corresponding  increase in  non-current  assets on the  Company's
balance  sheet.  This is because it is  anticipated  that the Company's  funding
relationships  with its clients will continue to renew no less  frequently  than
once a year.  Although the Company has historically been successful in replacing
major clients, the loss of one or more major clients and an inability to replace
those clients could have a material adverse effect on the Company.

     Lifetime Options, Inc., a Viatical Settlement Company ("Lifetime Options"),
a wholly-owned  subsidiary of the Company, was engaged in the business of buying
life insurance  policies at a discount from individuals  facing life threatening
illnesses. During 1997, Lifetime Options curtailed purchasing policies. Lifetime
Options  may elect to collect  policies as they mature or to sell some or all of
its policies.

     Other  than  Lifetime  Options,  none  of  the  Company's  subsidiaries  is
currently engaged in business which could have a material effect on the Company.




                                                            17

<PAGE>



  Results of Operations

     The following table sets forth certain items of revenue and expense for the
period indicated and the percentage relationship of each item to total revenue.
<TABLE>
<CAPTION>

                                                                  For the Years Ended December 31,
                                                  -----------------------------------------------------------------
                                                         1997                     1996                   1995
                                                  ------------------     -------------------   ---------------------         
                                                  REVENUE    PERCENT      REVENUE    PERCENT      REVENUE   PERCENT
                                                  ---------  -------    ---------    -------    ----------  -------

<S>                                            <C>             <C>    <C>              <C>    <C>             <C>  
REVENUE:
  Earned Discounts .........................   $  7,436,630    74.3%  $ 10,025,779     80.8%  $ 10,932,331    84.1%
  Fees and Other Income ....................      2,569,213    25.7      2,378,782     19.2      2,065,015    15.9
                                                  ---------    ----      ---------     ----      ---------    ----
      TOTAL REVENUE ........................     10,005,843   100.0     12,404,561    100.0     12,997,346   100.0
                                                 ----------   -----     ----------    -----     ----------   -----


EXPENSES:
  Compensation and Fringe Benefits  ........      3,087,085    30.9      3,318,609     26.8      3,198,497    24.6
  General and Administrative Expenses ......      2,165,396    21.7      2,804,643     22.6      2,758,285    21.2
  Interest Expense .........................      1,170,152    11.7      1,606,561     12.9        983,718     7.6
  Provision of Credit Losses 1..............      1,593,555    15.9      5,878,167     47.4      4,981,646    38.4
  Commissions ..............................        349,157     3.5        449,225      3.6        263,100     2.0
                                                    -------     ---        -------      ---        -------     ---
      TOTAL EXPENSES .......................      8,365,345    83.7     14,057,205    113.3     12,185,246    93.8
                                                  ---------    ----     ----------    -----     ----------    ----

INCOME BEFORE TAXES ........................      1,640,498    16.3     (1,652,644)   (13.3)       812,100     6.2

INCOME TAXES ...............................        606,985     6.0       (611,500)    (4.9)       331,000     2.5
                                                    -------     ---       --------     ----        -------     ---

NET INCOME .................................   $  1,033,513    10.3%  $ (1,041,144)    (8.4)% $    481,100     3.7%
                                               ============    ====   ============     ====   ============     === 

NET INCOME PER SHARE (BASIC) ...............   $        .45           $      (0.45)           $       0.16
                                               ============            ============           ============

WEIGHTED AVERAGE NUMBER OF
   SHARES (BASIC) ..........................      2,318,092               2,328,308              2,966,330
                                                  =========               =========              =========

NET INCOME PER SHARE (DILUTIVE) ............   $        .44           $      (0.45)           $       0.16
                                               ============            ============             ==========

WEIGHTED AVERAGE NUMBER OF
   SHARES (DILUTIVE) .......................      2,324,624               2,328,308              2,966,337
                                                  =========               =========              =========
<FN>
       1 For a discussion of this item of expense,  see Management's  Discussion
and  Analysis of Financial  Condition  and Results of  Operation  Provision  for
Credit Losses.
</FN>
</TABLE>

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

   Total Revenue.  Total revenue  consists of (i) earned discounts and (ii) fees
and other  income.  "Earned  discounts"  consist  primarily  of income  from the
purchase of accounts receivable and income from Collateralized  Advances.  "Fees
and other income" consist primarily of closing or application  fees,  commitment
or facility  fees,  interest,  other  related  financing  fees and  supplemental
discounts  paid by  clients  who do not  sell the  minimum  volume  of  accounts
receivable required by their contracts with the Company (including those clients
who prematurely  terminate their  agreements with the Company to move to a lower
cost source of funding).



                                       18

<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.

<TABLE>
<CAPTION>
                                                           For the Year Ended December 31,
                                            ----------------------------------------------------------------------------           
                                                          1997                                        1996
                                            ------------------------------------       ---------------------------------
                                                                  % of Total                                  % of Total
                                                  Revenue            Revenue                  Revenue            Revenue


<S>                                             <C>                    <C>                 <C>                     <C>  
Discount on Factored
  Accounts Receivable                           $5,103,750             51.0%               $ 5,777,660             46.6%
Earnings on Collateralized
  Advances                                       1,032,262              10.3                 2,522,856              20.3
Earnings on Purchased Life
  Insurance Policies                               172,231               1.7                   499,249               4.0
Other Earnings                                   1,128,387              11.3                 1,226,014               9.9
    Total                                        7,436,630              74.3                10,025,779              80.8
Fees and Other Income                            2,569,213              25.7                 2,378,782              19.2
    Total Revenue                              $10,005,843            100.0%               $12,404,561            100.0%
</TABLE>

    Total  revenue  decreased  19.3% in 1997 versus 1996,  from $12.4 million to
$10.0 million.  Within total revenue,  Earned  discounts from Factored  Accounts
Receivable  decreased  11.7% in 1997 as compared to 1996,  from $5.8  million to
$5.1 million. Average earned discounts from Factored Accounts Receivable in 1997
as a percentage of total  Factored  Accounts  Receivable  purchased in 1997 were
3.0%. The comparable  average percentage in 1996 was 3.34%, a decrease of 10.18%
in  1997.  This  reduction  reflects  the  downward  pressure  on  pricing  from
competition in the Company's core factoring  business.  In 1997 and 1996, earned
discounts  from  Factored  Accounts   Receivable   comprised  51.0%  and  46.6%,
respectively, of total revenue.

    The balance of the reduction in total revenue in 1997 was  attributable to a
lower  volume of,  and lower  earnings  from,  Collateralized  Advances.  Earned
discounts from Collateralized Advances decreased 59.1% in 1997 versus 1996, from
$2.5  million to $1.0  million.  While  outstanding  balance  of  Collateralized
Advances at  December  31,  1997 ($7.2  million)  decreased  only  [18.2%]  from
December 31, 1996 ($8.8 million),  a significant  portion of the  Collateralized
Advances  outstanding at December 31, 1997 were made in the second half of 1997.
Accordingly,  the Company only accrued earned  discounts on such advances during
the second half of 1997. In contrast,  the outstanding balance of Collateralized
Advances at  December  31, 1996 more  nearly  reflects  the average  outstanding
balance of  Collateralized  Advances  throughout 1996.  Accordingly,  throughout
1996,  the company  accrued  earned  discounts on a higher  average  outstanding
balance of Collateralized  Advances. The lower volume of Collateralized Advances
in 1997 was due in large part to stricter underwriting  standards established by
the company during 1997.

    Collateralized Advances currently bear interest at a rate, on average, of
approximately 2% per month.  Earned discounts from Collateralized Advances are

                                       19

<PAGE>



required to be paid in cash  monthly in arrears.  In 1997 and 1996,  earned
discounts from Collateralized Advances comprised 10.3% and 20.3%,  respectively,
of total revenue. See Provisions for Credit Losses below.

    Fees and other income  increased 8.0% in 1997 as compared to 1996, from $2.4
million to $2.6  million,  respectively.  In 1997 and 1996 fees and other income
comprised of 25.7% of total revenue and 19.2%, respectively.

    As of December 31, 1997 and 1996,  Factored Accounts  Receivable included on
the Company's balance sheet were $30.4 million and $22.4 million,  respectively,
(70.2% and 52.1%, respectively) of Gross Finance Receivables. As of December 31,
1997 and 1996,  Collateralized  Advances included on the Company's balance sheet
were  $7.2   million  and  $8.8   million,   respectively,   (16.7%  and  20.5%,
respectively) of Gross Finance Receivables.

    COMPENSATION AND FRINGE BENEFITS. Compensation and fringe benefits were $3.1
million  (30.9% of total  revenue) and $3.3 million  (26.8% of total revenue) in
1997 and 1996, respectively. Almost all of the 1997 decrease in compensation and
fringe benefits  (including  executive  compensation)  is the result of expenses
during 1996 associated with the severance of a key employee.

    GENERAL AND  ADMINISTRATIVE  EXPENSE.  In 1997,  general and  administrative
expense was $2.2  million  (21.7% of total  revenue) as compared to $2.8 million
(22.6% of total revenue) in 1996.  Overall general and  administrative  expenses
were comparable in 1997 and 1996,  with the exception of  professional  fees. In
1997,  professional  fees  decreased to $548 thousand (5.5% of total revenue) as
compared to $1.2  million  (9.9% of total  revenue) in 1996.  Professional  fees
decreased, in part, due to the favorable resolution of certain legal proceedings
instituted  in prior  years.  Also  contributing  to the decrease in general and
administrative expense was a decrease in insurance expense offset by an increase
in  depreciation.  Insurance  decreased $119 thousand due to the decision by the
Company's Board of Directors not to renew its directors' and officers' liability
insurance   policy.   Depreciation   increased  by  $114  thousand  due  to  the
implementation  of a new computer  system late in 1996 and the  commencement  of
depreciation thereof.

    INTEREST  EXPENSE.  Interest  expense  was  $1.17  million  (11.7%  of total
revenue)  versus  $1.6  million  (13.0%  of total  revenue)  in 1997  and  1996,
respectively. The decrease in interest expense is attributable to (i) a decrease
in the average daily balance  outstanding  on the  Company's  revolving  line of
credit,  (ii) a  reduction  in the rate of  interest  charged  by the  Company's
primary  lenders  and (iii) the  collection  of  approximately  $5.7  million of
non-performing  receivables.  The  average  daily  outstanding  balance  on  the
Company's  revolving  line of credit was $4.7 million and $11.3 million for 1997
and 1996,  respectively,  and the average  interest  rate paid on the  Company's
revolving  line of credit was 8.8% during 1997 as compared to 9.0% during  1996.
Interest  expense related to the Company's  Convertible  Subordinated  Notes was
$473 thousand (4.7% of total  revenue) in 1997,  compared to $465 thousand (3.8%
of total revenue) in 1996.

                                       20

<PAGE>



    PROVISION FOR CREDIT LOSSES.  The provision for credit losses decreased $4.3
million in 1997,  from $5.9  million  (47.6% of total  revenue)  in 1996 to $1.6
million  (15.9% of total  revenue) in 1997. As disclosed in the  Company's  Form
10-QSB  for the period  ended June 30,  1996,  following  certain  events in the
second  quarter  of  1996,  management  determined  that  it was  necessary  and
appropriate to write off or write down nine non-performing assets totalling $4.2
million.  Prior to the write-offs and write downs, these assets were included in
Non-earning  Receivables,  Other  Receivables  and Other Assets on the Company's
balance  sheet.  The provision  for credit losses in the second  quarter of 1996
reflected  the amount  deemed  necessary by  management to enable the Company to
charge the allowance for credit losses for the foregoing write-offs and to leave
a  balance  in the  allowance  for  credit  losses  deemed  sufficient  to cover
potential future write-offs.

    The  following  table  provides  a  summary  of  the  Company's  Non-Earning
Receivables,  Other  Receivables and Other Assets and information  regarding the
allowance for credit losses for the periods indicated.

<TABLE>
<CAPTION>
                                                                          As of December 31,
                                              --------------------------------------------------------
                                                 1997       1996         1995        1994        1993
                                              --------    --------    --------     -------    --------    
<S>                                            <C>         <C>         <C>         <C>         <C>    
Non-Earning Receivables, Other Receivables
  and Other Assets Data:
--------------------------------------------
Non-Earning Receivables ....................   $   829     $ 4,548     $ 1,589     $ 3,608     $ 3,411
Other Receivables ..........................     3,748       4,390       2,756       3,389       2,344
Other Assets (excluding miscellaneous) 1 ...     3,941       1,884       1,793       2,112       3,200
                                                 =====       =====       =====       =====       =====

Allowance for Credit Losses:
--------------------------------------------
Balance, January 1 .........................   $ 2,579     $ 2,351     $ 2,511     $ 2,120     $ 1,223
Provision for credit
  losses ...................................     1,594       5,878       4,982       5,359       4,858
Receivables charged off ....................    (1,776)     (5,711)     (5,194)     (5,016)     (4,144)
Recoveries .................................       342          61          52          48         183
                                                   ---          --          --          --         ---
Balance, December 31 (including $275,000
   allocated to Life Insurance Contracts
   at December 31, 1997) ...................   $ 2,739     $ 2,579     $ 2,351     $ 2,511     $ 2,120
               === ====                        =======     =======     =======     =======     =======

Allowance for Credit Losses as a percent of:
--------------------------------------------
Gross Finance Receivables ..................      6.32%       6.00%       5.32%       6.34%       6.60%
Non-Earning Receivables ....................    330.40%       56.7%     148.00%      69.60%      62.15%
Non-Earning Receivables, Other
  Receivables and Other Assets .............     32.16%       23.8%      38.30%      27.57%      23.67%

As a percent of the sum of Gross
  Finance Receivables, Other
  Receivables and Other Assets:
--------------------------------------------
Non-Earning Receivables ....................      1.63%       9.24%       3.26%       8.01%       9.05%
Other Receivables ..........................      7.35%       8.92%       5.66%       7.52%       6.22%
Other Assets ...............................      7.73%       3.83%       3.68%       4.69%       8.49%
<FN>
     1  See Financial Statements - Consolidated Statements of Cash Flows -
Supplemental Schedule of Non-Cash Activities.
</FN>
</TABLE>
      Certain reclassifications were made to the prior year amounts to conform
with the 1997 presentations. Of the balance in the allowance for credit
losses, the amount allocated to non-earning receivables, other receivables and
other assets was $1.055 million, $525 thousand, $1.459 million, $2.075 million
and $2.0 million on December 31, 1997, 1996, 1995, 1994 and 1993,
respectively. In addition, as of December 31, 1997 (as indicated in the
table),  $275,000  has  been  allocated  to life  insurance  contracts  owned by
Lifetime Options.


                                       21

<PAGE>





      Although the Company maintains an allowance for credit losses in an amount
deemed by management to be adequate to cover potential  losses, no assurance can
be given that the allowance will in fact be adequate or that an  inadequacy,  if
any, in the allowance could not have a material  adverse effect on the Company's
earnings in future periods.  Furthermore,  although management believes that its
periodic  estimates  of the  value of Other  Receivables  and Other  Assets  are
appropriate,  no  assurance  can be given  that the  amounts  which the  Company
ultimately  collects with respect to Other Receivables and Other Assets will not
differ significantly from management's  estimates or that those differences,  if
any,  could not have a material  adverse  effect on the  Company's  earnings  in
future periods. See (f) Asset Quality and (g) Credit Loss Policy and Experience.

      COMMISSIONS.  Commission expense was $349 thousand (3.5% of total revenue)
in 1997 as  compared  to $449  thousand  (3.6% of total  revenue)  in 1996.  The
decrease was largely due to the decrease of $2.6 million in earned  discounts in
1997  from  1996.   Additionally   more   business  was  generated  by  in-house
salespersons as compared to outside brokers.  These  salespersons earn a smaller
commission than outside brokers.

      LIQUIDITY AND CAPITAL RESOURCES.  The Company's  principal funding sources
are the collection of purchased receivables, payments received on Collateralized
Advances, retained cash flow and external borrowings.

      As of  December  31,  1997 the Company  had  approximately  $10.8  million
available under a $25.0 million secured revolving line of credit.  (See notes to
Consolidated Financial Statements - Note F - Notes Payable).

      As of December 31, 1997 and December 31, 1996, the Company had outstanding
approximately  $4,974,000 and $4,978,000,  respectively,  in aggregate principal
amount of  Convertible  Subordinated  Notes issued in exchange for shares of the
Company's  common stock.  The  Convertible  Subordinated  Notes  outstanding  at
December 31, 1997 and 1996 were issued in exchange for 785,475  shares of common
stock.  The Notes (i) mature on September 30, 2000; (ii) currently bear interest
at the rate of 9.5% per annum which rate may  fluctuate in  accordance  with the
prime  rate,  but may not fall below 8% nor rise above 10% per annum;  (iii) are
convertible  into  common  stock of the  Company at the rate of $7.50 per share;
(iv) are subordinated to Senior Indebtedness (as defined) of the Company and (v)
were issued pursuant to an indenture which contains certain  covenants which are
less restrictive than those contained in the Company's  secured revolving credit
facility.  Upon the occurrence of certain change of control  events,  holders of
the Notes have the right to have their Notes redeemed at par.

      At December 31, 1997, the Company had working capital of $23.9 million and
a ratio of current  assets to current  liabilities  of 2.31 to 1 as  compared to
December 31, 1996 working capital of $24.9 million and a ratio of current assets
to current  liabilities  of 2.35 to 1. As of December 31, 1997,  the Company had
conditional  commitments  of $57.9 million to purchase  accounts  receivable and
make Collateralized  Advances,  subject to the Company's  underwriting criteria.
Since many of those  commitments may expire without being drawn upon, the figure
of $57.9 million does not necessarily represent future cash requirements.

                                       22

<PAGE>



      The Company believes that internally  generated funds and borrowings under
its current credit  facility will be sufficient to finance the Company's  future
funding  requirements  for the near term.  If,  however,  an  unexpectedly  high
portion of the Company's potential new business includes Collateralized Advances
(especially  Collateralized  Advances  secured by assets other than  equipment),
internally  generated funds and borrowings  under the Company's  existing credit
facility  may  not  be  sufficient  to  fund  such  new  business.   Under  such
circumstances  the Company would attempt to negotiate the borrowing  base in its
existing credit facility to allow the Company to borrow greater amounts from its
primary lender(s) and thereby support the growth in Collateralized  Advances. If
those  negotiations  were  unsuccessful,  there is no assurance that the Company
could attract sufficient capital to enable the Company to pursue its strategy of
making additional Collateralized Advances.


  YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

      TOTAL  REVENUE.  Total revenue  consists of (i) earned  discounts and (ii)
fees and other income.  "Earned discounts" consist primarily of revenue from the
purchase of accounts  receivable  and life  insurance  policies  and income from
Collateralized Advances. "Fees and other income" consist primarily of closing or
application fees,  commitment or facility fees, other related financing fees and
supplemental  discounts  paid by clients who do not sell the  minimum  volume of
accounts receivable required by their contracts with the Company (including as a
result of "graduating" to a lower cost source of funding).

      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.


<TABLE>
<CAPTION>
                                                   For the Year Ended December 31,
                                   ----------------------------------------------------------
                                              1996                              1995
                                   --------------------------       -------------------------
                                                   % of Total                     % of Total
                                    Revenue          Revenue             Revenue    Revenue


<S>                                  <C>              <C>            <C>              <C>  
Discount on Factored
    Accounts Receivable ..........   $ 5,777,660      46.6%          $ 6,155,374      47.4%
Earnings on Collateralized
    Advances .....................     2,522,856      20.3             2,930,731      22.5
Earnings on Purchased Life
    Insurance Policies ...........       499,249       4.0               947,731       7.3
Other Earnings ...................     1,226,014       9.9               898,495       6.9
   Total .........................    10,025,779      80.8            10,932,331      84.1
Fees and Other Income ............     2,378,782      19.2             2,065,015      15.9
   Total Revenue .................   $12,404,561     100.0%          $12,997,346     100.0%
</TABLE>

    Total revenue  decreased 4.6% in 1996 over 1995, from $13.0 million to $12.4
million.  Earned discounts from Factored Accounts  Receivable  decreased 6.1% in
1996 as compared to 1995, from $6.2 million to $5.8 million. Earned discounts

                                       23

<PAGE>



from Factored  Accounts  Receivable  in 1996 as a percentage  of total  Factored
Accounts Receivable  purchased in 1996 were 3.39%. The comparable  percentage in
1995 was 4.25%, a decrease of 20.2% from 1995 to 1996.  This reduction  reflects
the  downward  pressure  on  pricing  from  competition  in the  Company's  core
factoring  business.  In 1996 and 1995,  earned discounts from Factored Accounts
Receivable comprised 46.6% and 47.4%, respectively, of total revenue.

    Earned discounts from  Collateralized  Advances decreased 13.9% in 1996 over
1995, from $2.9 million to $2.5 million. In 1996 and 1995, earned discounts from
Collateralized  Advances  comprised  20.3%  and  22.5%,  respectively,  of total
revenue. These percentages reflect management's decision to pursue the making of
Collateralized  Advances,  in addition to the Company's core factoring business.
Collateralized  Advances  currently  bear  interest at a rate,  on  average,  of
approximately 2% per month.  Earned discounts from  Collateralized  Advances are
required to be paid in cash monthly in arrears. See Provisions for Credit Losses
below.

    Fees and other income increased 15.2% in 1996 as compared to 1995, from $2.1
million to $2.4  million,  respectively.  In 1996 and 1995 fees and other income
comprised of 19.2% of total revenue and 15.9%, respectively.

    As of December 31, 1996 and 1995,  Factored Accounts  Receivable included on
the  Company's  balance  sheet  were $22.4  million  (60.0%)  and $25.2  million
(64.5%), respectively, of Gross Finance Receivables. As of December 31, 1996 and
1995,  Collateralized Advances included on the Company's balance sheet were $8.8
million  (23.4%)  and $10.8  million  (27.8%),  respectively,  of Gross  Finance
Receivables.

    Compensation and Fringe Benefits. Compensation and fringe benefits were $3.3
million  (26.8% of total  revenue) and $3.2 million  (24.6% of total revenue) in
1996 and 1995, respectively.  The absolute dollar increase is chiefly the result
of small increases in several categories of compensation. Executive compensation
in 1996 was $1.1 million  (8.9% of total  revenue)  versus $1.0 million (7.9% of
total  revenue) in 1995.  Almost all of the 1996  increase in  compensation  and
fringe benefits  (including  executive  compensation)  is the result of expenses
associated  with the  severance  of a key  employee  and costs  associated  with
replacing  that  employee,  including  hiring a former  Company  executive on an
interim basis to help identify and train the severed employee's replacement.

    General and  Administrative  Expense.  In 1996,  general and  administrative
expense was $2.8  million  (22.6% of total  revenue) as compared to $2.8 million
(21.2% of total revenue) in 1995.  Overall general and  administrative  expenses
were flat between 1996 and 1995,  however,  an increase in professional fees was
offset by  decreases  in licenses  and taxes and  duplicating  expense.  In 1996
professional  fees rose to $1.2 million  (9.9% of total  revenue) as compared to
$1.1 million (8.3% of total revenue) in 1995.  Professional  fees increased,  in
part,  due to on-going  litigation  and,  in part,  to the final  resolution  of
certain legal  proceedings  instituted in prior years.  Also contributing to the
increase in general  and  administrative  expense was an increase in  directors'
fees attributable to an increase in the size of the Board and an increase in the
number of scheduled meetings of the Board.


                                       24

<PAGE>



    Interest Expense. Interest expense was $1.6 million (13.0% of total revenue)
versus $984 thousand (7.6% of total revenue) in 1996 and 1995, respectively. The
increase in interest  expense is  attributable to (i) an increase in the average
daily balance  outstanding  on the Company's  revolving  line of credit and (ii)
interest expense related to the Company's Convertible, Subordinated Notes issued
in September 1995 and January 1996. The average daily outstanding balance on the
Company's  revolving  line of credit was $11.3 million and $8.5 million for 1996
and 1995,  respectively  and the  average  interest  rate paid on the  Company's
revolving  line of credit was 9.0% during 1996 as compared to 9.7% during  1995.
Interest  expense related to the Company's  Convertible  Subordinated  Notes was
$465 thousand (3.8% of total revenue) in 1996, compared to $87 thousand (0.7% of
total  revenue) in 1995. The increase in 1996 is  attributable  to the length of
time and dollar amount outstanding of the Convertible Subordinated Notes.

    Provision for Credit  Losses.  The provision for credit losses  increased in
1996 from $5.0 million  (38.3% of total  revenue) in 1995 to $5.9 million (47.4%
of total  revenue) in 1996.  As disclosed in the  Company's  Form 10-QSB for the
period ended June 30, 1996,  following  certain  events in the second quarter of
1996,  management  determined that it was necessary and appropriate to write off
or write down nine  non-performing  assets  totaling $4.2 million.  Prior to the
write-offs   and  write  downs,   these  assets  were  included  in  Non-earning
Receivables,  Other Receivables and Other Assets on the Company's balance sheet.
The  provision  for credit  losses in the second  quarter of 1996  reflected the
amount  deemed  necessary  by  management  to enable  the  Company to charge the
allowance for credit losses for the foregoing  write-offs and to leave a balance
in the allowance for credit losses deemed  sufficient to cover potential  future
write-offs.

    The  table  on Page 21  provides  a  summary  of the  Company's  Non-Earning
Receivables,  Other  Receivables and Other Assets and information  regarding the
allowance for credit losses for the periods indicated.

The increase in Non-Earning  Receivables  and Other  Receivables at December 31,
1996 was attributable to two clients put on non-accrual  status in late November
1996.

      Although the Company maintains an allowance for credit losses in an amount
deemed by management to be adequate to cover potential  losses, no assurance can
be given that the allowance will in fact be adequate or that an  inadequacy,  if
any, in the allowance could not have a material  adverse effect on the Company's
earnings in future periods.  Furthermore,  although management believes that its
periodic  estimates  of the  value of Other  Receivables  and Other  Assets  are
appropriate,  no  assurance  can be given  that the  amounts  which the  Company
ultimately  collects with respect to Other Receivables and Other Assets will not
differ significantly from management's  estimates or that those differences,  if
any,  could not have a material  adverse  effect on the  Company's  earnings  in
future periods. See (f) Asset Quality and (g) Credit Loss Policy and Experience.

      Commissions.  Commission expense was $449 thousand (3.6% of total revenue)
in 1996 as compared to $263 thousand (2.0% of total revenue) in 1995.  The

                                       25

<PAGE>



increase  was the  result  of a  larger  portion  of Gross  Finance  Receivables
acquired in 1996 being generated by commissioned brokers and other professionals
to whom the Company paid referral fees.

      LIQUIDITY AND CAPITAL RESOURCES.  The Company's  principal funding sources
are the  collection  of purchased  receivables,  retained cash flow and external
borrowings.

      As of December  31,  1996,  the Company had  approximately  $10.1  million
available  under a $25  million  secured  revolving  line of credit.  The credit
facility  contains a $5.0  million  sub-facility  for the issuance of letters of
credit,  a $2  million  sub-facility  (which  under  certain  circumstances  may
increase to $4 million)  the  proceeds of which may be used to make  advances to
clients secured by machinery and equipment and a $2.5 million  sub-facility  the
proceeds of which may be used by the Company to make advances to clients secured
by  inventory.  Borrowings  under the credit  facility bear interest at a spread
over the bank's base rate. The current  maturity date of this credit facility is
May 13, 1997. The Company is subject to covenants which are typical in revolving
credit facilities of this type. The Company is currently  discussing the renewal
of this credit facility with its lenders.

      As of December 31, 1996 and December 31, 1995, the Company had outstanding
approximately  $4,978,000 and $2,838,000,  respectively,  in aggregate principal
amount of  Convertible  Subordinated  Notes issued in exchange for shares of the
Company's  common stock.  The  Convertible  Subordinated  Notes  outstanding  at
December 31, 1995 were issued in exchange for 447,200 shares of common stock and
the Convertible  Subordinated Notes outstanding at December 31, 1996 were issued
in exchange for 785,475 shares of common stock  (including the 447,200 shares of
common  stock  exchanged  prior to December 31,  1995).  The Notes (i) mature on
September 30, 2000;  (ii)  currently bear interest at the rate of 9.5% per annum
which rate may  fluctuate in  accordance  with the prime rate,  but may not fall
below 8% nor rise above 10% per annum;  (iii) are convertible  into common stock
of the Company at the rate of $7.50 per share;  (iv) are  subordinated to Senior
Indebtedness  (as  defined) of the  Company  and (v) were issued  pursuant to an
indenture which contains certain covenants which are less restrictive than those
contained  in  the  Company's  secured  revolving  credit  facility.   Upon  the
occurrence of certain  change of control  events,  holders of the Notes have the
right to have their Notes redeemed at par.

      At December 31, 1996, the Company had working capital of $24.9 million and
a ratio of current  assets to current  liabilities  of 2.36 to 1 as  compared to
December 31, 1995 working capital of $26.0 million and a ratio of current assets
to current  liabilities  of 2.60 to 1. As of December 31, 1996,  the Company had
conditional  commitments  of $66.6 million to purchase  accounts  receivable and
make Collateralized  Advances,  subject to the Company's  underwriting criteria.
Since many of those  commitments may expire without being drawn upon, the figure
$66.6 million does not necessarily represent future cash requirements.

      The Company believes that internally  generated funds and borrowings under
its current or a replacement  credit  facility will be sufficient to finance the
Company's future funding requirements for the near term. If, however, an

                                       26

<PAGE>



unexpectedly  high portion of the  Company's  potential  new  business  includes
Collateralized  Advances (especially  Collateralized  Advances secured by assets
other than  equipment),  internally  generated  funds and  borrowings  under the
Company's  existing  credit  facility  may not be  sufficient  to fund  such new
business.  Under such  circumstances  the Company would attempt to negotiate the
borrowing  base in its existing  credit  facility to allow the Company to borrow
greater  amounts from its primary  lender(s)  and thereby  support the growth in
Collateralized  Advances.  If those negotiations were unsuccessful,  there is no
assurance  that the  Company  could  attract  sufficient  capital  to enable the
Company to pursue its strategy of making additional Collateralized Advances.

IMPACT OF INFLATION

      Management  believes that  inflation has not had a material  effect on the
Company's income, expenses or liquidity during the past three years.

      Changes in interest rate levels do not generally  affect the income earned
by the Company in the form of discounts  charged.  Rising  interest rates would,
however,  increase the  Company's  cost of funds based on its current  borrowing
arrangements which are base rate or LIBOR adjusted credit facilities.


ITEM 7.  FINANCIAL STATEMENTS (PAGES 34-56)


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


      None.













                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       27

<PAGE>



                                    Part III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS: COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT

      A definitive  proxy  statement is expected to be filed with the Securities
and Exchange Commission on or about April 13, 1998. The information  required by
this item is 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 is 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 is 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 is set forth  under the  caption
"Certain  Transactions" in the definitive proxy statement,  which information is
incorporated herein by reference thereto.


ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  1. Financial Statements:                                   Page Number

     The following Financial statements are submitted in Item 7.

     Independent Auditors' Report on Consolidated Financial
     Statements and Schedules                                        30

     Consolidated Balance Sheets as of December 31, 1997
     and 1996                                                     31-32

     Consolidated Statements of Operations for the years ended
     December 31, 1997, 1996, and 1995                               33

     Consolidated Statements of Shareholders' Equity for
     the years ended December 31, 1997, 1996 and 1995                34

     Consolidated Statements of Cash Flows for the years
     ended December 31, 1997, 1996 and 1995                       35-36

     Notes to Consolidated Financial Statements for the
     year ended December 31, 1997                                 37-60




                                       28

<PAGE>



        2. Financial Statement Schedules

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

        Schedule IV Indebtedness of and to Related Parties - Not
        Current for the years ended December 31, 1997, 1996 and 1995  61

        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.

(b)  Reports on Form 8-K

          None.

(c)  Listing of Exhibits

EXHIBIT  3.  ARTICLES OF INCORPORATION AND BY-LAWS

               Documents incorporated by reference - See Registration Statement
               on Form S-1 33-46748

EXHIBIT  4.  INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS

             Documents incorporated by reference - See Registration Statement on
              Form S-1 33-46748

              Documents  incorporated by reference - See the Company's Quarterly
              Report on Form 10-QSB for the Quarter Ended September 30, 1995.

EXHIBIT 10.  MATERIAL CONTRACTS

             Documents incorporated by reference - See Registration Statement on
              Form S-1 33-46748

              Documents  incorporated  by reference - See the  Company's  Annual
              Report on Form 10-KSB for the Fiscal Year Ended December 31, 1995

              Amended and Restated Revolving Credit and Security Agreement dated
              as of May 28, 1997 by and among IBJ Schroder  Bank & Trust Company
              (as Agent and  Lender),  National  Bank of Canada (as  lender) and
              Allstate Financial Corporation.

              First  Amendment  to Amended  and  Restated  Revolving  Credit and
              Security Agreement dated as of June 20, 1997.

              Agreement of Lease dated as of September 20, 1997 between Midtown
              Realty Company, LLC and Allstate Financial Corporation.

Exhibit 10.9 Employment Contracts

              Employment and Compensation Agreement with Francis B. Madden
              incorporated by reference to the Company's filing on Form 10-QSB
              for the Quarter Ended June 30, 1997.

              Employment and Compensation Agreement with Wade Hotsenpiller 
              incorporated by reference to the Company's filing on form 10-QSB
              for the Quarter Ended September 30, 1997.


Exhibit 21.  Subsidiaries of the Company

                                       29

<PAGE>



INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
Allstate Financial Corporation
Arlington, Virginia


      We have audited the accompanying  consolidated  balance sheets of Allstate
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated  statements of operations,  shareholders'  equity, and cash
flows for each of the three years in the period ended  December  31,  1997.  Our
audits also included the  financial  statement  schedule  listed in the Index at
Item 13(a) 2. These financial  statements and financial  statement  schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on
our audits.

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

      In our opinion, such consolidated  financial statements present fairly, in
all material respects,  the financial position of Allstate Financial Corporation
and  subsidiaries  as of December 31, 1997,  and 1996,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted  accounting  principles.
Also, in our opinion,  such financial  statement  schedule,  when  considered in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
present fairly, in all material respects, the information set forth therein.


Deloitte & Touche, LLP



Washington, D.C.
February 20, 1998

                                       30

<PAGE>



                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                                           December 31,
                                                     ---------------------------
                                                        1997             1996
                                                     -----------     -----------
                                     ASSETS

CURRENT ASSETS:
  Cash .........................................     $ 4,200,050     $ 1,624,899
  Finance Receivables - Net ....................      33,847,276      35,407,327
  Receivables - Other - Net ....................       2,988,927       4,094,975

  Prepaid expenses .............................         127,741         154,434

  Income tax receivable ........................            --         1,150,289

  Deferred income taxes ........................       1,056,686         893,000
                                                       ---------         -------
         TOTAL CURRENT ASSETS ..................      42,220,680      43,324,924

FURNITURE, FIXTURES AND EQUIPMENT, Net .........         494,240         538,164

OTHER ASSETS ...................................       4,203,727       2,116,343
                                                       ---------       ---------
         TOTAL ASSETS ..........................     $46,918,647     $45,979,431
                                                     ===========     ===========


                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and accrued expenses ........     $   420,356     $   446,360
  Notes payable ................................      14,373,724      14,954,582
  Income Tax Payable ...........................         240,226            --
  Credit balances of factoring clients .........       3,285,974       3,004,873
                                                       ---------       ---------
         TOTAL CURRENT LIABILITIES .............      18,320,280      18,405,815


NONCURRENT PORTION OF NOTES PAYABLE:
  Convertible Subordinated Notes and Other
       Non-Current Notes .......................       5,034,327       5,047,079
                                                       ---------       ---------
         TOTAL LIABILITIES .....................      23,354,607      23,452,894
                                                      ----------      ----------



                                       31

<PAGE>



                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)


COMMITMENTS AND CONTINGENCIES (See Note L.)

SHAREHOLDERS' EQUITY:
  Preferred stock, authorized 2,000,000 shares with
    no par value; no shares issued or outstanding      -                   -

  Common  stock,  authorized  10,000,000 
    shares  with no par  value;  3,102,328
    issued; 2,318,451 outstanding at
    December 31, 1997 and 2,317,919 outstanding
    at December 31, 1996, exclusive of
    shares held in treasury ..............            40,000             40,000

Additional paid-in-capital ...............        18,852,312         18,852,312

Treasury Stock 783,877 shares at
  December 31,1997 and 784,409 at
  December 31, 1996 ......................        (5,030,594)        (5,034,584)

Retained Earnings ........................         9,702,322          8,668,809
                                                   ---------          ---------
       TOTAL SHAREHOLDERS' EQUITY ........        23,564,040         22,526,537
                                                  ----------         ----------
                                                $ 46,918,647       $ 45,979,431
                                                ============       ============























                 See Notes to Consolidated Financial Statements

                                       32

<PAGE>



<TABLE>
<CAPTION>
                                             ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                                                  CONSOLIDATED STATEMENTS OF OPERATIONS


                                                              Years Ended December 31,
                                                -------------------------------------------
                                                     1997         1996            1995
                                                  ----------   ------------    ------------

<S>                                             <C>            <C>             <C>         
REVENUE:
    Earned discounts ........................   $  7,436,630   $ 10,025,779    $ 10,932,331
    Fees and other revenue ..................      2,569,213      2,378,782       2,065,015
                                                   ---------      ---------       ---------
             TOTAL REVENUE ..................     10,005,843     12,404,561      12,997,346
                                                  ----------     ----------      ----------
EXPENSES:
    Compensation and fringe benefits ........      3,087,085      3,318,609       3,198,497
    General and administrative ..............      2,165,396      2,804,643       2,758,285
    Interest expense ........................      1,170,152      1,606,561         983,718
    Provision for credit losses .............      1,593,555      5,878,167       4,981,646
    Commissions .............................        349,157        449,225         263,100
                                                     -------        -------         -------
             TOTAL EXPENSES .................      8,365,345     14,057,205      12,185,246
                                                   ---------     ----------      ----------

INCOME (LOSS) BEFORE INCOME TAXES ...........      1,640,498     (1,652,644)        812,100

INCOME TAXES (BENEFITS) .....................        606,985       (611,500)        331,000
                                                     -------       --------         -------

NET INCOME (LOSS) ...........................   $  1,033,513   $ (1,041,144)   $    481,100
                                                ============   ============    ============

NET INCOME (LOSS) PER COMMON SHARE
    DILUTED .................................   $        .44   $       (.45)   $       0.16
                                                ============   ============    ============
    BASIC ...................................   $        .45   $       (.45)   $       0.16
                                                ============   ============    ============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
    DILUTED .................................      2,324,624      2,328,808       2,966,337
                                                   =========      =========       =========
    BASIC ...................................      2,318,092      2,328,308       2,966,330
                                                   =========      =========       =========
</TABLE>
















                 See Notes to Consolidated Financial Statements

                                       33

<PAGE>


<TABLE>
<CAPTION>

                                             ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                                             CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                              YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


                                                      Additional
                                   Common              Paid in                Treasury               Retained
                                   Stock               Capital                 Stock                 Earnings               Total
                                 -----------        ----------------        -------------         --------------
<S>                                 <C>                <C>                                            <C>                <C>       
Balance - January 1,
1995                                $40,000            $18,852,312                                    $9,228,853         28,121,165
    Exchange of
    Convertible
    Subordinated Notes
    for 447,200 shares
    of common stock                                                            (2,871,901)                               (2,871,901)
    Net Income                         -                      -                      -                   481,100            481,100
                                  ----------          ------------            ------------            -----------       ------------
Balance - December 31,
1995                                $40,000            $18,852,312            $(2,871,901)            $9,709,953        $25,730,364
    Exchange of
    Convertible
    Subordinated Notes
    for 338,275 shares
    of common stock                       -                      -             (2,170,683)                     -         (2,170,683)
    Conversion of
    Convertible
    Subordinated Notes
    to 1,066 shares of
    common stock                          -                      -                   8,000                     -              8,000
    Net (Loss)                            -                      -                      -               (1,041,144)      (1,041,144)
                                  ----------          ------------            ------------            -----------       ------------
Balance - December 31,
1996                                $40,000            $18,852,312            $(5,034,584)            $8,668,809        $22,526,537
    Conversion of
    Convertible
    Subordinated Notes
    to 532 shares of
    common stock                          -                      -                   3,990                     -              3,990
    Net Income                            -                      -                      -                 1,033,513       1,033,513
                                  ----------          ------------            ------------            -----------       ------------
Balance - December 31,              $40,000            $18,852,312             $(5,030,594)            $9,702,322        $23,564,040
                   ===              =======            ===========             ===========             ==========        ===========
1997                                                   
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       34

<PAGE>



<TABLE>
<CAPTION>
                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                              Years Ended December 31,
                                                                           ---------------------------------------------------------
                                                                                1997                  1996                  1995
                                                                           ------------         -------------         --------------

<S>                                                                         <C>                 <C>                   <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (Loss) .............................................          $ 1,033,513         $  (1,041,144)        $     481,100
   Adjustments to reconcile net income
      to cash provided by operating activities:
     Depreciation - net ..........................................              222,124               107,664               100,093
     Provision for credit losses .................................            1,593,555             5,878,167             4,981,646
    Changes in operating assets and liabilities:
      Decrease/(Increase) in other receivables ...................            1,106,048            (1,978,133)              463,457
      Decrease/(Increase) in prepaid expenses ....................               26,693                50,389                (6,732)
      Increase in Income Tax Payable .............................              240,226                  --                    --
      Decrease/(Increase) in other assets ........................           (2,087,384)              461,955               397,760
      (Decrease)/Increase in accounts payable
         and accrued expenses ....................................              (26,004)              153,758               (11,236)
      (Increase) in deferred income tax asset ....................             (163,686)                 --
      Decrease/(Increase) in income tax receivable ...............            1,150,289              (428,208)              (93,958)
                                                                              ---------              --------               ------- 

NET CASH PROVIDED BY OPERATING ACTIVITIES ........................            3,095,374             3,204,448             6,328,130
                                                                              ---------             ---------             ---------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of finance receivables,
      including repurchases and life insurance
      contracts ..................................................         (201,026,991)         (199,191,058)         (172,311,795)
   Collections of finance receivables,
      including repurchases and life insurance
      contracts ..................................................          200,993,487           195,019,127           162,572,708
   Increase/(Decrease) in credit balances
      of factoring clients .......................................              281,101               631,144               668,691
   Purchase of furniture, fixtures and equipment .................             (178,200)             (108,199)             (158,691)
                                                                               --------              --------              -------- 

NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES .................               69,397            (3,648,986)           (9,229,087)
                                                                                 ------            ----------            ---------- 


CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from line of credit
      and other borrowings .......................................          100,490,490            58,584,464            72,153,625
   Principal payments on line of credit
      and other borrowings .......................................         (101,080,100)          (57,246,639)          (70,228,402)
   Treasury Stock Acquisition costs ..............................                  (10)              (22,683)              (33,901)
                                                                                    ---               -------               ------- 

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES .................             (589,620)            1,315,142             1,891,322
                                                                               --------             ---------             ---------

NET INCREASE (DECREASE) IN CASH ..................................            2,575,151               870,604            (1,009,635)

CASH, Beginning of year ..........................................            1,624,899               754,295             1,763,930
                                                                              ---------               -------             ---------

CASH, End of year ................................................         $  4,200,050           $ 1,624,899         $     754,295
                                                                           ============           ===========         =============
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       35

<PAGE>


<TABLE>
<CAPTION>
                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (continued)



                                                                                                Years Ended December 31,
                                                                             -------------------------------------------------------
                                                                                  1997                1996                  1995
                                                                               ---------           ----------            ---------


<S>                                                                           <C>                   <C>                   <C>       
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Interest paid ................................................            $1,121,272            $1,605,196            $1,014,406
                                                                              ==========            ==========            ==========

    Taxes paid ...................................................            $  460,000            $   14,321            $  408,958
                                                                              ==========            ==========            ==========


SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:

    Transfer of finance and other
       receivables to other assets ...............................            $2,401,026            $2,004,423            $  267,750
                                                                              ==========            ==========            ==========

    Issuance of Convertible Subordinated
       Notes in exchange for common stock ........................            $     --              $2,148,000            $2,838,000
                                                                              ==========            ==========            ==========

    Issuance of Common Stock in Exchange
       for Subordinated Notes ....................................            $    3,990            $    8,000            $     --
                                                                              ==========            ==========            ==========
</TABLE>
























                 See Notes to Consolidated Financial Statements

                                       36

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting and reporting policies of Allstate Financial Corporation and
its subsidiaries  (collectively,  the "Company")  conform to generally  accepted
accounting  principles and the 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.  In
preparing its financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates  shown in the  consolidated  balance  sheet and the  statement  of income.
Actual results could differ  significantly  from those estimates.  In the normal
course of business,  the Company  encounters  economic  risks.  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 receivables  portfolio at its own costs of
borrowing  funds  in the  market.  Credit  risk is the  risk of  default  on the
Company's  loan  portfolio  that  results  from  the  borrowers'   inability  or
unwillingness  to make  contractually  required  payments.  Market risk reflects
changes in the value of collateral underlying loans receivable and the valuation
of the Company's real estate owned.

     The  determination  of the  allowance for loan losses is based on estimates
that are  susceptible to  significant  changes in the economic  environment  and
market conditions.  Management  believes that, as of December 31, 1997 and 1996,
the allowance  for loan losses is adequate  based on the  information  currently
available.  A worsening  or  protracted  economic  decline  could  increase  the
likelihood  of losses due to credit and market  risks and could  create the need
for substantial additions to the allowance for loan losses.

CONSOLIDATION

     The consolidated  financial  statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
transactions.  No segment of its  business,  other than  factoring  and  general
financing is significant in relation to the Company's  consolidated total assets
and revenues.

RECLASSIFICATIONS

     Certain amounts related to 1996 have been  reclassified to conform with the
1997 presentation.

Finance Receivables and Allowance for Credit Losses


                                       37

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

     Finance Receivables consist of factored accounts receivable, Collateralized
Advances  (as  defined  below),  overadvances  secured  by general  liens,  life
insurance  contracts and non-earning  receivables.  Factored accounts receivable
are  stated  at the face  amount  outstanding,  net of  unearned  discounts,  an
allowance for credit losses,  and  participations.  Advances  collateralized  by
inventory,   equipment,   real   estate   and  other   property   (collectively,
"Collateralized  Advances") and overadvances secured by general liens are stated
at the aggregate  principal amount outstanding plus accrued earnings,  net of an
allowance for credit losses. Life insurance contracts are stated at the purchase
price paid for the contracts plus accrued earnings, net of an allowance based on
management's  estimate of the present value of the discounted cash flow from the
portfolio of life insurance contracts. Non-earning receivables are stated at the
amount advanced by the Company plus earnings  accrued to the time the accrual of
earnings is  suspended,  net of an allowance for credit  losses.  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 discount,  then the Company  increases
the allowance for credit losses or reduces the carrying value of the non-earning
receivable to its  estimated  fair value and makes a charge to its allowance for
credit  losses  in an  amount  equal to the  difference  between  the  Company's
investment in the non-earning receivable and its estimated fair value.

     The  allowance  for  credit  losses  is  maintained  at a level  which,  in
management's  judgment,  is sufficient to absorb losses  inherent in the finance
receivable portfolio. The allowance for credit losses is based upon management's
review and evaluation of the finance receivables  portfolio.  Factors considered
in the  establishment  of the allowance for credit losses  include  management's
evaluation  of  specific  finance   receivables,   the  adequacy  of  underlying
collateral,   historical  loss  experience,   expectations  of  future  economic
conditions and their impact on particular industries and individual clients, and
other  discretionary  factors.  The  allowance  for  credit  losses  is based on
estimates  of potential  future  losses,  and ultimate  losses may vary from the
current  estimates.  These  estimates  are typically  reviewed  quarterly and as
adjustments become necessary, the effects of the change in estimates are charged
against  the  allowances  for credit  losses in the period in which they  become
known. Finance receivables may be reclassified on the Company's balance sheet as
"other  receivables"  or "other assets" when, in  management's  opinion,  such a
reclassification  most  accurately  reflects the  character  of the asset.  This
usually  occurs within three to twelve  months after the client stops  factoring
with the Company. At the time of any such reclassification,  the Company usually
suspends  or  discontinues  the  accrual of  earnings  for  financial  statement
purposes.  If at any time the Company  determines  it is not likely to recover a
finance receivable in full, the receivable is appropriately written down against
the allowance.  Finance  Receivables are fully charged off against the allowance
when the Company has exhausted its

                                       38

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

efforts  against the  client's  customer,  the client,  guarantors,  other third
parties and any additional collateral retained by the Company.

     Effective  January 1, 1995,  the Company  adopted  Statement  of  Financial
Accounting  Standards (SFAS) No. 114, "Accounting By Creditors for Impairment of
a Loan."  This  statement  required  the  Company to  measure  the value of each
impaired  loan based on the  present  value of its  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.  Effective  January 1, 1995, the Company  adopted
SFAS  No.  118,  "Accounting  by  Creditors  for  Impairment  of a Loan - Income
Recognition  and  Disclosures."  This  Statement  amends  SFAS No. 114, to allow
creditors to use existing  methods for  recognizing  interest income on impaired
loans.


PURCHASED LIFE INSURANCE CONTRACTS

     Lifetime  Options,  a  wholly-owned  subsidiary  of the  Company,  provided
financial   assistance  to  individuals  facing   life-threatening   illness  by
purchasing their life insurance policies at a discount from face value.  Because
most  of  the  life  insurance   policies  purchased  by  Lifetime  Options  are
underwritten by highly rated insurance  companies (and, in many cases, backed by
state guaranty  funds),  the management of Lifetime Options believes that credit
risk  is not  material.  During  1997,  Lifetime  Options  curtailed  purchasing
policies. This decision enabled management to better focus on the Company's core
commercial  finance business at a time when competition had reduced yields,  and
medical  advances  have  created a certain  degree of  uncertainty,  in Lifetime
Options'  business.  In connection  with  curtailing  its  operations,  Lifetime
Options sold some of the life insurance policies in its portfolio.


OTHER RECEIVABLES

     Other receivables consist primarily of amounts due to the Company where the
source of payment is expected to be from legal  proceedings or other  collection
efforts instituted  against a client's  customer,  guarantors and/or other third
parties.  Other receivables typically arise from the reclassification of finance
receivables. At the time of reclassification,  other receivables are stated at a
value estimated by management based on management's assessment of the likelihood
of payment or success on the  merits,  the ability of the third party to pay and
other discretionary factors. Also, at the time of reclassification,  the accrual
of  earnings  is usually  suspended  or  discontinued  for  financial  statement
purposes. Write-downs, if any, at the time of

                                       39

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

reclassification   are  charged   against  the  allowance  for  credit   losses.
Management's  estimates  of the fair value of other  receivables  are  typically
reviewed  quarterly  and as  adjustments  become  necessary,  the effects of the
change in estimates are charged  against the allowance  for credit  losses.  The
costs of carrying and collecting  other  receivables  are generally  expensed in
operations  during the period in which they are incurred.  Other receivables are
subject to legal and other collection processes and contingencies over which the
Company does not have  exclusive  control.  Accordingly,  the amounts  which the
Company  ultimately  receives  in  payment  of other  receivables  could  differ
significantly from management's estimates.


FURNITURE, FIXTURES AND EQUIPMENT

     Furniture,  fixtures and  equipment are recorded at cost.  Depreciation  is
computed using straight line and accelerated  methods over the estimated  useful
lives of the related assets.


OTHER ASSETS

     At the date of  acquisition,  other  assets are recorded at fair value less
estimated  selling  costs.  Also at the  date of  acquisition,  the  accrual  of
earnings is usually suspended or discontinued for financial  statement purposes.
Write-downs  to fair value at the date of  acquisition  are charged  against the
allowance for credit losses. Subsequent to acquisition, the asset is adjusted to
the lower of cost or fair value less estimated costs to sell and adjustments, if
any, are charged  against the allowance for credit  losses.  Operating  expenses
pertaining  to other  assets are expensed in  operations  in the period in which
they are incurred.  Gains or losses on the disposition of other assets are first
reflected in the allowance for credit losses. Any gain which exceeds the amount,
if any, previously written-off is reflected in current income.

     The amounts  ultimately  recovered  by the Company  from other assets could
differ materially from the amounts used in arriving at the net carrying value of
the assets  because of future  market  factors  beyond  the  Company's  control,
adversarial  actions  taken  by the  client  or  other  owners  of the  property
foreclosed or changes in the Company's strategy for recovering its investment.


FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance  with the  requirements  of SFAS No. 107,  "Disclosure  About Fair
Value of Financial Instruments", which requires the disclosure of fair value

                                       40

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

information about financial  instruments when it is practicable to estimate that
fair value and excessive costs would not be incurred,  the following methods and
assumptions were used in estimating the fair value of financial instruments:

     Cash  and  Cash  Equivalents  -- The  carrying  amounts  for  cash and cash
     equivalents approximates fair value.

     Finance  Receivables,  Commitments  and Other  Receivables  -- The carrying
     amount of receivables  approximate fair value because of the short maturity
     of these instruments.

     Notes payable which are primarily  adjustable  rate notes,  are recorded at
     book values, which approximate the respective fair values.


UNEARNED AND EARNED DISCOUNTS ON FACTORED ACCOUNTS RECEIVABLE

     At the time of purchase,  the unearned  discount is deducted  from the face
amount of the account  receivable  purchased  and is recorded as a reduction  to
such receivable.  Unearned discounts are recognized as income in accordance with
the respective terms of the accounts receivable factoring and security agreement
between the Company and each of its clients. The factoring agreement contains an
earnings  schedule  detailing  the discount the Company is entitled to charge at
various time intervals  (typically a uniform  discount  during the first 30 days
following  the  purchase  and an  incrementally  higher  discount  every 15 days
thereafter).  The  Company  recognizes  discounts  on the first day of each time
interval.  The Company's method of recognizing  earned discounts does not differ
materially  from the  interest  method.  At the time an  account  receivable  is
purchased,  a due date is set by  management  based on the  anticipated  payment
date. This  anticipated  payment date is used to identify past due  receivables.
The  accrual  of earned  discounts  is  discontinued  when,  in the  opinion  of
management,  the collection of additional  earnings from the client's  customer,
the  client,  guarantors  or  collateral  held,  if any, is  unlikely.  Accounts
receivable  which  have  been  identified  as past due may  continue  to  accrue
earnings if, in the opinion of  management,  collection of the earnings from the
client's customer, the client, guarantors or collateral held, if any, is likely.

     When accounts receivable are placed on non-accrual status, earned discounts
theretofore  accrued in the current  year are  charged  against  current  year's
earnings if, in the opinion of  management,  the  collection of such earnings is
unlikely.  Earned discounts  accrued in prior years are charged to the allowance
for credit losses if, the opinion of management, the collection of such earnings
is unlikely.

                                       41

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


EARNED DISCOUNTS ON COLLATERALIZED ADVANCES AND OVERADVANCES SECURED BY
GENERAL LIENS

     Earned discounts on Collateralized Advances accrue typically on the average
outstanding  amount of the  advance  during  each  calendar  month (or  fraction
thereof).  Earned  discounts  on  overadvances  secured by general  liens accrue
typically on the outstanding amount of the overadvance during successive 15- day
intervals.  In both cases, accrued earnings are typically required to be paid in
full no less frequently than monthly in arrears.


FEES AND OTHER INCOME

     Fee income includes  application  fees, letter of credit and guaranty fees,
and  commitment or facility fees received from clients.  Commitment and facility
fees are deferred and recognized  over the term of the commitment or facility on
a straight  line basis.  Application  fees are paid by clients to the Company to
cover the cost of  performing  credit  investigations  and field reviews and are
recognized  when received.  Letter of credit and guaranty fees are usually for a
sixty- to  ninety-day  period  and are  recognized  when the letter of credit or
letter of guaranty is issued.

     Other income  includes  supplemental  discounts  (i.e.,  early  termination
fees), interest income and miscellaneous income.


INCOME TAXES

     The Company  recognizes  the amount of taxes  payable or  refundable in the
current  year and  deferred  tax  liabilities  and  assets  for the  future  tax
consequences  of events that have been  recognized  in the  Company's  financial
statements or tax returns. In addition, the Company will reduce any deferred tax
assets by the  amount of any tax  benefit  that  more  than  likely  will not be
realized.


RECENTLY IMPLEMENTED ACCOUNTING PRONOUNCEMENTS

     In March 1997, the Financial Accounting Standards Board Issued SFAS No.
128, "Earnings Per Share". See Note K.

     In September 1996, SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" was issued.  SFAS No.
125 provides accounting and reporting standards for transfers and servicing

                                       42

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

       of financial assets and extinguishments of liabilities, based on a
financial-components  approach  that  focuses on control.  Under this  approach,
after a  transfer  of  financial  assets,  financial  and  servicing  assets are
recognized if controlled or liabilities  are  recognized if incurred.  Financial
and  servicing  assets are removed from the balance  sheet when control has been
surrendered  and  liabilities  are removed when  extinguished.  SFAS No. 125 was
effective and adopted on January 1, 1997 and will be applied prospectively.  The
adoption  of this  Statement  did not have a  material  impact on the  Company's
financial position or results of operations.


NEW ACCOUNTING PRONOUNCEMENTS

     In February 1997, The FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. SFAS No. 129 consolidates the existing guidance from
several other pronouncements relating to an entities capital structure.

     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This   pronouncement   establishes   standards  for  reporting  and  display  of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose  financial  statements.  SFAS No. 130 is effective
for financial statements beginning after December 15, 1997.

     Additionally,  in June of 1997,  the FASB issued SFAS No. 131,  Disclosures
about  Segments  of  an  Enterprise  and  Related  Information.   SFAS  No.  131
establishes  standards for the way that public  enterprises  report  information
about operating  segments in the annual  financial  statements and requires that
those  enterprises  report  selected  information  about  operating  segments in
interim financial reports issued to shareholders.  It also establishes standards
for related disclosures about products and services,  geographic areas and major
customers.  SFAS No. 131 is effective for financial  statements  beginning after
December 15, 1997.

     The implementation of these statements will only impact the presentation of
certain  components of the Company's  financial  statements and related footnote
disclosures.



                                       43

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

B. RECEIVABLES

     Finance receivables net consist of the following:

                                                            December 31,
                                                 -------------------------------
                                                      1997              1996
                                                 ------------      -------------

Factored accounts receivable ...............     $ 30,417,522      $ 22,390,229
Collateralized Advances ....................        7,236,040         8,808,455
Overadvances and accrued earnings
  collateralized by general liens ..........        1,372,526         1,849,778
Life Insurance Contracts ...................        3,455,868         5,368,266
Non-Earning Receivables ....................          828,850         4,547,893
                                                      -------         ---------

     Gross Finance Receivables .............       43,310,806        42,964,621
Less:  Participation .......................       (2,208,959)       (1,000,000)
Less:  Unearned discount ...................       (5,274,640)       (4,278,322)
Less: Allowance for Credit Losses -
     (including $275,000 allocated to
     Lifetime Options at December 31,
        1997 and $0 at December 31, 1996)...       (1,979,931)       (2,278,972)
                                                   ----------        ---------- 
     Finance receivables, net ..............     $ 33,847,276      $ 35,407,327
                                                 ============      ============


Factored  accounts  receivable  usually  become due within a maximum of 90 days.
After this time,  the  Company  either  requires  the client to repay the amount
advanced on the  receivable  plus the earned  discount  under the full  recourse
provisions of its  agreements  or,  depending on an analysis of  collectibility,
extends the payment  terms of the  receivable  through a process  referred to as
"repurchasing" the receivable.  If at any time the Company determines that it is
unlikely  to receive  payment  on a factored  account  receivable,  the  Company
retains  the right to require  its  clients to repay the amount the  Company has
advanced on the receivable plus the amount of discount earned.

      Collateralized  Advances secured by fixed assets (e.g.,  equipment or real
estate) are  typically  required to be repaid  based on a 36 month  amortization
schedule  (although the amortization  schedule in certain  circumstances  may be
significantly  longer) with a final  balloon  payment due not more than one year
after  the  making of the  Collateralized  Advance.  If at the time the  balloon
payment is due the Company's  funding  relationship with the client is extended,
the Company  will  typically  renegotiate  the balloon  payment.  Collateralized
Advances  secured by current  assets (e.g.  inventory) are subject to a daily or
weekly  borrowing  base  formula and come due in a single,  lump sum payment not
more than one year after the making of the initial such Collateralized

                                       44

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

Advance.  If at the time such payment is due the Company's funding  relationship
with the client is extended,  the Company will typically  extend the maturity of
the lump sum payment.

      Overadvances  secured by general  liens are  required to be repaid in full
(either in  installments  or in a single,  lump sum payment) in as little as one
week or as long as six months in accordance with a written agreement between the
Company and its client.

Other receivables consist of the following:

                                                            December 31,
                                                    --------------------------- 
                                                       1997              1996
                                                   -----------      -----------
Third party receivables in collection ........     $ 3,747,587      $ 4,389,580
Miscellaneous ................................             340            5,395
Less: Allowance for credit losses ............        (759,000)        (300,000)
                                                      --------         -------- 
                                                   $ 2,988,927      $ 4,094,975
                                                   ===========      ===========

All receivables are pledged as collateral  under a revolving line of credit (See
Footnote F).

    Changes in the allowance for credit losses were as follows:

    BALANCE, January 1, 1995                 $ 2,510,778

         Provision for credit losses           4,981,646
         Receivables charged off              (5,193,525)
         Recoveries                               52,069
                                                  ------

    BALANCE, December 31, 1995                 2,350,968

         Provision for credit losses           5,878,167
         Receivables charged off              (5,711,065)
         Recoveries                               60,902
                                                  ------

    BALANCE, December 31, 1996                 2,578,972

         Provision for credit losses           1,593,555
         Receivables charged off              (1,775,586)
         Recoveries                              341,990
                                                 -------

    BALANCE, December 31, 1997               $ 2,738,931
                                             ===========



                                       45

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

    The  allowance  for credit  losses is  classified  in the  balance  sheet as
follows:

                                                      December 31,
                                          ----------------------------------
                                               1997                 1996
                                           ----------            -----------

         Gross Finance Receivables         $1,979,931             $2,278,972
         Other Receivable                     759,000                300,000
                                              -------                -------
                                           $2,738,931             $2,578,972
                                           ==========             ==========

     Impairment of loans having  recorded  value of $4,759,528 and $3,396,661 at
December  31,  1997 and 1996  have  been  recognized  in  conformity  with  FASB
statements No. 114, Accounting by Creditors for Impairment of a Loan, as amended
by FASB  statement No. 118,  Accounting by Creditors for  Impairment of a Loan -
Income Recognition and Disclosures.  The average recorded investment in impaired
loans during 1997,  1996, and 1995 was $4,078,095,  $3,396,661,  and $3,307,474,
respectively.  The  allowance  for  credit  losses  related  to these  loans was
$1,055,294,  $525,000,  and  $1,549,500  at December 31, 1997,  1996,  and 1995,
respectively.  The Company  suspended  the  recording of income from these loans
once deemed impaired.

C. FURNITURE, FIXTURES AND EQUIPMENT

      The  Company's  investment  in  property  and  equipment  consists  of the
following:
                                                            December 31,
                                                  -----------------------------
                                                      1997               1996
                                                  ----------          ---------

       Furniture , fixtures and equipment         $1,145,785          $ 993,039
       Automobiles                                   156,810            149,141
       Less: Accumulated depreciation               (808,355)          (604,016)
                                                    --------           -------- 
                                                  $  494,240          $ 538,164
                                                  ==========          =========

     The  furniture,  fixtures and equipment  are pledged as collateral  under a
revolving line of credit (see Note F). Also,  the Company  pledged an automobile
as collateral under a capital lease.


                                       46

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

D. OTHER ASSETS

      Other assets consist of:
                                                             December 31,
                                                  -----------------------------
                                                      1997              1996
                                                  ----------        -----------
    Commercial property held for sale and
          receivables secured by mortgages        $3,941,160        $1,883,768
    Condominium, not used in trade or
          business                                   232,575           232,575
    Deferred loan costs                               29,992
                                                      ------        -----------
                                                  $4,203,727        $2,116,343
                                                  ==========        ==========

    Included in  commercial  property held for sale are certain  properties  for
which the Company does not hold title.  Rather,  the Company holds  mortgages on
these  assets  in  which  the  client  or other  obligor  has no  equity  in the
collateral  at its current  estimated  fair value.  Proceeds for  repayment  are
expected to come only from the sale of the collateral,  and either the client or
other obligor has abandoned control of the asset or it is doubtful the client or
other obligor will rebuild  equity in the  collateral or repay the receivable by
other means in the  foreseeable  future.  At December 31, 1997, one property was
under contract for an aggregate selling price of $750,000.


E. CREDIT BALANCES OF FACTORING CLIENTS

      At  December  31, 1997 and 1996,  credit  balances  of  factoring  clients
consist of: (i) a holdback  reserve of $1,740,046 and $1,246,756,  respectively,
which is payable to clients upon the collection of factored accounts receivable,
(ii) a factors  reserve of $428,067  in 1997 and -0- in 1996  (which  represents
amounts due to factoring  clients  subject to contractual  limitation) and (iii)
cash collateral of $1,117,861 and $1,758,117 respectively.




                                       47

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                                F. NOTES PAYABLE

      Notes payable consist of:
                                                              December 31,
                                                      --------------------------
                                                         1997           1996
                                                      ----------     ----------
Notes  payable -  related  parties;
    interest  payable  at 1/4%  over  prime due
    December 31, 1999 and on demand;
    unsecured                                           $156,216      $164,969
Notes payable; interest payable
    at 1/4% over prime due December 31,
    1999 and on demand, unsecured                         21,827        21,827
Convertible  Subordinated  Notes
    due September 30, 2000 - interest at 1.25%
    over prime; unsecured; total authorized
    amount - $5,000,000                                4,974,000     4,978,000
Revolving line of credit - interest
    at .25% over the base rate or 2.25%
    over LIBOR; collateralized by finance
    receivables and personal
    property;  total line - $25,000,000               14,250,081    14,825,012
Capitalized Lease - Payable over 24 months;
    final payment due April, 1998,
    collateralized by automobile.                          5,927        11,853
                                                           -----        ------

                                                     $19,408,051   $20,001,661
                                                     ===========   ===========

At December 31, 1997, 1996 and 1995, the prime rate was 8.50%,  8.25% and 8.50%,
respectively.

These notes payable are classified on the balance sheet as follows:

                                                           December 31,
                                               -------------------------------- 
                                                   1997                1996
                                               -----------         -----------

Current portion of notes payable               $14,373,724         $14,954,582
Noncurrent portion of notes payable -
    Convertible Subordinated Notes and
    Other Notes                                  5,034,327           5,047,079
                                                 ---------           ---------
                                               $19,408,051         $20,001,661
                                               ===========         ===========

    The  majority  of the notes  payable  to  related  parties  arose  from cash
advances made to the Company prior to 1990 and are due to individuals related to
the former principal owners of the Company. Interest expense on notes

                                       48

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

payable to related  parties for the years ended December 31, 1997, 1996 and 1995
was $15,187, $15,400, and $16,200, respectively.

    Aggregate  annual  principal  payments  on notes  payable for the five years
subsequent to December 31, 1997 are as follows:

              Twelve Months Ending December 31,
              ---------------------------------
                           1998                    $14,373,724
                           1999                         60,327
                           2000                      4,974,000
                           2001                          -
                           2002                          -
                                                   -----------
                                                   $19,408,051
                                                   ===========

      As of  December  31,  1997 the Company  had  approximately  $10.8  million
available under a $25.0 million secured revolving line of credit.  The revolving
line of credit contains  various sub facilities  which limit its use. The entire
facility is available  for the  purchase of accounts  receivable;  however,  the
Company may borrow only (i) $5.0  million  secured by machinery  and  equipment,
(ii) $2.5 million  secured by  inventory,  and (iii) issue up to $5.0 million of
Letters of Credit.  Borrowings  under the credit  facility  bear  interest  at a
spread  over the  bank's  base rate or a spread  over  LIBOR,  at the  Company's
election.  The Company is subject to  covenants  which are typical in  revolving
credit  facilities  of this  type.  The  current  maturity  date of this  credit
facility is May 27, 2000.

      Bank  commitment fee expense for the years ended  December 31, 1997,  1996
and 1995 was $27,828, $38,400, and $41,900, respectively.

      As of December 31, 1997 and December 31, 1996, the Company had outstanding
approximately  $4,974,000 and $4,978,000,  respectively,  in aggregate principal
amount of  Convertible  Subordinated  Notes issued in exchange for shares of the
Company's common stock  (currently held by the Company as treasury  stock).  The
Convertible  Subordinated  Notes were issued in exchange  for 785,475  shares of
common stock.  The  Convertible  Subordinated  Notes (i) mature on September 30,
2000,  (ii) currently  bear interest at a rate of 9.5% per annum,  which rate of
interest  fluctuates  with the prime  rate,  but may not fall  below 8% nor rise
above 10% per annum,  (iii) are convertible  into common stock of the Company at
$7.50 per share,  (iv) are  subordinated  in right of  payment to the  Company's
obligations  under its secured  revolving  credit  facility  and (v) were issued
pursuant  to an  indenture  which  contains  certain  covenants  which  are less
restrictive  than those  contained in the  Company's  secured  revolving  credit
facility.  Upon the occurrence of certain change of control events,  the holders
of the  Convertible  Subordinated  Notes  have  the  right to have  their  notes
redeemed at par. During 1997 and 1996, $4,000 and $8,000 of Convertible

                                       49

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

Subordinated  Notes were  converted into 532 and 1,066 shares of common stock of
the Company, respectively.

G. STOCK OPTION AND BENEFIT PLANS

     In October 1995, the Financial  Accounting  Standards Board 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 accounting
for all stock  compensation  arrangements.  The Company continues to account for
stock  options  under APB No. 25 and  provides  the  additional  disclosures  as
required by SFAS No. 123.

      The Company has reserved 275,000 shares of common stock for issuance under
its qualified stock option plan. 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.  The  following  table
summarizes qualified stock option transactions from 1995 through 1997.
                                            Total              Option Price
                                           Options               Per Share
                                          ---------          ----------------

   Outstanding, January 1, 1995             94,437            $5.75 to $14.00
      Granted                                1,200            $5.38 to $ 7.69
      Forfeited                            (53,470)           $5.88 to $14.00
                                           ------- 

   Outstanding, December 31, 1995           42,167            $5.37 to $14.00
      Granted                              116,100            $5.62 to $ 6.75
      Forfeited                            (24,867)           $5.43 to $14.00
                                           -------  

   Outstanding, December 31, 1996          133,400 1          $5.37 to $14.00
      Granted                                1,200            $5.62 to $ 6.75
      Forfeited                               (800)           $5.43 to $14.00
                                              ---- 

   Outstanding, December 31, 1997           133,800
                                            =======

   Exercisable, December 31, 1997            49,301
                                             ======
--------
       1 In December 1997, the expiration date on 15,000 stock options issued in
December 1992 was extended from December 1997 to June 15, 1998. No  compensation
was  recorded  since the  exercise  price was in excess of the market price when
extended.

                                       50

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


        The Company has  reserved  150,000  shares of common  stock for issuance
under its non-qualified  stock option plan. 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
from 1995 through 1997:

                                               Total           Option Price
                                              Options            Per Share
                                             ---------       ---------------
                                                       
        Outstanding, January 1, 1995            8,668        $7.13 to $14.00
           Granted                             10,000        $5.60
           Forfeited                           (6,668)       $7.13
                                               ------        

        Outstanding, December 31, 1995         12,000        $5.60 to $14.00
           Granted                             23,000        $7.00
           Forfeited                          (10,000)       $5.60
                                              -------       

        Outstanding, December 31, 1996         25,000        $7.00 to $14.00
           Granted                             44,000        $7.00
           Forfeited                              -          $5.60
                                              -------

        Outstanding, December 31, 1997         69,000        $5.60 to $14.00
                                               ======

        Exercisable, December 31, 1997         69,000
                                               ======


        The table below summarizes the stock option activity for both plans:

                                           1997           1996          1995
                                         -------         -------       -------

        Outstanding at January 1         158,400          54,167       103,105
           Granted                        45,200         139,100        11,200
           Exercised                        --                --            --
           Forfeited                        (800)        (34,867)      (60,138)

        Outstanding at December 31       202,800         158,400        54,167

        Exercisable at December 31       118,301          40,794        34,231



                                       51

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

     The weighted average fair value at date of grant for options granted during
1997 and 1996 was $2.29 and  $2.37,  respectively.  The fair value of options at
date of grant was  estimated  using the  Black-Scholes  model  with an  expected
option  life of 3.1  years and 3.9  years in 1997 and  1996,  and the  following
weighted average assumptions,  respectively, for 1997 and 1996: dividend yield -
none either year; interest rate - 6.86% and 6.25%;  volatility 38.00% and 42.00%
for the respective year.  Weighted average option exercise price information for
years 1997, 1996 and 1995:


        Per Share                           1997            1996           1995
                                          ------          -------         ------
        Outstanding at January 1           $6.45           $8.64          $8.56
           Granted                         $6.16           $5.96          $5.67
           Exercised                         --              --             --
           Forfeited                       $6.22           $7.79          $7.68
        Outstanding at December 31         $6.24           $6.45          $8.64

        Exercisable at December 31         $7.04          $10.50          $9.10


Proforma Disclosure

     The  Company's  net income  would have been reduced by $74,712 or $0.03 per
share  basic and  dilutive  for 1997 in  stock-based  compensation  cost for the
Company's  qualified and  non-qualified  stock option plans if the plan had been
determined  based on the fair  value at the  grant  dates for  awards  under the
plans.  The Company's net loss would have been increased by $49,000 or $0.02 per
share basic and  dilutive  for 1996  compared  to a  reduction  of net income of
$2,000 with no change in the earnings per share in 1995. The proforma  effect on
net income for 1996 and 1995 is not representative of the proforma effect on net
income in future  years  because  it does not take into  consideration  proforma
compensation expense related to grants made prior to 1995.

     Effective  January 1, 1990,  the Company  adopted the  "Allstate  Financial
Corporation  401(k) Retirement Plan" (the Plan) for the benefit of the Company's
employees.  The Plan  provides for the deferral of up to 15% of a  participating
employee's  salary,   subject  to  certain  limitations,   and  a  discretionary
contribution  by  the  Company.  The  Company's  contribution  is  allocated  to
participating   employees   based  on  relative   compensation.   The  Company's
contribution  for the years ended December 31, 1997,  1996 and 1995 was $45,704,
$45,751, and $34,563, respectively.



                                       52

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

H. INCOME TAXES

      The tax provision consists of:
                                                   Years Ended December 31,
                                        ----------------------------------------
                                            1997          1996           1995
Federal:
  Current ..........................    $ 765,405      $(591,200)      $276,500
  Deferred .........................     (160,100)       (65,900)        16,000
                                         --------        -------         ------
                                          605,305       (657,100)       292,500
                                          -------       --------        -------

State:
  Current ..........................        5,266        (20,300)        38,500
  Deferred .........................       (3,586)        65,900           --
                                           ------         ------             
                                            1,680         45,600         38,500
                                            -----         ------         ------

    TOTAL ..........................    $ 606,985      $(611,500)      $331,000
                                        =========      =========       ========


Tax Expense at Statutory Rate ......    $ 557,770      $(561,900)      $276,100
Increase (Decrease)
  Resulting from:
  State Income Taxes,
    Net of Federal Income
    Tax Effect .....................         --          (15,800)        24,500
  Non-deductible expense ...........       20,100         25,200         19,100
  Other ............................       29,115        (59,000)        11,300
                                           ------        -------         ------
                                        $ 606,985      $(611,500)      $331,000
                                        =========      =========       ========

Effective Tax Rate .................        37.0%          37.0%          40.8%
                                            ====           ====           ==== 




                                                          December 31,
                                                 ---------------------------
                                                    1997              1996
                                                 ---------         --------

      Deferred tax asset:
        Allowance for credit losses              $1,056,686         $893,000
                                                 ==========         ========




                                       53

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

I. RELATED-PARTY TRANSACTIONS

      Certain  members  of the  immediate  families  of Eugene  Haskin  and Leon
Fishman, directly or through trusts, have provided financing to Lifetime Options
through unsecured loans with interest payable monthly at an annual interest rate
of 1/4% over the prime rate. One-quarter percent over the prime rate is the same
rate paid by the Company to its unaffiliated, bank lenders.

      Lifetime Options' total  indebtedness to members of Mr. Haskin's immediate
family was $15,146 at December 31, 1997 and 1996. During 1997 and 1996, Lifetime
Options  paid   aggregate   interest  on  these  loans  of  $1,451  and  $1,427,
respectively.

      Lifetime  Options'  total   indebtedness  to  members  of  Leon  Fishman's
immediate  family was $38,071 at December 31, 1997,  and $46,823 at December 31,
1996. During 1997 and 1996,  Lifetime Options paid aggregate  interest of $3,875
and $4,229, respectively.

      Rental  payments of $24,000 were received by the Company in 1997, 1996 and
1995,  respectively,  from Leon Fishman, the Company's current Vice Chairman and
former President, for the personal use of a condominium owned by a subsidiary of
the Company.


J.    FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK AND CREDIT
      CONCENTRATIONS

      The Company is a party to financial  obligations  with  off-balance  sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
clients. These financial obligations include conditional commitments to purchase
receivables,   obligations   under   guaranties   issued  by  the   Company  and
reimbursement  obligations  under  letters of credit  issued  for the  Company's
account. These obligations involve, to varying degrees,  elements of credit risk
in excess of the amount recognized on the balance sheet.

      The Company's maximum exposure to credit loss under financial  obligations
with off-balance sheet risk is represented by the contractual or notional amount
of these  obligations.  The  Company  uses the same  credit  policies  in making
conditional  commitments  and incurring  contingent  obligations  as it does for
on-balance sheet  obligations.  These commitments have fixed expiration dates or
other  termination  clauses and usually  require payment of a fee by the client.
Since many of the  commitments  may expire  without being drawn upon,  the total
commitment amounts do not necessarily  represent future cash  requirements.  The
Company receives collateral to secure letters of credit and guaranties.

                                       54

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

      Financial  obligations whose contract or notional amounts represent credit
risk are as follows:
                                                            December 31,
                                                    ---------------------------
                                                         1997          1996
                                                    -----------     -----------
      Conditional Commitments to purchase
         receivables                                $57,948,000     $66,641,000
      Standby letters of credit and guaranties      $   219,927     $   336,230


      For the year ended  December  31,  1997,  gross  earnings  from one client
accounted  for 35% of the Company's  total earned  discounts as compared to 1996
where two clients accounted for 31% of the Company's total earned discounts.  At
December 31, 1997 and 1996,  two clients each accounted for more than 10% of the
Company's outstanding gross finance receivables.


K. NET INCOME PER SHARE

      In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128,  "Earnings Per Share".  SFAS No. 128  supersedes  APB No. 15 to conform
earnings  per share with  international  standards  as well as to  simplify  the
complexity  of the  computation  under APB No. 15.  SFAS No. 128  requires  dual
presentation  of basic and diluted  earnings per share on the face of the income
statement.  Basic  earnings  per share  excludes  dilution  and is  computed  by
dividing income available to common shareholders by the weighted-average  number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential  dilution  that could occur if  securities  or other  contracts to
issue common stock were exercised or converted  into common stock.  SFAS No. 128
is effective for both interim and annual periods ending after December 15, 1997.
The basic and  dilutive  earnings per share are  reflected  in the  statement of
operations.

      The  following  table  details  the  calculation  of the basic and diluted
Earnings per share.


                                       55

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


                                          Income (Loss)    Shares     Per-Share
                                          (Numerator)   (Denominator)   Amount
Year Ended December 31, 1995:
Basic EPS:
 Net Income available to common          $   481,100      2,966,330     $0.16
                                                                        =====
 Stockholders

Effect of Dilutive Securities:
 Stock Options                                   -                7
                                         -----------      ---------
Diluted EPS:
 Net Income available to common
 stockholders plus assumed
 conversions                             $   481,100      2,966,337     $0.16
                                         ===========      =========     =====
Year Ended December 31, 1996:
Basic EPS:
 Net (Loss)                             $(1,041,144)      2,328,308    $(0.45)
                                                                       =======
Effect of Dilutive Securities:
 Stock Options                                  -              -
                                        ------------      ---------
Diluted EPS:
 Net Loss plus assumed
 conversions                            $(1,041,144)      2,328,308    $(0.45)
                                                                       =======
Year Ended December 31, 1997:
Basic EPS:
 Net Income available to common
 Stockholders                             $1,033,513      2,318,092     $0.45
Effect of Dilutive Securities:
 Stock Options                                   -            6,532
                                          ----------      ---------
Diluted EPS:
 Net Income available to common
 stockholders plus assumed
 conversions                              $1,033,513      2,324,624     $0.44
                                          ==========      =========     =====

During 1997 and 1995,  there were various  options to purchase  84,349 and 1,095
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.


                                       56

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

The Company  incurred a net loss for the year ended December 31, 1996. Since the
inclusion of stock options in the  computation  of diluted EPS would have had an
antidilutive effect, the common shares associated with the options were excluded
from the computation.

The  convertible  subordinated  notes,  which convert into the Company's  common
stock at $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 the three years ended December 31, 1997.


L. COMMITMENTS AND CONTINGENCIES

      The Company leases office space under operating leases with Consumer Price
Index  escalations and rental  escalations  based on increases in base operating
expenses as defined in the  agreements.  The Company's  headquarter's  lease was
renegotiated  during  1995 and  extended  for six years to December 1, 2001 at a
reduced rental. The Company also pays rent for subsidiaries and storage space.

      Future minimum rental payments are as follows:

              Twelve Months Ended December 31,
              --------------------------------

                           1998                         265,000
                           1999                         270,000
                           2000                         276,000
                           2001                         267,000
                                                        -------
                                                     $1,078,000
                                                     ==========

      Rent expense was  $210,126, $200,539, and $232,500, in 1997, 1996 and
1995, respectively.

      The  Company  is a  defendant  in White,  Trustee  v.  Allstate  Financial
Corporation  pending in the U.S.  Bankruptcy  Court for the Western  District of
Pennsylvania.  The Company provided receivables financing and advances for Lyons
Transportation  Lines,  Inc.  ("Lyons").  Lyons was the  subject of a  leveraged
buy-out  and  subsequently  filed a  bankruptcy  petition.  In 1991,  the Lyons'
trustee  brought an action  against the Company  claiming,  among other  things,
fraudulent transfer and breach of contract.  In late 1994, the Company reached a
settlement  agreement  with the  Lyons'  trustee,  subject  to  approval  by the
bankruptcy court, which would have released the Company from all claims upon the
payment of $300,000.  In connection  with the  settlement,  the Company paid and
added  $300,000 to the  provision  for credit  losses in 1994. A creditor in the
bankruptcy proceeding, Sherwin-Williams Company, objected to

                                       57

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

the proposed  settlement  amount and, in March 1995, the objection was sustained
by the  bankruptcy  court.  The  $300,000  previously  paid by the  Company  was
returned  to the  Company in April  1996;  however,  the  Company  continues  to
maintain a liability for this amount. The matter is currently being litigated in
the District  Court.  Management  does not believe at this time that the Company
has a material  exposure  significantly in excess of the previously  agreed upon
settlement amount.

      In  connection  with the same  transaction,  the Company was also named in
January 1994 as a defendant in  Sherwin-Williams  Company v. Robert Castello et.
al.  pending in the United States  District  Court for the Northern  District of
Ohio.  Sherwin-Williams  is  suing  all  parties  with  any  involvement  in the
transaction  to  recover  damages  allegedly  incurred  by  Sherwin-Williams  in
connection  with the leveraged  buy-out and the  bankruptcy  litigation  arising
therefrom.  Sherwin-Williams  asserts  that it has or will  incur  pension  fund
liabilities  and  other  liabilities  as a  result  of  the  transaction  in the
approximate amount of $11 million and has asserted claims against the Company in
that amount. The complaint asserts,  among other things,  that the purchasers of
Lyons breached their purchase  agreement with  Sherwin-Williams  by pledging the
assets of Lyons to the Company to obtain the down payment. The Company was not a
party to the purchase agreement. In response to the complaint, the Company filed
a motion to dismiss all claims. In March 1997, a Federal magistrate  recommended
to the  District  court  that the  Company's  motion to  dismiss  the six claims
contained  in  the  original  complaint  be  granted.  However,  the  magistrate
recommended  that the Company's motion to dismiss two new claims contained in an
amended  complaint be denied.  The District  Court  sustained  the  magistrate's
recommendation.  The Company  believes that it has  meritorious  defenses to the
Counterclaims  and  intends  to  vigorously  defend  all  claims.  However,  the
litigation is in the  preliminary  stage and the  probability  of a favorable or
unfavorable  outcome  and the  potential  amount  of  loss,  if any,  cannot  be
determined or estimated at this time.

     The Company is a counterclaim  defendant in Allstate Financial  Corporation
v. A.G.  Construction,  Inc.  (n/k/a  A.G.  Plumbing,  Inc.),  American  General
Construction  Corp., Adam Guziczek and Cheryl Lee Guziczek pending in the United
States  Bankruptcy  Court for the  Southern  District  of New York.  The Company
provided receivable financing to A.G. Construction,  Inc. (n/k/a/ A.G. Plumbing,
Inc.) in 1988 and to American  General  Construction  Corp.  (hereinafter,  A.G.
Construction, Inc. (n/k/a A.G. Plumbing) and American General Construction shall
be  collectively  referred  to as "AG")  in  1991.  AG's  primary  business  was
renovation of public housing for the City of New York.  Adam and Cheryl Guziczek
(hereinafter  collectively referred to as "Guziczek")  personally guaranteed the
obligation  due the  Company  under  the  financing  arrangement.  In  1993,  AG
defaulted on its obligations under the financing

                                       58

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

arrangement with the Company. Thereafter, the Company confessed judgment against
AG and  Guziczek in Virginia  and  commenced  actions in New York to enforce the
guaranties  and to attempt  recovery on the confessed  judgments.  In one of the
actions,  an  answer  and  counterclaim  against  the  Company  was  filed.  The
counterclaim  asserted  claims  for  usury,  diversion  of  proceeds  of  public
improvement  contracts,  and  overpayments  to the  Company  by AG in  excess of
$2,000,000  (hereinafter the "Counterclaims").  No specific damage claims amount
was set forth in the Counterclaims.

      On August 1, 1994,  Guziczek  filed a voluntary  Chapter 11 petition under
the United States Bankruptcy Code and on June 14, 1995 the case was converted to
a Chapter 7  proceeding.  On  January 3,  1996,  AG filed a  separate  voluntary
Chapter 7 petition.  No action was ever taken by the trustee in the  Guziczek or
AG bankruptcy  proceedings  to pursue the  Counterclaims.  On June 2, 1997,  the
trustee for the AG bankruptcy  estate filed a motion to abandon  certain  claims
against the Company,  including all claims that the Company diverted proceeds of
public  improvement  contracts.  On  October 7, 1997,  New York  Surety  Company
(hereinafter  referred to as the  "Surety")  filed  pleadings  objecting  to the
abandonment of such claims against the Company.  The Surety provided the payment
and performance  bond to AG in connection with the  construction  jobs performed
for the City of New  York.  In its  pleadings,  the  Surety  asserts  that it is
subrogated   to  AG's  claims  and  thereby  seeks  to  intervene  and  file  an
intervenor's  complaint against the Company.  The proposed  complaint adopts the
Counterclaims   and  seeks  an  accounting.   The  Surety  asserts   damages  of
approximately  $4,000,000.  The Company believes it has meritorious  defenses to
the  Counterclaims  and intends to vigorously  defend all claims.  However,  the
litigation is in the  preliminary  stage and the  probability  of a favorable or
unfavorable  outcome  and the  potential  amount  of  loss,  if any,  cannot  be
determined or estimated at this time.

      Except as  described  above,  the  Company is not 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.  From time to time,  the Company is required to initiate  litigation to
collect  amounts owed by former clients,  guarantors or obligors.  In connection
with such  litigation,  the Company  periodically  encounters  counterclaims  by
defendant(s) for material amounts.  Such counterclaims are typically without any
factual  basis and,  management  believes,  are usually  asserted for  defensive
purposes by the litigant.

Additional Information Regarding Directors and Officers

      On  December  29,  1997,  Value  Partners  (a  shareholder  with  a  26.6%
beneficial ownership interest including  Convertible  Subordinated Notes held by
Value Partners) together with three other shareholders of the Company who

                                       59

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

are also  independent  directors  (collectively,  the  "Ewing  Group"),  filed a
petition in the Circuit court for Arlington County, Virginia against the Company
seeking to (i)  invalidate  the election of directors held at the annual meeting
of  shareholders  on  November  18,  1997,  (ii)  order a new 1997  election  of
directors  and (iii) enjoin the Board of Directors of the Company from acting as
such without court approval pending a new election.  In support of its petition,
the Ewing Group  alleged that a majority of the Board of Directors  had breached
an  agreement  reached at the  September  24, 1997 meeting of the Board to elect
David W.  Campbell  Chairman  of the board,  create an  Executive  Committee,  a
majority of whose members would be members of the Ewing Group,  and retain Value
Partners'  counsel,  Elias,  Matz,  Tiernan and  Herrick  LLP, as counsel to the
Company.  The Company denied the Ewing Group's  allegations,  asserting that, by
withholding authority to vote for five nominees at the November 1997 shareholder
meeting,  the Ewing Group had  breached an  understanding  to support all of the
Board's  nominees for election.  The Company also asserted that, in light of his
unsatisfactory  performance between October and November, it would not be in the
best  interests  of the  Company  and its  shareholders  to elect  Mr.  Campbell
Chairman of the Board. After discovery and evidentiary and other hearings before
the court,  the Ewing Group and the  Company  agreed to the entry of a decree by
the court ordering a meeting of shareholders on May 12, 1998, the date otherwise
specified in the Company's Amended By-Laws, as amended, as the date for the 1998
annual meeting of shareholders.


                                       60

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

                                                       SCHEDULE  IV


<TABLE>
<CAPTION>
                                   INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT



                               
                               Balance at                                          Balance End of Period
                               Beginning of                          Amounts       ----------------------
Name of Debtor                   Period         Additions              Paid           Current   Not Current
--------------                ------------     ----------          -----------      ---------   -----------



<S>                            <C>              <C>                  <C>              <C>          <C>     
Year Ended December 31, 1997:

Various                        $164,968         $ 4,248              $  13,000        $103,000     $ 53,216
                               ========         =======              =========        ========     ========

Year Ended December 31, 1996:

Various                        $161,788         $ 3,180              $   -            $103,000     $ 61,968
                               ========         =======              ====             ========     ========

Year Ended December 31, 1995:

Various                        $161,788         $  -                 $    -           $103,000     $ 58,788
                               ========         ===                  =====            ========     ========
</TABLE>





                                       61

                                     <PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)

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.

                                   ALLSTATE FINANCIAL CORPORATION


                               By:
                                   Craig Fishman, President and CEO

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.


                                         Craig Fishman
Date                                     President, Chief Executive
                                         Officer, Director

                                         Lawrence M. Winkler
Date                                     Secretary/Treasurer,
                                         Principal Accounting,
                                         Chief Financial Officer

                                         Eugene R. Haskin
Date                                     Director

                                         James Spector
Date                                     Director

                                         Leon Fishman
Date                                     Director

                                         Alan Freeman
Date                                     Director

                                         Lawrence Vecker
Date                                     Director

                                       62

<PAGE>