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, 1996
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 tothis Form 10-KSB.   X


        Revenues for year ended December 31, 1996, were $12,404,561.

        The aggregate market value of the common stock held by non affiliates as
of March 21, 1997 was  $5,730,071  computed by reference  to the closing  market
price at which the stock was traded on March 21, 1997.


        Indicate the number of shares outstanding  of  each  of the registrant's
classes of common stock, as of the latest practicable date.
        2,317,919 (March 21, 1997)


                      DOCUMENTS INCORPORATED BY REFERENCE.

                                      NONE.



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                                     PART I



Item 1. Business


(a) Consolidation

     This Form 10-KSB filing  includes  Allstate  Financial  Corporation and its
wholly  owned  subsidiaries.  Other  than  Lifetime  Options,  Inc.,  a Viatical
Settlement  Company,  which  has  started  to  curtail  operations,  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
with capital through the discounted purchase of their accounts  receivable.  The
Company  also  makes  advances  to  its  factoring  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.

     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

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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  additional  working  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.

     Through the  services it  provides,  the Company  seeks to help its clients
achieve profitable growth, and ultimately to qualify for funding at a cost lower
than that provided by the Company.  Although  clients  frequently  "graduate" to
lower  cost  sources  of  funding,   the  Company  believes  that  its  role  in
facilitating  this  transition  is one of the most  significant  benefits it can
provide.

  Lifetime Options, Inc., a Viatical Settlement Company

     In 1991 the Company formed Lifetime  Options,  Inc., a Viatical  Settlement
Company  ("Lifetime  Options") as a wholly owned subsidiary to provide financial
assistance to individuals facing  life-threatening  illnesses, by the discounted
purchase  of their  life  insurance  policies.  The  amount of the  discount  is
determined by Lifetime  Options based on the size of the policy being purchased,
the maximum life expectancy of the insured  individual as determined by at least
one  independent  medical  specialist,  the  anticipated  premiums  payable with
respect to the policy and Lifetime Options' expected  financing costs associated
with  purchasing and carrying the policy.  In general,  the purchase price for a
policy is between 55% and 85% of the amount of the  benefits  payable  under the
policy.  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),  Lifetime Options does not believe that
credit risk is material to its business.

     Before Lifetime Options  purchases a life insurance  policy,  the insured's
medical records are reviewed by an independent  physician who provides  Lifetime
Options with an opinion of the insured's life expectancy. Historically, Lifetime
Options  typically  required up to three  independent  reviews but, based on its
experience,  the  management  of Lifetime  Options no longer  believes  multiple
medical  reviews  are  necessary.  To date,  the  physician  engaged by Lifetime
Options has provided life  expectancies  which, on average,  fairly  approximate
actual lifespans.  However, there can be no assurance that the physician engaged
by Lifetime Options will in the future be able to perform as he has in the past.
If  the   physician   engaged  by  Lifetime   Options  were  to   systematically
underestimate life expectancies or if life extending treatments (or a cure) were
found for AIDS (almost all of the life insurance  policies purchased by Lifetime
Options to date have been purchased from individuals with AIDS),  there would be
a material adverse effect on the earnings of

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Lifetime Options. Lifetime Options relies on its independent physician to assist
in monitoring  important medical advances (and potential medical  advances).  In
particular,  Lifetime Options'  independent  physician is closely monitoring the
effects of a relatively new family of drugs known as protease inhibitors.  These
drugs,  while not a cure for AIDS,  may extend the lives of certain  individuals
infected with HIV.

     During 1996, Lifetime Options started to curtail its operations.  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:

                                                   December 31,
                                     1996     1995      1994      1993     1992
                                        (In Thousands, Except Per Share Data)

Total Revenue                     $12,405   $12,997   $12,030   $10,850  $11,538

Net Income (Loss)                  (1,041)      481       148       457    3,393

Net Income (Loss) per Share-F1,2    ( .45)      .16       .05       .15     1.22

Finance Receivables, net           30,574    32,671    27,503    24,674   29,971

Total Assets                       45,939    44,881    41,851    36,583   39,559

Shareholders' Equity F3            22,527    25,730    28,121    27,974   27,343


(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
$75,000,000. 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, 1996 and 1995.
--------
1 On May 7, 1992,  the Company issued 950,000 shares of Common Stock in a public
offering  and  received  net  proceeds of  $10,832,000.

2 Calculated based on weighted average shares outstanding  of 2,328,000 in 1996,
2,966,330 in 1995, 3,102,328 in 1994, 3,116,460 in 1993, and  2,790,365 in 1992.

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 approxi-
mately $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.

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<PAGE>





                                           1996                    1995

                                 Gross Finance            Gross Finance
                                  Receivables   Percent    Receivables   Percent
    Business of Client           (In thousands)           (In thousands)

Computer components and software      $9,457      25.2%     $11,049       28.4%

Manufacturing                          7,461      19.9        8,381       21.5

Publishing, direct mail and            3,822      10.2        4,652       11.9
  advertising

Importing and distributing               639       1.7        3,923       10.0

Food and drug store industry             --        --         3,900       10.0

Insurance claims                       1,324        3.5       2,786        7.1

Trucking and air freight               3,098        8.2       1,277        3.3

Construction and construction supply   3,623        9.6       1,057        2.7

Distribution                           3,676        9.8         724        1.9

Graphic art                              --         --          556        1.4

Engineer and health temps                233        0.6         347        0.9

Airlines                                 --         --          251        0.6

Recreation Facilities                  3,658        9.7         --          --

Other                                    605        1.6         105        0.3
                                     -------      -----     -------        -----
Total                                $37,596      100%      $39,008        100%
                                     =======      =====     =======        =====


    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, 1996 two clients (MGV  International,  Inc.  and The Monroe Cable Co.,  Inc.
("Monroe"))  each  accounted  for more than 10% of the  Company's  Gross Finance
Receivables.  Computer  components  and  software  accounted  for 25.2% of Gross
Finance  Receivables at December 31, 1996 and 28.4% of Gross Finance Receivables
at December 31, 1995.  Two  companies  (Monroe and MGV) each  accounted for more
than 10% of the Company's total income in 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

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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 and Non-Earning Receivables.
See (g) 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  (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) and (iii) credit balances
of factoring  clients.  The credit balance with respect to a particular  account
receivable  is  generally  remitted to the client when the Company  collects the
account receivable in full, but the remaining unearned discount is typically not
remitted  to the client  until the  Company  has  received  full  payment of all
accounts receivable purchased on a specific schedule of accounts receivable.  As
such,  the remaining  unearned  discount is available to offset any  uncollected
payments  due on other  accounts  receivables  purchased  from the client and to
offset uncollected  payments due on other types of Gross Finance  Receivables or
any other amounts due from the client.

    The  Company's  range of earned  discounts on Factored  Accounts  Receivable
purchased is from 1.3% to 12.0%.  The discount rate is based on a pre-determined
sliding scale which increases over time until a Factored  Account  Receivable is
paid by the client's  customer or repurchased  by the client.  The discount rate
established for the purchase of accounts  receivable from a given client depends
on various  considerations,  such as the length of time the accounts  receivable
are  expected  to be  outstanding,  the monthly  volume of  accounts  receivable
generated by the client, the Company's anticipated  administrative costs and the
perceived  level of  risk.  The  ratio  of  discounts  earned  to Gross  Finance
Receivables  acquired  (including Gross Finance  Receivables  repurchased by the
Company) was approximately 4.7% for 1996.  Discounts earned include all earnings
with respect to Gross Finance Receivables. See (g) Asset Quality.

  Collateralized Advances

    In  addition  to the  purchase of  accounts  receivable,  the Company  makes
Collateralized Advances. The Company has elected to more aggressively pursue the
making of  Collateralized  Advances  as it  perceives  the need by its  targeted
customers for such advances and such funding is not available from many of the

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Company's competitors. 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,  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.

                                                     December 31,
                                      1996     1995      1994      1993     1992
                                                    (In thousands)


Factored Accounts Receivable   $22,390    $25,170   $22,242   $22,275   $29,135
Collateralized Advances          8,809     10,842     7,215     2,495       958
Overadvances Secured by
  General Liens                  1,850      1,407       279     1,340     3,524

Non-Earning Receivables          4,547      1,589     3,587     3,411     2,142
                                ------     ------    ------    ------    ------
Gross Finance Receivables       37,596     39,008    33,323    29,521    35,759

Less: Unearned Discount        (3,443)     (3,986)   (3,309)   (2,727)   (4,566)
Less: Allowance for Credit
       Losses                  (2,579)     (2,351)   (2,511)   (2,120)   (1,223)
Less: Participation            (1,000)       -         -         -         -
                               -------     -------   -------   -------   -------
Finance Receivables, Net       $30,574     $32,671   $27,503   $24,674   $29,970
                               =======     =======   =======   =======   =======

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    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 "(g) 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  "(g)  Asset  Quality")  on the  Company's  balance  sheet if the  Company
repossesses the collateral securing such receivables. See (g) 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.

                                                December 31,
                                   1996    1995    1994     1993   1992
                                               (In thousands)
Commitments under
  guaranties and
  letters of credit               $ 336   $ 727   $ 347   $1,794   $940


  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) Monitoring and Oversight

     Before  a  client   relationship  is   established,   the  Company  obtains
information  about the  prospective  client  and its  principals,  including  an
on-site  review  of  records  pertaining  to the  client's  operations  and  its
available collateral. Similar on-site reviews are conducted periodically, either
by

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Company  personnel  or by  independent  certified  public  accountants  or other
professionals  retained by the Company.  In addition,  the Company  arranges for
initial and periodic reviews of public records in order to monitor the filing of
any  subsequent  liens which could impair the value of  collateral  in which the
Company has an ownership or security interest.

     Prior to purchasing  accounts  receivable  with an aggregate face amount of
$10,000 or more owed by any one account debtor, the Company:  (i) evaluates that
account debtor's creditworthiness,  which evaluation is updated periodically and
(ii)  establishes  a limit on the  amount of  accounts  receivable  owed by that
particular account debtor which the Company will purchase from all clients.  The
Company also selectively verifies directly with account debtors the validity and
primary terms of accounts receivable to be purchased.  After purchasing accounts
receivable,  the Company  carefully  monitors whether they are paid according to
terms.  If payment is due,  follow-up  contact is usually  made with the account
debtor.  During this follow-up contact, the Company seeks to determine the cause
of the payment delay in order to take appropriate  action at an early stage. The
status of overdue accounts receivable and other relevant information is reported
to each client monthly,  or sooner,  if appropriate.  See (h) Credit Loss Policy
and Experience.

     Before making a  Collateralized  Advance,  the Company conducts (or engages
third parties to conduct) 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.


(f) 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.  The Company's software was written  specifically for the Company and
the Company believes it to be proprietary.


(g) 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, 1996, the Company's Gross Finance  Receivables  included
$22,390,229  of  Factored  Accounts  Receivable  on  which  approximately  2,500
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.

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     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 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 newly 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, 1996, no single 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, 1996, the Company's Gross Finance  Receivables  included
$8,808,455 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,  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, 1996, the Company's Gross Finance Receivables included
$1,849,778 of Overadvances Secured by General Liens.  See (d) The Company's
Services - Overadvances Secured by General Liens.

  Non-Earning Receivables

     As of December 31, 1996, the Company's Gross Finance Receivables included
$4,547,893 of Non-Earning Receivables. See (h) Credit Loss Policy and
Experience.



                                       10

<PAGE>



  Other Receivables

     As of December  31,  1996,  included on the  Company's  balance  sheet were
$4,394,975  of "Other  Receivables".  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 (h) Credit  Loss Policy and  Experience  below and
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations - Provision for Credit Losses.

  Other Assets

     As of December  31,  1996,  included on the  Company's  balance  sheet were
$2,116,343 of other assets.

                                                             December 31,
                                                       1996         1995
Other assets include:
 Inventory held for sale                           $     --     $   20,000
 Commercial property held for sale                  1,883,768      862,750
 Residential property held for sale                      --        910,000
                                                    ---------    ---------
                                                    1,883,768    1,792,750
  Miscellaneous                                       232,575      256,573
                                                    ---------    ---------
                                                    2,116,343    2,049,323
                                                    =========    =========

    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.

                                       11

<PAGE>



See (h) Credit Loss Policy and Experience and Management's Discussion and
Analysis of Financial Condition and Results of Operations - Provision for
Credit Losses.

(h) 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.

    At the  time  an  account  receivable  is  purchased,  a due  date is set by
management based on the receivable's  anticipated payment date. This anticipated
payment date is used to identify  past due  Factored  Accounts  Receivable.  The
Company carefully monitors  collections and takes follow-up action if payment is
past due. Within ninety days after the Company  purchases an account  receivable
which remains unpaid (or sooner if the Company deems necessary), the Company may
initiate additional actions which may involve obtaining payment from the account
debtor,  requiring the client to repay the initial advance and the amount of the
earned but unpaid discount,  obtaining  substitute  accounts receivable from the
client  or  charging  the  credit   balance  due  the  client.   In  appropriate
circumstances,  the Company may also take action against personal guarantors and
other liens and collateral.

    Gross  Finance  Receivables  which  have  been  identified  as past  due may
continue to accrue earnings if, in the opinion of management,  collection of the
earnings from the account debtor, the client, guarantors or other collateral, if
any, is likely.  The accrual of earned  discounts is  discontinued  when, in the
opinion of management,  the  collection of additional  earnings from the account
debtor, the client,  guarantors or other collateral is unlikely.  If the Company
concludes  that it is unlikely to recover from any of the foregoing  sources the
amount of its initial  advance and the earned but unpaid  discount,  the Company
promptly increases the allowance for credit losses or reduces the carrying value
of the  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 receivable and its estimated fair value. In the case
of Other  Receivables  and Other  Assets,  the  accrual of  earnings  is usually
suspended or discontinued for financial statement purposes at the time the Other
Receivable arises or the Other Asset is acquired.  See (g) Asset Quality - Other
Receivables and Other Assets.

    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;
(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

                                       12

<PAGE>



always requires personal  guaranties (either unlimited  guaranties or guaranties
limited to the validity and collectability 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 (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.

(i) Marketing

    New clients are generated principally from a nation-wide referral network of
business brokers, banks, accountants,  investment bankers,  turnaround managers,
lawyers and independent  brokers as well as from previous and existing  clients.
Brokers are paid commissions  calculated on the gross earnings  collected by the
Company on each funded referral.

    The Company employs six full-time  marketing  professionals  to maintain and
expand  its  referral  network.  In  addition,  from time to time,  the  Company
advertises in national and local  newspapers and trade journals to increase name
recognition. The Company also increases name recognition through direct mailings
to existing and potential referral sources.



                                       13

<PAGE>



(j) Competition

    Competition   from  banks,   traditional   asset-based   lenders  and  small
independent finance companies  accelerated in 1996. The Company anticipates that
competition  will remain  intense  through all of 1997 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 historically. The Company has also
responded to  increased  competition  (and the  resulting  downward  pressure on
pricing in the Company's core factoring  business) by putting increased emphasis
on funding relationships which include (in addition to the factoring of accounts
receivable) the making of Collateralized  Advances.  See (b) Nature of Business;
(g)  Asset  Quality  and  Management's  Discussion  and  Analysis  of  Financial
Condition  and Results of  Operations  - Total  Income.  The Company  intends to
continue to pursue this  strategy.  In addition,  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.


(k) Expansion Strategy

    The  Company's  strategy for 1997 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; and (iv) 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.


(l) Employees

    The Company currently has 49 full-time employees, of whom 29 are employed in
providing accounts  receivable and credit services (including 4 certified public
accountants and one attorney),  6 are employed in marketing,  5 are in executive
positions  (including two CPA's and one attorney),  4 are in legal  (including 2
attorneys) and 5 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.


(m)  Issuance of Convertible Subordinated Notes

    See Management's  Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.



                                       14

<PAGE>



(n)  Forward-Looking Information

    Certain  disclosures  contained in this  Form-10KSB  contain forward looking
information  based on current  information and  expectations of the company that
involve a number of risks, uncertainties and assumptions,  including the overall
state of the  economy,  competition  among  financial  institutions,  the credit
quality of the Company's clients and account debtors,  and the Company's ability
to generate  growth in earning  assets  through the  generation of new business.
Should one or more of these risks or  uncertainties  materialize,  or should the
underlying  assumptions  prove incorrect,  actual outcomes could vary materially
from those expected.


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 $191,000 in
1996 compared to $192,000 in 1995. 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.


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 7, 1996.

    The shareholders voted as follows:

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

        Leon Fishman                 2,045,204           20,861            -0-
        Eugene Haskin                2,045,204           20,861            -0-
        David Campbell               2,046,104           19,961            -0-
        Craig Fishman                2,045,204           20,861            -0-
        Alan Freeman                 2,045,762           20,303            -0-
        William Savage               2,046,104           19,961            -0-
        James Spector                2,046,104           19,961            -0-
        Edward McNally               2,046,104           19,961            -0-
        Lawrence Vecker              2,045,762           20,303            -0-

        In addition,  the  shareholders  approved an amendment to the  Company's
1990  Qualified  Stock Option Plan whereby the number of shares of the Company's
common stock  issuable  thereunder  was increased from 175,000 shares to 275,000
shares. The results of the voting were 1,870,536 for, 170,294 against, and 5,185
abstaining.


                                       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,
                            1996              1995                1994
                        High     Low      High      Low       High    Low

First Quarter          6 7/8    5 1/2    7 3/16    5 9/16     7 1/8   5 3/8
Second Quarter         6 1/2    5 1/2    8         6 1/4      6 5/8   4 5/8
Third Quarter          5 13/16  5 1/2    7 1/2     5 1/2      6 5/8   5 11/16
Fourth Quarter         7        5 1/2    6         5 6/16     6 7/8   6

    On March 4, 1997 there were approximately 53 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  certain  stock  is held  in the  name of
nominees.  Based on the best  information  made  available to the Company by the
transfer  agent,  there are  approximately  527 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 recourse,  full notification  basis. In addition,
the  Company  also makes  Collateralized  Advances.  The  Company has elected to
continue to more aggressively pursue the making of Collateralized Advances as it
perceives the need by its targeted  customers for such advances and such funding
is not  available  from many of the  Company's  competitors.  On  occasion,  the
Company will also provide other specialized financing structures which

                                                 16

<PAGE>



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.

    The  Company's  clients are small- to  medium-sized  businesses  with annual
revenues  typically  ranging  between  $600,000 and  $75,000,000.  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. However, banks and asset-based lenders
have started lending to our type of client. 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 (h) Credit
Loss Policy and Experience.

    Continuing  competition  within  the  marketplace  from  banks,  asset-based
lenders and newly created  finance  companies have encroached upon the Company's
potential client base and have negatively  affected earned discounts on Factored
Accounts  Receivable.  Additionally,  the Company has attracted  larger  clients
which  often  increases  the  amount of time  needed to  negotiate  and fund new
business.  Also,  Collateralized  Advances require more in-depth and diverse due
diligence which can further delay the funding of new business.  Nonetheless, the
Company believes that its ability to respond quickly and to provide specialized,
flexible and  comprehensive  financing  structures to its clients  enables it to
compete  effectively.  In order to remain  competitive,  the Company  is,  where
necessary and appropriate,  offering lower rates than it has  historically.  The
Company  believes that increased  competition  will continue for the foreseeable
future and will continue to exert  downward  pressure on pricing,  especially in
the  Company's  core  factoring  business.  To counter the downward  pressure on
pricing,  the Company  intends to continue to  diversify  its sources of income,
primarily by continuing to place emphasis on funding relationships which include
(in  addition  to  the   factoring  of  accounts   receivable)   the  making  of
Collateralized Advances.

    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.  Even 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,  a  wholly-owned  subsidiary  of  the  Company,  provides
financial   assistance  to  individuals  facing   life-threatening   illness  by
purchasing  their life  insurance  policies at a discount  from face value.  The
amount of the discount is  determined  by Lifetime  Options based on the size of
the policy being purchased, the maximum life expectancy of the insured, the

                                                 17

<PAGE>



amount of the  anticipated  premiums  payable  with  respect to the policy being
purchased and the  anticipated  financing cost  associated  with  purchasing and
carrying the policy. In general,  the purchase price for a policy is between 55%
and 85% of the  benefits  payable  under the  policy.  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 to
its business.

    Before  purchasing each policy,  Lifetime Options has each insured's medical
records  reviewed by at least one  independent  physician who provides  Lifetime
Options with an opinion of the insured's life expectancy. Historically, Lifetime
Options  typically  required up to three  independent  reviews but, based on its
experience,  the  management  of Lifetime  Options no longer  believes  multiple
medical  reviews are  necessary.  To date,  the  physicians  engaged by Lifetime
Options have provided life expectancies  which, on average,  fairly  approximate
actual lifespans.  However,  there is no assurance that the physician engaged by
Lifetime Options will in the future be able to perform as he has in the past. If
the   physician(s)   engaged  by  Lifetime   Options   were  to   systematically
underestimate life expectancies or if life extending treatments (or a cure) were
found for AIDS (almost all of the life insurance  policies purchased by Lifetime
Options to date have been purchased from individuals with AIDS),  there would be
a material adverse effect on the earnings of Lifetime Options.  Lifetime Options
relies on its independent  physician to assist in monitoring  important  medical
advances (and potential  medical  advances).  In particular,  Lifetime  Options'
independent  physician is closely  monitoring  the effects of a  relatively  new
class of drugs known as protease  inhibitors.  These drugs, while not a cure for
AIDS, may extend the lives of certain individuals infected with HIV.

    During  1996,  Lifetime  Options  started to curtail  its  operations.  This
decision  enables  management to better focus on the Company's  core  commercial
finance  business at a time when  competition  has reduced  yields,  and medical
advances  have created a certain  degree of  uncertainty,  in Lifetime  Options'
business.

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


  Results of Operations

    The following  tables sets forth certain items of income and expense for the
periods  indicated and indicates for each full year the percentage  relationship
of each item to total income.



                                                 18

<PAGE>



<TABLE>

                                                           Consolidated Quarterly Summary of Operations
                                                           --------------------------------------------
<CAPTION>
                                               1996                                                  1995
                           -----------------------------------------------      -----------------------------------------------
                           Fourth        Third        Second         First      Fourth         Third        Second       First
                           Quarter      Quarter      Quarter       Quarter      Quarter       Quarter      Quarter      Quarter
                           -------      -------      -------       -------      -------       -------      -------      -------
<S>                     <C>          <C>          <C>           <C>          <C>           <C>          <C>          <C>
Income:
 Earned Discount .....  $ 2,546,104  $ 2,423,715  $ 2,722,140   $ 2,333,820  $ 3,055,687   $ 2,578,345  $ 2,420,653  $ 2,877,646

 Fees and Other
  Income .............      763,730      499,802      563,398       551,852      408,619       600,245      649,726      406,425
                            -------      -------      -------       -------      -------       -------      -------      -------
    Total Income .....    3,309,834    2,923,517    3,285,538     2,885,672    3,464,306     3,178,590    3,070,379    3,284,071
                          ---------    ---------    ---------     ---------    ---------     ---------    ---------    ---------

Expenses:
 Compensation and
  Fringe Benefits ....      735,750      737,910      995,894       849,055      852,787       785,161      753,069      807,480
 General and
  Administration .....      618,501      632,985      941,088       612,069      776,522       642,766      730,759      608,238
 Interest Expense ....      463,591      360,627      426,983       355,360      353,885       205,307      166,020      258,506
 Provision for
  Credit Losses1 .....      798,597      527,341    3,928,570       623,659    2,211,046       859,000      610,500    1,301,100
 Commissions .........       97,191      126,248      136,145        89,641       63,455        64,928       72,846       61,871
                             ------      -------      -------        ------       ------        ------       ------       ------
    Total Expenses ...    2,713,630    2,385,111    6,428,680     2,529,784    4,257,695     2,557,162    2,333,194    3,037,195
                          ---------    ---------    ---------     ---------    ---------     ---------    ---------    ---------

Income/(Loss) Before
 Income Taxes ........      596,204      538,406   (3,143,142)      355,888     (793,389)      621,428      737,185      246,876

Income Taxes/(Benefit)      220,900      198,800   (1,162,900)      131,700     (260,200)      228,700      271,500       91,000
                            -------      -------   ----------       -------     --------       -------      -------       ------

Net Income/(Loss) ....  $   375,304  $   339,606  $(1,980,242)  $   224,188  $  (533,189)  $   392,728  $   465,685  $   155,876
                        ===========  ===========  ===========   ===========  ===========   ===========  ===========  ===========

Net Income / (Loss)
  Per Share ..........  $      0.16  $      0.15  $     (0.85)  $      0.09  $      (.20)  $       .13  $       .15  $       .05
                        ===========  ===========  ===========   ===========  ===========   ===========  ===========  ===========

Weighted Average
 Number of Shares ....    2,317,919    2,317,237    2,316,853     2,361,461    2,655,128     3,009,971    3,102,328    3,102,328
                          =========    =========    =========     =========    =========     =========    =========    =========
</TABLE>


<TABLE>
                                                            For the Years Ended December 31,
                                         ------------------------------------------------------------------
<CAPTION>
                                                   1996                   1995                  1994
                                         ---------------------   --------------------   -------------------
                                          REVENUE      PERCENT     REVENUE    PERCENT    REVENUE    PERCENT
                                         ----------   --------   ----------   -------   ---------   -------
<S>                                    <C>               <C>   <C>              <C>   <C>             <C>
INCOME:
  Earned Discounts ..................  $ 10,025,779      80.8% $ 10,932,331     84.1% $ 9,947,678     82.7%
  Fees and Other Income .............     2,378,782      19.2     2,065,015     15.9    2,082,320     17.3
                                          ---------      ----     ---------     ----    ---------     ----
      TOTAL INCOME ..................    12,404,561     100.0    12,997,346    100.0   12,029,998    100.0
                                         ----------     -----    ----------    -----   ----------    -----


EXPENSES:
  Compensation and Fringe Benefits ..     3,318,609      26.8     3,198,497     24.6    2,996,029     25.0
  General and Administrative Expenses     2,804,643      22.6     2,758,285     21.2    2,673,959     22.2
  Interest Expense ..................     1,606,561      12.9       983,718      7.6      610,531      5.1
  Provision of Credit Losses<F1>.....     5,878,167      47.4     4,981,646     38.4    5,359,159     44.5
  Commissions .......................       449,225       3.6       263,100      2.0      155,280      1.3
                                            -------       ---       -------      ---      -------      ---
      TOTAL EXPENSES ................    14,057,205     113.3    12,185,246     93.8   11,794,958     98.1
                                         ----------     -----    ----------     ----   ----------     ----

INCOME BEFORE TAXES .................    (1,652,644)    (13.3)      812,100      6.2      235,040      1.9

INCOME TAXES ........................      (611,500)     (4.9)      331,000      2.5       87,500       .7
                                           --------      ----       -------      ---       ------       --

NET INCOME ..........................   $ 1,041,144)     (8.4)% $   481,100      3.7%  $  147,540      1.2%
                                        ===========      ====   ===========      ===   ==========      ===

NET INCOME PER SHARE                    $     (0.45)               $   0.16            $     0.05
                                        ===========                ========            ==========

WEIGHTED AVERAGE NUMBER OF SHARES         2,328,308               2,966,330             3,102,328
                                          =========               =========             =========

-----------
<FN>
<F1> 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>

                                       19

<PAGE>



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

  TOTAL INCOME.  Total income consists of (i) earned discounts and (ii) fees and
other income.  "Earned  discounts" consist primarily of income 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 income by type of  transaction  for the
periods indicated and the percentage relationship of each type of transaction to
total income.

                                             For the Year Ended December 31,
                                        ----------------------------------------
                                               1996                   1995
                                        -----------------    -------------------

                                                % of Total            % of Total
                                         Income    Income       Income    Income
                                       ---------   ------    ----------   ------
 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 Income ....................  $12,404,561  100.0%    $12,997,346  100.0%
                                      ===========  =====     ===========  =====



    Total income  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
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 income.

    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
income. 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.


                                       20

<PAGE>



    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 income 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 income) and $3.2 million (24.6% of total income) 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 income)  versus $1.0 million (7.9% of total
income) 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  income) as compared to $2.8  million
(21.2% of total income) 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  income) as compared to
$1.1 million (8.3% of total income) 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.

    Interest Expense.  Interest expense was $1.6 million (13.0% of total income)
versus $984 thousand (7.6% of total income) 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 income) in 1996,  compared to $87 thousand (0.7% of
total  income) 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 income) in 1995 to $5.9 million (47.4% of
total income) 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  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.


                                                 21

<PAGE>



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

<TABLE>
                                                                As of December 31,
                                               ------------------------------------------------------------
<CAPTION>
                                                  1996         1995         1994         1993         1992
                                               --------     --------     --------    ---------     --------
<S>                                            <C>          <C>          <C>          <C>          <C>
GROSS FINANCE RECEIVABLES, OTHER
  RECEIVABLES AND OTHER ASSETS DATA:
------------------------------------
Gross Finance Receivables ..................   $ 37,600     $ 39,008     $ 33,323     $ 29,250     $ 35,760
Non-Earning Receivables (included
  in Gross Finance Receivables) ............      4,548        1,589        3,608        3,411        2,142
Other Receivables ..........................      4,390        2,756        3,389        2,344        1,397
Other Assets (excluding miscellaneous) .....      1,884        1,793        2,112        3,200        2,017

ALLOWANCE FOR CREDIT
  LOSSES:
--------------------
Balance, January 1 .........................   $  2,351     $  2,511     $  2,120     $  1,223     $    784
Provision for credit
  losses ...................................      5,878        4,982        5,359        4,858        1,361
Receivables charged off ....................     (5,711)      (5,194)      (5,016)      (4,144)        (941)
Recoveries .................................         61           52           48          183           19
                                                     --           --           --          ---           --
Balance, December 31 .......................   $  2,579     $  2,351     $  2,511     $  2,120     $  1,223
                                               ========     ========     ========     ========     ========

ALLOWANCE FOR CREDIT LOSSES
AS A PERCENT OF:
---------------------------
Gross Finance Receivables ..................       6.85%        6.03%        7.54%        7.25%        3.42%
Non-Earning Receivables ....................       56.7%      148.00%       69.60%       62.15%       57.10%
Non-Earning Receivables, Other
  Receivables and Other Assets .............       23.8%       38.30%       27.00%       23.67%       22.01%

AS A PERCENT OF THE SUM OF GROSS
  FINANCE RECEIVABLES, OTHER
  RECEIVABLES AND OTHER ASSETS:
--------------------------------
Non-Earning
  Receivables ..............................       10.4%        3.65%        9.29%        9.80%        5.47%
Other Receivables ..........................       10.0%        6.33%        8.73%        6.74%        3.57%
Other Assets ...............................       4.29%        4.11%        5.44%        9.20%        5.15%
</TABLE>


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 (g) Asset Quality and (h) Credit Loss Policy and Experience.

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


                                       22

<PAGE>



     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
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.

                                       23

<PAGE>




IMPACT OF INFLATION

     Management  believes that  inflation  has not had a material  effect on the
Company's income, expenses or liquidity during the past 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 prime or base rate adjusted credit facilities.


  YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

     TOTAL  INCOME.  The  Company's  total  income,  which  consists  of  earned
discounts  and fees and other  income,  rose 8.0% in 1995 over 1994,  from $12.0
million to $13.0 million.  Earned  discounts from Factored  Accounts  Receivable
decreased  18.7% in 1995 as compared to 1994, from $7.6 million to $6.2 million.
Earned  discounts from Factored  Accounts  Receivable in 1995 as a percentage of
total Factored Accounts Receivable  purchased in 1995 were 4.25%. The comparable
percentage  in 1994 was  4.61%,  a  decrease  of 7.8%  from  1994 to 1995.  This
reduction  reflects the downward  pressure on pricing  from  competition  in the
Company's  core  factoring  business.  In 1995 and 1994,  earned  discounts from
Factored Accounts Receivable comprised 47.4% and 63.0%,  respectively,  of total
income.  These  percentages  reflect lower  average  earned  discounts  from the
Company's core factoring  business due to competition and management's  decision
to pursue and increase the making of Collateralized Advances, in addition to the
Company's core factoring business.

     Earned discounts from Collateralized Advances increased 145.1% in 1995 over
1994, from $1.2 million to $2.9 million. In 1995 and 1994, earned discounts from
Collateralized Advances comprised 22.5% and 9.9%, respectively, of total income.
These  changes  again  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  calculated  generally  on the  highest  outstanding
amount of the  Collateralized  Advance during the 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  were  relatively  unchanged  in 1995 as compared to
1994.  In both years fees and other  income  were  approximately  $2.1  million.
Increases  in 1995 in closing  fees and  supplemental  discounts  were offset by
reductions in related  financing fees and the absence of a one-time  finders fee
of $50 thousand earned in 1994.

     As of December 31, 1995 and 1994,  Factored Accounts Receivable included on
the  Company's  balance  sheet  were $25.2  million  (64.5%)  and $22.2  million
(66.7%), respectively, of Gross Finance Receivables. As of December 31, 1995 and
1994, Collateralized Advances included on the Company's balance sheet were $10.8
million  (27.8%)  and $7.2  million  (21.7%),  respectively,  of  Gross  Finance
Receivables.  The relative  increase  from the end of 1994 to the end of 1995 in
the percentage of Gross Finance Receivables comprised of Collateralized Advances
reflects  management's  decision  to  emphasize  the  making  of  Collateralized
Advances, in addition to the Company's core factoring business.


                                       24

<PAGE>



     COMPENSATION  AND FRINGE  BENEFITS.  Compensation  and fringe benefits were
$3.2 million (24.6% of total income) and $3.0 million (25.0% of total income) in
1995 and 1994, respectively.  The absolute dollar increase is chiefly the result
of increases in sales personnel and compensation. Executive compensation in 1995
was $1.0  million  (7.9% of total  income)  versus $1.0  million  (8.5% of total
income) in 1994.

     GENERAL AND  ADMINISTRATIVE  EXPENSE.  In 1995  general and  administrative
expense was $2.8  million  (21.2% of total  income) as compared to $2.7  million
(22.2%  of  total  income)  in  1994.   The  increase  for  1995  was  primarily
attributable to a rise in professional fees,  licenses and taxes and duplicating
expense.  In 1995  professional fees rose to $1.1 million (8.3% of total income)
as compared to $805 thousand (6.7% of total income) for 1994.  Professional fees
have increased,  in part, due to on-going  litigation and, in part, to the final
resolution  certain  of  legal  proceedings  instituted  in  prior  years.  Also
contributing to the increase in general and administrative  expense were license
and tax  expenditures  incurred in connection  with  maintaining  certain assets
acquired  in  settlement  of  Finance  and  Other  Receivables.   Other  charges
increasing  general and  administrative  expense were  telephone  and travel and
entertainment  (primarily  associated with new business  development) which were
offset, in part, by decreases in loan  amortization,  office supplies and credit
and filing costs.

     INTEREST EXPENSE. Interest expense was $984 thousand (7.6% of total income)
versus $611 thousand (5.1% of total income) in 1995 and 1994, respectively.  The
rise in  interest  expense is  attributable  in part to (i) an  increase  in the
average daily balance  outstanding  on the Company's  revolving  line of credit,
(ii) the rise in the base or prime rate of interest  from 1994 to 1995 and (iii)
interest expense related to the Company's Convertible, Subordinated Notes issued
in  September  1995.  The average  daily  outstanding  balance on the  Company's
revolving  line of credit was $8.5  million and $6.5  million for 1995 and 1994,
respectively and the average interest rate paid on the Company's  revolving line
of credit  rose (as a result  of  increases  in the base or prime  rate) to 9.7%
during 1995 as compared to 8.3% during  1994.  Interest  expense  related to the
Company's Convertible Subordinated Notes was $87 thousand in 1995.

     COMMISSIONS. Commission expense was $263 thousand (2.0% of total income) in
1995 as compared to $155 thousand  (1.3% of total income) in 1994.  The increase
was the result of a larger portion of Gross Finance Receivables acquired in 1995
being  generated by  commissioned  brokers and other  professionals  to whom the
Company paid referral fees.


ITEM 7.  FINANCIAL STATEMENTS (PAGES 34-56)


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

        None.

                                       25

<PAGE>



                                    PART III

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

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

                      Name          Age   Position(s)

        Craig Fishman.................36  President, Chief Executive Officer
                                           and a Director
        Leon Fishman..................65  Director/Vice Chairman
        Eugene R. Haskin..............67  Chairman of the Board
        Lawrence M. Winkler...........61  Secretary, Treasurer, Chief Financial
                                           Officer
        Edward McNally................53  Director
        Lawrence Vecker...............67  Director
        James C. Spector..............63  Director
        William H. Savage.............64  Director
        David W. Campbell.............50  Director
        Alan L. Freeman...............55  Director
        Wade Hotsenpiller.............55  Senior Vice President, Chief Operating
                                           Officer
        Peter Matthy..................51  Exec. Vice President, Director-Sales
                                           & Marketing
        Richard A. Brasch.............40  General Counsel

     CRAIG  FISHMAN has been the President  and Chief  Executive  Officer of the
Company  since July 1, 1996.  He joined the Company in 1991 as a Vice  President
and in February 1993, was appointed General Counsel. In May 1994, he was elected
President of Lifetime  Options and in September  1995,  Mr.  Fishman was elected
Senior Vice President of the Company. Mr. Fishman has served as a director since
November 1995.  From 1987 to April 1991 Mr.  Fishman was an attorney  associated
with the law firm of White & Case in New York City.  Craig Fishman is the son of
Leon Fishman and the nephew of Lawrence Winkler.

     LEON  FISHMAN is a director and Vice  Chairman of the  Company.  He was the
former President and Chief Executive Officer of the Company.  Mr. Fishman served
on the  Company's  Board of  Directors  from 1982  until  November  1995 and was
re-elected  to the Board on November 7, 1996.  He  co-founded  the Company  with
Eugene  Haskin in 1982.  Mr.  Fishman  served as Secretary  and Treasurer of the
Company and held other management positions prior to being elected President and
Chief Executive Officer in 1989.

     Prior to co-founding the Company,  Mr. Fishman had extensive  experience as
the president and major  shareholder  of companies  involved in factoring,  real
estate development and manufacturing.

     EUGENE R. HASKIN is Chairman of the Board of the Company and has served as
a Director of the Company  since  co-founding  the Company  with Leon Fishman in
1982. Mr. Haskin served as President of the Company from 1982 to 1989.  Prior to
co-founding  the Company,  Mr. Haskin was an executive with and a major investor
in companies  involved in  factoring,  real estate  development  and heating oil
distribution.

     LAWRENCE M. WINKLER is Secretary, Treasurer and Chief Financial Officer of
the Company and has served as a director from 1983 until his resignation in
November 1996.  Mr. Winkler began his career at the Company in 1982 as Second
Vice President, was promoted to Senior Vice President in April 1989 and has
held his current positions since May 1989.  Mr. Winkler, a certified public
accountant, was a general partner in the accounting firm of Alexander Grant

                                       26

<PAGE>



and Company prior to joining the Company.  Mr. Winkler is the brother-in-law
of Leon Fishman and uncle of Craig Fishman.

     JAMES C. SPECTOR has been a member of the Board of Directors since June
1989.  Mr. Spector served as Executive Vice President of the Company from
February 1991 to October 1993.  Prior to joining the Company, Mr. Spector had
served for many years as an executive with Heller Financial, Inc. and certain
of its related companies, specializing in asset-based and real estate lending.
His most recent positions in that organization included Executive Vice
President and Chief Operating Officer of Heller Mortgage Corporation, from
August 1984 through June 1985, and Senior Vice President of Heller Financial,
Inc. from July 1985 through September 1987. He is currently Executive Vice
President of Bank Atlantic, Ft. Lauderdale, Florida.

     WILLIAM  H.  SAVAGE  has been a member  of the  Board  of  Directors  since
November  1995.  Since  1990,  Mr.  Savage  has been  engaged  in a  variety  of
investment  ventures in real estate  development  and banking.  Since 1991,  Mr.
Savage has served as Chairman of Island Preservation Partnership,  the owner and
developer  of Dewees  Island,  a 1,200 acre ocean  front,  barrier  island  near
Charleston,  South  Carolina.  He is the  Chairman of the Board of Knights  Hill
Corporation,  which owns and manages timberlands in South Carolina.  Since 1982,
he has been the Managing  Partner of Calvert  Associate  which owns an apartment
complex in Alexandria, Virginia. Prior to 1990, Mr. Savage was the President and
Chief  Executive  Officer of Ameribanc  Investors  Group,  Annandale,  Virginia,
parent company of Ameribanc  Savings Bank. Since 1977, he has been the President
of  Richard  United  Corporation,  a real  estate  investment  company  based in
Alexandria, Virginia.

     DAVID W.  CAMPBELL  has  been a member  of the  Board  of  Directors  since
November 1995.  Since April 1996, Mr.  Campbell has been the President and Chief
Operating  Officer  and a Director of Southern  Financial  Bancorp and  Southern
Financial Bank. Mr. Campbell was formerly  President and Chief Executive Officer
of Ameribanc Savings Bank ("ASB") in Annandale, Virginia from June 1990 to March
1995. Prior to that, he was Executive Vice President and Chief Operating Officer
of ASB from  1984 to June  1990 and also a  director  of ASB from  1988 to March
1995. He served as a Trustee of the Ameribanc Investors Group from 1992 to March
1995.

     ALAN L. FREEMAN has been a member of the Board of Directors  since November
1995.  He is  currently  Managing  Partner  of  Freeman,  Buczyner  &  Gero,  an
accounting firm. Prior to that he was a Partner with Deloitte & Touche from 1989
to 1991 and a Partner with the accounting firm Shapiro, Fleischmann & Co.
from 1966 to 1989.

     EDWARD  A.  MCNALLY  has been a member  of the  Board  of  Directors  since
November  1996.  Mr.  McNally  is  Managing  Director,   Windham  Partners,  LLC
(commencing August 1996);  President,  McNally and Co. (commencing August 1995);
Independent  management consultant (commencing April 1991); formerly Senior Vice
President, National Westminster Bank USA (1983 through 1992).

     LAWRENCE  VECKER has been a member of the Board of Directors since November
1996. Mr. Vecker is currently Executive Vice President of North American Capital
Corp., a New York based private merchant bank.  Formerly,  he was Executive Vice
President of Congress Financial Corp., a subsidiary of CoreStates Financial Corp
(1974 through 1995);  Executive Vice President,  S.V.  Associates  (1971 through
1974); United Factors and UM&M Financial Corporation,

                                       27

<PAGE>



divisions of United  Merchants and  Manufacturers,  Inc.,  attained  position of
Senior Vice President (1948 through 1971).

     WADE  HOTSENPILLER  is  the  Company's  Senior  Vice  President  and  Chief
Operating Officer (commencing December 19, 1996). Formerly, he was President and
Director  (June 1986 to July 1996) and Chief  Operating  Officer  (April 1984 to
July 1996) of Washington Federal Savings Bank,  Herndon,  VA. From 1976 to 1983,
he was an Executive Vice President and functioned as Chief Operating  Officer of
Perpetual American Bank, FSB. Mr.  Hotsenpiller is a certified public accountant
and served in various  audit  positions  with  increasing  responsibilities  for
Arthur Andersen & Co. From 1964 to 1976.

     PETER MATTHY  joined the Company in April 1996 in the capacity of Executive
Vice  President and Chief  Operating  Officer.  Mr. Matthy remains the Company's
Executive Vice President and has now assumed the functional  responsibilities of
nationwide  Director of Sales and Marketing.  Prior to joining the Company,  Mr.
Matthy was employed by IBJ  Schroder  Bank & Trust  Company for 15 years,  as an
executive Vice President with responsibilities as Director of Corporate Banking,
a Member of the Management  Committee,  and Chairman and Chief Executive Officer
of its leasing  subsidiary.  He previously was a corporate  banking executive at
Bankers Trust Company from 1968 to 1978.

     RICHARD A. BRASCH has been  General  Counsel of the Company  since  January
1996.  He joined the  Company in 1993 as  Associate  General  Counsel.  Prior to
joining the Company,  Mr.  Brasch was a  partner/shareholder  in the law firm of
Stearns  Weaver  Miller  Alhadeff & Sitterson,  P.A. in Miami,  Florida where he
worked  from  1985  to  1993  with a  concentration  on  representing  financial
institutions.

     Directors of the Company are elected to serve until the next annual meeting
of shareholders of the Company and until their respective successors are elected
and qualified. Officers serve at the pleasure of the Board.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officer and directors, and persons who own more than 10% of its common stock, to
file  reports of  ownership  and changes in ownership  with the  Securities  and
Exchange  Commission  ("Commission").  Officers,  directors and greater than 10%
stockholders  are required by the  Commission to furnish the Company with copies
of all Section 16(a) forms that they file.

     Based  solely on its review of the copies of such forms  received by it, or
written  representations  from  certain  reporting  persons  that  no Form 5 was
required for those  persons,  the Company  believes  that during 1996 all filing
requirements  applicable  to  its  officers,  directors  and  greater  than  10%
stockholders were complied with.

ITEM 10.  EXECUTIVE COMPENSATION

     The  following  tables  provide  certain  summary  information   concerning
compensation  paid or  accrued by the  Company to or on behalf of the  Company's
Chief Executive Officer and each of the four most highly  compensated  executive
officers of the Company whose total compensation  exceeded $100,000 for the year
ended December 31, 1996.


                                       28

<PAGE>


                                     SUMMARY COMPENSATION TABLE


                                                    AWARDS -
                                                   Securities
Name and                                           Underlying     All Other
Principal Position      Year    Salary      Bonus  Options (1)  Compensation (2)
------------------      ----   --------     ------ -----------  ---------------
Craig Fishman
President and CEO       1996   $170,330     $  -0-    30,000        $3,000
                        1995   $161,177     $  -0-       -          $3,000
                        1994   $126,405     $  -0-       -          $2,578
Leon Fishman
Director/Vice Chairman  1996   $295,009     $  -0-       -          $3,000
                        1995   $377,885     $  -0-       -          $3,000
                        1994   $375,000     $  -0-       -          $3,000

Lawrence M. Winkler     1996   $169,450     $  -0-    20,000        $3,000
Secy/Treasurer &        1995   $154,732     $  -0-       -          $3,000
CFO                     1994   $143,533     $2,500       -          $2,889

Richard Brasch          1996   $109,328     $4,000    12,500        $3,000
General Counsel         1995   $132,023     $3,000       -          $2,640
                        1994   $110,533     $2,500       -          $2,211

Peter Matthy            1996   $105,435     $  -0-    20,000           -
Exec. Vice President,   1995   $   -0-      $  -0-       -             -
Director of Sales &     1994   $   -0-      $  -0-       -             -
Marketing

--------------------------------------------
(1)   No SARs have been granted.
(2)   Represents contributions to 401(k) plan.

INDIVIDUAL GRANTS IN LAST FISCAL YEAR

                                  Option Grants in Last Fiscal Year
                                          Individual Grants

                               Number of     Percent of
                               Securities    Total Options  Exercise
                               Underlying    Granted to       or
                               Options       Employees in    Base    Expiration
           Name                Created       Fiscal Year     Price      Date
--------------------------------------------------------------------------------

Craig Fishman                     30,000         36.4%       5.62      6/30/2001

Leon Fishman                        -              -          -

Lawrence M. Winkler               20,000         24.2        5.62      6/30/2001

Peter D. Matthy                   20,000         24.2        5.62      6/30/2001

Richard A. Brasch                 12,500         15.2        5.62      6/30/2001
                                  ------         ----
                                  82,500        100.0%
                                  ======        =====



<TABLE>
AGGREGATE OPTIONS/SARS EXERCISED IN LAST FISCAL YEAR AND F/Y END OPTION/SAR
VALUE
<CAPTION>
                                                                              Value of Unexercised
                      Shares                     Unexercised Options        In-the-Money Options/SARs
                    Acquired on      Value           at F/Y End                  at F/Y End
Name                  Exercise      Realized  (Exercisable/Unexercisable)  (Exercisable/Unexercisable)
---------------     ------------   ---------   -------------------------    --------------------------
<S>                      <C>            <C>         <C>                           <C>
Craig Fishman            -              -           2,500/32,500                  - /$ -0-

Leon Fishman             -              -           7,500/  -                     - /$ -0-

Peter Matthy             -              -            -   /20,000                  - /$ -0-

Lawrence Winkler         -              -           5,000/20,000                  - /$ -0-

Richard Brasch           -              -            -   /12,500                  - /$ -0-
</TABLE>




                                       29

<PAGE>



     Directors  who are not officers of the Company  receive a fee of $2,000 per
board or committee  meeting  attended in person,  plus  reimbursement  for their
expenses  associated with attending these  meetings.  Commencing  November 1995,
Directors who are not officers of the Company  receive a fee of $500 per special
board or committee meeting attended by conference  telephone call. Directors who
are officers of the Company  receive no  compensation  for serving as directors,
but are  reimbursed for  out-of-pocket  expenses  related to attending  board or
committee meetings.  In addition,  commencing August 1996 and continuing through
December  31,  1997,  Directors  who are not officers of the Company are granted
1,000  stock  options per  meeting  attended  at an exercise  price equal to the
greater of (i) 7.00 per share and (ii) 110% of the  average of the  closing  bid
and ask prices for the  Company's  common stock on the most recent three days on
which trading occurred in the Company's common stock preceding such grants.
The options are exercisable until December 31, 1999.

     The Company is party to employment  agreements with four executive officers
of the Company. The following sets forth their principal terms.

     The Company is party to an employment  agreement  with Craig  Fishman,  the
Company's  President and Chief  Executive  Officer.  Effective July 1, 1996, Mr.
Fishman's  current  base  salary is  $200,000  and is subject to annual  cost of
living  increases,  but not less than 5% per annum.  Any other  increases in his
salary  are at the  discretion  of the  Compensation  Committee.  The  agreement
contains  confidentiality and non-compete  provisions,  obligates the Company to
provide Mr.  Fishman with the use of an  automobile  and requires the Company to
include Mr. Fishman in any benefit plans made available to employees  generally.
The agreement  expires by its terms on June 30, 1998. If Mr. Fishman dies or his
employment  is  terminated  (other  than  for  cause)  during  the  term  of the
agreement,  the Company is obligated to pay him an amount equal to the lesser of
(x) one year's  compensation and (y) the compensation due for the then remainder
of the agreement (but in no event less than six months compensation).

     The Company is party to an employment  agreement with Peter D. Matthy,  the
Company's Executive Vice President. Effective July 1, 1996, Mr. Matthy's current
base  salary  is  $150,000;  salary  increases  are  at  the  discretion  of the
Compensation Committee.  The agreement contains  confidentiality and non-compete
provisions,  obligates  the  Company to provide  Mr.  Matthy  with the use of an
automobile  and requires the Company to include Mr.  Matthy in any benefit plans
made  available to employees  generally.  The agreement  expires by its terms on
June 30, 1998.  If Mr. Matthy dies or his  employment is terminated  (other than
for cause) during the term of the agreement, the Company is obligated to pay him
an amount equal to one year's compensation.

     The Company is party to an employment  agreement  with Lawrence M. Winkler,
the Company's Secretary/Treasurer and Chief Financial Officer. Effective July 1,
1996, Mr. Winkler's current base salary is $160,775; salary increases are at the
discretion of the Compensation Committee. The agreement contains confidentiality
and  non-compete  provisions,  obligates the Company to provide Mr. Winkler with
the use of an automobile  and requires the Company to include Mr. Winkler in any
benefit plans made available to employees  generally.  The agreement  expires by
its terms on June 30, 1998. If Mr.  Winkler dies or his employment is terminated
(other  than  for  cause)  during  the term of the  agreement,  the  Company  is
obligated  to  pay  him an  amount  equal  to  the  lesser  of  (x)  one  year's
compensation  and  (y)  the  compensation  due for  the  then  remainder  of the
agreement (but in no event less than six months compensation).



                                       30

<PAGE>



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth, as of March 20, 1997, the amount of common
stock of the Company which may be deemed  beneficially owned: (i) by each person
known to the Company to be the beneficial owner of more than 5% of the aggregate
shares of the  Company's  outstanding  common  stock,  (ii) by each of the named
executive officers in the Summary  Compensation Table, (iii) by each director of
the Company and (iv) by all officers and directors as a group.


                                   Common Shares      Exercisable     Percent of
Name and Address                Beneficially Owned  Options Included     Class
------------------             -------------------  ----------------  ----------
Leon Fishman
20191 E. Country Club Dr.
N. Miami Beach, FL  33180           253,750              7,500            10.91%

Eugene Haskin
4000 Island Blvd.
N. Miami Beach, FL  37160           242,500              2,000            10.45%

Lawrence M. Winkler
1300 Crystal Drive
Arlington, VA 22202                  5,050               5,000             0.03%

James Spector
10580 SW 77 Terrace
Miami, FL 33173                      4,200               4,000             0.02%

Peter Matthy
5812 Highland Drive
Chevy Chase, MD 70815                7,000                 -               0.03%

Alan Freeman
20191 East Country Club Drive
Aventura, FL 33180                   4,000               4,000             0.02%

Craig Fishman
2687 Hillsman Street
Falls Church, VA 22043               7,300               2,500             0.03%

David W. Campbell
6410 Nobel Rock Court
Clifton, VA 22024                    4,000               3,000             0.02%

William H. Savage
314 Franklin Street
Alexandria, VA 22314                11,000               4,000             0.04%

Edward A. McNally
120-41 Prospect Street
Ridgefield, CT 06837                 5,000               4,000             0.02%

Lawrence Vecker
1600 Parker Avenue
Fort Lee, NJ 07024                   4,000               4,000             0.02%

Timothy G. Ewing
Value Partners, Ltd.
2200 Ross Avenue
Dallas, TX  75201                   661,835                -              26.57%

Tweedy, Browne Company L.P.
52 Vanderbilt Avenue
New York, NY  10017                 245,150                -              10.58%

Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94403-7777            132,000                -               5.69%

Richard A. Brasch
9313 Hamilton Drive
Fairfax, VA 22031                      -                   -                 -

For all Officers and Directors
as a group (12 persons)             547,800                -              23.20%

                                       31

<PAGE>





ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See Part II, Item 7 of this 10-KSB (Financial Statements).

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                                                34

      Consolidated Balance Sheets as of December 31, 1996 and 1995            35

      Consolidated Statements of Operations for the years ended
      December 31, 1996, 1995, and 1994                                       36

      Consolidated Statements of Shareholders' Equity for
      the years ended December 31, 1996, 1995 and 1994                        37

      Consolidated Statements of Cash Flows for the years
      ended December 31, 1996, 1995 and 1994                               38-39

      Notes to Consolidated Financial Statements for the
      year ended December 31, 1996                                         40-55

      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, 1996, 1995 and 1994            56

      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




                                       32

<PAGE>



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

            Amendments to Exhibit 10.7 - Revolving Credit and Security Agreement
            dated as of May 13, 1994 between IBJ Schroder  Bank & Trust  Company
            (as Lender  and as Agent) and  Allstate  Financial  Corporation  (as
            Borrower), as amended to March 4, 1996.

            Ninth Amendment dated as of April 26, 1996 Tenth Amendment dated as
            of June 30, 1996

EXHIBIT 10.9 EMPLOYMENT CONTRACTS

             Employment  and  Compensation  Agreement,  effective  as of July 1,
             1996, by and between the Company and Craig Fishman.

             Employment and Compensation Agreement, effective as of July 1,
             1996, by and between the Company and Lawrence M. Winkler

             Employment and Compensation Agreement, effective as of July 1,
             1996, by and between the Company and Peter D. Matthy

EXHIBIT 21.  SUBSIDIARIES OF THE COMPANY

                                       33

<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, 1996 and 1995, and the
related consolidated  statements of operations,  shareholders'  equity, and cash
flows for each of the three years in the period ended  December  31,  1996.  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, 1996,  and 1995,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1996 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 21, 1997

                                       34

<PAGE>


<TABLE>
                               ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                               -----------------------------------------------
                                         CONSOLIDATED BALANCE SHEETS
                                         ---------------------------
<CAPTION>
                                                                                     December 31,
                                                                     -------------------------------------
                                                                         1996                       1995
                                                                     -----------                -----------
                                                   ASSETS

<S>                                                                   <C>                        <C>
CURRENT ASSETS:
  Cash                                                                $1,624,899                $   754,295
  Receivables:
    Finance, net                                                      30,574,239                 32,670,706
    Purchased life insurance contracts, net                            4,493,088                  4,292,332
    Other                                                              4,394,975                  2,756,342

  Prepaid expenses                                                       154,434                    204,823

  Income tax receivable                                                1,150,289                    722,081

  Deferred income taxes                                                  893,000                    893,000
                                                                         -------                    -------
        TOTAL CURRENT ASSETS                                          43,284,924                 42,293,579

FURNITURE, FIXTURES AND EQUIPMENT, Net                                   538,164                    537,629

OTHER ASSETS                                                           2,116,343                  2,049,323
                                                                       ---------                  ---------
                                                                     $45,939,431                $44,880,531
                                                                     ===========                ===========


                                    LIABILITIES AND SHAREHOLDERS' EQUITY
                                    ------------------------------------

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                              $   446,360                $   292,602
  Notes payable                                                       14,851,582                 13,516,938
  Note payable-related party                                             103,000                    103,000
  Credit balances of factoring clients                                 2,964,873                  2,333,729
                                                                       ---------                  ---------
        TOTAL CURRENT LIABILITIES                                     18,365,815                 16,246,269


NONCURRENT PORTION OF NOTES PAYABLE:
  Related parties                                                         61,969                     58,788
  Convertible Subordinated Notes                                       4,985,110                  2,845,110
                                                                       ---------                  ---------
        TOTAL LIABILITIES                                             23,412,894                 19,150,167
                                                                      ----------                 ----------

COMMITMENTS AND CONTINGENCIES

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;  2,317,919
    outstanding at December 31, 1996 and 2,655,128
    outstanding  at December  31,  1995,  exclusive  of
    shares held in treasury                                               40,000                      40,000

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

 Treasury Stock 784,409 shares at
    December 31, 1996 and 447,200 at
    December 31, 1995                                                (5,034,584)                  (2,871,901)

  Retained Earnings                                                    8,668,809                   9,709,953
                                                                       ---------                   ---------
        TOTAL SHAREHOLDERS' EQUITY                                    22,526,537                  25,730,364
                                                                      ----------                  ----------
                                                                     $45,939,431                 $44,880,531
                                                                     ===========                 ===========
</TABLE>

                               See Notes to Consolidated Financial Statements

                                       35

<PAGE>



<TABLE>
                                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                                 -----------------------------------------------
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                       -------------------------------------




<CAPTION>
                                                                   Years Ended December 31,
                                                    ---------------------------------------------------------
                                                        1996                   1995                   1994
                                                    -----------            -----------            -----------
<S>                                                 <C>                    <C>                    <C>
INCOME:
    Earned discounts                                $10,025,779            $10,932,331            $ 9,947,678
    Fees and other income                             2,378,782              2,065,015              2,082,320
                                                      ---------              ---------              ---------
          TOTAL INCOME                               12,404,561             12,997,346             12,029,998
                                                     ----------             ----------             ----------
EXPENSES:
    Compensation and fringe benefits                  3,318,609              3,198,497              2,996,029
    General and administrative                        2,804,643              2,758,285              2,673,959
    Interest expense                                  1,606,561                983,718                610,531
    Provision for credit losses                       5,878,167              4,981,646              5,359,159
    Commissions                                         449,225                263,100                155,280
                                                        -------                -------                -------
          TOTAL EXPENSES                             14,057,205             12,185,246             11,794,958
                                                     ----------             ----------             ----------

INCOME (LOSS) BEFORE INCOME TAXES                    (1,652,644)               812,100                235,040

INCOME TAXES (BENEFITS)                                (611,500)               331,000                 87,500
                                                       --------                -------                 ------

NET INCOME (LOSS)                                    (1,041,144)           $   481,100            $   147,540
                                                     ==========            ===========            ===========

NET INCOME (LOSS) PER SHARE                         $(      .45)           $      0.16            $      0.05
                                                    ============           ===========            ===========

WEIGHTED AVERAGE NUMBER OF SHARES                     2,328,308              2,966,330              3,102,328
                                                      =========              =========              =========
</TABLE>

                                 See Notes to Consolidated Financial Statements


                                       36

<PAGE>



<TABLE>
                                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                                 -----------------------------------------------
                                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 -----------------------------------------------
                                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                  --------------------------------------------



<CAPTION>
                                                Common          Additional        Treasury        Retained
                                                 Stock        Paid in Capital       Stock         Earnings
                                                ------        ---------------    ---------      -----------

<S>                                            <C>             <C>                               <C>
Balance - January 1, 1994                      $40,000         $18,852,312            -          $9,081,313

   Net Income                                     -                   -               -             147,540
                                                ------          ----------         ------         ---------
Balance - December 31, 1994                     40,000          18,852,312                        9,228,853

   Exchange of Convertible
     Subordinated Notes for
     447,200 shares of common stock               -                   -          (2,871,901)           -

   Net Income                                     -                   -               -             481,100
                                               -------         -----------      ------------     ----------
Balance - December 31, 1995                    $40,000         $18,852,312      $(2,871,901)     $9,709,953

   Exchange of Convertible
     Subordinated Notes for
     338,275 shares of common stock               -                   -          (2,170,683)           -

   Conversion of Convertible
     Subordinated Notes to
     1,066 shares of common stock                 -                   -               8,000            -

   Net Loss                                       -                   -               -          (1,041,144)
                                               -------        -----------       ------------     -----------
Balance - December 31, 1996                    $40,000        $18,852,312       $(5,034,584)     $8,668,809
                                               =======        ===========       ============     ===========

</TABLE>



                                 See Notes to Consolidated Financial Statements

                                       37

<PAGE>



<TABLE>
                                   ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                                   -----------------------------------------------
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       -------------------------------------

<CAPTION>
                                                                             Years Ended December 31,
                                                                 -----------------------------------------------
                                                                     1996              1995              1994
                                                                 -----------       ------------       ----------
<S>                                                             <C>                <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (Loss)                                             $(1,041,144)      $    481,100       $  147,540
   Adjustments to reconcile net income
   to cash provided by operating activities:
     Depreciation - net                                              107,664            100,093           92,801
     Provision for credit losses                                   5,878,167          4,981,646        5,359,159
     Changes in operating assets and liabilities;
     Decrease/(Increase) in other receivables                        133,237            632,296       (1,044,840)
     (Increase)/Decrease in prepaid expenses                          50,389             (6,732)          54,030
     Decrease/(Increase) in other assets                             461,955            397,760          997,247
     (Decrease)/Increase in accounts payable
        and accrued expenses                                         153,758            (11,236)          83,200
     Decrease/(Increase) in deferred income tax asset                   -                16,000         (307,000)
     Increase in income tax receivable                              (428,208)           (93,958)        (273,271)
                                                                    --------            -------         --------

NET CASH PROVIDED BY OPERATING ACTIVITIES                          5,315,818          6,496,969        5,108,866
                                                                   =========          =========        =========

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of finance receivables,
     including repurchases and life insurance
     contracts                                                  (199,191,058)      (172,311,795)    (188,868,852)
   Collections of finance receivables,
     including repurchases and life insurance
     contracts                                                   192,907,757        162,403,869      177,854,250
   Increase/(Decrease) in credit balances
     of factoring clients                                            631,144            668,691         (246,290)
   Purchase of furniture, fixtures and equipment                    (108,199)          (158,691)        (152,639)
                                                                    --------           --------         --------

NET CASH USED IN INVESTING ACTIVITIES                             (5,760,356)        (9,397,926)     (11,413,531)
                                                                  ----------         ----------      -----------


CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from line of credit
     and other borrowings                                         58,584,464         72,153,625       66,975,004
   Principal payments on line of credit
     and other borrowings                                        (57,246,639)       (70,228,402)     (61,691,628)
   Treasury Stock Acquisition costs                                  (22,683)           (33,901)            -
                                                                     -------            -------       ----------

NET CASH PROVIDED BY FINANCING ACTIVITIES                          1,315,142          1,891,322        5,283,376
                                                                   ---------          ---------        ---------

NET INCREASE (DECREASE) IN CASH                                      870,604         (1,009,635)      (1,021,289)

CASH, Beginning of year                                              754,295          1,763,930        2,785,219
                                                                     -------          ---------        ---------

CASH, End of year                                                $ 1,624,899      $     754,295      $ 1,763,930
                                                                 ===========      =============      ===========
</TABLE>




                 See Notes to Consolidated Financial Statements

                                       38

<PAGE>


<TABLE>
                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
                                   (continued)



<CAPTION>
                                                                       Years Ended December 31,
                                                              --------------------------------------
                                                                 1996           1995         1994
                                                              ----------     ----------   ----------
<S>                                                           <C>            <C>           <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Interest paid                                             $1,605,196     $1,014,406    $  631,187
                                                              ==========     ==========    ==========

    Taxes paid                                                $   14,321     $  408,958    $  667,919
                                                              ==========     ==========    ==========


SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:

    Transfer of finance and other
      receivables to other assets                             $2,004,423     $  267,750    $   62,508
                                                              ==========     ==========    ==========

    Issuance of Convertible Subordinated
      Notes in exchange for common stock                      $2,148,000     $2,838,000    $     -
                                                              ==========     ==========    ==========
</TABLE>




                 See Notes to Consolidated Financial Statements

                                       39

<PAGE>



                           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.  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,  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 increases 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 consolidated total assets and revenues.


FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
---------------------------------------------------
    Finance Receivables consist of factored accounts receivable,  Collateralized
Advances  (as  defined  below),   overadvances  secured  by  general  liens  and
non-earning  receivables.  Factored  accounts  receivable are stated at the face
amount  outstanding,  net of  unearned  discounts  and an  allowance  for credit
losses. 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. 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  promptly  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.


                                       40

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

    The  allowance  for  credit  losses  is  maintained  at a  level  which,  in
management's  judgment,  is sufficient to absorb losses  inherent in the finance
receivables   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.  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 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. The Company's adoption of these Statements did not have a material impact
on its financial position or results of operations.


PURCHASED LIFE INSURANCE CONTRACTS
----------------------------------
    The  Company  purchases  life  insurance  contracts,  at  a  discount,  from
individuals facing life threatening illnesses.  The life insurance contracts are
purchased  after a review of the  insured's  medical  records by an  independent
physician who verifies the insured's physical condition and estimates his or her
life  expectancy.  Historically,  the Company  required up to three  independent
medical  reviews but,  based on its  experience,  management no longer  believes
multiple medical reviews are necessary.  Life insurance  contracts are purchased
from  individuals who have an anticipated life expectancy of up to sixty months.
Purchase discounts,  which are accounted for as unearned discounts, are based on
the estimated life  expectancy of the insured  individual,  as determined by the
independent  physician(s).  At the  time  of  purchase,  the  Company  is  named
beneficiary of the policy.  Future insurance policy premiums are usually paid by
the Company. Unearned discounts are recorded as income using the interest method
over the  estimated  life  expectancy  of the  individual  insured.  The Company
reviews such life  expectancies on a quarterly basis and records  adjustments as
necessary.  Actual results could differ significantly from those estimated based
on life

                                       41

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

expectancies.  Factors such as life extending treatments (or a cure) for certain
illnesses could impact the recognition of unearned  discounts.  Most of the life
insurance  contracts  purchased  are  underwritten  by  highly  rated  insurance
companies and, in many cases,  are backed by state guaranty funds.  Accordingly,
management  does not believe  that credit risk is material  and,  therefore,  no
allowance  for  credit  losses is  maintained  with  respect to  purchased  life
insurance  contracts.  The Company is curtailing  the purchase of life insurance
policies to better focus on its core commercial finance activities.

OTHER RECEIVABLES
-----------------
    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 reclassifica-
tion 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
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  to 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  disposition  of other  assets are first
reflected in the allowance for credit losses. Any gain which exceeds the amount,
if any, previously written-off will be 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 owner of the property

                                       42

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

foreclosed or changes in the Company's strategy for recovering its investment.
See (h) Credit Loss Policy and Experience.

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
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,  Purchased Life Insurance  Contracts,  Commitments and
    Other  Receivables -- The determination of the fair value of these assets is
    not practicable to estimate as there is no secondary  market and the Company
    holds these assets to maturity.

    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.



                                       43

<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 highest
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, interest income, finder's fees
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.

NET INCOME PER SHARE
--------------------
    Net  income  per share  has been  computed  by  dividing  net  income by the
weighted   average  number  of  common  shares  and  common  share   equivalents
outstanding  during each period.  The Company's  Convertible  Subordinated Notes
were  anti-dilutive  for purposes of calculating  earnings per share in 1996 and
1995.

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
    In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting  for the Impairment of Long-Lived  Assets and for Long-Lived  Assets
Disposed Of." This  Statement  prescribes  the  accounting for the impairment of
long-lived assets, such as property, plant and equipment,  identifiable tangible
assets and goodwill related to those assets. An impairment loss is recorded when
the  undiscounted  cashflows from the use and eventual  disposal of the asset is
less than the carrying  value of the asset.  The Company  adopted this Statement
effective  January  1,  1996.  The  adoption  of this  Statement  did not have a
material impact on the Company's financial position or results of operations.

    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

                                       44

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

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 (See Note H).


B. RECEIVABLES
   -----------
    Finance receivables consist of the following:

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

    Factored accounts receivable                 $22,390,229       $25,169,997
    Collateralized Advances                        8,808,455        10,842,047
    Overadvances and accrued earnings
      collateralized by general liens              1,849,778         1,407,233
    Non-Earning Receivables                        4,547,893         1,588,545
                                                   ---------         ---------

        Gross Finance Receivables                 37,596,355        39,007,822
    Less:  Participation                          (1,000,000)            -
    Less:  Unearned discount                      (3,443,144)       (3,986,148)
    Less:  Allowance for credit losses            (2,578,972)       (2,350,968)
                                                  ----------        ----------
        Finance receivables, net                 $30,574,239       $32,670,706
                                                 ===========       ===========


     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
collectability,  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  required 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  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  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.



                                       45

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

     Purchased life insurance contracts consist of:

                                                          December 31,
                                                ----------------------------
                                                   1996              1995
                                                -----------      -----------
    Purchased life insurance contracts          $5,368,266       $5,155,828
    Unearned discount                             (835,178)        (861,496)
    Amount withheld                                (40,000)            -
    Due other beneficiaries                           -              (2,000)
                                                ----------       ----------
    Purchased life insurance contracts, net     $4,493,088       $4,292,332
                                                ==========       ==========

Amounts "due other beneficiaries" represents Lifetime Options' obligation to pay
amounts to third parties upon its receipt of proceeds from the  underlying  life
insurance  policies.  Included in purchased life insurance contracts at December
31,  1996 and 1995 are $1.7  million  and $2.0  million,  respectively,  of life
insurance  contracts  insuring  individuals with life  expectancies in excess of
twelve months.

    Other receivables consist of the following:

                                                           December 31,
                                                 ----------------------------
                                                     1996             1995
                                                 ----------        ----------
    Notes receivable                             $     -           $   68,284
    Miscellaneous                                     5,394            18,868
    Third party receivables in collection         4,389,580         2,669,190
                                                 $4,394,974        $2,756,342

    Changes in the allowance for credit losses were as follows:

                 BALANCE, January 1, 1994 ......   $ 2,120,127

                     Provision for credit losses     5,359,159
                     Receivables charged off ...    (5,015,957)
                     Recoveries ................        47,449
                                                     ---------

                 BALANCE, December 31, 1994 ....     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
                                                   ===========


        Impairment  of  loans  having  recorded  investments  of  $3,396,661  at
    December 31, 1996 have been  recognized in conformity  with FASB  statements
    No.  114 as  amended  by  FASB  statement  No.  118.  The  average  recorded
    investment in impaired loans during 1996 was $3,396,661. The total allowance
    for credit losses  related to these loans was $525,000 at December 31, 1996.
    The Company  suspended  the recording of income from these loans once deemed
    impaired. Receipts of cash are credited to the outstanding loan

                                       46

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

    balance.  At December  31,  1995 and  December  31,  1994,  loans  totalling
    $3,307,474 and $6,583,262, respectively, had specific reserves of $1,549,500
    and $2,075,716.


C. FURNITURE, FIXTURES AND EQUIPMENT
   ---------------------------------
     The  Company's  investment  in  property  and  equipment  consists  of  the
following:

                                                          December 31,
                                                 ---------------------------
                                                    1996              1995
                                                 ---------        ----------
        Furniture , fixtures and equipment       $ 993,039        $1,109,894
        Automobiles                                149,141           181,703
        Less: Accumulated depreciation            (604,016)         (753,968)
                                                 $ 538,164        $  537,629

    The  furniture,  fixtures and equipment  are pledged as  collateral  under a
    revolving line of credit (see Note F).


D. OTHER ASSETS
   ------------
     Other assets consist of:
                                                          December 31,
                                                ------------------------------
                                                    1996               1995
                                                ----------          ----------
    Inventory held for sale                     $     -             $   20,000
    Commercial property held for sale            1,883,768             862,750
      Residential property held for sale              -                910,000
                                                ----------          ----------
                                                 1,883,768           1,792,750
    Condominium, not used in trade or
         business                                  232,575             232,575
    Deferred loan costs                               -                 23,998
    Other                                             -                   -
                                                ----------          ----------
                                                $2,116,343          $2,049,323
                                                ==========          ==========

    Included in Commercial property held for sale and Residential  property held
for sale are properties for which the Company does not hold title.  Rather,  the
Company holds  mortgage  liens against 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.


E. CREDIT BALANCES OF FACTORING CLIENTS
   ------------------------------------
     At December 31, 1996 and 1995, credit balances of factoring clients consist
of: (i) a holdback reserve of $1,206,756 and $1,242,450,  respectively, which is
payable to clients upon the collection of factored accounts  receivable and (ii)
excess cash collateral of $1,758,117 and $1,091,279 respectively.



                                       47

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

F. NOTES PAYABLE
   -------------
     Notes payable consist of:
                                                            December 31,
                                                  ------------------------------
                                                      1996                1995
                                                  ------------      ------------
Notes payable - related parties;
 interest at 1% over prime due
 December 31, 1996 (being extended
 to December 31, 1999) and on demand;
 unsecured                                          $164,969            $161,788

Notes payable; interest payable
 at 1% over prime due December 31,
 1996 (being extended to 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                               4,978,000           2,838,000

Revolving line of credit - interest
 at 3/4% over the base rate; collateralized
 by finance receivables and personal
 property;  total line - $25,000,000              14,825,012          12,262,522

Line of credit - interest at 1% over
 prime, expired December 31, 1996,
 collateralized by specific purchased life
 insurance policies; total line
 $2,000,000                                            -               1,239,699

Capitalized Lease - Payable over 24 months;
 final payment due April, 1998, collateralized
 by automobile.                                       11,853                -
                                                 -----------         -----------
                                                 $20,001,661         $16,523,836
                                                 ===========         ===========


    At December 31,  1996,  1995 and 1994,  the prime rate was 8.25%,  8.50% and
8.75%, respectively.


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

                                                            December 31,
                                                -------------------------------
                                                    1996                 1995
                                                -----------         -----------
Current portion of notes payable                $14,851,582         $13,516,938
Current portion of notes payable -
    related party                                   103,000             103,000
Noncurrent portion of notes payable -
    related parties                                  61,969              58,788
Noncurrent portion of notes payable -
    Convertible Subordinated Notes                4,985,110           2,845,110
                                                  ---------           ---------
                                                $20,001,661         $16,523,836
                                                ===========         ===========



                                       48

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

    Aggregate  annual  principal  payments  on notes  payable for the five years
subsequent to December 31, 1996 are as follows:

           Twelve Months Ending December 31,
           ---------------------------------
                      1997                    $14,948,729
                      1998                          5,853
                      1999                         69,079
                      2000                      4,978,000
                      2001                          -
                                              -----------
                                              $20,001,661
                                              ===========

     As of  December  31,  1996 the  Company  had  approximately  $10.1  million
available  under a $25.0 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 by the Company 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  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 13, 1997.  The Company is
currently discussing with its lenders a renewal of this credit facility.

     Bank commitment fee expense for the years ended December 31, 1996, 1995 and
1994 was $38,400, $41,900, and $24,700, respectively.

     During  1996  Lifetime  Options,  Inc.,  a Viatical  Settlement  Company (a
wholly-owned  subsidiary of the  Company),  had a $2 million  revolving  line of
credit  with a local  federal  savings  bank.  This  line of credit  expired  on
December 31, 1996 at which time all indebtedness was paid in full.

     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  (currently held by the Company as treasury  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  exchanged prior
to  December  31,  1995).  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 may fluctuate 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 1996,  $8,000 of  Convertible  Subordinated  Notes were
converted into 1,066 shares of common stock of the Company.

     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

                                       49

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

payable to related  parties for the years ended December 31, 1996, 1995 and 1994
was $15,400, $16,200, and $33,400, respectively.


G. SHAREHOLDERS' EQUITY
   --------------------
     On  September  11,  1995,  and January 12, 1996 the Company  exchanged  its
Convertible  Subordinated  Notes for an aggregate of 785,475 shares of its stock
currently held in the Company's  treasury.  Costs  incurred in this  transaction
amounted  to  $22,683  in  1996  and  $33,901  in  1995.  For  details  of  this
transaction, see Note F.


H. STOCK OPTION AND BENEFIT PLANS
   ------------------------------
     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 1994 through 1996.

                                             Total          Option Price
                                            Options           Per Share
                                            -------        -----------------

      Outstanding, January 1, 1994          94,371         $7.00 to $14.00
         Granted                             1,200         $5.75 to $ 6.50 (1)
         Forfeited                          (1,134)        $6.50 to $14.00
                                            -------

      Outstanding, December 31, 1994        94,437         $5.750 to $14.000
         Granted                             1,200         $5.375 to $ 7.6875
         Forfeited                         (53,470)        $5.875 to $14.00
                                           --------

      Outstanding, December 31, 1995        42,167         $5.375 to $14.00
         Granted                           116,100         $5.62  to $ 6.75
         Forfeited                         (24,867)        $5.437 to $14.00
                                           --------

      Outstanding, December 31, 1996       133,400
                                           =======
      Exercisable, December 31, 1996        15,794
                                           =======



------------------------------------
      (1) In May 1994,  11,200 stock options issued in 1992 and 1993 at $11.6250
      to $17.000, were repriced to $6.50.


      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 1994
through 1996:


                                       50

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

                                               Total           Option Price
                                              Options             Per Share
                                             --------         ----------------

      Outstanding, January 1, 1994            21,668          $7.125 to $14.00
         Exercised                              -             $7.125 to $14.00
         Forfeited                           (13,000)         $
                                             --------

      Outstanding, December 31, 1994           8,668          $7.125 to $14.000
         Granted                              10,000          $5.600
         Forfeited                           ( 6,668)         $7.125
                                             --------

      Outstanding, December 31, 1995          12,000          $5.600 to $14.000
         Granted                              23,000          $7.000
         Forfeited                           (10,000)         $5.600
                                             --------

      Outstanding, December 31, 1996          25,000
                                             =======
      Exercisable, December 31, 1996          25,000
                                             =======

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

                                               1996         1995        1994
                                             -------      -------     -------
      Outstanding at January 1                54,167      103,105     116,039
         Granted                             139,100       11,200       1,200
         Exercised                                --           --          --
         Canceled                            (34,867)     (60,138)    (14,134)
      Outstanding at December 31             158,400       54,167     103,105

      Exercisable at December 31              40,794       34,231      71,368

      The  weighted  average  fair  value at date of grant for  options  granted
during  1996 and 1995 was  $2.37  and  $2.64,  respectively.  The fair  value of
options at date of grant was estimated  using the  Black-Scholes  model using an
expected  option  life of 3.9  years  and 4.2  years in 1996 and  1995,  and the
following  weighted  average  assumptions,  respectively,  for  1996  and  1995:
dividend yield - none either year; interest rate - 6.25% and 6.17%; volatility -
42.00% for both years.  Weighted  average option exercise price  information for
years 1996, 1995 and 1994:

      Per Share                                    1996         1995        1994
                                                  -----        -----       -----
      Outstanding at January 1                    $8.64        $8.56       $8.58
         Granted                                   5.96         5.67        6.21
         Exercised                                  --           --          --
         Canceled                                  7.79         7.68        8.30
      Outstanding at December 31                   6.45         8.64        8.56

      Exercisable at December 31                  10.50         9.10        8.21


Proforma Disclosure

      If  stock-based   compensation  cost  for  the  Company's   qualified  and
non-qualified  stock option plans 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 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.


                                       51

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

      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, 1996,  1995 and 1994 was 45,751,
$34,563, and $38,100, respectively.

I. INCOME TAXES
   ------------
     The tax provision consists of:
                                                 Years Ended December 31,
                                        ---------------------------------------
                                           1996           1995          1994
                                        ----------     ---------     ----------
Federal:
  Current ..........................    $(591,200)     $ 276,500     $ 394,500
  Deferred .........................      (65,900)        16,000      (307,000)
                                          -------         ------      --------
                                         (657,100)       292,500        87,500
                                         --------        -------        ------

State:
  Current ..........................      (20,300)        38,500          --
  Deferred .........................       65,900           --            --
                                           ------         ------        ------
                                           45,600         38,500          --
                                           ------         ------        ------

   TOTAL ...........................    $(611,500)     $ 331,000     $  87,500
                                        =========      =========     =========


Tax Expense at Statutory Rate ......    $(561,900)     $ 276,100     $  79,900
Increase (Decrease)
  Resulting from:
  State Income Taxes,
   Net of Federal Income
   Tax Effect ......................      (15,800)        24,500          --
  Non-deductible expense ...........       25,200         19,100         7,600
  Other ............................      (59,000)        11,300          --
                                          -------         ------        ------
                                        $(611,500)     $ 331,000     $  87,500
                                        =========      =========     =========

Effective Tax Rate .................         37.0%          40.8%         37.2%
                                             ====           ====          ====



                                                         December 31,
                                                 ---------------------------
                                                   1996               1995
                                                 --------           --------
     Deferred tax asset:
       Allowance for credit losses               $893,000           $893,000
                                                 ========           ========


J. 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% over the prime  rate.  One  percent  (1%) over the prime rate was the same
rate paid by Lifetime Options to its unaffiliated, bank lender.

     Lifetime Options' total  indebtedness to members of Mr. Haskin's  immediate
family was $15,146 at December 31, 1996 and 1995. During 1996 and 1995, Lifetime
Options  paid   aggregate   interest  on  these  loans  of  $1,427  and  $1,514,
respectively.


                                       52

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

     Lifetime Options' total indebtedness to members of Leon Fishman's immediate
family was $46,823 at December 31, 1996, and 43,642 at December 31, 1995. During
1996 and 1995,  Lifetime  Options paid aggregate  interest of $4,229 and $4,360,
respectively.

     Rental  payments of $24,000 were received by the Company in 1996,  1995 and
1994,  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.


K.   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.

     Financial  obligations  whose contract or notional amounts represent credit
risk are as follows:
                                                            December 31,
                                                  -----------------------------
                                                      1996              1995
                                                  -----------       -----------
     Conditional Commitments to purchase
        receivables                               $66,641,000       $59,153,000
     Standby letters of credit and guaranties     $   336,230       $   726,967


     For the year ended  December  31,  1996,  gross  earnings  from two clients
accounted for 31% of the Company's total earned discounts. At December 31, 1996,
two clients each accounted for more than 10% of the Company's  outstanding gross
finance  receivables.  For the year ended December 31, 1995, gross earnings from
three clients accounted for 37% of total earned discounts. At December 31, 1995,
two  clients  accounted  for more than 10% of the  Company's  outstanding  gross
finance receivables.


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 lease was renegotiated during 1995
and extended for six years from December 1, 1995 at a reduced rental.  The

                                       53

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

Company  also pays rent for  subsidiaries  and storage  space.  Rent expense was
$200,539, $232,500, and $222,000, in 1996, 1995 and 1994, respectively.

     Future minimum rental payments are as follows:

           Twelve Months Ended December 31,

                      1997                    $164,000
                      1998                     169,000
                      1999                     173,000
                      2000                     179,000
                      2001                     184,000
                      ----                     -------
                                              $869,000
                                              ========


     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 Lyon's
trustee  brought an action  against the Company  claiming,  among other  things,
fraudulent  transfer and breach of contract.  A partial  summary  judgement  was
granted in favor of the Company which reduced the  fraudulent  transfer claim by
$1.6 million.  As a  consequence,  the remaining  fraudulent  transfer claim was
approximately  $1,000,000.  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 the proposed settlement amount
and, in March 1995, the objection,  was sustained by the bankruptcy  court.  The
Company appealed the order sustaining the objection,  however, in April 1996 the
appellate  court  exercised its  discretion not to hear the appeal at that time.
The $300,000 previously paid by the Company was returned to the Company in April
1996. 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.  The  Company  filed a motion to dismiss  the
claims and a motion to stay discovery pending a ruling on the motion to dismiss.
The  motion  to stay  discovery  was  granted  and,  in March  1996,  a  federal
magistrate  recommended  to the  District  Court  that the  Company's  motion to
dismiss be  granted.  Prior to the  District  Court  ruling on the  magistrate's
recommendation,   Sherwin-Williams  filed  an  amended  complaint.  The  amended
complaint added two additional claims for "civil conspiracy" and

                                       54

<PAGE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (continued)

"tortious interference with contract". The two new claims arise from essentially
the same allegations set forth in the earlier complaint,  i.e., that the Company
assisted in the breach of the  purchase  agreement.  In March 1997,  the federal
magistrate again  recommended to the District Court that the Company's motion to
dismiss the claims contained in the original complaint be granted.  However, the
magistrate  recommended  that the Company's motion to dismiss the two new claims
contained in the amended  complaint be denied.  Management  does not believe the
litigation will have a material  effect on the financial  position or results of
operations  of the Company  because,  in  management's  opinion,  the claims are
without merit.

        The Company was a defendant  in Harold B.  Murphy,  Chapter 7 Trustee v.
Allstate  Financial  Corporation,  et al.  in the U.S.  Bankruptcy  Court in the
District  of  Massachusetts.  Claims for  alleged  preferential  transfers  were
asserted by the bankruptcy trustee for Clearpoint Research  Corporation ("CRC"),
for former  client,  who filed a petition in  bankruptcy,  after the Company had
collected all amounts owed to it. No specific damage amount was specified in the
complaint but it is assumed the bankruptcy  trustee was seeking  recovery of the
full amount of accounts  receivables  collected  (approximately $4 million).  In
December 1996, the Company settled all claims with the bankruptcy  trustee for a
payment of $95,000. This settlement will be paid in 1997.

        As  previously  disclosed in the  Company's  Form 10-QSB for the quarter
ended June 30, 1995,  the Company has reached a  settlement  with the Trustee in
the  bankruptcy  of Premium  Sales  Corporation,  a former  client of one of the
Company's  wholly-owned  subsidiaries.  The  settlement is intended to be a full
release of any and all claims between the Company (and its subsidiaries) and the
Trustee including,  without limitation,  any alleged preference liability of the
Company and its  subsidiaries.  The  settlement  was approved by the  bankruptcy
court in January  1996.  The  settlement  will become  fully  effective  and the
settlement  monies will be disbursed at the time a plan of  distribution  in the
Premium Sales  Corporation  bankruptcy is approved by the bankruptcy  court. The
impact  of  this  settlement  has  been  reflected  in the  Company's  financial
statements.

        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.



                                       55

<PAGE>







<TABLE>
                                                SCHEDULE  IV


                            INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT



<CAPTION>
                                 Balance at
                                Beginning of                      Amounts     Balance End of Period
Name of Debtor                     Period      Additions           Paid       Current   Not Current
--------------                  ------------  -----------      ----------     -------  -----------
<S>                              <C>          <C>               <C>           <C>        <C>
Year Ended December 31, 1996:

Various                          $161,788     $  3,180          $    -        $103,000   $ 61,9681

Year Ended December 31, 1995:

Various                          $161,788     $  -              $    -        $103,000   $ 58,788

Year Ended December 31, 1994:

Various                          $602,759     $377,237          $818,208      $103,000   $ 58,788
</TABLE>





                                       56

<PAGE>








SIGNATURES

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

                                   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


                                         William Savage

Date                                     Director


                                                     57

<PAGE>







SIGNATURES

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

                                   ALLSTATE FINANCIAL CORPORATION



                               By: /s/ Craig Fishman
                                   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.




         /s/ Craig Fishman               Craig Fishman

Date     March 19, 1997                  President, Chief Executive
                                         Officer, Director


         /s/ Lawrence M. Winkler         Lawrence M. Winkler

Date     March 19, 1997                  Secretary/Treasurer,
                                         Principal Accounting and
                                         Chief Financial Officer


         /s/ Eugene R. Haskin            Eugene R. Haskin

Date     March 19, 1997                  Director



         /s/ James Spector               James Spector

Date     March 19, 1997                  Director



         /s/ Leon Fishman                Leon Fishman

Date     March 19, 1997                  Director


         /s/ William H. Savage           William H. Savage

Date     March 19, 1997                  Director


                                       57