SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

     (Mark One)
     x/  Annual report under Section 13 or 15(d) of the Securities  Exchange Act
         of 1934 for the fiscal year ended December 31, 1998

     |_| Transition report under Section 13 or 15(d) of the Securities Exchange
          Act of 1934

                  For the transition period from ___________ to ____________

                         Commission File Number 0-17832

                         Allstate Financial Corporation
                 (Name of Small Business Issuer 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)

         Issuer'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

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

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-K (Section  229.405 of this chapter)  contained in this
form,  and no  disclosure  will  be  contained,  to  the  best  of  registrant's
knowledge,  in  definitive  proxy  or  information  statements  incorporated  by
reference in Part III of this Form 10_KSB or any  amendment to this Form 10-KSB.
|_|

         Revenues for year ended December 31, 1998, were  $10,301,218.  Revenues
for year ended December 31, 1998, were $10,301,218.
         The aggregate  market value of the common stock held by non  affiliates
as of March 29, 1999 was $9,294,732  computed by reference to the closing market
price at which the stock was traded on March 29, 1999.

         The number of shares  outstanding of the issuer's  common stock,  as of
March 29, 1999, was 2,323,683.

  Transitional Small Business Disclosure Format (check one):  Yes ____  No __X__

                      DOCUMENTS INCORPORATED BY REFERENCE.

         Portions of the definitive  proxy statement for the 1999 annual meeting
of  stockholders  to be filed on or about April 15, 1999 are  incorporated  into
Para. III, Items 9 through 12 of this Form 10-KSB.

                                       1
<PAGE>

Part I

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


Item 1.  Description of Business

     Allstate Financial  Corporation (the "Company") was incorporated in 1982 in
the Commonwealth of Virginia.  The Company is a commercial  finance  institution
which  provides  financing  to small and  middle-market  businesses  through the
discounted  purchase of invoices with recourse to the seller,  and through loans
secured by accounts  receivable,  inventory,  machinery and equipment,  and real
estate.  In  addition,  the  Company  provides  other  financial  assistance  to
businesses in the form of guarantees and letters of credit. In 1997, the Company
began a program of purchasing invoices without recourse,  assuming the risk that
an account debtor may become  insolvent.  This activity  ceased during 1998. The
Company's  subsidiary  Lifetime  Options,  Inc.  manages  a  portfolio  of  life
insurance  policies  it  purchased  from  individuals  facing   life-threatening
illnesses. During 1997, Lifetime Options ceased purchasing policies.

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

     The Company's  corporate  offices in Arlington,  Virginia  house all of its
credit and client administration activities. There is also a marketing office in
New York,  New York.  In 1999,  the Company plans to open  additional  marketing
offices to focus on origination  of earning assets in geographic  areas where it
is not currently represented.

Business of Company


Principal Products

     The Company's  principal  products are financing for small and medium-sized
businesses, usually those with annual sales of $1 million to $30 million dollars
per year. Through its offering of both the purchase of invoices with recourse to
the  seller  ("Recourse  Factoring"  or  "Factoring")  and  advances  secured by
accounts  receivable,  inventory,  machinery  and  equipment,  and  real  estate
("Asset-Based  Lending" or "ABL"),  the Company  provides  its clients  with the
ability to expand their working capital and acquire productive  business assets.
The  Company  may also allow a client

                                       2
<PAGE>

to use the  Company's  credit  standing by
providing a letter of guaranty or by obtaining a letter of credit for the client
from the  Company's  bank.  These  forms of credit  enhancement  are used by the
clients to acquire  inventory for sale to their customers.  Through its range of
products,  the Company believes it offers a single source of financing for these
businesses throughout their life cycles.


Distribution Methods

     Traditionally,  the Company has  marketed  its  Factoring  product  through
referrals  from a network of  independent  brokers with whom it has  agreements.
These brokers receive fees when the Company  advances funds to clients they have
referred  to the  Company.  The ABL product is  marketed  through the  Company's
marketing employees,  who solicit referrals from business consultants,  lawyers,
accountants, and commercial banks. The Company requires more extensive financial
information  and reporting from clients who seek to qualify for its ABL product,
and believes that these kinds of referral sources will be more likely to provide
prospects who will qualify for such financing.


Competition

     In its Factoring and ABL  businesses,  the Company faces  competition  from
other factoring companies,  asset-based  lenders,  diversified lenders who offer
both products, and commercial banks who offer secured financing. Due to the size
of facilities that it offers, the Company competes with both regional sources of
financing  and large  national  organizations.  Many of these  competitors  have
significant financial,  marketing and operational resources, and may have access
to capital at lower costs than the Company can obtain.


Sources of Capital

     The  Company's  requirement  for  capital is a function of its level of its
investment  in  receivables.  The  Company  funds this  investment  through  its
revolving bank credit line, its convertible  subordinated  notes, and internally
generated funds.

     The Company  maintains a $25 million  revolving line of credit with a group
of banks.  The line of credit is secured by  substantially  all of the Company's
assets.  The total  facility  may be used by the Company to fund the purchase of
invoices  or  advances  secured  by  accounts  receivable.  There are  sublimits
available for the funding of advances  secured by client inventory and machinery
and  equipment,  and for  issuance  of  letters  of  credit  by the bank  group.
Borrowings  under the line of credit bear interest at the agent bank's base rate
or a margin over the London  Interbank  Offering Rate, at the Company's  option.
The credit line has covenants of the type which are typical of those required of
borrowers  in the  Company's  business  line.  The line of credit is due May 12,
2000.

    The  Company  also has  outstanding  approximately  $5 million in  aggregate
principal  amount of convertible  subordinated  notes of which $361 thousand are
due in 2000  and  $4.6  million  are due in  2003.  The  notes  due in 2000  are
convertible  into  common  stock of the  Company at $7.50 per share and  require
interest  payments  based on a spread over the prime rate. The notes due in 2003
are  convertible  into common stock of the Company at $6.50 per share and bear a
fixed interest rate of 10%. The notes are unsecured and  subordinated in payment
to all other debt of the Company.  The notes due 2003 have  financial  covenants
that are  similar  to but less  restrictive  than the  covenants  in

                                       3
<PAGE>

the line of
credit.  In addition,  upon the occurrence of certain change of control  events,
the  holders  of the  notes  have the  ability  to put their  notes  back to the
Company.

     The Company believes that borrowings under its current credit facility, the
proceeds of the convertible  subordinated notes, and internally  generated funds
will be sufficient to finance the Company's  funding  requirements  for the near
term.


Client Base

     The  Company's  clients are small- to  medium-sized  growth and  turnaround
companies with annual revenues typically between $1 million and $30 million. The
Company's  clients do not  typically  qualify  for  traditional  bank  financing
because they are either too new, too small,  undercapitalized  (over-leveraged),
unprofitable or otherwise  unable to satisfy the  requirements of a bank lender.
Accordingly,  there is a significant risk of default and client failure inherent
in the Company's business.









                  [Remainder of Page Intentionally Left Blank]





                                       4
<PAGE>





     The following table indicates the composition of the Company's  receivables
by type of client business as of December 31, 1998 and 1997.
<TABLE>

                                                Year Ended December 31,
                                       -----------------------------------------
                                               1998               1997
                                       ------------------ --------------------
<CAPTION>
                                        
Business of Client                     Receivable  Percent  Receivable  Percent
                                      (in thousnds)       (in thousnds) 
<S>                                     <C>          <C>   <C>           <C> 
Importer and distributor of:
   Plastic bags .....................   $12,452      29.2% $ 4,745       9.5%
   Jewelry and jewelry boxes ........     8,797      20.6      433       0.8
   Computer components and ..........     1,414       3.3   11,564      23.1
       software 1
   Tapes ............................     1,401       3.3    2,094       4.2
   Food industry ....................     1,036       2.4      587       1.2
   Carpets ..........................      --         --     1,446       2.9
   Motor engineers ..................      --         --       394       0.8
Importer, manufacturer and distri-
   butor of apparel wear, accessories
   and other durable goods ..........     3,423       8.0    7,205      14.4
Provider of publishing, direct mail
   and advertising ..................     3,206       7.5    6,579      13.1
Life insurance contracts ............     2,629       6.2    3,181       6.3
Provider of trucking and air freight      2,668       6.3    4,298       8.6
Contracts for construction and
   construction supply ..............     2,228       5.2    4,359       8.7
Provider of computer training .......     1,350       3.2     --      --
Legal claims receivable .............       371       0.9      732       1.5
Provider of engineer and health
  temps .............................       334       0.8      380       0.8

Provider of uniform sales & rentals .       125       0.3    1,036       2.1
Recreational and health club ........       --        --       400       0.8
   facilities
Other ...............................     1,215       2.8      606       1.2
                                          -----    -------  ------   --------
         Total ......................   $42,649     100.0% $50,039     100.0%
                                        =======    ======= =======   ========
</TABLE>

                                                                  
1  Does not reflect participation of others of $759,424 and $2,208,957 at
December 31, 1998 and 1997 respectiveley.

                                       5
<PAGE>



     The following  table  indicates  the  composition  of the  Company's  gross
receivables by state of location of client  business as of December 31, 1998 and
1997.
<TABLE>

                             1998                   1997
<CAPTION>
                     --------------------  ---------------------
Client State          Receivables Percent  Receivables    Percent
                    (in thousands)         (in thousands)
<S>                    <C>         <C>        <C>           <C>  
New York ...........   $25,963     60.9%      $15,827       31.6%
New Jersey .........     5,375     12.6         7,061       14.1
Virginia ...........     3,000      7.0         3,913        7.8
California .........     2,731      6.4        14,390       28.7
Florida ............     1,979      4.6         1,302        2.6
North Carolina .....       727      1.7           --          --
Pennsylvania .......       707      1.7         1,415        2.8
Connecticut ........       423      1.0         1,605        3.2
Delaware ...........       404      0.9           340        0.7
Minnesota ..........       330      0.8           179        0.4
District of Columbia       213      0.5           --         --
Maryland ...........       208      0.5           531        1.1
Rhode Island .......       204      0.5           176        0.3
New Mexico .........       160      0.4           176        0.3
Wisconsin ..........       125      0.3           130        0.3
Illinois ...........        50      0.1            80        0.2
Georgia ............        50      0.1         1,159        2.3
Mississippi ........        --      --            189        0.4
Nebraska ...........        --      --            400        0.8
South Carolina .....        --      --             37        0.1
Texas ..............        --      --          1,078        2.2
Arkansas ...........        --      --             51        0.1
                       -------     ----       -------      -----
    Total ..........   $42,649   100.0%       $50,039      100.0%
                       =======   ======       =======      =====
</TABLE>


     The tables above reflect the  composition  of the Company's  receivables by
client industry and state of client location at the dates indicated. Because the
Company's major clients tend to change significantly over time, these tables are
not likely to reflect the  composition  of the Company's  receivables  by client
industry or state of location at future points in time.

    From time to time,  a single  client or single  industry  may account for a
significant  portion of the Company's  receivables.  For the year ended December
31, 1998,  two clients each accounted for more than 10% of gross  earnings.  The
total gross earnings for these two clients  accounted for 36.6% of the Company's
total earned  discounts and interest as compared to the year ended  December 31,
1997 where one client accounted for more than 10% of gross earnings, with 36.9%.
At December  31,  1998,  two  clients  each  accounted  for more than 10% of the
Company's outstanding gross finance receivables,  and those two clients together
accounted  for  36.9%  of the  Company's  total  finance  receivables,  while at
December  31,  1997,  one client  accounted  for more than 10% of the  Company's
outstanding  gross finance  receivables,  with 22.8%.  During 1998,  the Company
adopted a policy to  restrict  the size of any one new client to a maximum of $3
million,  and to take steps to reduce the size of the three existing clients who
are currently over that limit.  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.

                                       6

<PAGE>

     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  qualify for more  competitively  priced bank or  asset-based
financing  within  that time  period,  or would be  liquidated.  Therefore,  the
Company's major clients have tended to change  significantly  over time.  Today,
however,  because the Company is  offering a wider range of  products,  at lower
rates than it has historically,  it is possible that the length of the Company's
funding relationships with its clients may be extended. Although the Company has
historically been successful in replacing major clients, the loss of one or more
major  clients and an inability to replace  those  clients could have a material
adverse effect on the Company.


Obligor (Account Debtor) Information

     The quality of the  purchased  invoices is the Company's  primary  security
against credit losses from its Factoring activities.  The Company generally does
not purchase accounts receivable that have aged significantly.


     As of December 31, 1998 and 1997, the Company's  receivables included $23.7
million and $34.8 million of purchased invoices on which approximately 4,200 and
3,400 entities,  respectively,  were obligated.  There is considerable variation
from period to period in the  composition  of account  debtors and the amount of
their respective obligations to the Company.


     If the Company has not received  payment on a Factored  account  receivable
within 90 days  after  its  acquisition  or if at any time  prior to 90 days the
Company determines that it is unlikely to receive payment,  the Company requires
the client to repay the amount the Company has advanced on the  receivable  plus
the amount of discount  earned.  If,  after 90 days,  follow up calls to account
debtors  lead the  Company to believe  that an invoice is  collectable  within a
reasonable  period  of time,  the  Company  may  allow  the  advance  to  remain
outstanding in return for an additional discount from the client. In that event,
the earned discount owed on the original period of the advance is collected from
the client the end of 90 days and earned discounts  thereafter  accrue as if the
account receivable were a new purchase.

     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, 1998 and 1997, the largest single account debtor
accounted for approximately 2% and 10.7%,  respectively,  of the Company's gross
purchased  invoices.  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.


Government Regulation

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

     In connection with certain of its clients whose obligors include the United
States or  departments  or agencies  thereof (the "U. S.  Government"),  certain
receivables  purchased by the Company are subject to the Federal  Assignment  of
Claims Act ("FACA").  FACA provides that an assignment of

                                       7
<PAGE>

a client's contractual
claim for monies due from the U.S.  Government  will be enforceable  against the
U.S.  Government by a third party  assignee of such client,  such as the Company
when it enters into a Factoring  arrangement,  only under limited circumstances.
The Company does not always  comply with FACA when it purchases  invoices  where
the U.S.  Government is the account debtor.  Non-compliance with FACA causes the
Company to lose any right it may have to receive payments directly from the U.S.
Government or cause the U.S.  Government to acknowledge  the Company's  claim in
such receivables.  However, FACA does not limit the Company's ability to require
its clients to direct payments made by the U.S.  Government to a Post Office box
controlled  by the  Company  in order  that the  Company  may apply  them to the
clients' accounts. The U. S. Government also has significant rights of offset in
connection with its contractual  payments. In cases where the U.S. Government is
the obligor,  an assignee must comply with FACA in order to protect  itself from
such offsets. The U.S. Government has broad offset rights, including offsets for
unpaid taxes and offsets arising from disputes involving other contracts between
the client and the U.S.  Government.  During 1998 and 1997, the U.S.  Government
accounted for immaterial  percentages of the Company's  total volume of invoices
purchased.


Year 2000 Disclosures

     The Year 2000 issue is the result of computer  programs being written using
two digits  rather  than four  digits to define the  applicable  year.  Computer
equipment,  software  and  other  devices  with  embedded  technology  that  are
time-sensitive  may recognize a date using "00" as the year 1900 rather than the
year 2000.  This could  result in system  failures  or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to process  transactions,  send  invoices,  or engage in other  normal  business
activities.  The inability of business  processes to function  correctly in 2000
could have serious  adverse  effects on companies  and entities  throughout  the
world.  Management has determined that the  consequences of its Year 2000 issues
could have a material effect on the Company's  business,  results,  or financial
condition if the Company and certain  material  third parties do not become Year
2000 compliant.

     The Company has identified all significant  information  technology  ("IT")
applications  that are not Year 2000  compliant.  Management does not believe it
has any non-IT  systems,  (those other than  computers or software which include
microprocessors),  which are not certified by their  vendors as  compliant.  The
Company has determined to replace all of the  non-compliant  IT applications and
hardware  with  applications  and hardware  certified by third party  vendors as
compliant and tested for compliance.  The first phase of Year 2000  remediation,
identifying the appropriate replacement  applications,  has been completed.  The
second phase, purchasing or contracting to license or purchase the applications,
is expected to be completed prior to April 30, 1999. Each new system selected is
"off the shelf", and is certified Year 2000 compliant,  so, therefore, the third
phase, installation and testing, will be limited and is expected to be completed
by June 30, 1999. The fourth phase,  limited conversion of certain existing data
to the replacement systems, is expected to be substantially completed at the end
of the testing phase, and finally  completed before September 30, 1999. The cost
of becoming Year 2000 compliant through  acquisition of new systems is estimated
at $100 thousand, of which no expenditures have been incurred for the year ended
December 31,  1998.  The funds for these  expenditures  are  available  from the
Company's expected cash flows during the periods of expenditure.

     The  Company's  IT systems are not  interdependent  with those of any third
party.  Major  suppliers,  who  are  primarily   telecommunications   companies,
financial  institutions  and public  utilities,  have disclosed that they do not
expect any significant  interruptions in their businesses.  The Company has sent
questionnaires  to its clients and material  obligors,  and will evaluate  their

                                       8
<PAGE>

responses  prior to September  30, 1999.  If a material  client or obligor has a
business  interruption,  the Company's operations could be affected. In the most
likely worst case Year 2000 scenario,  the Company will not be able to determine
whether certain clients and obligors have unresolved Year 2000 issues,  and some
clients and obligors  may have  business  interruptions  even though the Company
believes  they will be  compliant.  In these cases the Company may have to cease
doing business with clients or obligors that could have a material effect on the
Company's  financial  condition.  The Company has not  determined  whether  such
possible  events may have a material effect on its financial  condition,  but is
continuing  to  analyze  the  uncertainty   through  monitoring  the  Year  2000
compliance efforts of clients and obligors.

     A  contingency  plan has not yet been  developed  for dealing with the most
reasonably  likely  worst case  scenario.  The Company  expects to complete  its
analysis and contingency planning by September 30, 1999.


Employees

     The Company  currently  has 30 full-time  employees.  None of the Company's
employees is a party to any  collective  bargaining  agreement,  and  management
considers its relations with employees to be satisfactory.


Item 2.  Description of Property

     The Company's  principal 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
approximately  $184  thousand  in 1998  compared to $172  thousand in 1997.  The
Company has a right of first refusal to acquire an additional,  contiguous 1,500
square feet at its present site when that space becomes available.

     Commencing  November  1997, the Company also occupied  approximately  2,500
square  feet of space in an  office  building  in New York  City.  The  costs of
renting this  facility  were $81 thousand in 1998 and $14 thousand in 1997.  The
Company  elected to terminate  the lease in February  1999 for a one-time fee of
$35 thousand. At the same time the Company leased an executive suite facility in
New York City for a term ending  July 1999,  with  options to renew.  The annual
rent on the new facility is approximately $26 thousand.

     The Company believes that its present office facilities are adequate.


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

None.

                                       9

<PAGE>


Part II


Item 5. Market For Common Equity and Related  Stockholder  Matters The Company's
common stock is traded on the Nasdaq Stock Market (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
periods  indicated,  as  furnished  by the National  Association  of  Securities
Dealers,  Inc. These bids represent prices among dealers,  do not include retail
markups, markdowns or commissions, and may not represent actual transactions.
    

<TABLE>

                               Fiscal Years Ended December 31,
                            1998                                1997
<CAPTION>
                     High          Low               High                Low

<S>                  <C>           <C>               <C>                 <C>  
First Quarter        9.000         5.688             6.375               5.500
Second Quarter       8.375         5.438             6.125               5.625
Third Quarter        7.250         3.375             6.000               5.125
Fourth Quarter       4.375         2.625             7.000               4.875
</TABLE>



     On March 3, 1999, there were  approximately 42 stockholders of record based
on  information  provided  by  the  Company's  transfer  agent.  The  number  of
stockholders  of record  does not  reflect the actual  number of  individual  or
institutional  stockholders of the Company because a significant  portion of the
Company's  stock is held in  street  name.  Based on the best  information  made
available  to the Company by the transfer  agent,  there are  approximately  410
beneficial holders of the Company's common stock.

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

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

General

     The Company is a commercial finance institution which provides financing to
small and middle-market businesses through Factoring, the discounted purchase of
invoices with full recourse to the seller, and ABL, advances secured by accounts
receivable,  inventory,  machinery and equipment,  and real estate. On occasion,
the Company will also provide  other  specialized  financing  structures,  which
satisfy the unique  requirements  of the  Company's  clients.  The Company  also
provides its clients with letters of guaranty,  and arranges for the issuance of
letters of credit for its clients.

     During the second quarter of 1997, the Company  established a new division,
Allstate Factors, which was engaged in traditional  "non-recourse"  factoring in
which the factor  typically  assumes the risk that an account  debtor may become
insolvent. The Company minimized the exposure associated with assuming such risk
by  refactoring  the  receivables  purchased  by Allstate  Factors  with a large
commercial factor that assumed the insolvency risk.  Allstate Factors has ceased
purchasing  receivables,  and the Company is now  engaged in  managing  Allstate
Factors' existing portfolio.

     Lifetime Options, Inc., a Viatical Settlement Company ("Lifetime Options"),
a wholly-owned  subsidiary of the Company, was engaged in the business of buying
life insurance policies, at a

                                       10
<PAGE>

discount, from individuals facing life-threatening
illnesses.  During 1997, Lifetime Options ceased purchasing policies,  and it is
now engaged solely in managing its existing portfolio.


     The Company's  clients are small- to  medium-sized  businesses  with annual
revenues  typically  ranging  between $1 million and $30 million.  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. They are frequently  experiencing  periods of rapid growth or some level
of  financial  stress.  Thus,  the  Company  generally  relies on the quality of
obligors of the client or the assets the client can pledge as collateral, rather
than the financial condition of the client itself.

     On December 29, 1997, Value Partners,  Ltd., a major shareholder,  together
with  three  other  shareholders  of  the  Company  who  were  also  independent
directors,  filed a petition in the Circuit Court for Arlington County, Virginia
against the Company  seeking to (i) invalidate the election of directors held at
the annual meeting of  shareholders  on November 18, 1997, (ii) order a new 1997
election of  directors  and (iii)  enjoin the Board of  Directors of the Company
from  acting  as such  without  court  approval  pending a new  election.  After
discovery and evidentiary  and other hearings  before the court,  the plaintiffs
and the Company  agreed to the entry of a decree by the court ordering a meeting
of shareholders  on May 12, 1998, the date otherwise  specified in the Company's
Amended  By-Laws,  as  amended,  as the  date  for the 1998  annual  meeting  of
shareholders.   Prior  to  the  1998  annual  meeting  the  "Allstate  Financial
Corporation  Independent  Shareholders/Directors  Committee" (the  "Committee"),
which was  composed  of Value  Partners,  Ltd.;  David W.  Campbell,  William H.
Savage,  Edward A. McNally, and Lindsay B. Trittipoe,  independent  directors of
the Company; and C. Scott Bartlett,  a former director of the Company,  proposed
the election of a slate of directors in opposition  to the nominees  proposed by
the Company's  management (the lawsuit and the election are hereinafter referred
to as the "Proxy Contest").  At the 1998 shareholders  meeting, the shareholders
elected the directors proposed by the Committee.


Year ended December 31, 1998 vs. year ended December 31, 1997

     In its Factoring product line, the Company purchases invoices at their face
amount, and makes an advance payment to its client against the collection of the
invoices. The amount (less negotiated discounts) of the advance payment is based
upon the size, age and type of accounts being  purchased,  the quality of client
documentation  and  the  Company's  judgment  as  to  the  payment  history  and
creditworthiness of the obligors. The Company generates revenue through purchase
discounts,  which are negotiated on a  client-by-client  basis.  Total purchased
invoices as of December 31, 1998  decreased  $11.1 million,  or 31.9%,  to $23.7
million from $34.8  million as of December  31,  1997.  The bulk of the decrease
related to the liquidation of a Factoring  client of the Company which had filed
for  bankruptcy in the fourth  quarter of 1998,  and to  charge-offs.  Two other
significant  clients  successfully  obtained  financing with lower-cost  funding
sources.

     The Company's ABL product line provides  asset-based loans to the Company's
clients,  primarily  working capital and equipment loans, at negotiated  spreads
over the prime rate. In its ABL activities,  the Company typically  analyzes the
accounts receivable collateral,  obtains appraisals, based on liquidation value,
of the other  collateral  offered and  extends  credit  based upon a  negotiated
percentage of the appraised  collateral  values.  During 1998, the Company's ABL
advances  receivable  increased $4.3 million,  or 35.8%, to approximately  $16.3
million from $12.0 million at December 31, 1997. One major new client  accounted
for this  increase.  Interest  income  and  amounts  outstanding  under such ABL
facilities  are  expected to increase in 1999 due to the

                                       11
<PAGE>

continuing  demand for
this type of financing.  The Company believes that advances  receivable  subject
the  Company  to less  volatility  and risk than is  inherent  in its  Factoring
portfolio.

     The Company  anticipates that in 1999 it will achieve growth in both of its
product lines, in the geographic  markets currently  served,  and in new regions
where the Company  can  identify  appropriate  marketing  employees.  Continuing
growth depends heavily on the Company's  ability to find,  evaluate,  underwrite
and process financing requests from small and middle-market businesses and their
advisors,  accountants,  attorneys,  and other  sources.  This may  require  the
addition of experienced marketing, operations, support and administrative staff,
as well as additional funding resources to support growth in receivables.

     At December  31, 1998 and 1997,  the  Company had $832  thousand  and $0 in
income taxes  receivable,  and $4.0 million and $1.1 million in deferred  income
taxes,  respectively.  Income taxes  receivable  represent  the amounts of taxes
refundable  for the years  then  ended.  The  deferred  income  taxes  represent
projected   decreases  in  taxes   payable  in  future  years  as  a  result  of
carryforwards at the end of each year.

     Other  assets  decreased  72.8%,  to $654  thousand  from $2.4  million  at
December 31, 1998 and 1997, respectively. This decrease was primarily the result
of a $1.7  million  decrease  in land and  buildings  held for  resale,  to $548
thousand from $2.2 million.

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

                                                       For the Years Ended December 31,
                                                      1998                            1997
<CAPTION>

Type of Revenue                             Earned           Percent         Earned          Percent
                                           Revenue                           Revenue

<S>                                      <C>                  <C>           <C>                <C>  
Discount on purchased invoices           $4,229,332           41.1%         $4,705,913         47.0%

Earnings on advances
    receivable                            3,719,873           36.1           2,558,486         25.6

Earnings on purchased life
    insurance policies                       15,000            0.1             172,231          1.7

Fees and other income                     2,337,013           22.7           2,569,213         25.7
                                          ---------           ----         -----------         ----

Total revenue                           $10,301,218          100.0%        $10,005,843        100.0%
                                        ===========          ======         ==========        ======
</TABLE>



     Total revenue  increased by 3.0% in 1998 versus 1997, to $10.3 million from
$10.0 million.  Within total revenue,  discounts on purchased invoices decreased
10.1% in 1998 as compared to 1997. The average  earned  discount as a percentage
of total invoices  purchased in 1998 was 3.6%. The comparable average percentage
in 1997 was 3.0%,  representing  an  increase  of 20.0% in 1998.  This  increase
reflects  higher  discounts  on two  of the  Company's  larger  clients.  As the
composition  of the  Company's  client  base may change  over time,  there is no
assurance that the increased discount level can be maintained.

     Earnings on advances  receivable  increased  by 45.4% in 1998 versus  1997.
This was attributable to a higher average balance of advances,  $23.8 million in
1998 versus $19.9 million in 1997,  and a

                                       12
<PAGE>

higher yield on the  portfolio,  15.6%
versus 12.9%, respectively.  As a result of the Company's intent to increase its
ABL  business to decrease  the risk in the  portfolio,  the  composition  of the
Company's ABL client base may change over time,  and there is no assurance  that
the increased yield level can be maintained.

     There was a 91.3% decrease in earnings on purchased life insurance policies
in 1998 versus 1997.  The company  continues  to adjust  earnings on the polices
because it has determined  that the  assumptions of remaining life expectancy of
the insureds will not allow the collection of interest according to the terms of
the purchase agreements.

     Fees and other income  decreased  9.0% in 1998 as compared to 1997, to $2.3
million  from $2.6  million,  respectively.  The  decrease  was because the 1997
results included several large termination fees,  charged when clients refinance
their outstandings prior to expiration of their credit facilities.



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

                                           For the Years Ended December 31,
                                                       1998 1997
<CAPTION>

Type of Expense                             Amount           Percent         Amount             Percent
<S>                                       <C>                 <C>              <C>                <C>  
Compensation and fringe
   benefits                               $3,447,656          17.3%            $3,087,085         36.9%

General and administrative                 4,963,636           24.9             2,514,553         30.1

Interest expense                           1,903,336           9.6              1,170,152         14.0

Provision for credit losses                9,598,503           48.2             1,593,555         19.0
                                           ---------           ----           -----------        -----                    ----

Total expenses                           $19,913,131          100.0%           $8,365,345        100.0%
                                         ===========          ======           ==========        ======

</TABLE>


     Compensation  and fringe benefits  increased $361 thousand,  or 11.7%,  due
primarily to the $302  thousand  expenses  associated  with the severance of key
officers  following the Proxy  Contest,  and the payroll costs  associated  with
Allstate Factors.

                                       13

<PAGE>



     General and administrative  expense, which in total increased $2.4 million,
or 97.4%,  consisted of the following items, each shown as a percentage of total
G&A for the corresponding period.
<TABLE>


                                               For the Years Ended December 31,
                                             1998                               1997
<CAPTION>
                                   Amount         Percent               Amount       Percent

<S>                               <C>                <C>              <C>              <C>  
Rent, building & equipment        $764,180           15.4%            $524,698         20.9%
Office expense                     605,250           12.2              540,473         21.5
Selling expenses                   657,707           13.3              546,407         21.7
Client litigation                  989,687           19.9              355,982         14.2
Other professional fees            587,209           11.8              200,339          7.9
Proxy Contest & investor
   relations                       993,767           20.0               24,388          1.0
Other                              365,836            7.4              322,266         12.8
                                   -------           ----             --------        -----                                  ----
Total general and
    administrative              $4,963,636          100.0%          $2,514,553        100.0%
                                ==========         =======          ==========        ======

</TABLE>


     The  primary  components  of the  increase  in general  and  administrative
expenses were increased client litigation expense, higher professional fees, and
expenses  related  to the Proxy  Contest.  Rent,  building &  equipment  expense
increased $239 thousand,  or 45.6%,  primarily due to the impairment of computer
equipment and related  software that is not year 2000 compliant,  and because of
higher rent  expense due to the  maintenance  of the now closed New York office.
The largest  components  of the office  expense  increase  were bank charges and
credit reports. Selling expense increased $111 thousand, or 20.4%, primarily due
to commissions to the bank which refactored the Allstate Factors  invoices.  The
increase  in  client  litigation  expenses  of $633  thousand,  or  178.0%,  was
attributable  to legal  fees  incurred  by the  Company in  connection  with the
settlement  of ongoing  legal  cases to recover  monies  owed the  Company or to
defend the Company as a result of claims made by former  clients.  The  increase
principally  related to four specific cases, three of which have been concluded.
Other  professional  fees increased $387 thousand or 193.1%,  principally due to
recruiting  fees paid to third parties to recruit  individuals  to fill specific
executive  and staff  positions,  costs to obtain  debt  covenant  waivers,  and
accelerated  amortization  of remaining  legal and  administrative  fees for the
convertible subordinated notes which were retired during 1998.

     The Company incurred  expenses of $947 thousand,  which are not anticipated
to recur, related to the Proxy Contest, including $397 thousand paid directly or
reimbursed  to Value  Partners,  Ltd. for expenses  incurred by the Committee in
1998.  In their proxy  filing,  the  Committee  advised  shareholders  that,  if
successful in the Proxy Contest,  they would seek reimbursement from the Company
for  their  expenses.   This   reimbursement  was  recorded  as  a  general  and
administrative  expense.  See Note I to the  Consolidated  Financial  Statements
included herein.

     Interest Expense increased $733 thousand, or 62.7%, due to increases in the
average amount  outstanding  under the Company's bank line of credit,  which was
$11.7 million in 1998, compared to $4.7 million in 1997.

     The provision for credit losses represented the largest category of expense
as a component of revenue.  It also  suffered the largest  increase in 1998 from
its 1997 level, $8.0 million,  representing a 502.3% increase.  During 1998, the
Company had charge-offs of $9.6 million,  while recovering or reclassifying  $59
thousand.  Of the  charge-offs,  approximately  $5.3  million  were  related  to
accounts  placed on  non-performing  status prior to 1998 and which continued to
deteriorate in 1998,  including


                                       14

<PAGE>


$908 thousand related to the 1998 disposition at
a loss of real estate  collateral  securing an advance and the  deterioration of
collections on health club notes,  $1.3 million due to the bankruptcy of a major
obligor during 1998, $890 thousand due to a decision rendered in 1998 adverse to
the  Company  in a lawsuit,  and $857  thousand  due to the  failure of a client
during 1998. Of the $4.1 million of  charge-offs  related to loans placed on non
accrual  status in 1998,  $3.4 million  related to a single client who filed for
bankruptcy in 1998. Net  charge-offs  for 1998 of $9.5 million and the provision
of $9.6 million  resulted in an allowance for credit losses of $2.8 million,  or
7.93%  of  receivables  (net of  earned  income),  exclusive  of life  insurance
policies, outstanding as of December 31, 1998. None of the allowance at December
31, 1998 was  allocated  to  non-performing  accounts,  which are carried at net
realizable  value of $3.0 million.  During 1997, the Company had  charge-offs of
$1.8 million while  recovering  $341 thousand,  resulting in net  charge-offs of
$1.4  million.  The Company's  1997  provision for credit losses of $1.6 million
brought  the  allowance  for  credit  losses  to $  2.7  million,  or  7.07%  of
receivables  (net of earned  income).  At December 31, 1997, $1.1 million of the
reserve amount was allocated to non-performing assets of $8.5 million,  giving a
net realizable value estimate of $7.4 million.  The Company  determines  overall
reserve levels based on an analysis which takes into account a number of factors
including a determination of the risk involved with each individual client, plus
additional  considerations  based on concentration  and asset class. The Company
believes  that the allowance for credit losses is adequate in light of the risks
inherent in the portfolio at year-end 1998.


Liquidity and Capital Resources

     The  Company's  requirement  for  capital is a function of its level of its
investment  in  receivables.  The  Company  funds this  investment  through  its
revolving bank credit line, its convertible  subordinated  notes, and internally
generated funds.

     The  Company's $25 million  revolving  line of credit with a group of banks
has  covenants  of the  type  typical  of those  required  of  borrowers  in the
Company's  business line. These covenants  include  maintenance of (i) a minimum
coverage of earnings  before  interest and taxes  ("EBIT") to interest  expense,
(ii) a minimum tangible net worth as defined,  (iii)  limitations on the amounts
advanced  to any one  borrower,  (iv)  limitations  on  non-earning  assets as a
percentage  of total  assets,  and (v)  undrawn  availablity  of $2 million  (in
addition to the  Company's  availability  of $1.2 million at December 31, 1998.)
The Company was in default of the minimum EBIT coverage and the  limitations  on
funds advanced to any one client  requirements at December 31, 1998. The Company
requested and received waivers of the defaults and modifications to the terms of
the covenants,  and believes that it can meet the covenants in future periods as
they are now constructed  while meeting the funding needs of its existing client
base.  The Company is directing its efforts at increasing its portfolio of lower
risk asset-based loans while  maintaining or increasing its Factoring  business.
For these efforts to be successful, it may be necessary to request modifications
to the line of credit  related to amount and  terms.  There can be no  assurance
that the Company will be  successful  in  obtaining  such  modifications,  or in
obtaining replacement financing if is not successful.

     In addition to the restrictions noted above, the revolving credit agreement
with the banks prohibits the Company from paying  dividends on its common stock.
The Company has never paid  dividends on its common stock and currently does not
intend to pay cash  dividends;  rather,  it  intends  to retain its cash for the
continued expansion of its business.

     As of December 31, 1997,  the Company had  convertible  subordinated  notes
(collectively the "Old Notes")  outstanding with an aggregate  principal of $5.0
million.  The Old  Notes  were  issued in  exchange  for  785,475  shares of the
Company's common stock  (currently held by the Company as

                                       15
<PAGE>



treasury  stock).  The
Old Notes (i) mature on September 30, 2000, (ii) bear interest at the prime rate
plus 1.25% per annum  (currently 9.0% per annum) at December 31, 1998, (iii) are
convertible  into common  stock of the Company at $7.50 per share,  and (iv) are
subordinated  in right of payment to the  Company's secured  revolving  credit
facility.

     The  Old  Notes  had a  provision  that  upon  the  occurrence  of  certain
"fundamental changes"; the holders had the right to have these notes redeemed at
par.  The  election of the new Board of  Directors  at the May 1998  shareholder
meeting  was  deemed  to  have  constituted  a  fundamental  change  under  that
provision. The Company:

Advised all noteholders of their right to redeem the notes a par.
Issued new convertible  subordinated notes to a major shareholder to provide the
Company  with a  funding  source to  repurchase  all  notes  tendered  under the
fundamental  change  provision.  Repurchased  the  tendered  notes.  Offered all
remaining  noteholders,  that were  accredited  investors,  the  opportunity  to
exchange their Old Notes for newly issued convertible subordinated notes.

     The old  noteholders  tendered $2.9 million of Old Notes for  repurchase at
par.  Additionally,  Old Notes with a par of $1.7 million were exchanged for the
new issue of Convertible Subordinated Notes.

     During 1998,  convertible  subordinated notes were issued (collectively the
"New Notes") that (i) have a maturity of September 30, 2003,  (ii) bear interest
at a fixed rate of 10% per annum,  (iii) are not redeemable at the option of the
company, (iv) are convertible into the Company's common stock at $6.50 per share
and (v) are subordinated in right of payment to the Company's  secured revolving
credit  facility.  The New Notes have financial  covenants which are similar to,
but less  restrictive  than,  the covenants in the Company's  revolving  line of
credit.

     As of December 31, 1998,  the Company had  convertible  subordinated  notes
(Old and New Notes) outstanding of $5.0 million.

     The Company  expended  $52  thousand  and $178  thousand  on  premises  and
equipment  in 1998  and  1997,  respectively,  principally  in  connection  with
upgrades to computer  equipment,  office furniture and equipment,  and leasehold
improvements.  The Company funded such  expenditures  from internally  generated
funds or borrowings  under the line of credit.  The Company plans to continue to
significantly enhance its management information systems for providing, tracking
and supporting new products, such as the ABL offerings, and to assure compliance
with Year 2000. The source of funds for such expenditures is expected to be from
cash flow.


Impact of Inflation

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

     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
increase  the  Company's  cost of funding  discounted  receivables  based on its
current  borrowing  arrangements  which are base rate or LIBOR  adjusted  credit
facilities.  The Company's advances  receivable bear interest at floating (base)
rates, which would cause its borrowing costs to adjust at approximately the same
time as its costs would change.

                                       16
<PAGE>


Item 7.  Financial Statements

     See pages 20 to 45.


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


         None.


Part III

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

     A definitive  proxy  statement is expected to be filed with the  Securities
and Exchange Commission on or about April 15, 1999. The information  required by
this item is set forth  under the caption  "Election  of  Directors",  under the
caption  "Executive  Officers" and under the caption  "Section 16(a)  Beneficial
Ownership  Reporting  Compliance"  in  the  definitive  proxy  statement,  which
information is incorporated herein by reference thereto.


Item 10.  Executive Compensation

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


Item 11. Security Ownership of Certain Beneficial Owners and Management

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


Item 12.  Certain Relationships and Related Transactions

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


                                       17

<PAGE>



Item 13. Exhibits and Reports on Form 8-K

(a)     1. Financial Statements:                                    Page Number

The following financial statements are submitted:
 Independent Auditors' Report on Consolidated Financial
 Statements and Schedule                                                 20

 Consolidated Balance Sheets as of December 31, 1998 and 1997      21 through 22
 Consolidated Statements of Operations for the years ended
 years ended December 31, 1998 and 1997                                  23

 Consolidated Statements of Shareholders' Equity for
 the years ended December 31, 1998 and 1997                              24

 Consolidated Statements of Cash Flows for the years
 ended December 31, 1998 and 1997                                  25 through 26

 Notes to Consolidated Financial Statements                        27 through 44


 2.  Financial Statement Schedules

 The following financial statement schedule is filed as part of this report:
 Schedule IV Indebtedness to Related parties
 for the years ended December 31, 1998 and 1997.                          45

 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.


Exhibit  3.  Articles of Incorporation and By-laws

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


Exhibit  4.  Instruments Defining the Rights of Security Holders

        Documents incorporated by reference - See Registration Statement on 
        Form S-1 Registration No. 33-46748

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


                                       18
                                     <PAGE>




Exhibit 10. Material Contracts

     Waiver  and  Amendment  No. 1 dated as of August 12,  1998 to  Amended  and
Restated Revolving Credit and Security Agreement of May 12, 1997.

     Waiver and  Amendment  No. 2 dated as of September  14, 1998 to amended and
Restated Revolving Credit and Security Agreement of May 12, 1997.

     Waiver and  Amendment  No. 3 dated as of  November  13, 1998 to Amended and
Restated Revolving Credit and Security Agreement of May 12, 1997.

     Indenture  Dated as of September 14, 1998,  $4,961,000.00  10%  Convertible
Subordinated Notes.


Exhibit 10.9 Employment Contracts

    Employment and  Compensation  Agreement  dated July 1, 1996 with Lawrence M.
Winkler incorporated by reference to the Company's filing on Form 10-KSB for the
year ended December 31, 1996.

    Employment  and  Compensation  Agreement  dated  July 1, 1996 with  Peter D.
Matthy  incorporated by reference to the Company's filing on Form 10-QSB for the
year ended December 31, 1996.

    Employment  and  Compensation   Agreement  dated  July  1,  1996  with  Wade
Hotsenpiller  incorporated  by reference to the Company's  filing on Form 10-QSB
for the quarter ended September 30, 1997

    Severance  Agreement  dated July 2, 1998 with Craig Fishman  incorporated by
reference to the Company's  filing on Form 10-QSB for the Quarter Ended June 30,
1998.

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


Exhibit 21.  Subsidiaries of the Company



19

<PAGE>



INDEPENDENT AUDITORS' REPORT

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


     We have audited the  accompanying  consolidated  balance sheets of Allstate
Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated  statements of operations,  shareholders'  equity, and cash
flows for each of the two years in the  period  ended  December  31,  1998.  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, 1998,  and 1997,  and the results of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 1998 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 4, 1999
(March 30, 1999 as to Note F)

  

                                     20
<PAGE>


<TABLE>

                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                         December 31,
<CAPTION>
                                                      1998             1997
                                                     -----             ----

                    ASSETS

<S>                                              <C>               <C>         
Cash .......................................     $  2,420,644      $  4,200,050
                                                 ------------      ------------

Purchased receivables ......................       22,302,284        29,921,154
Advances receivable ........................       15,652,457        12,022,624
                                                 ------------      ------------
                                                   37,954,741        41,943,778
Less: Allowance for credit losses ..........       (2,799,931)       (2,738,931)
                                                 ------------      ------------
Total receivables - net ....................       35,154,810        39,204,847
                                                 ------------      ------------

Income tax receivable ......................          831,656              --

Deferred income taxes ......................        3,960,946         1,056,686

Furniture, fixtures and equipment, net .....          166,400           494,240

Other assets ...............................          653,957         2,402,107
                                                 ------------      ------------

TOTAL ASSETS ...............................     $ 43,188,413      $ 47,357,930
                                                 ============      ============
</TABLE>


                                       21
<PAGE>

<TABLE>
 
                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                       1998              1997
                                                       ----              ----

      LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                                <C>             <C>         
Accounts payable and accrued expenses ...........  $  1,081,655    $    420,356
Credit balances of factoring clients ............     4,559,570       3,725,257
Notes payable ...................................    15,014,717      14,434,051
Convertible subordinated notes ..................     4,958,000       4,974,000
Income taxes payable ............................          --           240,226
                                                   ------------    ------------

TOTAL LIABILITIES ...............................    25,613,942      23,793,890
                                                   ------------    ------------

COMMITMENTS AND CONTINGENCIES (See Note L) ......          --              --

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

  Common  stock,  authorized
   10,000,000 shares with no par value;
   3,102,328 issued; 2,324,083 outstanding
   at December 31, 1998 and 2,318,451
   outstanding at December 31, 1997,
   exclusive of shares held in treasury .........        40,000          40,000

  Additional paid-in-capital ....................    18,874,182      18,852,312

  Treasury stock, 781,745 shares at December 31,
    1998 and 783,877 at December 31, 1997 .......    (4,986,520)     (5,030,594)

  Retained earnings (restricted) ................     3,646,809       9,702,322
                                                   ------------    ------------

TOTAL SHAREHOLDERS' EQUITY ......................    17,574,471      23,564,040
                                                   ------------    ------------

                                                   $ 43,188,413    $ 47,357,930
                                                   ============    ============
                                                                     (Concluded)
</TABLE>


                 See Notes to Consolidated Financial Statements


                                       22

<PAGE>

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

                                           Year Ended December 31,

<CAPTION>
                                          1998            1997
<S>                                  <C>             <C>         
REVENUE
  Earned discounts and interest ..   $  7,964,205    $  7,436,630
  Fees and other revenue .........      2,337,013       2,569,213
                                                     ------------
    TOTAL REVENUE ................     10,301,218      10,005,843
                                                     ------------

EXPENSES
  Compensation and fringe benefits      3,447,656       3,087,085
  General and administrative .....      4,963,636       2,514,553
  Interest expense ...............      1,903,336       1,170,152
  Provision for credit losses ....      9,598,503       1,593,555
                                     ------------    ------------

    TOTAL EXPENSES ...............     19,913,131       8,365,345
                                                     ------------

INCOME (LOSS) BEFORE INCOME TAX
  EXPENSE  (BENEFIT) .............     (9,611,913)      1,640,498

INCOME TAX EXPENSE (BENEFIT) .....     (3,556,400)        606,985
                                                     ------------

NET INCOME (LOSS) ................   $ (6,055,513)   $  1,033,513
                                                     ============

NET INCOME (LOSS) PER COMMON SHARE
  Diluted ........................   $         (2.61)   $        .44
  Basic ..........................   $         (2.61)   $        .45

WEIGHTED AVERAGE NUMBER OF SHARES
    OUTSTANDING
  Diluted ........................      2,322,222       2,324,624
  Basic ..........................      2,322,222       2,318,092
</TABLE>
                                     



                 See Notes to Consolidated Financial Statements

                                       23
<PAGE>


<TABLE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

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


<S>                           <C>            <C>             <C>             <C>             <C>         
Balance - January 1, 1997 .   $     40,000   $ 18,852,312    $ (5,034,584)   $  8,668,809    $ 22,526,537

  Conversion of
  convertible
  subordinated notes to
  532 shares of common
  stock ...................           --             --             3,990            --             3,990

  Net income ..............           --            --              --          1,033,513       1,033,513
                              ------------   ------------    ------------    ------------    ------------
Balance -
   December 31, 1997 ......   $     40,000   $ 18,852,312    $ (5,030,594)   $  9,702,322    $ 23,564,040

  Amortization of
  treasury
  stock acquisition costs .           --             --            28,084            --            28,084

  Conversion of
  Convertible
  Subordinated Notes to
  2,132 shares of common
  stock ...................           --             --            15,990            --            15,990

  3,500 Options exercised .           --           21,870            --              --            21,870

  Net (loss) ..............       ________      _________       _________      (6,055,513)     (6,055,513)
                                                                             ------------    ------------

Balance - December 31, 1998
                              $     40,000   $ 18,874,182    $ (4,986,520)   $  3,646,809    $ 17,574,471
                                                                                             ============
                     
</TABLE>

                 See notes to Consolidated Financial Statements

                                       24
<PAGE>

<TABLE>


                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Years Ended December 31
<CAPTION>

                                                              1998               1997
<S>                                                      <C>              <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss) ..................................   $  (6,055,513)   $   1,033,513
Adjustments to reconcile net income to cash
  Provided by operating activities:
   Depreciation - net ................................         112,334          222,124
   Impairment of software ............................         218,202
   Loss on disposition of automobiles ................          49,487             --
   Provision for credit losses .......................       9,598,503        1,593,555
Changes in operating assets and liabilities:
   Other assets ......................................       1,748,150         (954,643)
   Income tax payable ................................        (240,226)         240,226
   Accounts payable and accrued expenses .............         661,299          (26,004)
   Deferred income taxes .............................      (2,904,260)        (163,686)
   Income tax receivable .............................        (831,656)       1,150,289
                                                                          -------------
NET CASH PROVIDED BY OPERATING
   ACTIVITIES ........................................       2,356,320        3,095,374
                                                                          -------------


CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of receivables, including life insurance
  contracts, and advances ............................    (202,674,562)    (195,768,163)
  Collections of receivables, including life insurance
  contracts, and advances ............................     197,126,096      195,734,659
  Increase in credit balances of
   factoring clients .................................         834,314          281,101
  Purchase of furniture, fixtures and equipment ......         (52,183)        (178,200)
                                                                          -------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES
                                                            (4,766,335)          69,397
                                                                          -------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from line of credit .......................     100,417,016      100,490,490
  Proceeds from subordinated debt ....................       4,597,000             --
  Principal payments on line of credit ...............     (99,820,361)    (101,080,100)
  Principal payments on subordinated debt ............      (4,613,000)            --
  Treasury stock acquisition costs ...................          28,084              (10)
  Options exercised ..................................          21,870    _____--______
                                                         -------------    -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
                                                               630,609         (589,620)
                                                                          -------------

NET INCREASE (DECREASE) IN CASH ......................      (1,779,406)       2,575,151

CASH, Beginning of year ..............................       4,200,050        1,624,899
                                                                          -------------

CASH, End of year ....................................   $   2,420,644    $   4,200,050
                                                         =============    =============
                                                                             (Continued)
</TABLE>
                                                                                
                                       25
<PAGE>

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

                             Year Ended December 31,

<CAPTION>
                                                       1998         1997


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

<S>                                                 <C>          <C>       
  Interest paid ..................................  $1,802,979   $1,121,272
                                                    ==========   ==========
  Taxes paid .....................................  $  419,742   $  460,000
                                                    ==========   ==========

SUPPLEMENTAL SCHEDULE OF NONCASH
ACTIVITIES:

  Transfer of finance and other
   receivables to other assets ...................  $     --     $1,700,000
                                                    ==========   ==========

  Issuance of common stock in exchange for
   subordinated notes ............................  $   15,990   $    3,990
                                                    ==========   ==========     
                                                                 (Concluded)
                                                                                
</TABLE>



                 See Notes to Consolidated Financial Statements


                                       26
<PAGE>





                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 For the Years Ended December 31, 1998 and 1997

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting and reporting policies of Allstate Financial Corporation and
its subsidiaries  (collectively,  the "Company")  conform to generally  accepted
accounting  principles and the general  practices within the financial  services
industry.  Those policies that materially  affect the determination of financial
position,  results  of  operations,  and cash  flows are  summarized  below.  In
preparing its financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates  shown in the  consolidated  balance  sheet and the  statement  of income.
Actual results could differ  significantly  from those estimates.  In the normal
course of business,  the Company  encounters  economic  risks.  Economic risk is
comprised of interest  rate risk,  credit risk,  and market risk.  Interest rate
risk is the risk that unfavorable  discrepancies will occur between the rates of
interest earned by the Company on its receivables portfolio and its own costs of
borrowing  funds  in the  market.  Credit  risk is the  risk of  default  on the
Company's  purchased  receivable  and advance  portfolio  that  results from the
borrowers'  inability or unwillingness to make contractually  required payments.
Market risk  reflects  changes in the value of collateral  underlying  purchased
receivable  and advance  receivables  and the  valuation of the  Company's  real
estate owned.

     The  determination of the allowance for credit 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,  1998,  the
allowance  for credit  losses is  adequate  based on the  information  currently
available.  A  worsening  in the state of the  general  economy or a  protracted
economic  decline  could  increase  the  likelihood  of losses due to credit and
market  risks  and  could  create  the need  for  substantial  additions  to the
allowance for credit losses.


Consolidation

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


Reclassifications

     Certain amounts related to 1997 have been  reclassified to conform with the
1998  presentation.  


Purchased and Advance Receivables and Allowance for Credit Losses

     Purchased  receivables consist of invoices,  which have been purchased with
or without  recourse to the seller,  and life insurance  policies.  Invoices are
stated  at  the  face  amount   outstanding,   net  of  unearned  discounts  and
participations.  Life  insurance  policies are stated at the purchase price paid
for  the  policies  plus  accrued  earnings,   net  of  an  allowance  based  on
management's estimate of the discounted present value of the expected cash flows
from the contracts.  Because most of the


27

<PAGE>

purchased  life insurance  policies are
underwritten by highly-rated  insurance companies (and, in many cases, backed by
state guaranty funds), management believes that credit risk is not material.

Advances  Receivable  are  interest-bearing  loans  collateralized  by  clients'
pledged  assets  and  general  liens and are stated at the  aggregate  principal
amount outstanding plus accrued earnings.

     The  allowance  for  credit  losses  represents  the  provision  charged to
operations,  less purchased receivables or advances receivables charged off, net
of  recoveries.  The allowance for credit losses is maintained at a level which,
in  management's  judgment,  is  sufficient  to absorb  losses  inherent  in the
receivable portfolio. The allowance for credit losses is based upon management's
review and evaluation of the  receivable  portfolio.  Factors  considered in the
establishment of the allowance for credit losses include management's evaluation
of specific 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 allowance for credit
losses in the period in which they become  known.  When any  receivable  becomes
doubtful as to collection of discount or interest income,  the account is placed
on  non-performing  status  and, in  accordance  with The  Financial  Accounting
Standards Board ("FASB")  Statement of Financial  Accounting  Standards ("SFAS")
No. 114,  Accounting by Creditors  for  Impairment of a Loan, as amended by SFAS
No. 118,  Accounting by Creditors for Impairment of a Loan - Income  Recognition
and Disclosure, is considered by management to be "impaired".  When a receivable
becomes  non-performing  the Company  discontinues  the accrual of earnings  for
financial statement purposes. If the Company determines that it is not likely to
recover,  from any source,  the amount of its initial advance and the earned but
unpaid discount or interest  thereon,  then the Company  increases the allowance
for  credit  losses  or  reduces  the  carrying  value  of  the  non-performing,
receivable to its  estimated  fair value and makes a charge to its allowance for
credit  losses  in an  amount  equal to the  difference  between  the  Company's
investment in the non-performing receivable and its estimated fair value.

     Purchased  and  advance  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.


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


                                       28

<PAGE>

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


Fair Value of Financial Instruments

     In accordance with the  requirements  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 approximate fair value.

     Purchased,  advance  receivables  and  commitments - The carrying amount of
receivables  approximate  fair  value  because  of the short  maturity  of these
instruments.

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

     Convertible  subordinated  notes  payable are  primarily  fixed  rate.  The
carrying  amount of these notes  approximates  fair value  because the  interest
rate,  conversion price, and period to maturity have not  significantly  changed
since the dates that the notes were issued.

Unearned and Earned Discounts on Purchased Receivables

     At the time of purchase,  the unearned  discount is deducted  from the face
amount of the invoice and is recorded as a reduction to such  invoice.  Unearned
discounts are recognized as income in accordance  with the  respective  terms of
the  agreements  between  the  Company  and  each of its  clients.  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 invoice is purchased, a due date is set based on
the  client's  sales  terms.  This  due  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.
Invoices which have been  identified as past due may continue to accrue earnings
if, in the opinion of management, collection of the earnings from one or more of
the above sources is likely.

     When  invoices  are  placed  on  non-performing  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.


29

<PAGE>


Interest and Discounts Earned on Advances Receivable

     Interest and discounts earned on advances  receivable accrue on the average
monthly  or  semi-monthly  outstanding  amount  or on the daily  balance  of the
advance.  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  examinations and
are recognized when received. Letter of credit and guaranty fees are usually for
a sixty- to ninety-day  period and are  recognized  when the letter of credit or
letter of guaranty is issued.

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


Income Taxes

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


Recently Implemented Accounting Pronouncements

     In February 1997, FASB issued SFAS No. 129, Disclosure of Information about
Capital Structure.  SFAS No. 129 consolidates the existing guidance from several
other pronouncements  relating to an entity's capital structure. At December 31,
1998,  the  implementation  of this  statement  did not  materially  impact  the
presentation of any component of the Company's financial  statements and related
footnote disclosures.

     Effective  January 1, 1998, the Company  adopted the provisions of SFAS No.
130, Reporting  Comprehensive Income. SFAS No. 130 establishes standards for the
reporting  and display of  comprehensive  income and its  components  (revenues,
expenses,  gains  and  losses)  in  a  full  set  of  general-purpose  financial
statements.  SFAS No. 130 defines  comprehensive  income as the change in equity
excluding  transactions  with  stockholders  such  as  the  issuance  of  stock.
Comprehensive   income   has  two  major   components:   net  income  and  other
comprehensive   income.  Other  comprehensive  income  includes  such  items  as
unrealized gain and losses on available-for-sale  securities.  For the two years
ended December 31, 1998, net income equalled comprehensive income.


     Effective  January 1, 1998, the Company  adopted SFAS No. 131,  Disclosures
about  Segments  of  an  Enterprise  and  Related  Information.   SFAS  No.  131
establishes  standards for the way that public  enterprises  report  information
about operating  segments in the annual  financial  statements and

                                       30

<PAGE>



requires that those  enterprises  report  selected  information  about operating
segments  in  interim  financial   reports  issued  to  shareholders.   It  also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas and major  customers.  SFAS No. 131 is effective for financial
statements  beginning after December 15, 1997. At December 31, 1998, the Company
has one reportable segment.

New Accounting Pronouncements

     In June of 1998,  the FASB issued SFAS No. 133,  Accounting  for Derivative
Instruments and Hedging Activities.  This statement  establishes  accounting and
reporting  standards for derivative  instruments  including  certain  derivative
instruments embedded in other contracts, and for hedging activities. It requires
a company to recognize all  derivatives  as either assets or  liabilities in the
balance sheet and to measure those  instruments at fair value. This statement is
effective for fiscal years beginning  after June 15, 1999.  Management is in the
process of  evaluating  the  potential  impact of this standard on the Company's
financial position and results of operations.


RECEIVABLES

<TABLE>
     Receivables consist of the following at December 31:

<CAPTION>
                                                   1998               1997

<S>                                             <C>                <C>         
Invoices .................................      $ 23,731,826       $ 34,835,229
  Less: Unearned discount ................        (3,299,175)        (5,885,984)
  Less: Participations ...................          (759,424)        (2,208,959)
Life Insurance policies ..................         2,629,057          3,180,868
                                                ------------       ------------

Total Purchased receivables - net ........      $ 22,302,284       $ 29,921,154
                                                ============       ============

Advances receivable ......................        16,288,673         12,022,624
  Less: Unearned discount ................          (636,216)           --_____
                                                ------------       ------------

Total Advances receivable - net ..........      $ 15,652,457       $ 12,022,624
                                                ============       ============
</TABLE>



     Invoices  purchased  usually become due within a maximum of 90 days.  After
this  time,  the  Company  generally  requires  the  client to repay the  amount
advanced on the  receivable  plus the earned  discount  under the full  recourse
provisions of its agreements.  If at any time the Company  determines that it is
unlikely to receive  payment on a  purchased  invoice,  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.



     Advances  receivable  may be made on a revolving  basis or require  monthly
amortization.  Revolving  advances  receivable  secured by current  assets (e.g.
accounts  receivable  or inventory)  are subject to a daily or weekly  borrowing
base  formula and come due in a single,  lump sum payment at the maturity of the
agreement between the Company and its client.


                                       31

<PAGE>


<TABLE>
     Changes in the allowance for credit losses were as follows:
<CAPTION>


<S>               <C>                                                 <C>      
BALANCE,  January 1, 1997 ..............................              2,578,972

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

BALANCE, December 31, 1997 .............................              2,738,931

  Provision for credit losses ..........................              9,598,503
  Receivables charged off ..............................             (9,596,124)
  Recoveries ...........................................                 58,621
                                                                    -----------

BALANCE, December 31, 1998 .............................            $ 2,799,931
                                                                    ===========
</TABLE>


     Impaired loans  recognized in conformity  with SFAS No. 114,  Accounting by
Creditors for  Impairment of a Loan,  which  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;  as amended by SFAS No.  118,
Accounting  by  Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures,  which allows the Company to use existing  methods for  recognizing
interest income on impaired loans, are as follows:

<TABLE>
<CAPTION>

                                                        December 31,
                                                    1998             1997

<S>                                              <C>              <C>       
Total recorded investment in impaired loans      $2,633,856       $6,536,471

Amount of recorded investment in impaired
loans for which there is no related allowance    $2,633,856       $2,058,068

Amount of recorded investment in impaired
oans for which there is a related allowance         --            $4,478,403

Related allowance for impaired loans                --            $1,030,294
</TABLE>

--------------------------------------------------------------------------------
See  note  J-Financial  obligations  with  off-balance  sheet  risk  and  credit
concentrations.


                  [Remainder of Page Intentionally Left Blank]

                                       33
<PAGE>


C. FURNITURE, FIXTURES AND EQUIPMENT

   Furniture, fixtures and equipment consist of:
<TABLE>

                                                           December 31,
<CAPTION>
                                                        1998             1997


<S>                                               <C>               <C>        
Furniture, fixtures and equipment ..........      $   634,296       $ 1,145,785
Automobiles ................................           21,290           156,810
Less:  Accumulated depreciation ............         (489,186)         (808,355)
                                                  -----------       -----------
                                                  $   166,400       $   494,240
                                                  ===========       ===========
</TABLE>
--------------------------------------------------------------------------------

     Furniture,  fixtures  and  equipment  is  pledged  as  collateral  under  a
revolving  line of credit (see Note F).  Also,  in 1997 the  Company  pledged an
automobile as collateral under a capital lease.

OTHER ASSETS

     Other assets consist of:
<TABLE>
                                                            December 31,
<CAPTION>
                                                       1998              1997


<S>                                                <C>                <C>       
Land held for sale .......................         $  375,000         $1,700,000
Building held for sale ...................               --              281,124
Condominium held for sale ................            172,575            232,575
Employee advance .........................              6,000                340
Prepaid expenses .........................             42,602            184,034
Miscellaneous receivable .................             57,780              4,034
                                                   ----------         ----------
                                                   $  653,957         $2,402,107
                                                   ==========         ==========
</TABLE>
                                               
E. CREDIT BALANCES DUE CLIENTS

     At  December  31,  1998 and 1997,  credit  balances  of  factoring  clients
consisted of: (i) a holdback reserve of $3,139,873 and $2,179,328, respectively,
which is payable to clients upon the collection of  receivables,  (ii) a factors
reserve of $7,250 and $428,067 in 1998 and 1997 (which represents amounts due to
factoring  clients subject to contractual  limitation) and (iii) cash collateral
of $1,412,447 and $1,117,862, respectively.



                  [Remainder of Page Intentionally Left Blank]

                                       33
<PAGE>


F. NOTES PAYABLE AND CONVERTIBLE SUBORDINATED NOTES

<TABLE>
                                                              December 31,
<CAPTION>
                                                          1998            1997
<S>                                                    <C>           <C>        
Notes payable- related parties;
 due on demand;
 interest payable at 1/4% over prime;
 unsecured .........................................   $      --     $   156,216

Notes payable; due on demand;
 interest payable at 1/4% over prime;
 unsecured .........................................        14,717        21,827

Revolving line of credit; due
 May 12, 2000;  interest at .25% over
 the base rate or 2.25% over one month
 LIBOR; collateralized by finance receivables
 and personal property .............................    15,000,000    14,250,081

Capitalized Lease - payable over 24 months;
  final payment due April, 1998;
  collateralized by automobile .....................        --             5,927
                                                       -----------   -----------

  Total notes payable ..............................   $15,014,717   $14,434,051
                                                       ===========  ===========

Convertible Subordinated Notes; due September 30,
  2000; interest payable at 1.25% over prime;
  unsecured ........................................       361,000     4,974,000


Convertible Subordinated Notes; due September 30,
  2003; interest payable at 10% fixed; unsecured ...     4,597,000        --    
                                                         ----------  -----------

  Total convertible subordinated notes .............   $ 4,958,000   $ 4,974,000
                                                       ===========   ===========
</TABLE>

--------------------------------------------------------------------------------
    At  December  31,  1998 and  1997,  the  prime  rate  was  7.75%  and  8.5%,
respectively,  and the one month LIBOR was 5.582% and 5.118%,  respectively.  At
December 31, 1998 and 1997, the prime rate was 7.75% and 8.50%, respectively.


     Notes  payable - related  parties  arose from  advances made to the Company
prior to 1990 and were  paid in full  during  1998.  Interest  expense  on notes
payable to related  parties for the years ended  December  31, 1998 and 1997 was
$5,428 and $15,187, respectively.



                                       34
<PAGE>


     Aggregate  annual  principal  payments on notes  payable for the five years
subsequent to December 31, 1998, are as follows:


Years Ending December 31,                                       Amount


     1999                                                $       14,717
     2000                                                    15,361,000
     2001                                                           --
     2002                                                           --
     2003                                                     4,597,000
                                                            ------------
    Total                                                   $19,972,717
                                                            =========== 


     As of December  31,  1998,  the Company had  $1,217,407  available  under a
$25,000,000  secured  revolving  line of  credit  from a  group  of  banks.  The
revolving line of credit contains various sub facilities that limit its use. The
entire facility may be used for borrowing to finance the purchase of invoices or
advances  secured by accounts  receivable.  However,  the Company may (i) borrow
only $5,000,000  collateralized  by advances secured by machinery and equipment,
(ii) borrow only $2,500,000 collateralized by advances secured by inventory, and
(iii) issue only up to  $5,000,000  of Letters of Credit.  Borrowings  under the
credit  facility bear interest at a spread over the bank's base rate or a spread
over LIBOR, at the Company's election.  The Company is subject to covenants that
are typical in  revolving  credit  facilities  of this type.  Additionally,  the
revolving  credit  agreement  with the banks  prohibits  the Company from paying
dividends on its common stock.  At December 31, 1998, the Company was in default
of the  covenants,  which relate to interest  coverage and the maximum amount of
funds  which may be advanced to any one  client.  Waivers of the  defaults  were
received  from the  members of the bank  group on March 30,  1999.  The  current
maturity date of this credit facility is May 12, 2000.

     Bank  commitment fee expense for the years ended December 31, 1998 and 1997
was $10,912 and $27,828, respectively.

     As of December 31, 1997,  the Company had  convertible  subordinated  notes
(collectively  the "Old  Notes")  outstanding  with an  aggregate  principal  of
$4,974,000.  The Old  Notes  were  issued  in  exchange  785,475  shares  of the
Company's common stock  (currently held by the Company as treasury  stock).  The
Old Notes (i) mature on September 30, 2000, (ii) bear interest at the prime rate
plus 1.25% per annum,  (iii) are convertible into common stock of the Company at
$7.50 per share,  and (iv) are subordinated in right of payment to the Company's
secured revolving credit facility.

     The  Old  Notes  had a  provision  that  upon  the  occurrence  of  certain
"fundamental changes"; the holders had the right to have these notes redeemed at
par. The election of the new Board of  Directors  at the May,  1998  shareholder
meeting  was  deemed  to  have  constituted  a  fundamental  change  under  that
provision. The Company:

-Advised all noteholders of their right to redeem the notes a par.

-Issued new convertible  subordinated notes to a major shareholder to provide
 the Company  with a  funding  source to  repurchase  all  notes  tendered
 under the fundamental  change  provision.

-Repurchased  the  tendered  notes.

-Offered all remaining  noteholders,  that were  accredited  investors,  the
 opportunity to exchange their Old Notes for newly issued convertible
 subordinated notes.

                                       35



<PAGE>

     The old noteholders tendered $2,896,000 of Old Notes for repurchase at par.
Additionally,  Old Notes with a par of  $1,701,000  were  exchanged  for the new
issue of convertible subordinated notes.

     During 1998,  convertible  subordinated notes were issued (collectively the
"New Notes") that (i) have a maturity of September 30, 2003,  (ii) bear interest
at a fixed rate of 10% per annum,  (iii) are not redeemable at the option of the
Company, (iv) are convertible into the Company's common stock at $6.50 per share
and (v) are  subordinated  in the  right of  payment  to the  Company's  secured
revolving  credit  facility.  The New Notes have financial  covenants  which are
similar to, but less restrictive than, the covenants in the Company's  revolving
line of credit. At December 31, 1998, the Company was in default of the covenant
which  relates to interest  coverage.  A waiver of the default was received from
the required percentage of noteholders

     As of December 31, 1998,  the Company had  convertible  subordinated  notes
(Old and New Notes) outstanding of $4,958,000.


G. STOCK OPTION AND BENEFIT PLAN

Stock Option Plans

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






                  [Remainder of Page Intentionally Left Blank]

                                       36

<PAGE>



Qualified Plan

     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 for the years ended December 31,
1997 and 1998.

             
                                            Total               Option Price
                                          Options                Per Share

Outstanding, January 1, 1997               133,400 1          $5.37 to $14.00
  Granted                                   16,200            $5.62 to  $6.75
  Forfeited or expired                        (800)           $5.43 to $14.00
                                          ---------

Outstanding, December 31, 1997             148,800            $5.37 to  $7.75
  Granted                                   30,200            $5.00 to  $7.75
  Exercised                                 (3,500)           $5.62 to  $6.50
  Forfeited or expired                     (57,900)           $5.62 to $14.00
                                         ----------

Outstanding, December 31, 1998             117,600            $5.00 to  $7.75
                                           =======

Exercisable, December 31, 1998              49,201
                                        ==========
-------------------------------------------------------------------------------

Non-Qualified Plan

     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 1997
through 1998:


                                             Total              Option Price
                                            Options               Per Share

Outstanding, January 1, 1997                 25,000           $7.00 to $14.00
  Granted                                    44,000           $7.00
  Forfeited or expired                         --                   --
                                             -------  
Outstanding, December 31, 1997               69,000           $5.60 to $14.00
  Granted                                    35,000           $7.00
  Forfeited or expired                       (2,000)         $14.00
                                             -------
Outstanding, December 31, 1998              102,000           $7.00
                                            =======

Exercisable, December 31, 1998              102,000
                                            =======

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

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


                                     37

<PAGE>


Qualified and Non-Qualified Plans

     The table below summarized the option activity for both plans for the years
ended December 31: The table below summarizes the stock option activity for both
plans:

                                                        1998              1997


Outstanding at January 1 ...................          217,800           158,400
  Granted ..................................           65,200            60,200
  Exercised ................................           (3,500)             --
  Forfeited or expired .....................          (59,900)             (800)
                                                     --------          --------
Outstanding at December 31 .................          219,600           217,800
                                                     ========          ========
Exercisable at December 31 .................          151,201           138,303
                                                     ========          ========
                                                                       --------

     The weighted average fair value at date of grant for options granted during
1998 and 1997 was $.98 and  $2.29,  respectively.  The fair  value of options at
date of grant was  estimated  using the  Black-Scholes  model  with an  expected
option life of 2.5 years and 3.1 years in 1998 and 1997,  respectively,  and the
following  weighted  average  assumptions,  respectively,  for  1998  and  1997:
dividend yield - none either year;  interest rate - 5.63% and 6.86%;  volatility
41.00% and 38.00% for the respective year.

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


                                                    1998         1997

Per Share
Outstanding at January 1 .....................    $  6.24      $  6.45
  Granted ....................................    $  5.01      $  6.16
  Exercised ..................................    $  6.25          --
  Forfeited or Expired .......................    $  5.76      $  6.22
                                                   ------       ------  

Outstanding at December 31 ...................    $  6.37      $  6.24
                                                   ======       ======

Exercisable at December 31 ...................    $  6.49      $  7.04
                                                   ======       ======
                                                          

     The  Company's  net loss would have been  increased by $88,335 or $0.04 per
share basic and  dilutive for 1998,  in  stock-based  compensation  cost for the
Company's  qualified and  non-qualified  stock option plans if the plan had been
determined  based on the fair  value at the  grant  dates for  awards  under the
plans.  The Company's net income would have been reduced by $74,712 or $0.03 per
share basic and dilutive for 1997.


Retirement Plan

     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,  1998 and 1997 was $46,701 and
$45,704, respectively.

                                       38
<PAGE>


H. INCOME TAXES

     Income tax expense (benefit) consists of:
<TABLE>

                                                       Years Ended December 31,
<CAPTION>
                                                     1998               1997
<S>                                                <C>             <C>
Federal:
  Current ......................................   $    45,187     $   765,405
  Deferred .....................................    (3,366,887)       (160,100)
                                                   -----------     -----------
                                                    (3,321,700)        605,305
                                                   -----------     -----------

State:
  Current ......................................          --             5,266
  Deferred .....................................      (234,700)         (3,586)
                                                   -----------     -----------
                                                      (234,700)          1,680
                                                   -----------     -----------

Total income tax expense (benefit) .............   $(3,556,400)    $   606,985
                                                   ===========     ===========

Tax (benefit) expense at statutory rate ........   $(3,268,050)    $   557,770
  Change in (benefit) expense resulting from:
  State income taxes, net of Federal income
    tax effect .................................      (154,903)           --
  Non-deductible expense .......................        11,900          20,100
  Other ........................................      (145,347)         29,115
                                                   -----------     -----------
                                                   $(3,556,400)    $   606,985
                                                   ===========     ===========

Effective tax rate .............................          37.0%           37.0%
                                                   ===========     ===========

</TABLE>


     The deferred tax asset consists of:
<TABLE>

                                                             December 31,
<CAPTION>
                                                       1998              1997

<S>                                                 <C>               <C>       
Deferred tax asset:
  Allowance for credit losses ..............        $3,874,302        $1,056,686
  Fixed assets .............................            86,644            --   
                                                    ----------        ----------
Total ......................................        $3,960,946        $1,056,686
                                                    ==========        ==========
</TABLE>

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

     The Company's net operating  loss ("NOL") for the year ending  December 31,
1998, amounted to $8,768,082.  The carry-forward  period associated with the NOL
expires December 31, 2018.


RELATED-PARTY TRANSACTIONS

     Certain  members  of the  immediate  families  of  Eugene  Haskin  and Leon
Fishman,  shareholders  and former  directors and officers,  directly or through
trusts,  had provided financing to a subsidiary of the Company through unsecured
loans with interest  payable monthly at an annual interest rate of 1/4% over the
prime rate, the same rate paid by the Company to its unaffiliated bank lenders.

     Total  indebtedness to members of Mr. Haskin's and Mr. Fishman's  immediate
families was $-0- at December  31, 1998 and $53,217 as of 1997.  During 1998 and
1997, the Company paid  aggregate  interest on these loans of $2,058 and $5,326,
respectively.

     Rental  payments  of $13,173  were  received  by the  Company in 1998,  and
$24,000 in 1997 and from Leon  Fishman,  for the personal  use of a  condominium
owned by a subsidiary of the Company.  Mr.  Fishman ceased renting the apartment
on June 30, 1998.

     In    1998    the    "Allstate    Financial     Corporation     Independent
Shareholders/Directors Committee" (the "Committee"), which was composed of Value
Partners,  Ltd.,  a major  shareholder;  David W.  Campbell,  William H. Savage,
Edward A.  McNally,  and  Lindsay B.  Trittipoe,  independent  directors  of the
Company; and C. Scott Bartlett,  a former director of the Company,  proposed the
election of a slate of directors in opposition  to the nominees  proposed by the
Company's management.  In their proxy filing, the Committee advised shareholders
that, if successful in the  election,  they would seek  reimbursement  for their
expenses  from the  Company.  The  Company  paid  directly or  reimbursed  Value
Partners,  Ltd. for expenses incurred by the Committee in the amount of $397,318
in 1998.  This  reimbursement  was  recorded in the  consolidated  statement  of
operations as a general and administrative expense.

     Value  Partners,  Ltd.,  was  paid  approximately  $207  thousand  and $123
thousand in 1998 and 1997, respectively, in interest on convertible subordinated
notes. Value Partners, Ltd held convertible subordinated notes of $4,197,000 and
$1,301,000 at December 31, 1998 and 1997, respectively.


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

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

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

     Financial  obligations  whose contract or notional amounts represent credit
risk are as follows:

                                                                 December 31,
                                                         1998           1997

Conditional Commitments to purchase
  receivables ..................................     $47,810,000     $57,948,000
Standby letters of credit and guarantees .......            --       $   219,927
--------------------------------------------------------------------------------

                                       40
<PAGE>


     For the year ended December 31, 1998, three clients  accounted for 46.4% of
the Company's total earned  discounts and interest.  At December 31, 1998, three
clients  accounted for 48.7% of the Company's  total  receivables.  Although the
Company monitors account debtor concentration and regularly evaluates the credit
worthiness of account  debtors,  there can be no assurances  that account debtor
concentration could not have a material adverse effect on the Company.

K. NET INCOME PER SHARE

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









                  [Remainder of Page Intentionally Left Blank]


                                       41
<PAGE>




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




                                       Income (Loss)        Shares     Per-Share
                                       (Numerator)      (Denominator)    Amount

Year Ended January 1, 1997
Basic EPS
 Net income available to common
    stockholders ...................    $ 1,033,513       2,318,092    $    .45
Effect of Dilutive Securities
  Stock Options ....................           --             6,532     --
  Diluted EPS
  Net income available to Common
  stockholders plus assumed
  conversions ......................    $ 1,033,513       2,324,624    $    .45

Year Ended December 31, 1998

Basic EPS
 Net (loss) ........................    $(6,055,513)      2,322,222    $  (2.61)
Effect of dilutive securities
 Stock options .....................           --              --       --
Diluted EPS
 Net (loss) plus assumed
 conversions .......................    $(6,055,513)      2,322,222    $  (2.61)

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

     During 1998 and 1997, respectively,  there were various options to purchase
103,700  and  84,349  shares of common  stock  which  were not  included  in the
computation  of the diluted EPS because the options'  exercise price was greater
than the average market price of the common shares.

     The Company  incurred  net losses for the years ended  December  31,  1998.
Since the  inclusion of stock  options in the  computation  of diluted EPS would
have had an antidilutive  effect,  the common shares associated with the options
were excluded from the computation.

     The convertible subordinated notes, which convert into the Company's common
stock at $6.50 and $7.50 per share,  were also excluded from the  computation of
the diluted EPS because the  conversion  price was greater than the market price
at any given point during which they were  outstanding for the three years ended
December 31, 1998.











L. COMMITMENTS AND CONTINGENCIES

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


              Years Ending December 31,                          Amount


                           1999                                 $203,000
                           2000                                  190,000
                           2001                                  174,000
                                                                --------
                                    Total                       $567,000
                                                                ========
-------------------------------------------------------------------------------

     Rental  expense for the years ended December 31, 1998 and 1997 was $330,226
and $230,416, respectively.

     The Company was a defendant in Skiba,  Trustee  (f/k/a  White,  Trustee) v.
Allstate  Financial  Corporation  in the U.S.  District  Court  for the  Western
District  of  Pennsylvania.  The  Company  provided  receivables  financing  and
advances  for  Lyons  Transportation  Lines,  Inc.  ("Lyons"),   which  filed  a
bankruptcy  petition.  The Trustee  brought  suit  against  the  Company  making
fraudulent   conveyance   and  breach  of   contract   claims  and  the  Company
counter-claimed  for its  attorneys'  fees and  costs.  The  case  was  tried in
December 1998, at which time a jury found in the Company's  favor both as to the
Trustee's claims, as well as on the Company's  counter-claim against the Trustee
for the Company's legal fees and costs of $465,000.  The court entered  judgment
in favor of the Company and  against  the Trustee for that  amount.  The Trustee
noted an appeal.  Pursuant to an  indemnification  agreement between the Trustee
and  a  principal   creditor/debtor  of  the  Lyons  estate,  Sherwin  Williams,
Sherwin-Williams is ultimately responsible for payment of such judgment.


     In connection with the same Lyons  transaction,  the Company was also named
in January, 1994 as a defendant in Sherwin-Williams  Company v. Robert Castello,
et.al.  in the United States  District Court for the Northern  District of Ohio.
Sherwin-Williams sued parties involved in the Lyons leveraged buy-out to recover
damages allegedly incurred by  Sherwin-Williams in connection with the leveraged
buy-out and Lyons' subsequent bankruptcy.  Sherwin-Williams asserted that it had
incurred  pension fund  liabilities  and other  damages as a result of the Lyons
transaction  exceeding  $11,000,000  and asserted claims against the Company and
its  co-defendants  for such sums.  Subsequent to December 31, 1998 (the date of
the financial  statements),  the Company and its co-defendants  agreed to settle
the case - at no cost to the Company - in return for the Company's  agreement to
forego the judgment  entered in the Company's  favor in the Western  District of
Pennsylvania Skiba, Trustee vs. Allstate Financial  Corporation.  As of the date
of this Report, such settlement  agreement is in the process of being documented
with mutual  releases as to all claims and all parties.  The Company  expects to
file a joint motion with the Lyons Trustee to have such  settlement  approved as
to  the  Trustee  and  the  Company  in the  Western  District  of  Pennsylvania
bankruptcy  proceeding.   The  Company  expects  all  parties  to  present  such
settlement to the U.S.  District Court for the Northern  District of Ohio, along
with a request for dismissal of that case as well.

     The Company is a counterclaim  defendant in Allstate Financial  Corporation
v. A.G.  Construction,  Inc.  (n/k/a  A.G.  Plumbing,  Inc.),  American  General
Construction   Corp.,  Adam


                                       43
<PAGE>

Guziczek and Cheryl Lee Guziczek (hereinafter  collectively referred to as "AG")
pending in the United States  Bankruptcy Court for the Southern  District of New
York. In a 1993 action the Company  undertook an attempt to recover  against AG.
An answer and  counterclaim  was filed  against the  Company.  The  counterclaim
asserted  claims  for  usury,   diversion  of  proceeds  of  public  improvement
contracts,  and  overpayments  to the  Company  by AG in  excess  of  $2,000,000
(hereinafter  the  "Counterclaims").  No specific  damage  claims amount was set
forth in the Counterclaims.


     No action was ever taken by the trustee in the AG bankruptcy proceedings to
pursue the  Counterclaims.  On June 2, 1997,  the trustee for the AG  bankruptcy
estate filed a motion to abandon these claims against the Company. On October 7,
1997, New York Surety Company (hereinafter  referred to as the "Surety"),  which
provided  the  payment  and  performance  bond  to AG  in  connection  with  the
construction jobs performed for the City of New York, filed pleadings  objecting
to the  abandonment  of such claims  against the Company,  asserting that it was
subrogated to AG's claims.  The proposed  complaint adopts the Counterclaims and
seeks an accounting.  The Surety asserts damages of approximately $4,000,000. On
April 9, 1998, the bankruptcy court remanded the matter to state court.

     On June 24,  1998,  the  Surety  was  formally  declared  insolvent  by the
Superintendent of Insurance of the State of New York (hereinafter referred to as
the "Superintendent") and as such the Superintendent was judicially appointed as
rehabilitator  of the  Surety to  conduct  its  business.  At this  time,  it is
uncertain  whether the  Superintendent  will  continue to pursue the  litigation
against the Company.


     The Company believes it has meritorious  defenses to the  Counterclaims and
intends to  vigorously  defend all claims.  However,  the  litigation  is in the
preliminary stage and the probability of a favorable or unfavorable  outcome and
the potential  amount of loss, if any, cannot be determined or estimated at this
time.


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


                                       44
<PAGE>



                                   SCHEDULE IV

<TABLE>
                         INDEBTEDNESS TO RELATED PARTIES


<CAPTION>
                                   Balance at                            Balance at
                                  Beginning of                 Amounts      End of
Name of Creditor                       Period    Additions      Paid        Period

<S>                                 <C>          <C>          <C>          <C> 
Year Ended December 31, 1998:
  All directors and officers as a
    group .......................   $     --     $  102,000   $     --     $  102,000
  Various other related parties .      156,216          882      157,098         --
  Value Partners, Ltd. ..........    1,301,000    2,896,000        --___    4,197,000
                                    ----------   ----------   ----------   ----------
                                    $1,457,216   $2,998,882   $  157,098   $4,299,000
                                    ==========   ==========   ==========   ==========

Year Ended December 31, 1997:

   Various other related parties    $  164,968   $    4,248   $   13,000   $  156,216
   Value Partners, Ltd. .........    1,301,000       --____        --___    1,301,000
                                    ----------   ----------   ----------   ----------
                                    $1,465,968   $    4,248   $   13,000   $1,457,216
                                    ==========   ==========   ==========   ==========

</TABLE>
                                   





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/ Charles G. Johnson
        Charles G. Johnson
        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/ Charles G. Johnson     Charles G. Johnson
Date    March 30, 1999     President, Chief Executive Officer, Director

/s/ Lawrence M. Winkler    Lawrence M. Winkler
Date    March 30, 1999     Secretary/Treasurer, Principal Accounting and
                           Chief Financial Officer

/s/ David W. Campbell      David W. Campbell
Date    March 30, 1999     Chairman, Director

           ________________William H. Savage
Date   ___________________ Director

/s/ Edward A. McNally      Edward A. McNally
Date    March 30, 1999     Director

/s/ Lindsay B. Trittipoe   Lindsay B. Trittipoe
Date    March 30, 1999     Director

/s/ C. Scott Bartlett      C. Scott Bartlett
Date    March 30, 1999     Director

/s/ Steven Lefkowitz       Steven Lefkowitz
Date   March 30, 1999      Director





<PAGE>