SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
                                    ---------

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997
                                       OR
              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                For the transition period from _______ to _______

                                                 Commission file number 0-27736

                         POINT WEST CAPITAL CORPORATION
                         -------------------------------
             (Exact name of registrant as specified in its charter)


                    Delaware                        94-3165263
                    --------                        -----------
          (State or other jurisdiction of         (I.R.S. Employer
           incorporation or organization)         Identification Number)


         1700 Montgomery Street, Suite 250
         ---------------------------------
         San Francisco, California                        94111
         -------------------------                        ------
         (Address of principal executive offices)        (Zip Code)

                                 (415) 394-9467
                                 --------------
              (Registrant's telephone number, including area code)

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

                        Common Stock, $.01 par value
                                (Title of Class)

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

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

The aggregate  market value of the  registrant's  common stock,  $.01 par value,
held  by   non-affiliates  of  the  registrant  as  of  February  28,  1998  was
approximately $5,833,600.

The  number  of  shares  of the  registrant's  common  stock,  $.01  par  value,
outstanding as of February 28, 1998 was 3,253,324.

                      Documents Incorporated by Reference:
                      -----------------------------------
The  registrant's  proxy  statement  (to be filed)  related  to its 1998  annual
meeting of stockholders is incorporated by reference in Part III hereof.


<PAGE>




                         POINT WEST CAPITAL CORPORATION

                             Form 10-K Annual Report
                   For the Fiscal Year Ended December 31, 1997

                                Table of Contents
<TABLE>
<CAPTION>


<S>                                                                                             <C>

PART I                                                                                          Page
     Item 1.  Business................................................................            1
     Item 2.  Properties..............................................................            8
     Item 3.  Legal Proceedings.......................................................            9
     Item 4.  Submission of Matters to a Vote of Security Holders.....................            9
 .

PART II
     Item 5.  Market for the Registrant's Common Equity and Related Stock Matters ....            10
     Item 6.  Selected Financial Data.................................................            11
     Item 7.  Management's Discussion and Analysis of Financial Condition and.........
              Results of Operations...................................................            12
     Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............            23
     Item 8.  Financial Statements and Supplementary Data.............................            23
     Item 9.  Changes in and Disagreements with Accountants on Accounting.............
               and Financial Disclosure...............................................            23


PART III
     Item  10.Directors and Executive Officers of the Registrant......................            45
     Item  11.Executive Compensation..................................................            45
     Item  12.Security Ownership of Certain Beneficial Owners and Management .........            45
     Item  13.Certain Relationships and Related Transactions..........................            45
 .

PART IV
     Item  14.Exhibits, Financial Statement Schedules and Reports on Form 8-K ........            45

Signatures............................................................................            49

</TABLE>

                                       i

<PAGE>





Unless indicated otherwise, all information contained herein gives effect to the
Reorganization and the Reverse Stock Split (each as defined herein).  Unless the
context otherwise  requires,  all references to "Point West" refer to Point West
Capital  Corporation  (formerly  known  as  Dignity  Partners,   Inc.)  and  all
references  to the  "Company"  refer to Point West Capital  Corporation  and its
consolidated entities.


                                     PART I
                                     ------

ITEM 1--BUSINESS
----------------

General
-------

         The Company is a specialty  financial services company.  Until February
1997, the Company provided  viatical  settlements for terminally ill persons.  A
viatical  settlement is the payment of cash in return for an ownership  interest
in, and the right to  receive  the face value of, a life  insurance  policy.  In
connection  with a viatical  settlement,  the  policyholder  assigned his or her
policy to the Company,  which became the holder,  owner or certificate holder of
the policy and the  beneficiary  thereunder  with the right to receive  from the
insurance company the face value payable under the policy following the death of
the insured.  The amount paid by the Company for a policy was  determined by the
Company based on various factors,  including the Company's  estimate of the life
expectancy  of the insured  and the  estimated  premiums  payable by the Company
under the policy over the expected  life of the insured and certain  other costs
of the viatical  settlement.  Through  December 31, 1997, the Company  purchased
1,531  policies with an aggregate face value of $114.1  million,  of which $42.6
million had been  collected  on 626 policies  upon the death of the insured.  In
addition,  through December 31, 1997, the Company had received proceeds of $19.2
million  on 348  policies  sold to third  parties  pursuant  to sale  agreements
(representing  $28.4 million in aggregate  face value).  In excess of 95% of the
Company's   purchases  involved  policies  insuring  the  lives  of  individuals
diagnosed with HIV and AIDS. See "Asset Sales; Viatical Settlement Business."

         In February 1997, Point West's Board of Directors (the "Board") decided
to cease the  Company's  viatical  settlement  business.  The  Board's  decision
resulted  from (i) accounts of research  results  reported at the  International
AIDS  Conference  held in  Vancouver,  British  Columbia in July 1996 (the "AIDS
Conference"),  (ii) the Board's beliefs regarding  increased risks of purchasing
and holding  policies  insuring the lives of  individuals  diagnosed with HIV or
AIDS,  (iii) accounts of subsequent  research  results which appeared to confirm
the reports from the AIDS Conference, and (iv) a determination by the Board that
it was not viable for the Company to  continue to operate a viatical  settlement
business  solely for  non-AIDS  policies.  Also as a result of the  accounts  of
research results  reported at the  International  AIDS  Conference,  the Company
decided  in the third  quarter of 1996 to sell all or  substantially  all of its
assets.  See  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations."

         Through  December 31, 1997, the Company had entered into  agreements to
sell  373  policies  with an  aggregate  face  value of  $29.2  million  and had
consummated  the sale of all but 14 of such policies  (having an aggregate  face
value of  $937,000).  The  Company,  through its wholly  owned  special  purpose
subsidiary,  Dignity  Partners  Funding  Corp.  I  ("DPFC"),  continues  to hold
policies  which are  pledged as  security  for the  Securitized  Notes  (defined
herein).  The Company  continues to service the life insurance  policies held by
DPFC.

         Subsequent  to  February  1997,  the  Company  has  sought  to become a
broad-based  specialty  financial services company. To that end, the Company has
expanded its financial services business through the formation and investment in
other  entities,   including  Fourteen  Hill  Management,  LLC  ("Fourteen  Hill
Management"),  Fourteen Hill Capital, L.P. ("Fourteen Hill Capital"), Allegiance
Capital,  LLC  ("Allegiance")  and  Allegiance  Funding  Corp.  I.  ("Allegiance
Funding").   The  Company   continues  to  evaluate  other  strategic   business
opportunities.  Fourteen Hill Capital and Allegiance,  whose business activities
are described below, are indicative of the types of business  opportunities  the
Company intends to pursue.
                                       1

<PAGE>

The Company
-----------

   General
   -------

         Point West was  incorporated in Delaware as Dignity  Partners,  Inc. in
September 1992 and commenced  operations on January 2, 1993. Effective August 1,
1997,  its name was changed to Point West  Capital  Corporation.  The  Company's
principal  executive offices are located at 1700 Montgomery  Street,  Suite 250,
San Francisco, California 94111, and its telephone number is (415) 394-9469.

   DPFC
   ----

         DPFC is a wholly owned  subsidiary of Point West formed for the limited
purposes of issuing Senior  Viatical  Settlement  Notes,  Series 1995-A,  Stated
Maturity March 10, 2005 (the "Securitized  Notes") and purchasing (with proceeds
of the  Securitized  Notes) and holding  beneficial  ownership of the  policies.
Those  policies are pledged as collateral  for the  Securitized  Notes.  DPFC is
deemed a bankruptcy remote entity. See "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations -- Method of Consolidation" and "
-- Liquidity  and Capital  Resources."  DPFC has  purchased 902 policies with an
aggregate  face value of $67.1 million and will not purchase any more  policies.
At December 31, 1997,  DPFC owned 543 policies  with an aggregate  face value of
$42.2 million.

   Fourteen Hill Management and Fourteen Hill Capital
   --------------------------------------------------

         On June 3, 1997,  the  Company  formed  Fourteen  Hill  Management  and
Fourteen  Hill  Capital.  Fourteen  Hill  Management  is a wholly owned  limited
liability  company of Point West formed solely for the purpose of serving as the
general  partner of one or more small business  investment  companies  ("SBIC").
Fourteen Hill Capital is a limited  partnership formed solely for the purpose of
operating as an SBIC.  Fourteen Hill Capital  received its SBIC license from the
Small Business  Administration  ("SBA") effective  September 26, 1997.  Fourteen
Hill Management is the sole general partner of Fourteen Hill Capital,  and Point
West is one of the two limited partners of Fourteen Hill Capital.  Fourteen Hill
Capital  provides  loans,  debt and  equity  capital to small  companies  (i.e.,
generally  companies  with a net worth less than $18  million  and  average  net
income  less than $6 million  for the last two  years).  Fourteen  Hill  Capital
commenced  operations  in August 1997 by  providing  a loan to one  unaffiliated
entity  and  providing  equity  capital to  another  unaffiliated  entity in the
aggregate  amount  of $1.25  million.  Such  transactions  were  the  only  ones
outstanding at December 31, 1997. See  "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations -- Method of  Consolidation"  and
Note 17 of Notes to Consolidated Financial Statements.

   Allegiance and Allegiance Funding
   ---------------------------------

         Allegiance is a limited  liability  company formed on September 5, 1997
as a specialty  finance company to operate a  securitization-based  loan program
targeted to the nation's funeral home and cemetery owners.  Through December 31,
1997,  Allegiance  had funded one loan in the amount of $3.8  million.  The only
outstanding  commitment  at  December  31,  1997 of $2.1  million  was funded in
January  1998.  Point West  provided the $5.9 million of capital for such loans.
Point West has a 54% equity  interest and 95% voting  control in Allegiance  and
serves as its managing member. Allegiance owns 100% of Allegiance Funding, which
is a special  purpose  corporation  formed to facilitate the  securitization  of
loans consummated by Allegiance.  See  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations -- Method of Consolidation."



                                       2


<PAGE>

Asset Sales; Viatical Settlement Business
-----------------------------------------

   Introduction
   ------------

         In December 1996, the holders of the Company's Common Stock,  $0.01 par
value ("Common Stock"), authorized the Board to sell all or substantially all of
the assets of the Company. The Board subsequently  authorized the sale of all or
substantially all of the Company's policies other than the sale of policies held
by DPFC. The sale of policies held by DPFC, all of which are pledged as security
for the  Securitized  Notes,  will  require  the  consent of the Company and the
holders of the Securitized Notes ("Noteholders").  See "Management's  Discussion
and Analysis of Financial  Condition and Results of Operations -- Description of
Securitized  Notes." The Company has discussed  potential sales of DPFC policies
with the Noteholders;  however,  the Company has not determined  whether it will
decide to sell such polices and cannot  determine  whether the Noteholders  will
consent to such a sale or whether such a sale is feasible.

   Terms of Sale Agreements
   ------------------------

         Through  December 1997, the Company entered into several  agreements to
sell portions of its portfolio of policies. None of the purchasers is affiliated
with the  Company  or any of its  directors  or  officers.  The sale  agreements
provided for the sale, upon the issuing  insurance  company's  acknowledgment of
transfer of ownership,  of an aggregate of 373 policies having an aggregate face
value of  approximately  $29.2 million for an aggregate  purchase price of $19.5
million.  The agreements  contained cross indemnity provisions pursuant to which
the Company and the purchaser  agreed to indemnify  each other  against  losses,
liabilities  or damages  arising in connection  with a claim under any policy or
with any breach of any representation or warranty made by the breaching party in
the agreement.

         Through  December 31, 1997,  the Company had  collected an aggregate of
$19.2  million in sales  proceeds  under the sale  agreements.  Eleven  policies
covered by sale  agreements  were not sold because the insured died prior to the
issuing  insurance  company's  acknowledgment  of transfer of  ownership  of the
policy and the Company  collected  the death  benefit  instead of selling  these
policies.  The Company  experienced  delays or difficulties in transferring  the
ownership of the remaining 14 policies and, due to contractual provisions in the
related sales  agreements,  the sales of these  policies  were not  consummated.
However,  the Company is  continuing  its attempt to sell these  policies.  Such
policies  (representing  $937,000 in face  amount)  were  carried on the balance
sheet at December 31, 1997 at $129,000  after  giving  effect to the reserve for
loss on assets held for sale.

   Viatical Settlement Business
   ----------------------------

     Until the  Company  ceased  purchasing  policies,  the  Company's  viatical
settlement  business involved the following  principal steps: (a) origination of
policy  purchases,  (b) underwriting,  which included  evaluating the terms of a
policy and, with the assistance of one or more  independent  physicians or other
medical consultants,  estimating the life expectancy of the insured, (c) closing
the  transaction,  (d)  monitoring the insured and the policy and (e) collecting
the policy proceeds following the insured's death. The Company ceased purchasing
policies in February 1997 and, therefore,  monitoring and collection  activities
are the only steps that continue in servicing the policies.

         Monitoring
         ----------

                  Following the purchase of a life insurance policy, the insured
         is regularly  monitored to obtain  timely  information  concerning  the
         insured so that  proceeds  may be  collected  as  promptly  as possible
         following the death of the insured.  In addition,  the Company monitors
         the  policy to ensure it does not lapse  because of a failure to timely
         pay premiums.  Such premiums are paid by the Company unless a waiver is
         in place.  Some  protection  against  the  failure to pay  premiums  is
         provided by  statutory  or policy  provisions  that  require  insurance
         companies to provide  written  notice  before  terminating a policy for
         failure to pay

                                       3

<PAGE>

         premiums.  As owner of  record of the  policy,  the  Company  generally
         receives such notice  directly.  Furthermore,  the Company monitors the
         policy to ensure  that  premium  waivers  are  renewed  and that,  when
         required, the policy is converted (e.g., from a group term policy to an
         individual  whole life policy) in a timely  manner.  See  "Management's
         Discussion   and  Analysis  of  Financial   Condition  and  Results  of
         Operations -- Certain Accounting Implications for DPFC." Collection

                  Once the Company learns of an insured's death, a request for a
         copy of the death certificate is filed in the appropriate  governmental
         office. The Company then files the death certificate with the insurance
         company  and  requests  payment of the  policy  proceeds.  The  Company
         monitors the collection  status until it receives the face value of the
         policy.

Consideration of Strategic Options
----------------------------------

         In September 1996, the Company,  in light of the  uncertainties  facing
its  viatical   settlement   business,   engaged   Jefferies  &  Company,   Inc.
("Jefferies")  to  assist  the  Company  in  the  evaluation  of  its  strategic
direction.  As a result of the Company's  evaluation and Jefferies'  assistance,
the Company is pursuing small business investments through Fourteen Hill Capital
and loans to the nation's  funeral home and cemetery owners through  Allegiance.
The Board continues to evaluate other  strategic  options,  primarily  financial
services opportunities. There can be no assurance that any other feasible option
will be found or that any option selected and pursued will be profitable.

Small Business Investments
--------------------------

     Overview
     --------

         Fourteen Hill Capital is licensed by the SBA as an SBIC.  Fourteen Hill
Capital  will  focus  on  creating  a  diversified  portfolio  of  loans  to and
investments  in  later-stage  growth  and  expansion  companies.  Such loans and
investments  will be  structured  in a variety of ways,  including  loans,  debt
investments such as subordinated debt with equity participation through warrants
or conversion rights, and investments in preferred and common stock.

     Regulation
     ----------

         As an SBIC,  Fourteen  Hill  Capital  is  required  to make loans to or
invest in qualified  entities as defined by regulations  promulgated by the SBA.
Such entities are generally companies with a net worth less than $18 million and
average net income less than $6 million for the last two years. Additionally, at
least 20% of  Fourteen  Hill  Capital's  loans and  investments  must be made to
entities  with a net worth less than $6 million and average net income less than
$2 million for the last two years.

         SBIC's are permitted to obtain funds from the SBA based upon the amount
of regulatory  capital defined in the SBA  regulations.  In the case of Fourteen
Hill Capital, such regulatory capital was $5 million at December 31, 1997.

         Because Fourteen Hill Capital holds a debenture SBIC license,  Fourteen
Hill  Capital may be  permitted  to borrow up to $10 million  from the SBA.  Any
borrowings  bear interest at the rate for ten year  debentures  issued by SBIC's
and funded  through  public sales of  certificates  bearing the SBA's  guarantee
("Debenture Rate"). Such interest is payable semi-annually.  In addition,  there
is a leverage fee of 3% and a fee of 1% per annum on the  outstanding  amount of
debt.  Among other  requirements,  an SBIC with a debenture  SBIC  license  must
maintain proper diversification of its portfolio, which generally means that, in
order to borrow funds from the SBA, no single  investment  may exceed 20% of the
SBIC's  regulatory  capital.  See  "Management's   Discussion  and  Analysis  of

                                       4

<PAGE>



Financial   Condition  and  Results  of  Operations  --  Liquidity  and  Capital
Resources."  At present,  Fourteen Hill Capital has not obtained any  borrowings
from the SBA.

         SBIC's such as Fourteen  Hill  Capital are also limited with respect to
the rates of interest they can charge on their loans and debt  investments.  The
maximum  rate of interest  permitted  at present for loans is the greater of (i)
19% and (ii) 1100 basis points over the Debenture Rate or weighted  average cost
of capital incurred (including SBA debt). The maximum rate of interest permitted
at present  for debt  investments  is the  greater of (i) 14% and (ii) 600 basis
points over the  Debenture  Rate or weighted  average  cost of capital  incurred
(including SBA debt).

         Fourteen  Hill  Capital may be subject to licensing  requirements  as a
lender in  jurisdictions  in which it operates and is subject to usury and other
similar laws in such jurisdictions.

     Origination & Investment Selection
     ----------------------------------

         Fourteen  Hill  Capital  intends to focus on  investing  in later stage
growth  companies.  The  investments in which  Fourteen Hill Capital  intends to
invest will typically range from $500,000 to $1 million. Fourteen Hill Capital's
investments  in small  businesses  are made with the  intent of having the loans
repaid and liquidating  the equity portion of the investments  after five years.
Although  Fourteen Hill Capital  expects to dispose of an investment  after five
years,  situations  may  arise  in which it may  hold  equity  securities  for a
different period of time.

         Fourteen  Hill  Capital  seeks to lend to or  invest  in  well-managed,
growing,  public or private  companies that seek capital to finance a variety of
activities  including  new  product  development,  expansion  into new  markets,
increasing production capacity or the acquisition of complementary businesses.

         Fourteen Hill Capital considers a number of criteria in making loan and
investment  decisions.  Although the criteria  below may not be applied in every
instance and their importance may vary depending on the relevant  circumstances,
the following  characteristics  generally are sought when evaluating a potential
borrower or  investment:  (i) highly skilled  management  with the capability to
organize  resources,  develop  products and exploit market  opportunities,  (ii)
superior growth and the presence of a clearly defined  marketing  strategy which
addresses  the  conditions  of  the  market,  the  needs  of the  customers  and
established  competitive  practices  exhibited in the relevant  industry,  (iii)
strong  demonstrable  cash  flows,  both  historical  and  projected,  or  other
security,  (iv) access to additional capital from the existing  shareholders and
(v) the  existence of a reasonable  exit  strategy.  Fourteen  Hill Capital will
employ third party experts where appropriate to assess the market opportunity or
operational capabilities of the potential investee.

         Fourteen  Hill  Capital  locates  potential  SBIC  investments  through
contacts Point West's  executive  officers (the "Executive  Officers") have with
investment  bankers,  lenders,  venture  capitalists,  leveraged  buyout sponsor
groups and other  SBIC's.  Fourteen  Hill  Capital  uses  analysts  that  review
informational  packages  in  order  to  identify  potential  investments.  After
identifying  investments that meet Fourteen Hill Capital's  investment criteria,
the analyst conducts a more thorough investigation and analysis of the applicant
("Due  Diligence").  The Due Diligence  process often includes  on-site  visits,
review of historical and  prospective  financial  information,  interviews  with
management, employees, customers and vendors of the applicant, background checks
and research on the applicant's product, service or particular industry.

         Fourteen Hill Capital has a committee (the "Investment Committee") that
consists  of  Bradley  N.  Rotter,  Alan B.  Perper  and John Ward  Rotter,  the
Executive  Officers.  All loan and  investment  decisions  are  presented to the
Investment Committee for their approval prior to commitment.

                                       5

<PAGE>


     Monitoring Investments
     ----------------------

         Portfolio loans and investments  will have a designated  individual who
will be  responsible  for  periodic  contact  and all  initial  troubleshooting.
Additionally,  this contact will carefully review operating results,  cash flow,
working  capital and  financial  structure  against  budgets.  Any  divestiture,
foreclosure or restructuring must be approved by the Investment Committee.

     Competition
     -----------

         Fourteen  Hill  Capital's   principal   competitors  include  financial
institutions,  venture capital firms and other non-traditional  lenders. Many of
these  entities have greater  financial and  managerial  resources than Fourteen
Hill Capital.  The Company  believes that many of these  entities do not have an
interest  in the  relatively  small size of  transactions  which  Fourteen  Hill
Capital targets.  Additionally,  the Company believes that Fourteen Hill Capital
will be able to compete effectively with such entities primarily on the basis of
the  quality of its  service,  its  reputation  and the  timely  decision-making
process it follows,  and to a significantly  lesser degree on the interest rates
or other terms it offers on loans or investments to those seeking capital.

Loans to Funeral Homes and Cemeteries
-------------------------------------

     Overview
     --------

         Allegiance provides long-term debt to experienced owners of established
funeral home and cemetery  businesses on a senior  secured basis at  competitive
rates. Allegiance Funding, a wholly owned subsidiary of Allegiance,  was created
to facilitate the potential funding and securitization of loans.

         The funeral home and cemetery  businesses  comprise  what is frequently
called the "death care" industry.  Death care is a relatively  stable and mature
industry. This is partly due to the inevitable nature of mortality. In addition,
most areas of the country are already  served by one or more  funeral  homes and
cemetery  establishments  and  opportunities  for  expansion  mostly  consist of
consolidation  of existing  establishments.  Though subject to  consolidation in
recent years, the death care industry remains highly fragmented.  The for-profit
ownership  base within the death care industry is split among private  entities,
primarily  smaller  family-owned   businesses  and  a  number  of  large  public
corporations,  including Service Corp.  International,  Loewen Group and several
others.  A variety of factors,  including  turnover  among the base of privately
owned death care businesses and the recognition of the increasing value of these
businesses,  have  combined to create  demand for capital  within the  industry.
These capital needs have been underserved by traditional lending sources.

         Allegiance  generally  will seek to finance  funeral  home and cemetery
businesses  which are  well-established  by virtue  of years of  service  in the
communities they serve.  The Company believes that the heritage,  reputation and
attendant  goodwill built up by these institutions  provide superior  collateral
value.

     Marketing & Origination
     -----------------------

         Allegiance  is  targeting  family-owned  and  other  private  owners of
funeral  home and  cemetery  establishments.  It is expected  that loans will be
sourced by marketing  representatives  both directly through the solicitation of
owners of funeral homes and cemetery  businesses and indirectly through contacts
with industry associations,  professional groups,  business advisors and others.
Origination  activities will be supported  through print advertising in industry
trade publications, newsletters and attendance at industry conferences.

         Loans are offered with fixed or adjustable interest rates, generally in
minimum  amounts of  $500,000.  Loan  proceeds may be used by the borrower for a
variety of purposes,  including  acquisition,  debt  refinancing and stockholder
buyouts or distributions.  Allegiance  charges a loan arrangement fee payable at
closing  as well as

                                       6

<PAGE>


application  and  commitment  fees,  which  may be  credited  against  the  loan
arrangement fee at closing. Contractual repayment terms require monthly payments
sufficient  to pay accrued  interest  and a portion of principal  sufficient  to
amortize the loan balance over a long-term repayment  schedule,  currently 15 to
18 years.

         Allegiance  obtains a senior,  secured  position  with  respect  to the
borrowers and business  establishments it finances.  As such, security for loans
is  generally  provided  through a mortgage  (deed of trust)  providing  a first
priority security interest in the real property  (normally a fee interest but in
certain instances a leasehold interest)  associated with the borrower's business
establishment(s);   security  agreement  providing  a  first  priority  security
interest in the related personal  property,  intangible  assets and intellectual
property;  pledge agreement  providing a first priority security interest in the
borrower's stock (if a corporation);  and personal  guarantees of the borrower's
principals.

     Underwriting
     ------------

         Loan  commitments  are  made  based  on  an  in-depth  qualitative  and
quantitative  underwriting analysis. This analysis focuses on the applicant, its
ownership and management, and the funeral home and/or cemetery establishments it
owns and  operates.  The  process  begins  with the  collection  of  information
concerning  the  borrower.  Information  collected  from the  borrower  includes
detailed    information    regarding    ownership,    business   locations   and
characteristics,  personnel,  the real  property and personal  property  used in
connection  with the  business,  the market  environment  in which the  business
operates,  banking and trade references and historical  financial statements and
tax returns.

         The  management  review  seeks to assess the quality,  sufficiency  and
commitment of management,  with an emphasis on the borrower's owners or managers
("key  principals").  This  assessment  includes a review of the key principals'
backgrounds,   including  education,  professional  experience,  other  business
experience and other activities such as community  involvement.  Staffing levels
of licensed and other professionals are reviewed to determine  sufficiency given
historic service volume and any projected  increases.  Allegiance  requires that
the funeral  home and  cemetery  establishments  financed by it, and the funeral
directors and embalmers associated with such  establishments,  be fully licensed
in compliance with applicable legal requirements.

         The business portion of the underwriting  analysis includes a review of
tangible aspects of the business such as property condition and appearance,  and
intangible  factors  affecting  business value and  economics,  such as history,
location and market  demographics.  Financial statements are analyzed internally
to determine  historic  adjusted  cash flow in light of the proposed loan amount
and debt service  burden.  In addition,  third-party  consultants  independently
determine  adjusted cash flow and assess business  value.  Business value of the
subject  business  is  assessed  based  primarily  on  its  historic   financial
performance  and  secondarily  on the real  property  and  other  assets  of the
business.
Assessments  of business  value are used to determine a  loan-to-business  value
ratio.

          Prior to  closing,  any real  property  to be  pledged  as  collateral
undergoes an environmental review,  utilizing third-party  environmental service
providers,  which generally meets standards for due diligence developed to avoid
lender liability.

          All loan decisions are presented to an investment  committee comprised
of the Executive  Officers and the president of  Allegiance  for their  approval
prior to commitment.  Allegiance relies on outside legal counsel to prepare loan
documents and close loans.

     Servicing
     ---------

         It is  anticipated  that Point  West will  perform  certain  basic loan
servicing  functions  related to loans made by Allegiance.  These  functions may
include  sending  monthly  billing  statements and other  notices,  tracking and
posting  loan  payments,   directing  the  transfer  of  loan  payments  to  the
appropriate accounts and maintaining loan files.

                                       7

<PAGE>


         In  addition  to the  functions  performed  by Point  West,  Allegiance
performs  loan  portfolio  surveillance  functions  in order to  monitor  credit
quality. Borrowers provide certain information periodically, including quarterly
and  annual  financial  statements  as well as  supplemental  business  activity
information.  Allegiance  utilizes this information  collected from borrowers to
periodically   monitor  covenant  compliance  and  the  credit  quality  of  the
borrowers'  underlying  businesses.  As a senior secured lender, in the event of
default,   Allegiance  is  in  a  relatively  strong  position  to  control  any
disposition of the businesses it finances.  However,  the monitoring  process is
intended to help borrowers identify and address problems to avoid defaults.

     Competition
     -----------

         Allegiance faces  competition  from  alternative  providers of capital,
including primarily financial institutions,  the financial services industry and
to a lesser  extent other  companies in the death care  industry.  The financial
services  industry  is  highly   competitive.   Allegiance  competes  with  both
traditional  lenders such as commercial banks,  thrifts and finance companies as
well as specialized  lenders such as Provident  Services,  Inc. (a subsidiary of
Service Corp.  International) and Franchise Mortgage  Acceptance Co. The Company
believes that  Allegiance's  focus on and knowledge of the death care  industry,
its ability to offer loans on terms which meet the needs of owners and acquirers
of death care businesses,  and the attractiveness of independent ownership, will
provide it with the ability to operate successfully.

         Regulation
         ----------

         Allegiance  may be subject  to  licensing  requirements  as a lender in
jurisdictions  in which it  operates  and is subject to usury and other  similar
laws in such jurisdictions.

Investment in Convertible Preferred Shares
------------------------------------------

         On November 4, 1996, Point West made a strategic  equity  investment of
$3.0  million in  convertible  preferred  stock and an option to buy 8.2 million
shares  of  common  stock  of  American  Information  Company,  Inc.  ("American
Information"),  a privately  held company  which,  among other things,  provides
information services to individuals owning or purchasing  automobiles.  In March
1997, Point West sold a portion of its investment.  See "Management's Discussion
and  Analysis of Financial  Condition  and Results of  Operations  -- Year Ended
December 31, 1997  Compared to Year Ended  December 31, 1996 -- Net Gain on Sale
of Convertible  Preferred Shares" and Note 5 of Notes to Consolidated  Financial
Statements.

Employees
---------

         As of December 31, 1997, the Company  employed 15  individuals,  two of
whom (in addition to the Executive  Officers) also perform services on behalf of
The Echelon Group of  Companies,  LLC ("New  Echelon  LLC").  New Echelon LLC is
owned by the Executive Officers.  None of the Company's employees is a member of
a labor union.  The Company  believes that it maintains  good relations with its
employees.


ITEM 2--PROPERTIES
------------------

         The Company currently leases  approximately 5,900 square feet of office
space in San Francisco which it shares with New Echelon LLC. The Company,  which
is the lessee  under the lease,  charges  New Echelon LLC for 35% of the rent of
the entire office space. See "Certain  Relationships and Related  Transactions."
The Company  believes  that its current  office  space will be adequate  for its
purposes through the expiration of the lease in 1999. The Company also leases an
office in Incline Village, Nevada.

                                       8

<PAGE>


ITEM 3--LEGAL PROCEEDINGS
-------------------------

         From time to time, the Company is involved in routine legal proceedings
incidental  to  its  business,  including  litigation  in  connection  with  the
collection of amounts owed by insurance company  obligors.  The Company does not
expect that these  proceedings,  individually  or in the aggregate,  will have a
material  adverse  effect on the  Company's  financial  position,  liquidity  or
results of operations.
                                      
         On  December  19,  1996,  a  complaint  was filed in the United  States
District  Court,  Northern  District of  California  (the  "Court")  (Docket No.
C96-4558)  against  Dignity  Partners,  Inc. and each of its  directors by three
individuals  purporting  to act on behalf of  themselves  and an  alleged  class
consisting of all  purchasers  of the  Company's  common stock during the period
February 14, 1996 to July 16, 1996.  The complaint  alleged that the  defendants
violated  Section  10(b) of the  Securities  Exchange Act of 1934 and Rule l0b-5
thereunder and Section 11 of the  Securities Act of 1933 and seeks,  among other
things,  compensatory  damages,  interest,  fees and costs. The allegations were
based  on  alleged  misrepresentations  in  and  omissions  from  the  Company's
registration statement and prospectus related to its initial public offering and
certain documents filed by the Company under the Exchange Act. On July 18, 1997,
the Court granted the defendants' motion to dismiss the complaint.  However, the
Court  gave  the  plaintiffs  permission  to  file  an  amended  complaint.  The
plaintiffs  filed an amended  complaint  on  September 8, 1997 and on October 8,
1997 the  Company  and other  defendants  filed a motion to dismiss  the amended
complaint.  On December 5, 1997,  the Court  granted the  defendants'  motion to
dismiss the amended complaint. However, the Court gave the plaintiffs permission
to file a second amended complaint in connection with claims under Section 10(b)
of the Securities  Exchange Act of 1934 and Rule l0b-5 thereunder.  Following an
order  granting  permissive   intervention  of  an  additional  plaintiff,   the
plaintiffs  were granted  leave to attempt to allege a claim under Section 11 of
the Securities Act of 1933 in the second  amended  complaint.  On March 2, 1998,
the  plaintiffs  filed a second amended  complaint.  The Company and each of the
defendants intend to continue to defend the action vigorously.

         On February 13, 1997,  a complaint  was filed in the Superior  Court of
California, City and County of San Francisco (Docket No. 984643) against Dignity
Partners,  Inc.,  and each of its  executive  officers and New Echelon LLC by an
individual  purporting  to  act on  behalf  of  himself  and  an  alleged  class
consisting of all  purchasers  of the  Company's  common stock during the period
February 14, 1996 to July 16, 1996.  The complaint  alleges that the  defendants
violated  section 25400 of the  California  Corporate  Code and seeks to recover
damages. The allegations are based on alleged misstatements,  concealment and/or
misrepresentations and omissions of allegedly material information in connection
with the Company's  initial  public  offering and  subsequent  disclosures.  The
Company and each of the defendants intend to defend the action vigorously.

ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

         No  matters  were  submitted  to a vote of the  Company's  stockholders
during the fourth quarter of 1997.

                                       9


<PAGE>


                                     PART II

ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
--------------------------------------------------------------
                     STOCKHOLDERS MATTERS
                     ---------------------

         The Common Stock trades on The Nasdaq Stock  MarketSM  under the symbol
"PWCC." As of March 10, 1998, there were  approximately 120 holders of record of
Common Stock, including banks, brokerage firms and other nominees. A substantial
portion of the publicly-held shares of Common Stock are held in book-entry form.
As of March 10, 1998, the Company  estimates that there were  approximately  420
beneficial  owners of Common  Stock.  The  following  table sets forth,  for the
fiscal quarters indicated, the high and low sales prices for the Common Stock on
The Nasdaq Stock MarketSM.  The Company's  initial public  offering  occurred on
February 14, 1996.


                               1997                   High         Low
                               ----                   ----         --- 
           First Quarter........................   $  2 7/8     $  2 1/2
           Second Quarter.......................      3 5/8        2 1/2
           Third Quarter........................      3 5/8        2 7/8
           Fourth Quarter                             4 3/4        2 3/8

                               1996                   High         Low
                               ----                   ----         ---
           First Quarter (from February, 1996)..   $  14 1/2    $  11 1/8
           Second Quarter.......................      13 3/4       6 1/2
           Third Quarter........................      9            1
           Fourth Quarter.......................      3 15/32      2 1/8



         The  Company  has  never  declared  or paid any cash  dividends  on its
capital stock. The Indenture pursuant to which the Securitized Notes were issued
(the "Indenture")  limits the Company's ability to pay dividends by restricting,
prior to repayment in full of the  Securitized  Notes,  the Company's  access to
cash generated through the collection of pledged policies. The Company currently
intends to retain its  future  earnings,  if any,  to  finance  its  businesses.
Therefore,  the Company does not anticipate  paying cash dividends on the Common
Stock for the foreseeable future.

                                 10


<PAGE>



ITEM 6--SELECTED FINANCIAL DATA
-------------------------------

         The  data  presented  below  should  be read in  conjunction  with  the
consolidated financial statements and notes thereto and "Management's Discussion
and  Analysis  of  Financial  Condition  and  Results  of  Operations"  included
elsewhere  herein.  For the reasons set forth in  "Management's  Discussion  and
Analysis  of  Financial  Condition  and  Results  of  Operations  --  Method  of
Accounting,"  information  for 1997 and 1996  and as of  December  31,  1997 and
December  31,  1996  are not  comparable  to each  other  or to  prior  periods.
Operating Data consists only of information  regarding life insurance  policies.
Operating Data for Fourteen Hill Capital and  Allegiance  have not been provided
because their  operations  were  insignificant  in 1997. Net income for Fourteen
Hill Capital and Allegiance in aggregate  represented less than 3% of net income
for 1997.
<TABLE>
<CAPTION>



                                                                                   Years Ended December 31,
                                                                                   ========================

                                                                                  1997      1996      1995       1994       1993(1)
                                                                                            (Dollars in thousands)
                                                                                            ----------------------
<S>                                                                              <C>         <C>        <C>        <C>       <C>

Statement of Operations Data:
-----------------------------
Earned discounts on life insurance policies  (2) ..............................  $  --   $ 3,697   $  6,933   $  4,240    $  420
Earned  discounts on prior  maturities and matured
 policies (2)..................................................................    489     1,782         --         --        --
Net gain on sale of convertible preferred shares ..............................    680        --         --         --        --
Gain (loss) on assets sold.....................................................  1,463     (180)         --         --        --
Total income...................................................................  3,918     6,405      7,389      4,443       437
Interest expense...............................................................  3,599     3,984      3,352      1,115        52
Provision for loss on assets held for sale.....................................    328     3,140         --         --        --
Loss on  investment  in wholly  owned  financing
 subsidiary....................................................................     --     6,940         --         --        --
Total expenses.................................................................  6,795    17,118      5,394      2,279       776
Income (loss)  before  income  taxes,  minority  interest
and net loss in wholly owned financing subsidiary
charged to reserve for equity interest ........................................ (2,877)  (10,713)     1,996      2,163       (339)
Income tax benefit (expense)...................................................     (4)      526       (625)      (137)       229
Minority interest of limited partners in earnings of
 investee (3)..................................................................     --        --       (568)    (1,791)      (236)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest.................................................  3,891       488         --         --         --
Net income (loss)..............................................................  1,011    (9,699)       803        235       (347)
Basic earnings(loss)per share (4).............................................. $ 0.29  $  (2.46)   $  0.51    $  0.26    $(10.15)
Diluted earnings (loss)per share (4)........................................... $ 0.28  $  (2.46)   $  0.42    $  0.19    $(10.15)
Weighted average number of shares of common stock
outstanding--Basic (in thousands)(4)...........................................  3,522     3,942      1,589        899         34
Weighted average  number of shares of common stock
and common stock  equivalents outstanding --
Diluted (in thousands)(4) .....................................................  3,606     3,942      1,902      1,211         34

Operating Data:
---------------
Number of policies sold during period(5).......................................     91       257         --         --          --
Number of policies outstanding, end of period (6) .............................    557       754        749        548         188
Aggregate face value of policies sold during period (5)........................ $7,590   $20,810         --         --          --
Aggregate  face  value  of  portfolio  of  policies,  end of
 period (6).................................................................... $43,089  $56,792   $ 59,744    $43,205     $14,785

                                       11
<PAGE>

Balance Sheet Data (at period end):
------------------

Cash and cash equivalents...................................................... $10,040   $6,586   $  1,057    $    31    $  1,073
investment securities..........................................................   5,817       --         --         --          --
Loans receivable...............................................................   4,016       --         --         --          --
Assets held for sale...........................................................     129   11,520         --         --          --
Purchased life insurance policies..............................................  36,587   41,246     48,938     32,916      11,446
Investment in  convertible  preferred shares...................................   1,658    3,000         --         --          --
Total assets...................................................................  62,969   68,944     58,226     35,433      13,967
Reserve  for  equity  interest  in  wholly  owned  financing
  subsidiary...................................................................   2,300    6,453         --         --          --
Long term notes payable........................................................  38,804   41,218     39,105         --          --
Other long term debt...........................................................      --       --      1,444     18,447          --
Total.liabilities..............................................................  41,703   48,802     46,680     22,176         594
Minority interest of limited partners in investment
  partnership (3)..............................................................      --       --      6,680      9,195      10,035
Total stockholders' equity.....................................................  21,266   20,142      4,866      4,062       3,339

----------

<FN>
(1)  The  Company  commenced   operations  on  January  2,  1993  and  commenced
     purchasing life insurance policies on April 4, 1993.
(2)  See  "Management's  Discussion and Analysis of Financial  Condition and
     Results of Operations-Method of Accounting."
(3)  The minority  interest for  1995,1994,1993  represents  the interest of the
     former limited  partners of Dignity  Viatical  (defined  herein) in the net
     assets and income of Dignity  Viatical.  See  "Management's  Discussion and
     Analysis of  Financial  Condition  and Results of  Operations  -- Method of
     Consolidation"  and  Notes  1c and 9 of  Notes  to  Consolidated  Financial
     Statements.
(4)  Reflects the following  transactions as if such transaction had occurred at
     the beginning of each period  presented:  (a) On September 30, 1995,  Point
     West and its then sole  stockholder,  The Echelon  Group Inc.  ("Echelon"),
     which was owned entirely by the Executive  Officers,  entered into a series
     of  transactions  (collectively,  the  "Reorganization")  to  separate  the
     business of Point West from  Echelon's  other  business  interests;  (b) On
     January 12, 1996,  Point West  effected a reverse  stock split  pursuant to
     which each outstanding  share of Common Stock was converted into .7175 of a
     share of Common Stock;  (c) In February  1996,  all  outstanding  shares of
     Point West's  Cumulative  Pay-in-Kind  Preferred  Stock were converted into
     321,144  shares of Common  Stock.  The  Reorganization  included  a sale of
     assets by Echelon to New  Echelon,  which was also  owned  entirely  by the
     Executive Officers,  and a merger of Echelon into Point West. In connection
     with such  merger,  Point  West's authorized  and  outstanding capital  was
     increased.   See  Note  10  and  12  of  Notes  to  Consolidated  Financial
     Statements.
(5)  Represents  policies sold or covered by a sale  agreement  executed  during
     1997 and 1996  other than  policies  which had not been  transferred  as of
     December 31, 1997.
(6)  Includes  policies  categorized as "assets held for sale,"  "purchased life
     insurance policies" and "matured policies receivable."
</FN>
</TABLE>


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

         The  following  is  a  discussion  and  analysis  of  the  consolidated
financial  condition  and  results of  operations  for the Company for the years
ended December 31, 1997,  1996 and 1995, and of certain  factors that may affect
the Company's  prospective  financial  condition and results of operations.  The
following  should  be  read  in  conjunction  with  the  consolidated  financial
statements and related notes  appearing  elsewhere  herein.  For the reasons set
forth below  (including  the  reclassification  into "assets held for sale" of a
substantial  portion of the  Company's  assets in the third  quarter of 1996 and
related accounting consequences and the inception of two businesses in 1997) the
Company's  results  of  operations  and  cash  flows  for  1997 and 1996 are not
comparable to each other or to prior periods.

Overview
--------

         The Company is a specialty  financial  services company.  The Company's
financial statements consolidate the assets, liabilities and operations of DPFC,
Fourteen  Hill  Management,  Fourteen Hill Capital,  Allegiance  and  Allegiance
Funding. See Notes to Consolidated  Financial Statements  (contained herein) for
further information regarding these entities.

                                       12

<PAGE>


         Until February  1997, the Company  provided  viatical  settlements  for
terminally ill persons. See "Cessation of Viatical Settlement Business;  Sale of
Assets;  Name  Change."  Subsequently,  the  Company  has  sought  to  become  a
broad-based  specialty  financial services company. To that end, the Company has
expanded its financial services business through the formation and investment in
other  entities,  including  Fourteen  Hill  Management,  Fourteen Hill Capital,
Allegiance  and  Allegiance  Funding.  The Company  continues to evaluate  other
strategic business  opportunities.  Fourteen Hill Capital and Allegiance,  whose
business  activities are described  under Item 1 -- Business,  are indicative of
the types of business  opportunities the Company intends to pursue.  See "Method
of Consolidation." No assurance can be given that the Company will be successful
in becoming a broad-based  specialty financial services company or that any such
enterprise will be successful.

         Point West was formed in September  1992 and  commenced  operations  on
January 2, 1993.  Effective September 30, 1995, Echelon was merged with and into
Point West as part of the Reorganization.  See Footnote (4) to Item 6.--Selected
Financial  Data.  The Merger had no material  impact on the Company's  financial
condition  or  results  of  operations  except  for  the  effect  on  per  share
calculations.

Cessation of Viatical Settlement Business; Sale of Assets; Name Change
----------------------------------------------------------------------

         The principal  business  activity of the Company through  February 1997
was to provide  viatical  settlements  for  terminally  ill persons.  A viatical
settlement  is the payment of cash in return for an  ownership  interest in, and
right to receive the death benefit (face value) from, a life insurance policy.

         On July 16,  1996,  the Company  announced  that,  in light of the data
regarding new treatments  involving  combinations  of various drugs presented at
the  AIDS  Conference,  the  Company  was  temporarily  ceasing  processing  new
applications for policies insuring individuals afflicted with AIDS and HIV while
it further analyzed the effects of such research results on its business and its
strategic  options.  Further analysis resulted in the Company's  concluding that
the efficacy of the treatments  reported at the AIDS Conference and subsequently
reported  treatments had increased the risks of purchasing and holding  policies
insuring  the lives of  individuals  diagnosed  with HIV and AIDS.  The  Company
decided  in the third  quarter of 1996 to sell all or  substantially  all of its
assets. As a result of such decision, the Company reclassified all of its assets
(other than the policies held by DPFC) to a "held-for-sale"  category during the
third quarter of 1996.  Accordingly,  such assets are accounted for on the lower
of carrying  value or fair value less cost to sell.  The Company  cannot predict
what further impact the foregoing may have on its business,  prospects,  results
of operations or financial position.

         The Company  sought and received in December 1996 stockholder approval
to sell all or  substantially  all of its assets.

         Based  on the  Company's  evaluation  of the  effects  of the  research
results  reported  at the AIDS  Conference  and  subsequent  reports  and  other
information,  the Company  believed  that it had become  extremely  difficult to
predict  accurately  life  expectancy  of  people  afflicted  with HIV and AIDS.
Further,  the  Company  decided  that it was not viable to continue to operate a
viatical  settlement  business  solely for non-AIDS  policies while a market for
non-AIDS policies  develops,  if it developed at all. As a result,  the Board in
February 1997 approved the cessation of the viatical settlement business and the
sale by the Company of its non-AIDS policies.

         Through  December 31, 1997, the Company entered into agreements to sell
approximately  373 policies with an aggregate  purchase  price of $19.5 million,
representing  $29.2  million in aggregate  face value.  Through  such date,  the
Company  consummated  the sale of 348 policies for $19.2  million,  representing
$28.4 million in aggregate  face value.  The Company  reported a pre-tax loss of
$180,000 in 1996 and a pre-tax gain of $1.5 million in 1997 in  connection  with
such sales.  See "Year Ended  December 31, 1997 Compared to Year Ended  December
31,  1996 -- Gain  (Loss) on Assets  Sold" and "Year  Ended  December  31,  1996
Compared to Year Ended  December  31,  1995 -- Gain (Loss) on Assets  Sold." The
Company has experienced  delays or difficulties in transferring the ownership of
14 policies with an aggregate  face value of $937,000 at December 31, 1997.  The
Company  continues  to pursue

                                       13

<PAGE>


other  options for the sale of these 14  policies;  however,  due to the limited
market the Company  reevaluated the fair value of these policies and recorded in
the third  quarter of 1997 an  additional  reserve of $328,000 for these assets.
The fair value is based on  management's  best  estimate in light of the limited
market and the prices  received  by the  Company  in  connection  with its other
sales.  As of December  31,  1997 the  carrying  value of these 14 policies  was
$129,000. See Note 4 of the Notes to Consolidated Financial Statements.

         The Company also continues to hold,  through DPFC, a substantial amount
of policies,  which at December 31, 1997 totaled 543 policies  with a face value
of $42.2 million and a carrying value of $36.9 million.

         Because  the  Company  no longer  engages  in the  viatical  settlement
business,  the  Board  determined  that a  change  in  the  Company's  name  was
appropriate.  The Company sought and received in June 1997 stockholder  approval
to amend  Point  West's  certificate  of  incorporation  to change its name from
Dignity Partners,  Inc. to Point West Capital  Corporation.  The name change was
effective August 1, 1997.

Method of Accounting
--------------------
         Through  June  30,  1996,  the  Company   recognized   income  ("earned
discount") on each  purchased  policy by accruing,  over the period  between the
acquisition date of the policy and the Company's estimated date of collection of
the policy's face value (the "Accrual  Period"),  the difference  (the "unearned
discount")  between (a) the face value of the policy less the amount of fees, if
any, payable to a referral source upon collection of the face value, and (b) the
carrying value of the policy. Through June 30, 1996, the carrying value for each
policy  was  reflected  on  the  Company's   consolidated  balance  sheet  under
"purchased life insurance  policies" and consisted of the purchase price,  other
capitalized  costs and the earned  discount on the policy accrued to the balance
sheet  date.  The  Company  capitalized  as incurred  the  following  costs of a
purchased  policy:  (i) the  purchase  price paid for the  policy,  (ii)  policy
premiums,  if any, paid by the Company,  (iii) amounts, if any, paid to referral
sources upon acquisition of the policy and (iv) amounts paid to Company-retained
physicians  or other  medical  consultants  ("Consultants")  who  estimated  the
insured's life expectancy. The carrying value of a policy changed over time, and
was  adjusted  quarterly  to reflect  earned  discounts  accrued on the  policy,
amounts paid for any  additional  future  increases in coverage,  any additional
premium  payments  and any  premium  refunds  if the policy  becomes  covered by
premium  waiver  provisions.  The length of the Accrual Period was determined by
the Company  based upon its  estimate of the date on which it would  collect the
face value of the policy. Such estimate was based upon the Company's estimate of
the life  expectancy of the insured,  after review of the medical records of the
insured  by one or more  Consultants,  and was  also  adjusted  to  reflect  the
historical  accuracy of the life  expectancies  estimated by the Consultants and
the typical period between the date of an insured's  death and the date on which
the Company collects the face value of the policy.

         The unearned  discount  was accrued  over the Accrual  Period using the
"level yield"  interest  method.  Under the "level yield" method,  the yield was
held constant such that when the yield was applied to the carrying  value of the
policy on a compounded basis over the course of the Accrual Period, the unearned
discount was fully accrued as earned discount by the end of the Accrual Period.

         As a result of the Company's  decision to sell all or substantially all
of its  assets,  the  Company  established  a reserve for loss on sale of assets
during the  quarter  ended  September  30,  1996 and  reevaluates  this  reserve
quarterly.  An additional  reserve of $328,000 was recorded in the third quarter
of 1997. The Company also  established a reserve for loss of Point West's equity
interest in DPFC during the third  quarter of 1996 because of the  uncertainties
created by the data presented at the AIDS  Conference and subsequent  reports of
the efficacy of new  treatments  for  AIDS/HIV.  The reserve for loss on sale of
assets  was  $399,000  and $2.9  million  as of  December  31,  1997  and  1996,
respectively.  The reserve for loss of Point West's equity  interest in DPFC was
$2.3 million and $6.5 million as of December 31, 1997 and 1996, respectively. In
addition,  beginning in the third quarter of 1996,  the Company began  generally
recognizing income with respect to its viatical settlement business upon receipt
of proceeds on policies  (either  pursuant to sale of the policy or the death of
the  insured).Such income 

                                       14

<PAGE>


is equal to the  difference  between such proceeds  (less any back-end  sourcing
fees) and the carrying value of such policies after giving effect to any reserve
for  loss on the  sale of such  policies.  See  Notes  1e and 4 of the  Notes to
Consolidated  Financial Statements for further information regarding the reserve
for loss on sale of assets.

         Financial Accounting Standards No. 115 ("SFAS No. 115"), Accounting for
                                                                  -------------
Certain Instruments in Debt and Equity Securities,  requires marketable debt and
-------------------------------------------------
equity  securities  (including  those  held  by  Fourteen  Hill  Capital)  to be
classified into  held-to-maturity,  available-for-sale  and trading  categories.
Securities  classified as  held-to-maturity  are reported at amortized  cost and
available-for-sale  securities are reported at fair market value with unrealized
gains  and  losses  as a  separate  component  of  stockholders'  equity  net of
applicable  taxes.  There were no trading  securities at December 31, 1997.  Any
realized  gains  and  losses,  declines  in value  of  securities  judged  to be
other-than-temporary  and accrued  interest and dividends on all securities will
be reported in the income  statement as  recognized.  See Note 2 of the Notes to
Consolidated Financial Statements.

         The Company  accounts for loans  advanced by Fourteen  Hill Capital and
Allegiance by accruing interest on outstanding balances. Since there were only a
few loans  outstanding at December 31, 1997, the Company evaluated the loans and
determined  that a specific  reserve was not necessary.  As the loan  portfolios
grow, general reserves will be added to the extent considered necessary.

Method of Consolidation
-----------------------

     DPFC
     ----

         The Company's financial statements consolidate the assets,  liabilities
and operations of DPFC, Point West's wholly owned  subsidiary  through which the
Company  issued  the  Securitized  Notes.  See Note 7 of  Notes to  Consolidated
Financial  Statements.  DPFC has purchased  902 policies with an aggregate  face
value of $67.1  million and will not  purchase any more  policies.  The carrying
value of the policies held by DPFC was $36.9 million at December 31, 1997.

     Dignity Viatical and Dignified One
     ----------------------------------

         Dignity  Viatical  was a  limited  partnership  formed  in 1993 to fund
purchases  of life  insurance  policies.  Point West served as the sole  general
partner,  and persons not  affiliated  with the Company were  limited  partners.
Because Point West  controlled  Dignity  Viatical,  the assets,  liabilities and
operations of Dignity Viatical were  consolidated in the Company's  consolidated
financial statements from 1993 to June 24, 1996. The minority interest of former
limited   partners  in  investment   partnership   reflected  in  the  Company's
consolidated  financial statements represents the limited partners' interests in
the net  assets  and  income of Dignity  Viatical.  Through  June 1996,  Dignity
Viatical  had  purchased  169  policies  with an  aggregate  face value of $13.9
million.  On June  25,  1996,  Point  West  purchased  the  limited  partnership
interests  in  Dignity  Viatical  and  became  the  sole  owner  of  all  of the
partnership  interests  therein.  On August 2, 1996, the Company entered into an
agreement to sell to an  unaffiliated  third party virtually all of the policies
owned by Dignity Viatical  (representing  $5.9 million in face value).  The cash
proceeds of such sale in 1996  (approximately  $4.7 million) have been collected
by  the  Company.  See  Notes  lc  and  9 of  Notes  to  Consolidated  Financial
Statements.

         Dignified  One  was a  limited  partnership  formed  in  1994  to  fund
purchases of life insurance policies.  Dignified One purchased 26 policies, with
an aggregate face value of $1.8 million. All policies held by Dignified One were
collected or sold by September 1997. Due to its immateriality, Dignified One has
been treated as an investment for accounting purposes.  Therefore,  the policies
purchased  by Dignified  One are not  reflected  in the  Company's  consolidated
financial  statements or in the Company's  operating or selected  financial data
presented herein.

                                       15

<PAGE>



     Fourteen Hill Management and Fourteen Hill Capital
     --------------------------------------------------

         The Company also consolidates the assets, liabilities and operations of
Fourteen Hill Management and Fourteen Hill Capital.  Fourteen Hill Management is
a wholly owned  limited  liability  company of Point West formed on June 3, 1997
solely for the purpose of serving as the general  partner of one or more SBIC's.
Fourteen Hill Capital is a limited partnership formed on June 3, 1997 solely for
the  purpose of  operating  as an SBIC.  Fourteen  Hill  Management  is the sole
general  partner of Fourteen Hill Capital,  and owns 99.956% of the  partnership
interests.  Point  West is one of the two  limited  partners  of  Fourteen  Hill
Capital and owns a 0.04% of the partnership  interests.  The remaining 0.004% of
the partnership  interest is owned by one unaffiliated  limited  partner.  Point
West  capitalized  Fourteen Hill  Management  with $5.0  million.  Fourteen Hill
Management  has  committed  $5.0  million of capital  to this  partnership,  and
through  December 31, 1997,  had invested $2.5 million in Fourteen Hill Capital.
Fourteen Hill Management receives a management fee for its services on behalf of
Fourteen  Hill Capital.  See Notes 1d, 2, 3 and 17 of the Notes to  Consolidated
Financial Statements for further information  regarding Fourteen Hill Management
and Fourteen Hill Capital.

     Allegiance and Allegiance Funding
     ---------------------------------

         Allegiance is a limited  liability  company formed on September 5, 1997
as a specialty  finance company to provide  senior secured loans to funeral home
and cemetery owners. Point West has a 54% equity interest and 95% voting control
in  Allegiance  and serves as the managing  member of  Allegiance.  Allegiance's
president  and its  vice  president  of  marketing,  each of whom  was  hired in
September  1997,  have the balance of such  interests.  Allegiance  owns 100% of
Allegiance  Funding,  which is a special purpose subsidiary formed to facilitate
the potential securitization of loans consummated by Allegiance.  Net profits of
Allegiance  for each calendar  year will be allocated  first to Point West in an
amount equal to a return of 10% per annum,  compounded monthly, on the amount of
its capital  contribution,  but not in excess of such net profits. Any shortfall
will be carried forward indefinitely to the next calendar year or years in which
net profits are sufficient to make such allocation.  An additional 5% return for
each calendar  year will be allocated  first to Point West to the extent that in
each year  sufficient  profits are  available  with no carry  forward  provided.
Because the Company controls 95% of the voting power of Allegiance,  the assets,
liabilities and operations of Allegiance and Allegiance Funding are consolidated
with the assets, liabilities and operations of the Company. Through December 31,
1997,  Point West had invested $3.9 million in  Allegiance.  See Notes 1d, 3 and
13b of the Notes to Consolidated  Financial  Statements for further  information
regarding Allegiance.

Certain Accounting Implications for DPFC
----------------------------------------

         Although the  Securitized  Notes had an expected life of 2.1 years when
the aggregate  maximum  principal amount of the Securitized  Notes was increased
from $35 million to $50 million in September  1995, the  Securitized  Notes were
not  retired  through  collections  by  October  1997.  In the  event  that  the
collection experience for DPFC policies is substantially  delayed, the equity of
DPFC  may  become  negative.   Because  of  recent  delays  and  variability  in
collections,  the Company  cannot  currently  predict at what point in time,  if
ever, the equity of DPFC may become negative.

         Additionally,  if the  collection  experience  for the DPFC policies is
substantially  delayed,  the value of the equity of DPFC may erode  further  for
some of the following reasons.  First, a decision to discontinue paying premiums
on some  policies  may be made because the present  value of the expected  death
benefit on some policies may be less than expected future premiums to be paid on
such policies.  Second,  the face value of certain  policies  (especially  group
term) may begin to  decrease as the people  whose  lives are insured  thereunder
reach specified age levels (often 65). Finally, policies for which the insurance
was continued under a disability  provision may be uneconomical to convert given
the  insured's  age and life  expectancy  if such  insured  person  is no longer
considered disabled. The Company cannot determine at present the extent to which
policies held by DPFC will be so affected.

                                       16

<PAGE>




         In light of the foregoing, the Company believes that to the extent that
the losses of DPFC exceed its equity (creating a deficit),  the deficit would be
recorded by the Company as a loss. Upon the retirement of the Securitized  Notes
at less than book value,  the Company would  recognize a gain for the difference
which is expected to approximate  the deficit of DPFC. At December 31, 1997, the
equity of DPFC was $2.3 million. The Securitized Notes represent the obligations
solely of DPFC. The Company did not guarantee repayment of the Securitized Notes
and is not required to fund any principal or interest deficiencies thereunder.

Share Repurchase Program
------------------------

         In October 1996, the Board approved a share repurchase program pursuant
to which  the  Company  was  authorized  to  purchase  from time to time up to 1
million shares of Common Stock at prevailing  market prices.  In June 1997, such
authority  was increased to 1.04 million  shares of Common Stock.  In June 1997,
the Company  completed  the share  repurchase  program,  having  repurchased  an
aggregate of 1.04 million shares at a weighted average price of $2.77 per share.

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

         Earned Discounts. Effective July 1, 1996, the Company began recognizing
         ----------------
earned discounts only upon receipt of proceeds on matured policies  (pursuant to
the death of the  insured).  Consequently,  the  Company did not  recognize  any
earned  discounts on life insurance  policies during the year ended December 31,
1997, but instead  recognized  $489,000 of earned  discounts on matured policies
for the year ended  December  31, 1997.  Such income is equal to the  difference
between the  proceeds the Company  received on the  policies  (less any back end
sourcing  fees) and the carrying  value of such policies  after giving effect to
any reserve for loss on sale of such policies. See "Method of Accounting."

         In the first six months of 1996 the Company  recognized earned discount
on each purchased  policy by accruing,  over the Accrual Period,  the difference
between  (a) the face  value of the  policy  less the  amount  of fees,  if any,
payable to a referral  source upon  collection  of the face  value,  and (b) the
carrying value of the policy.  Earned  discounts on life insurance  policies was
$3.7  million for the six months ended June 30,  1996.  In the third  quarter of
1996 the  Company  began  recognizing  earned  discounts  only upon  receipt  of
proceeds  on  policies  (pursuant  to the  death of the  insured).  The  Company
recognized  $980,000 of earned  discounts  on matured  policies  during the year
ended December 31, 1996. In addition,  the Company recognized $802,000 of earned
discounts on prior maturities. Such earned discounts were carried on the balance
sheet at June 30, 1996 as unearned  income  which  related to policies for which
the Company had collected the proceeds  prior to the expected  collection  date.
The Company will not have any earned  discounts on prior maturities in any other
period. See "Method of Accounting."

         The Company  purchased  only four  policies  (representing  outstanding
commitments  as of December 31,  1996) with an aggregate  face value of $155,000
during the year ended December 31, 1997 compared to the purchase of 475 policies
with an aggregate face value of $33.1 million during the year ended December 31,
1996.  See "Cessation of Viatical  Settlement  Business;  Sales of Assets;  Name
Change."

         Interest  Income.  Interest  income  increased  51.2% in the year ended
         ----------------
December  31,  1997 over the year  ended  December  31,  1996 as a result of the
investment  of the proceeds  from the sale of policies in short term  securities
and marketable securities. Interest income generated in the first nine months of
1996 was primarily the result of the investment of the Company's  initial public
offering proceeds.

         Net Gain on Sale of Convertible  Preferred  Shares. In 1997 the Company
         --------------------------------------------------
recognized a $700,000  gain on the sale of a portion of Point West's  investment
in American Information.  In March 1997, Point West converted 8.2 million shares
of  convertible  preferred  stock  into 8.2  million  shares of common  stock of
American  Information  and sold such shares  (approximately  38% of Point West's
equity  investment in American  Information) to an unaffiliated  third party for
$1.8 million.  The carrying value of such shares was $1.1 million.  In addition,
Point

                                       17

<PAGE>


West  had  an  option  that  expired  on  October  26,  1997  to  purchase,  for
approximately  $1.1 million,  8.2 million  additional  shares of common stock of
American  Information.  Since Point West did not exercise this option, a $20,000
pre-tax loss was  recognized in 1997. The Company  accounts for this  investment
using  the cost  method.  See  Note 5 of the  Notes  to  Consolidated  Financial
Statements.

         Gain (Loss) on Assets Sold. The Company collected during 1997 the sales
         --------------------------
proceeds on 348 of the 373 policies subject to the sale agreements  entered into
through  December 31, 1997.  See Note 4 of the Notes to  Consolidated  Financial
Statements.  The total net gain recorded in 1997 in connection  with these sales
was $1.5 million  compared to a net loss of $180,000 in 1996.  The realized gain
(loss) was calculated based on the difference  between the sale proceeds and the
carrying  value after  giving  effect to the reserve for loss on sale of assets.
See "Cessation of Viatical Settlement Business; Sale of Assets; Name Change."

         Other  Income.  Components  of  other  income  include  collections  on
         ------------- 
policies of dividends, interest, paid-up cash values, increases in face value of
matured  policies,  refunds of premiums on matured policies and realized capital
gains on investments securities.  Other income decreased 68.1% in 1997 over 1996
due primarily to a decrease in the number of matured policies.  Other income was
also relatively high in 1996 due to an $80,000 aggregate  increase in face value
on two policies.

         Interest  Expense.  Interest expense decreased 9.6% in 1997 compared to
         -----------------
1996 due mainly to the repayment of indebtedness. There were no borrowings under
the Company's  revolving credit facility in 1997 compared to average  borrowings
of $800,000 in 1996. The revolving  credit facility was repaid and terminated in
August 1996.  Average  borrowings under the Securitized Notes were $39.3 million
in 1997  compared  to  $42.7  million  in the  1996.  The  interest  rate on the
Securitized Notes was 9.17% in both periods.

         Compensation and Benefits.  Compensation and benefits decreased 3.7% in
         -------------------------
1997  compared to 1996.  This  decrease was due mainly to the reduction in staff
with the cessation of application processing of new policies.  Subsequent to the
AIDS Conference,  the number of employees  decreased from 27 on July 16, 1996 to
15 at December  31,  1996.  Partially  offsetting  the staff  reduction  was the
increase in  compensation  and benefits for remaining  employees  (including the
Executive Officers) in 1997. The Company had 15 employees at December 31, 1997.

         Other   General  and   Administrative   Expenses.   Other  general and 
         ------------------------------------------------
administrative  expenses  increased 6.2% in 1997 compared to 1996. This increase
is  primarily  the result of  $412,000  in legal  expenses  recorded  in 1997 in
connection  with federal and state alleged class action  lawsuits  filed against
the Company and its  officers  and  directors  and  $151,000 in  increased  life
insurance policy premium costs recorded in 1997.  Partially  offsetting this was
an  aggregate  reduction in the amount of $405,000  consisting  of a decrease in
general legal expenses,  professional fees and the elimination of medical review
costs  associated  with  the  Company's  former  viatical  settlement  business.
Notwithstanding the increase in premium costs, such premium costs were reflected
in the reduction of the reserve for loss on investment in wholly owned financing
subsidiary. As a result, such increased premium costs did not impact net income.

         Amortization.  Amortization  costs  decreased 46.6% in 1997 compared to
         -------------
1996  primarily  because the Company  prepaid its revolving  credit  facility in
August 1996 and as a result wrote off unamortized  financing charges of $130,000
related to this facility in the third quarter of 1996.  All periods  include the
amortization of deferred financing costs for DPFC.

         Provision  for Loss on Assets Held for Sale.  The  Company  recorded in
         -------------------------------------------
1996 a  provision  for loss on sale of assets  totaling  $3.1  million  based on
management's  estimate  of proceeds  from the sale of  policies.  The  provision
equaled  the  difference  between  the  carrying  value of  policies  and  those
estimates.  The estimates  were based on the life  expectancies  of the insureds
covered by the policies,  the estimated  sale period and the prices  obtained by
the Company in  connection  with other sales of policies.  In 1997,  the Company
recorded an additional  provision in the 

                                       18

<PAGE>


amount of $328,000 in connection with the remaining policies not yet sold, based
on  management's  revised  best  estimate  of  proceeds  from  the  sale of such
policies.

         Loss on Investment in Wholly Owned Financing Subsidiary.  A reserve was
         ------------------------------------------------------- 
recorded in 1996 in the amount of $6.9 million to reflect the estimated  loss of
Point West's entire equity  interest in DPFC.  Point West had an initial capital
investment  in DPFC of $2.9 million and,  through  consolidation,  an additional
$4.0 million of increased  equity  attributable to the earnings of DPFC. See "--
Certain Accounting Implications for DPFC."

         Income Tax  Expense.  In 1997 the Company  recorded  $4,000 for minimum
         -------------------
state income taxes. The Company only recorded this minimum income tax expense on
the income statement  because the deferred tax asset of $3,805,100 was available
to offset any income tax liability. The Company adjusted its deferred tax asset,
liability  and related  allowance  to reflect the tax effect on the earnings for
1997.

         Net loss in Wholly Owned  Financing  Subsidiary  Charged to Reserve for
         ----------------------------------------------------------------------
Equity  Interest.  At  December  31,  1997 and 1996 the  reserve to reflect  the
----------------
estimated  loss of Point West's entire equity  interest in DPFC was $2.3 million
and $6.5 million,  respectively.  The DPFC net loss of $3.9 million and $488,000
recorded in 1997 and 1996, respectively,  was included in the Company's net loss
before  income  taxes,  minority  interest  of limited  partners  in earnings of
investment partnership and net loss in wholly owned financing subsidiary charged
to reserve for equity  interest.  This loss was charged  against the reserve for
equity interest in wholly owned financing  subsidiary.  For a description of the
composition of such reserve,  see "Loss on Investment in Wholly Owned  Financing
Subsidiary" above.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
---------------------------------------------------------------------

         Earned Discounts.  The Company purchased 475 policies with an aggregate
         ----------------
face value of $33.1 million  during the year ended December 31, 1996 compared to
the  purchase of 386  policies  with an  aggregate  face value of $29.7  million
during  1995.  Of the 475  policies  purchased  in 1996,  133  policies  with an
aggregate  face value of $8.1 million  were  purchased in the second half of the
year.  Earned  discounts on life insurance  policies  decreased  46.4% from $6.9
million during 1995 to $3.7 million through June 30, 1996.

         Effective  June 30, 1996,  the Company  reclassified  all of its assets
(other  than the  policies  held by DPFC) to a "held  for  sale"  category.  The
Company also  established  a reserve to reflect  estimated  loss of Point West's
equity  interest  in DPFC  because  of the  uncertainties  created  by the  data
presented at the AIDS  Conference and  subsequently  reported data. As a result,
beginning  on July 1, 1996,  the  Company  began  recognizing  income  only upon
receipt  of  proceeds  on  policies  (pursuant  to the  death  of the  insured).
Consequently,  the  Company  did not  recognize  any  earned  discounts  on life
insurance  policies  during  the second  half of 1996,  but  instead  recognized
$980,000 of earned discounts on matured policies for such period. Such income is
equal to the  difference  between  the  proceeds  the  Company  received  on the
policies  (less  any back end  sourcing  fees)  and the  carrying  value of such
policies  after  giving  effect  to any  reserve  for  loss on the  sale of such
policies.  See Notes 1e,  1f, 4 and 11 to the  Notes to  Consolidated  Financial
Statements.  In  addition,  in  connection  with  the  decision  to sell  all or
substantially  all of the  Company's  assets,  in the third  quarter of 1996 the
Company recognized $802,000 of earned discounts on prior maturities. Such earned
discounts were carried on the balance sheet at June 30, 1996 as unearned  income
which related to policies for which the Company had collected the proceeds prior
to the expected  collection  date.  The Company has not had earned  discounts on
prior  maturities  since the third  quarter of 1996 and will have none in future
periods.

         Interest Income.  Interest income increased dramatically (193%) in 1996
         ----------------
as a result of the  investment  of the  February  1996 initial  public  offering
proceeds in short term  securities and marketable  securities.  Interest  income
decreased  during  1996 as such  funds  were  used to  purchase  life  insurance
policies and for other working capital purposes.
See Note 10 of Notes to Consolidated Financial Statements.

                                       19


<PAGE>

         Gain  (Loss) on Assets  Sold.  The total net loss  recorded  in 1996 on
         ----------------------------
assets sold was $180,000.  On August 2, 1996,  the Company sold 58 policies held
by Dignity Viatical and two other policies to an unaffiliated  third party. This
transaction resulted in a pre-tax loss of approximately  $300,000. Also recorded
in 1996,  was a gain  totaling  $120,000  on  proceeds  collected  in respect to
policies sold  pursuant to a sale  agreement.  The realized gain was  calculated
based on the  difference  between  the sale value and the  carrying  value after
giving effect to the reserve for loss on sale of assets.

         Other  Income.  Other  income  increased  during  1996  due  mainly  to
         -------------
collections on a relatively larger portfolio and a $80,000 aggregate increase in
face value on two policies.

         Interest  Expense.  Interest expense increased 17.6% to $4.0 million in
         ------------------ 
1996 from $3.4  million in 1995 as a result of the  relatively  higher  level of
portfolio purchases and the increase in borrowings used to fund those purchases.
Average  borrowings  under the  Securitized  Notes  were  $42.7  million in 1996
compared to $26.7 million in 1995.  The interest rate on the  Securitized  Notes
decreased  to 9.2% in October  1995 from 9.5%.  Borrowings  under the  Company's
revolving  credit  facility  bore a dollar  weighted  interest rate of 12.1% and
13.6% in 1996 and 1995,  respectively.  Average borrowings were $800,000 in 1996
compared  to $4.2  million in 1995.  See Notes 6 and 7 of Notes to  Consolidated
Financial  Statements,  "Liquidity and Capital  Resources" and  "Description  of
Securitized Notes" for further  information  regarding the Securitized Notes and
revolving credit facility.

         Compensation and Benefits. Compensation and benefits increased 41.8% in
         -------------------------
1996  compared  to 1995 due to the  hiring of  additional  personnel  in 1996 to
handle the  administrative  tasks  relating to the Company's  relatively  larger
portfolio and non-broker referral business and to support the Company's relative
growth in the first six months of 1996.  Subsequent to the AIDS  Conference  and
the cessation of new application  processing,  the number of employees decreased
from 27 on July 16, 1996 to 15 at December 31, 1996.

         Other   General  and   Administrative   Expenses.   Other  general  and
         ------------------------------------------------   
administrative  expenses  increased 56.0% to $1,388,000 in 1996 from $890,000 in
1995. Expenses for legal, accounting,  insurance,  director fees and advertising
increased in 1996 an aggregate of $483,000, in part as a result of the Company's
status  as a public  company,  activities  related  to the  special  meeting  of
stockholders  of the Company held in December 1996 and new business  development
activities. Additionally, because the Company ceased processing applications for
policies  insuring  individuals  with AIDS and HIV,  approximately  $110,000  of
medical review costs associated with such policies in the  underwriting  process
were expensed in 1996.  The Company also recorded in 1996 a one-time  expense of
$92,000 to recognize the fair value of warrants  issued to Jefferies to purchase
up to  300,000  shares of  Common  Stock.  See Note 16 of Notes to  Consolidated
Financial Statements.

         Amortization. Because the Company prepaid its revolving credit facility
         ------------
in August 1996,  the Company  incurred a charge in the third  quarter of 1996 of
$130,000 as a result of writing off the unamortized financing charges related to
that facility.

         Provision  for loss on assets held for sale.  The  Company  recorded in
         -------------------------------------------
1996 a  provision  for loss on sale of assets  totaling  $3.1  million  based on
management's  estimate  of proceeds  from the sale of  policies.  The  provision
equaled  the  difference  between  the  carrying  value of  policies  and  those
estimates.  The estimates  were based on the life  expectancies  of the insureds
covered by the policies,  the estimated  sale period and the prices  obtained by
the  Company in  connection  with  other  sales of  policies.  For  purposes  of
calculating  such loss  provisions,  furniture and equipment  were valued on the
assumption that miscellaneous office equipment had no sales value.

         Loss on investment in wholly owned financing subsidiary. As of June 30,
         -------------------------------------------------------
1996,  the Company had an initial  capital  investment  recorded of $2.9 million
and,  through  consolidation,  an  additional  $4.0 million of increased  equity
attributable  to the  earnings of DPFC.  A reserve  was  recorded in 1996 in the
amount of $6.9  million to reflect the  estimated  loss of Point  West's  entire
equity interest in DPFC. See "-- Certain Accounting Implications for DPFC."

                                       20

<PAGE>


         Income Taxes.  Income tax expense decreased in 1996 over the comparable
         ------------
period in 1995.  This decrease was a result of the loss provision on assets held
for sale and equity loss of wholly owned financing subsidiary recorded in 1996.

         Minority  Interest  of  Limited  Partners  in  Earnings  of  Investment
         ----------------------------------------------------------------------
Partnership. All earned discounts attributable to the former limited partners of
-----------
Dignity  Viatical had been fully  accrued by December  31, 1995 and,  therefore,
minority interest of limited partners in earnings of investment  partnership was
zero for 1996 compared to $568,000 for 1995.

         Net loss in wholly owned  financing  subsidiary  charged to reserve for
         ----------------------------------------------------------------------
equity  interest.  In the fourth  quarter of 1996, the DPFC net loss of $488,000
----------------
was included in the Company's net loss before  income taxes,  minority  interest
and net loss in wholly owned financing  subsidiary charged to reserve for equity
interest.  This loss was charged against the initial reserve for equity interest
in wholly owned financing  subsidiary which was recorded in the third quarter of
1996.

Liquidity and Capital Resources
-------------------------------

         Other than any debt  borrowings  that may be available to Fourteen Hill
Capital through the SBA, the Company does not currently have an external funding
source.  Although Fourteen Hill Capital's license as a SBIC permits it to obtain
debt  from the  federal  government,  because  one of  Fourteen  Hill  Capital's
investments  represents an amount greater than 20% of its regulatory capital (at
February  28,  1998 this  investment  constituted  40% of  regulatory  capital),
Fourteen Hill Capital will not be able to access such debt until it liquidates a
portion of such investment or increases its regulatory capital.  The Securitized
Notes do not provide funds with which to fund  operations.  Allegiance is in the
process  of  negotiating  an  external  funding  facility  to  support  its loan
activity.  There can be no assurance that  Allegiance will be
able to  obtain  external  funding  or that  any such  funding  will be on terms
acceptable to the Company.

         At December 31, 1997, cash and cash  equivalents were $10.0 million and
investment  securities  was $5.8 million.  The Company  continues to analyze its
current and future needs for  financing,  which will be dependent on its ability
to develop the  businesses of Fourteen Hill Capital and Allegiance and any other
strategic  direction.  There  can be no  assurance  that  the  Company  will  be
successful in obtaining  external  financing on  satisfactory  terms assuming it
determines  it  needs  additional  funds.   However,   the  Company  at  present
anticipates  having  sufficient  liquidity to meet its capital  commitments  and
working capital and operational  needs through 1998, using current cash and cash
equivalents and investment securities.

         As of  December  31,  1997,  the  outstanding  principal  amount of the
Securitized  Notes was $38.8 million.  Principal  repayments on the  Securitized
Notes began in July 1996.  Principal  and interest  payments on the  Securitized
Notes are payable  solely  from  collections  on policies  pledged to secure the
payment  thereof  and do not  require  the  Company  to  expend  cash or  obtain
financing to satisfy such principal and interest obligations. See Notes 1f and 7
of the Notes to Consolidated Financial Statements.

Description of  Securitized Notes
---------------------------------

         The  Securitized  Notes were issued in 1995 pursuant to the  Indenture,
which provided for a maximum  lending  commitment of $50.0  million,  subject to
reduction of the commitment  amount or early  amortization  in April 1996 if the
outstanding  principal  balance  of the  Securitized  Notes was less than  $50.0
million.  Funds  advanced  under the  Securitized  Notes were used  primarily to
purchase  eligible policies which are pledged as collateral under the Indenture.
Prior to the Amortization  Date,  proceeds from collected policies pledged under
the Indenture  were  available to purchase  additional  policies.  Repayments of
principal  were  originally  scheduled  to begin  in  September  1996.  An early
amortization  event  occurred  in June 1996  with the  result  that the  maximum
lending commitment

                                       21


<PAGE>

was reduced to the then outstanding  balance ($45.5 million) from $50.0 million,
the Company  lost the ability to use proceeds of policy  collections  to acquire
additional  policies and principal  repayments on the Securitized Notes began in
July 1996. The Securitized  Notes bear interest at a fixed annual rate of 9.17%.
The principal amount of the Securitized Notes to be repaid in any month is equal
to  proceeds of  policies  collected  during the  preceding  month less  certain
required  monthly  payments (such as interest and servicing and trustee fees) to
be paid on such date.

         Although the Company and the Noteholders have had discussions about the
possible sale of policies  pledged under the  Indenture,  the Indenture does not
provide for the sale of any of the policies pledged thereunder.  Therefore,  any
such sale would require the consent of the Company and the Noteholders.

         The ownership  interest in policies purchased by DPFC is nominally held
by an unaffiliated  third party trustee under the Indenture but the policies are
beneficially  owned by DPFC. The Company accounts for this  securitization  as a
debt  financing  and not as a sale of assets,  which is in  accordance  with the
accounting literature in effect for bankruptcy remote entities with non-recourse
debt. The assets,  liabilities  and operations of DPFC are  consolidated  in the
Company's consolidated financial statements.

         The Indenture contains certain covenants  restricting the activities of
DPFC. Such covenants  include  provisions which (i) prohibit DPFC from incurring
debt other than trade  payables and expense  accruals and granting  liens unless
such action  would not cause  Standard & Poor's to  downgrade  or  withdraw  the
rating  it  assigned  to the  Securitized  Notes,  and (ii)  prohibit  DPFC from
engaging  in any  business  other  than  the  acquisition,  ownership,  sale and
pledging  of the pool of  pledged  policies  (the  "Pool")  and the other  trust
estate, the issuance and sale of the Securitized Notes and activities incidental
to the foregoing.  In addition, DPFC is required to maintain in an account under
the  Indenture  (the  "Liquidity  Account") a balance of 10% of the  outstanding
principal  balance of the Securitized  Notes.  Subject to certain  restrictions,
funds in the Liquidity Account may be used to pay, among other things, servicing
and trustee fees,  principal and interest and taxes. Events of default under the
Indenture  include  (i) a default in payment of  principal  or  interest  on the
Securitized  Notes when due,  (ii) a default by DPFC in the  performance  of any
material  covenant or a material breach of a representation  or warranty of DPFC
which is not cured  within  30 days,  and (iii)  certain  events of  bankruptcy,
insolvency and reorganization involving DPFC.

         Point  West  acts  as  servicer  under  the  Indenture  pursuant  to  a
Contribution,  Sale and Servicing  Agreement  (the  "Servicing  Agreement")  and
receives monthly,  pursuant and subject to the terms of the Indenture,  a fee of
$36,000  until the earlier to occur of  collection of the face value of the last
policy in the Pool or payment in full of the  Securitized  Notes.  Point West is
required  under the Servicing  Agreement to monitor each policy and to cause the
collection and remittance to the trustee of the face value of matured  policies.
Point West pays all expenses related to such monitoring and collection services,
including  paying  premiums and back-end  fees,  and is  reimbursed  for certain
expenses.  All  amounts  owed to  Point  West  pursuant  to the  monitoring  and
collecting activities are subject to availability of cash after payment of other
priority amounts as provided in the Indenture.  The Servicing Agreement contains
certain   covenants   restricting   Point  West's   activities,   including  (i)
restrictions  on mergers,  (ii)  provisions  related to respecting  the separate
legal  status of DPFC,  (iii) a  requirement  that no person  will own a greater
percentage  of the  aggregate  voting power of equity  securities  of Point West
entitled to vote in the election of directors than the  percentage  collectively
beneficially  owned by the  Executive  Officers  and no  person  other  than the
Executive Officers will own more than 20% of such aggregate voting power, (iv) a
requirement that the Executive Officers  constitute a majority of the Board, and
(v) a requirement that Point West employ at least two of the Executive  Officers
(or such other  personnel  reasonably  acceptable to the  Noteholders)  in their
respective  current  capacities.  An event  of  default  will  occur  under  the
Servicing Agreement if, among other things, (i) an event of default occurs under
the   Indenture,   or  (ii)  certain   events  of   bankruptcy,   insolvency  or
reorganization  occur with respect to Point West. If an event of default  occurs
under the Servicing Agreement,  Point West can be replaced as servicer under the
Indenture. The back-up servicer is the trustee under the Indenture.

                                       22

<PAGE>

Other
-----

         Based  on  a   preliminary   study,   the  Company   expects  to  spend
approximately  $50,000  to  $100,000  from 1998 to 1999 to modify  its  computer
information  systems enabling proper processing of transactions  relating to the
year 2000 and beyond  ("Year  2000  Compliant").  Amounts  expensed in 1997 were
immaterial.  The Company continues to evaluate appropriate courses of corrective
action, including replacement of certain systems whose associated costs would be
recorded  as assets and  depreciated.  The  Company  does not expect the amounts
required to be expensed over the next two years to have a material effect on its
financial position or results of operations.  The Company is also in the process
of reviewing whether or not its suppliers and vendors are Year 2000 Compliant.

Forward Looking Statements
--------------------------

         This report includes forward looking  statements  within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements made herein
which are not based on historical  facts are forward  looking and,  accordingly,
involve  risks and  uncertainties  that  could  cause  actual  results to differ
materially from those discussed.  Such forward looking  statements include those
relating to (i) the ability of the Company to sell any  remaining  policies held
for sale (See "Business -- Asset Sales; Viatical Settlement Business"), (ii) the
ability  of the  Company  to find new  successful  business  opportunities  (See
"Business -- Consideration of Strategic Options"), (iii) the ability of Fourteen
Hill  Capital to find  profitable  investments  which range from  $500,000 to $1
million (See  "Business  -- Small  Business  Investments"),  (iv) the ability of
Allegiance  to  originate  loans (See  "Business  -- Loans to Funeral  Homes and
Cemeteries"),  and (v) those  under  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations" relating to (a) face and carrying
values  of  policies  expected  to  continue  to be  owned by the  Company,  (b)
expectations  regarding  whether  and the time at which the  equity of DPFC will
become  negative  (see  "Certain   Accounting   Implications  for  DPFC"),   (c)
sufficiency of the Company's liquidity and capital resources (see "Liquidity and
Capital  Resources"),  and (d) expected expenses to make the Company's  computer
operations  Year 2000  compliant.  Such  statements  are  based on  management's
belief,  judgment and analysis as well as  assumptions  made by and  information
available to management at the date hereof.  In addition to any  assumptions and
cautionary  factors  referred to  specifically in this report in connection with
such forward  looking  statements,  factors  that could cause actual  results to
differ  materially from those  contemplated  by the forward  looking  statements
include (i) the level of success of Allegiance  and Fourteen Hill Capital,  (ii)
increased  competition to make loans to owners of funeral homes and  cemeteries,
(iii) the amount and timing of actual collections of DPFC policies following the
death of the  insured,  (iv)  the  results  of the  Company's  consideration  of
strategic   options  and  any  costs  associated  with  a  chosen  option,   (v)
availability  and  cost of  capital,  and  (vi)  the  ability  of the  Company's
suppliers and vendors to become Year 2000 compliant.

ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
--------------------------------------------------------------------

     Not required for fiscal 1997 because the Company's market capitalization 
 was less than $2.5 billion as of January 28, 1997.

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

     See pages 24 through 44.

ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
---------------------------------------------------------
                 ACCOUNTING AND FINANCIAL DISCLOSURE
                 -----------------------------------

     None.

                                       23


<PAGE>



KPMG Peat Marwick LLP
Three Embarcadero Center
San Francisco, CA 94111


                          Independent Auditors' Report
                          ----------------------------

The Board of Directors and Stockholders of
Point West Capital Corporation:

We have  audited  the  accompanying  consolidated  balance  sheets of Point West
Capital  Corporation,  as of  December  31,  1997  and  1996,  and  the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the years in the  three-year  period  ended  December  31,  1997.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Point West Capital
Corporation as of December 31, 1997 and 1996,and the results of their operations
and  their  cash  flows  for each of the years in the  three-year  period  ended
December 31, 1997, in conformity with generally accepted accounting principles.


                                       KPMG PEAT MARWICK LLP
San Francisco, California
February 26, 1998

                                       24

<PAGE>





                         POINT WEST CAPITAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996


<TABLE>
<CAPTION>

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

<S>                                                                                   <C>                     <C>    
Cash and cash equivalents                                                  $          10,039,560   $          6,586,447
Restricted cash                                                                        3,756,714              4,625,663
Investment securities (note 2)
           Held-to-maturity                                                            2,220,000                     --
           Available-for-sale                                                          3,597,343                     --
Matured policies receivable (note 1m)                                                    305,435              1,181,513
Loans receivable, net of unearned income of $59,884
           and $0, respectively (note 1d, 1m and 3)                                    4,015,716                     --
Assets held for sale (note 1e and 4)                                                     129,334             11,520,103
Purchased life insurance policies (note 1f)                                           36,586,788             41,246,239
Investment in convertible preferred shares (note 5)                                    1,658,478              3,000,000
Deferred financing and organizational costs, net of
           accumulated amortization of $621,884 and
           $381,690, respectively (note 1g)                                              525,433                681,910
Furniture and equipment, net of accumulated depreciation of
           $341 and $0, respectively (note 1h)                                             6,862                     --
Other assets                                                                             127,590                102,598
                                                                             --------------------   --------------------

           Total assets                                                    $          62,969,253  $          68,944,473
                                                                             ====================   ====================

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued expenses                                                           $             183,150  $             190,894
Accounts payable                                                                         216,851                320,577
Accrued compensation payable                                                             193,000                186,390
Payable for policies purchased (note 1m)                                                      --                427,553
Reserve for equity interest in wholly owned financing
           subsidiary (note 1f)                                                        2,300,037              6,452,589
Long term notes payable  (note 7)                                                     38,804,107             41,218,205
Deferred income taxes  (note 1i and 8)                                                     6,000                  6,000
                                                                             --------------------   --------------------
                                                                             

           Total liabilities                                                           41,703,145             48,802,208
           
                                                                             --------------------   --------------------

Stockholders' equity:
           Common  stock,  $0.01  par  value;   15,000,000   authorized  shares,
                4,291,824 and 4,291,824 shares, respectively, issued
                3,253,324 and 4,146,824 shares, respectively, outstanding                 42,918                 42,918
           Additional paid-in-capital                                                 29,496,720             29,496,720
           Net unrealized investment gains (note 2 and 8)                              2,597,239                     --
           Retained deficit                                                           (7,996,737)            (9,007,373)
           Treasury stock, 1,038,500 and 145,000 shares,
                respectively (note 10)                                                (2,874,032)              (390,000)
                                                                             --------------------   --------------------

           Total stockholders' equity                                                 21,266,108             20,142,265
                                                                             --------------------   --------------------

           Total liabilities and stockholders' equity                      $          62,969,253  $          68,944,473
                                                                             ====================   ====================

<FN>



          See accompanying notes to consolidated financial statements.
</FN>

</TABLE>


                                       25




<PAGE>



                         POINT WEST CAPITAL CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              For the Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                      1997             1996            1995
                                                                  --------------   --------------  --------------
<S>                                                                   <C>              <C>             <C>    


Income:
     Earned discounts on life insurance policies (note 11)        $          --     $  3,697,032   $   6,933,318
     Earned discounts on prior maturities (note 11)                          --          802,471              --
     Earned discounts on matured policies (note 11)                     488,563          979,611              --
     Interest income                                                  1,183,919          783,115         266,979
     Net gain on sale of convertible
           preferred shares (note 5)                                    679,665               --              --
     Gain (loss) on assets sold (note 4)                              1,463,080         (179,548)             --
     Other                                                              102,663          322,141         189,079
                                                                  --------------   --------------   -------------- 
                                                                                                   
           Total income                                               3,917,890        6,404,822       7,389,376

Expenses:
     Interest expense                                                 3,599,487        3,983,606       3,352,178
     Compensation and benefits                                        1,151,574        1,196,291         843,646
     Other general and administrative expenses                        1,474,916        1,388,338         889,816
     Amortization (note 1g and 6)                                       240,194          449,631         273,543
     Depreciation (note 1h)                                                 341           19,967          34,653
     Provision for loss on assets held for sale (note 1e and 4)         328,236        3,139,588              --
     Loss on investment in wholly owned financing
           subsidiary (note 1f)                                              --        6,940,189              --
                                                                  --------------   --------------  --------------
           Total expenses                                             6,794,748       17,117,610       5,393,836
                                                                  --------------   --------------  --------------

           Income (loss) before income taxes, minority interest
              and net loss in wholly owned financing subsidiary
              charged to reserve for equity interest                 (2,876,858)     (10,712,788)      1,995,540

Income tax (expense) benefit (note 8)                                    (4,000)         525,711        (624,510)

Minority interest of limited partners in earnings
     of investee (note 1c and 9)                                            --                --        (567,831)

Net loss in wholly owned financing subsidiary charged
     to reserve for equity interest (note 1f)                         3,891,494          487,600              --

                                                                  --------------   --------------  --------------
           Net income (loss)                                    $     1,010,636  $    (9,699,477) $      803,199
                                                                  ==============   ==============  ==============


Basic earnings (loss) per share (note 12)                                  0.29            (2.46)           0.51
Diluted earnings (loss) per share (note 12)                                0.28            (2.46)           0.42

Weighted average number of shares of common stock
     outstanding (note 12)                                            3,521,736        3,942,166       1,589,324
Weighted average number of shares of common stock
     and common stock equivalents outstanding (note 12)               3,605,674        3,942,166       1,902,482


<FN>
          See accompanying notes to consolidated financial statements.

</FN>
</TABLE>

                                       26

<PAGE>

                         POINT WEST CAPITAL CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>                
                                                                                    Net
                                                                     Additional  unrealized  Retained               
                                                                                                                                   
                          Preferred Stock        Common Stock        paid-in     investment  earnings       Treasury
                          ------------------     --------------
                          Shares    Amount     Shares      Amount    -capital      gains    (deficit)        Stock         Total
                          ------- ----------  ---------   -------    ----------  ---------  ------------  ------------  -----------
 
<S>                        <C>      <C>        <C>        <C>       <C>            <C>       <C>          <C>             <C>      



January 1, 1995            34,880  $3,488,013  1,589,324   $15,893 $   669,594  $       -- $  (111,095)  $        --   $ 4,062,405
Issuance of preferred
 stock dividend               380          --         --        --          --          --          --            --            --  
Net income                     --          --         --        --          --          --     803,199            --       803,199
                           -------- ----------  ---------  --------  ---------   ---------  ------------  ------------  -----------
Balances at December 31,
  1995                     35,260   $3,488,013  1,589,324  $15,893 $   669,594  $       -- $   692,104   $        --   $ 4,865,604
Issuance of preferred 
  stock dividend              580           --         --       --          --          --          --            --            --
Issuances of common stock
     (February 1996)      (35,840)  (3,488,013) 2,702,500   27,025  28,734,956          --          --            --    25,273,968
Purchase of treasury stock     --           --         --       --          --          --          --      (390,000)     (390,000)
Grant of warrants 
 (September 1996)              --           --         --       --      92,170          --          --            --        92,170
Net loss                       --           --         --       --          --          --  (9,699,477)           --    (9,699,477)
                           -------- ----------  --------- --------  ----------   ---------  ------------ ------------  ------------
Balances at December 31, 
 1996                          --   $       --  4,291,824  $42,918 $29,496,720  $       -- $(9,007,373)  $  (390,000)  $20,142,265
                           -------- ----------  --------- --------  -----------  ---------  ------------ ------------  ------------
Net unrealized investment
 gains                         --           --         --       --          --   2,597,239          --            --     2,597,239
Purchase of treasury stock     --           --         --       --          --          --          --    (2,484,032)   (2,484,032)
Net income                     --           --         --       --          --          --   1,010,636            --     1,010,636
Balances at December 31,  --------  ----------  ---------  -------- ----------- ----------  ------------ ------------  ------------
 1997                          --   $       --  4,291,824  $42,918 $29,496,720  $2,597,239 $(7,996,737)  $(2,874,032)  $21,266,108
                          ========= ==========  =========  ======== =========== ==========  ============ ============  ============

<FN>
          See accompanying notes to consolidated financial statements.

</FN>
</TABLE>


                                       27

<PAGE>



                         POINT WEST CAPITAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>




                                                                  1997                     1996                    1995
                                                              --------------------    ---------------------   ---------------------
<S>                                                           <C>                               <C>              <C>

Cash flows for operating activities:
  Net income (loss)                                        $            1,010,636    $          (9,699,477) $              803,199
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
      Depreciation and amortization                                       240,535                  469,599                 308,196
      Loss (gain) on assets                                            (1,463,080)                 191,851                      --
      Net gain on sale of convertible preferred shares                   (679,665)                      --                      --
      Provisions for loss on sale of assets                               328,236                3,139,587                      --
      Warrants granted to consultants                                          --                   92,170                      --
      Increase in accounts receivable                                          --                       --                  (6,036)
      Earned discounts on policies                                       (488,563)              (5,479,114)             (6,933,318)
      Purchase of life insurance policies                                (882,848)             (23,912,464)            (22,276,717)
      Collections on matured life insurance policies                    6,051,149               15,523,569              13,103,920
      Increase (decrease) in unearned income on policies                       --                 (715,883)                 86,175
      Decrease (increase) in other assets                                 (25,096)                 (15,519)                (76,251)
      Increase (decrease) in deferred taxes                                    --                 (525,711)                623,690
      Increase (decrease) in accrued expenses                              (7,744)                (138,933)                149,827
      Increase (decrease) in accounts payable                            (103,726)                 (56,627)                343,839
      Increase (decrease) in IPO financing costs payable                       --                 (306,900)                306,900
      Increase (decrease) in payable to related party                          --               (1,482,170)                769,475
      Increase (decrease) in accrued compensation payable                   6,610                 (662,758)                274,148
      Increase (decrease) in reserve for equity interest in wholly
                owned financing subsidiary                             (3,891,494)               6,452,589                      --
      Increase in minority interest                                            --                       --                 567,329

                                                                 ----------------          ----------------        ----------------
             Net cash provided by (used in) operating activities           94,950              (17,126,191)            (11,955,624)
                                                                 ----------------          ----------------        ----------------
Cash flows from investing activities:
 Proceeds from sale of assets held for sale                            12,692,793                6,533,523                      --
 Purchase of furniture and equipment                                       (7,203)                  (6,776)                (37,235)
 Decrease (increase) in restricted cash                                   868,949                  (58,818)             (4,459,832)
 Increase in investment securities                                     (3,220,000)                      --                      --
 Increase in loans receivable                                          (4,015,716)                      --
 Sale (purchase) of investment in convertible preferred stock           2,021,187               (3,000,000)                     --
                                                                 ----------------           ----------------       ----------------
            Net cash provided by (used in) investing activities         8,340,010                3,467,929              (4,497,067)
                                                                 ----------------           ----------------       ----------------

Cash flows from financing activities:
 Proceeds from long term notes payable                                         --                6,375,000              39,105,138
 Principal payments on long term notes payable                         (2,414,098)              (4,261,933)                     --
 Proceeds from other long term debt                                            --                5,540,132              22,701,070
 Principal payments on other long term debt                                    --               (6,984,402)            (39,703,752)
 Distribution to limited partners                                              --                 (783,313)             (3,083,171)
 Purchase of limited partners' interest in invetment partnership               --               (5,081,184)                     --
 Principal payment on loan from stockholder                                    --               (1,162,170)                     --
 Proceeds from issuances of common stock                                       --               25,273,968                      --
 Purchase of treasury stock                                            (2,484,032)                (390,000)                     --
 Increase in financing and organizational costs                           (83,717)                 (88,000)               (790,544)
 IPO financing costs                                                           --                       --                (750,000)
 Reimbursement of IPO financing costs                                          --                  750,000                      --
                                                                 ----------------           ----------------       ----------------

            Net cash (used in) provided by financing activities        (4,981,847)              19,188,098              17,478,741
                                                                 ----------------           ----------------       ----------------

            Net increase in cash and cash equivalents                   3,453,113                5,529,836               1,026,050

Cash and cash equivalents, beginning of period                          6,586,447                1,056,611                  30,561
                                                                 ----------------           ----------------       ----------------
Cash and cash equivalents, end of period                   $           10,039,560    $           6,586,447  $            1,056,611
                                                                 ================           ================       ================

Supplemental disclosures:
Supplemental disclosure of non-cash activities:
    Unrealized gain on securities available for sale       $            2,597,239    $                   -- $                   --
                                                                 ================           ================       ================
Supplemental disclosure of cash flow information:
    State taxes paid                                       $               40,233    $                6,389 $                3,367
                                                                 ================           ================       ================
    Cash paid for interest                                 $            3,607,231    $            4,113,703 $            2,901,685
                                                                 ================           ================       ================

<FN>
                                  
          See accompanying notes to consolidated financial statements.

                                     
</FN>
</TABLE>

                                    28

<PAGE>
     
                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements

                        December 31, 1997,1996 and 1995
 

1.       Summary of Significant Accounting Policies
         ------------------------------------------

         a.  General Description
             -------------------
       
         Point West Capital  Corporation  (formerly  known as Dignity  Partners,
Inc.)  ("Point  West")  and its  consolidated  entities  (the  "Company"),  is a
specialty financial services company.  Until February 1997, the Company provided
viatical  settlements for terminally ill persons.  A viatical  settlement is the
payment of cash in return for an ownership interest in, and right to receive the
death  benefit  (face  value)  from, a life  insurance  policy.  Upon a viatical
settlement,  the policyholder  assigned his or her policy to the Company,  which
became the holder, owner or certificate holder of the policy and the beneficiary
thereunder  with the right to receive from the insurance  company the face value
payable under the policy following the death of the insured.

         On July 16,  1996,  in response to  accounts  of the  research  results
reported  at the  International  AIDS  Conference  held  in  Vancouver,  British
Columbia in July 1996 (the "AIDS Conference"), the Company announced that it was
temporarily  ceasing the  processing of new  applications  to purchase  policies
insuring the lives of  individuals  diagnosed with HIV and AIDS while it further
analyzed the effects on its business of such  research  results.  Results from a
number of studies were reported  which  appeared to indicate that the treatments
involving  a  combination  of various  drugs were  reducing  substantially,  and
perhaps  eradicating,  the  levels of HIV  detectable  in the  blood of  persons
previously  diagnosed with HIV and AIDS.  Subsequent reports appeared to confirm
the reports from the AIDS Conference. On December 16, 1996, the Company obtained
stockholder approval to sell all or substantially all of its assets. The Company
has sold or is pursuing the sale of all of its policies other than those held by
DPFC (as defined herein). The Company believed that it was not viable to operate
a viatical  settlement  business solely for non-AIDS policies while a market for
non-AIDS policies  developed,  if it developed at all. As a result, the Board of
Directors (the "Board") in February 1997 decided to cease the Company's viatical
settlement business.

         Subsequent  to  February  1997,  the  Company  has  sought  to become a
broad-based  specialty  financial services company. To that end, the Company has
expanded its financial services business through the formation and investment in
other  entities,   including  Fourteen  Hill  Management,  LLC  ("Fourteen  Hill
Management")  and Fourteen Hill Capital,  L.P.  ("Fourteen  Hill Capital") which
invest in small  businesses,  and Allegiance  Capital,  LLC  ("Allegiance")  and
Allegiance  Funding Corp. I ("Allegiance  Funding")  which loan funds to funeral
home and cemetery owners.  The Company  continues to service the life insurance
policies held by its wholly owned special purpose  subsidiary,  Dignity Partners
Funding   Corp.  I  ("DPFC"),   and  to  evaluate   other   strategic   business
opportunities.

         Point West was  incorporated  in the State of Delaware on  September 8,
1992 as Dignity Partners,  Inc.  Effective August 1, 1997, Point West's name was
changed to Point West Capital Corporation.

         b.  Accounting Principles
             ---------------------

         The  consolidated  financial  statements  are  presented on the accrual
basis of accounting in conformity with generally accepted accounting principles.
The Company has not presented the viatical settlement business as a discontinued
operation  because a substantial  portion of the Company's assets are related to
the viatical  settlement  business.  The sale of policies  held by DPFC,  all of
which are  pledged as  security  for the  Securitized  Notes,  will  require the
consent  of  the  Company  and  the  holders  of  the  Securitized   Notes  (the
"Noteholders").  The Company has discussed potential sales of DPFC policies with
the Noteholders; however, the Company has not determined

                                       29

<PAGE>


                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements

                         
whether it will decide to sell such policies and cannot  determine  whether the
Noteholders will consent to such a sale or whether such a sale is feasible.

         c.  Principles of Consolidation
             ---------------------------

         The Company consolidates the assets,  liabilities and operations of its
wholly owned special purpose subsidiary, DPFC.

         The Company also consolidates the assets, liabilities and operations of
Fourteen Hill Management, a wholly owned limited liability company, and Fourteen
Hill  Capital,  a related  limited  partnership,  both  formed on June 3,  1997.
Fourteen Hill Capital commenced operations in August 1997 by providing a loan to
one  unaffiliated  entity and providing  equity capital to another  unaffiliated
entity in the aggregate amount of $1.25 million.  Fourteen Hill Capital received
its small business  investment  company ("SBIC") license from the Small Business
Administration   (the  "SBA")  effective   September  26,  1997.  Fourteen  Hill
Management is the sole general partner of Fourteen Hill Capital and owns 99.956%
of the  partnership  interests.  Point West is one of two  limited  partners  of
Fourteen Hill Capital and owns 0.04% of the partnership interests. The remaining
0.004% of the partnership interest is owned by one unaffiliated limited partner.
Point West capitalized Fourteen Hill Management with $5.0 million. Fourteen Hill
Management has committed  $5.0 million of capital to Fourteen Hill Capital,  and
through  December 31, 1997,  had invested $2.5 million in Fourteen Hill Capital.
At present,  Fourteen Hill Capital does not have any  outstanding  debt from the
SBA and the Company  believes  that,  until  Fourteen Hill Capital  liquidates a
portion of one of its investments or increases its regulatory capital,  Fourteen
Hill Capital will not be eligible to incur debt from the SBA.

         On  September  5,  1997,  the  Company  formed  Allegiance,  a  limited
liability company,  to provide senior secured loans to funeral home and cemetery
owners.  Point  West  has a 54%  equity  interest  and  95%  voting  control  in
Allegiance  and  serves  as the  managing  member  of  Allegiance.  Allegiance's
president and vice  president of marketing,  each of whom was hired in September
1997,  have the balance of such  interests,  which were deemed by the Company to
have a de minimis  value as of December 31, 1997.  In 1997,  Point West made the
only  capital  contribution  to  Allegiance  in  the  amount  of  $3.9  million.
Allegiance  owns  100%  of  Allegiance  Funding,  which  is  a  special  purpose
subsidiary   formed  to  facilitate  the  potential   securitization   of  loans
consummated by Allegiance.  The Company consolidates the assets, liabilities and
operations of Allegiance and Allegiance Funding. Allegiance commenced operations
in the fourth  quarter  of 1997 and at  December  31,  1997 had one loan (in the
principal amount of $3.8 million) and one commitment (in the principal amount of
$2.1  million)  outstanding.  See Note 13b. Net profits of  Allegiance  for each
calendar  year will be  allocated  first to Point  West in an amount  equal to a
return of 10% per  annum,  compounded  monthly,  on the  amount  of its  capital
contribution,  but not in  excess of such net  profits.  Any  shortfall  will be
carried  forward  indefinitely  to the next  calendar year or years in which net
profits are sufficient to make such allocation. An additional 5% return for each
calendar  year will be allocated  first to Point West to the extent that in each
year sufficient profits are available with no carry forward provided.

         Through June 1996,  Point West was the sole general  partner of Dignity
Viatical Settlement Partners, L.P. ("Dignity Viatical"),  a limited partnership.
Because  Point  West  controlled  the  partnership  (see  Note 9),  the  assets,
liabilities and operations of the partnership were consolidated with the assets,
liabilities  and  operations  of the  Company,  and the  interests of the former
limited  partners  were  reflected  as a minority  interest in the  accompanying
financial  statements  through  December 31, 1995. On June 25, 1996,  Point West
purchased  all of the limited  partnership  interests  in Dignity  Viatical  for
approximately  $5.2 million  which  resulted in an  elimination  of the minority
interest on the balance sheet.

                                       30

<PAGE>

                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements

                       
         d.  Loans Receivable
             ----------------

         Loans are stated at the principal amount  outstanding,  net of unearned
income.  Interest is accrued on the  outstanding  balances for all loans.  Since
there were only a few loans  outstanding  at  December  31,  1997,  the  Company
evaluated the loans and determined that a specific reserve was not necessary. As
the  loan  portfolios  grow,  general  reserves  will  be  added  to the  extent
considered necessary. See Note 3.

         e.  Assets Held For Sale
             --------------------

         As a result of the Company's  decision to sell all or substantially all
of its assets, the Company  reclassified during the third quarter of 1996 all of
its  assets  other  than  the  assets  of  DPFC to a  "held-for-sale"  category.
Accordingly,  such assets are  recorded on the balance  sheet as of December 31,
1997 and 1996 at the lower of carrying  value or fair value less  estimated cost
to sell. In connection therewith,  the Company established a reserve for loss on
sale of assets  during the quarter  ended  September  30,  1996 and  recorded an
additional reserve at September 30, 1997. See Note 4.

         f.  Purchased Life Insurance Policies
             ---------------------------------

         Through  June  30,  1996,  the  Company   recognized   income  ("earned
discount") on each  purchased  policy by accruing,  over the period  between the
acquisition date of the policy and the Company's estimated date of collection of
the face  value of the  policy  (the  "Accrual  Period"),  the  difference  (the
"unearned  discount")  between (a) the death benefit  payable (face value) under
the policy less the amount of fees,  if any,  payable to a referral  source upon
collection of the face value, and (b) the carrying value of the policy.  Through
June 30, 1996, the carrying value for each policy was reflected on the Company's
consolidated  balance  sheet  under  "purchased  life  insurance  policies"  and
consisted of the purchase price, other capitalized costs and the earned discount
on the policy  accrued to the balance  sheet date.  The Company  capitalized  as
incurred the following costs of a purchased policy:  (i) the purchase price paid
for the  policy,  (ii)  policy  premiums,  if any,  paid by the  Company,  (iii)
amounts,  if any, paid to referral  sources upon  acquisition  of the policy and
(iv) amounts paid to  Company-retained  physicians or other medical  consultants
("Consultants")  who estimated the insured's life expectancy.  The length of the
Accrual Period was determined by the Company based upon its estimate of the date
on which it would collect the face value of the policy.  Such estimate was based
upon the Company's estimate of the life expectancy of the insured,  after review
of the medical records of the insured by one or more  Consultants,  and was also
adjusted to reflect the historical  accuracy of the life expectancies  estimated
by the Company's  Consultants and the typical period (collection period) between
the date of an insured's  death and the date on which the Company  collected the
face value of the policy.

         The unearned  discount  was accrued  over the Accrual  Period using the
"level yield"  interest  method.  Under the "level yield" method,  the yield was
held constant such that when the yield was applied to the carrying  value of the
policy on a compounded basis over the course of the Accrual Period, the unearned
discount was fully accrued as earned discount by the end of the Accrual Period.

         Beginning in the third  quarter of 1996,  the Company  began  generally
recognizing income with respect to its viatical settlement business upon receipt
of proceeds on policies  (either  pursuant to sale of the policy or the death of
the insured). Such income is equal to the difference between such proceeds (less
any back-end sourcing fees) and the carrying value of such policies after giving
effect to any reserve  for loss on the sale of such  policies.

         Effective July 1996,  purchased life insurance  policies consisted only
of those  policies held by DPFC. The sale of policies held by DPFC, all of which
are pledged as security for the Securitized  Notes,  will require the consent of
the Company and the  Noteholders.  The Company has discussed  potential sales of
DPFC  policies with the  Noteholders;  however,  the Company has not  determined
whether it will decide to sell such policies and cannot

                                       31


<PAGE>

                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements


determine whether the Noteholders would consent to such a sale or whether such a
sale is  feasible.  A reserve was  recorded in the third  quarter of 1996 in the
amount of $6.9  million to reflect the  estimated  loss of Point  West's  equity
interest in DPFC.  As of December 31, 1997 and 1996 the reserve was $2.3 million
and $6.5 million,  respectively.  The reserve  provides for the write-off of the
unrealized residual value associated with DPFC.

         Only the net assets of DPFC are  available  to satisfy the  Securitized
Notes.  Point West did not guarantee the obligations  owed under the Securitized
Notes.  However,  to the  extent  that the  losses  of DPFC  exceed  its  equity
(creating  a deficit),  the deficit  would be recorded by the Company as a loss.
Upon the  retirement  of the  Securitized  Notes at less  than book  value,  the
Company  would  recognize  a gain  for  the  difference  which  is  expected  to
approximate the deficit of DPFC.

         g.  Deferred Financing and Organizational Costs
             -------------------------------------------

         Costs were  incurred to obtain debt  financing for the  acquisition  of
insurance   policies.   These  costs  have  been   deferred  and  are  amortized
straight-line over the respective terms of the financing arrangements.  In 1997,
financing and  organizational  costs of $50,000 were incurred in connection with
Fourteen  Hill Capital and $29,000 was incurred in connection  with  Allegiance.
These costs have been deferred and are amortized  straight-line over five years.
At December 31, 1997 and 1996 the total  deferred  financing and  organizational
cost was $525,000 and $682,000.

         h.  Furniture and Equipment
             -----------------------

         As a result of the Company's  decision to sell all or substantially all
of its assets,  furniture  and equipment at December 31, 1996 were valued on the
assumption that miscellaneous office equipment had no sales value. Furniture and
equipment  purchased in late 1997 in support of the Company's expanded financial
services business are stated at purchased cost net of accumulated  depreciation.
Depreciation  is provided on a  straight-line  basis over the  estimated  useful
lives of the assets, which is generally five years.

         i.  Income Taxes 
             ------------

         The Company  accounts  for income  taxes using the asset and  liability
method.  Under  the  asset  and  liability  method,   deferred  tax  assets  and
liabilities   are   recognized  for  the  estimated   future  tax   consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets  and  liabilities  and their  respective  tax basis  (temporary
differences). Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date of the tax change.

         Deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards,  and then a valuation allowance
is established to reduce that deferred tax asset if it is "more likely than not"
that the related tax benefits will not be realized in future years. See Note 8.

         j.  Cash and Cash Equivalents
             -------------------------

         The Company considers as cash equivalents all highly liquid investments
with an original maturity of three months or less.


                                       32

<PAGE>


                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements



         k.  Concentration of Credit Risk
             ----------------------------

         Financial  instruments  that  subject the Company to  concentration  of
credit risk consist primarily of receivables from insurance  companies which are
the obligors under insurance  policies owned by the Company.  As of December 31,
1997,  the  aggregate  face value of  policies  issued by any one  insurer  with
respect to the  Company's  portfolio of insurance  policies  approximated  8% of
total assets.

         Other financial  instruments  that subject the Company to concentration
of credit risk include a loan made by  Allegiance to an  unaffiliated  entity in
the amount of $3.8 million,  which  approximated  6% of total assets at December
31, 1997.

         l.  Earnings Per Share
             ------------------

         Statement  of  Financial  Accounting  Standards  No. 128,  Earnings per
Share,  was issued in February  1997 ("SFAS No. 128") and is effective for years
ending after December 15, 1997. Under this approach,  earnings per share ("EPS")
is to be  calculated  and  reported  as two  separate  calculations:  Basic EPS,
similar to the  previous  primary  earnings  per share  excluding  common  stock
equivalents;  and,  Diluted EPS,  similar to the previous fully diluted earnings
per share. EPS is calculated using the average number of Common Stock and Common
Stock  equivalents  outstanding.  Common  Stock  equivalents  for  1997  include
employee stock options,  non-employee director stock options and warrants issued
to Jefferies & Company,  Inc.,  the  investment  banking firm which  advised the
Company in connection with strategic options, which do not have an anti-dilutive
impact.  EPS for 1996 do not include stock  equivalents due to the anti-dilutive
effect.  Common  Stock  equivalents  for 1995  include  shares  issued  upon the
conversion into Common Stock of outstanding shares of the Company's  Convertible
Cumulative  Pay-in-Kind Preferred Stock (the "Convertible Preferred Stock"). The
outstanding  shares of  Convertible  Preferred  Stock were converted into Common
Stock in February 1996. See Note 12.

         m.  Terminology
             -----------

         Matured policies  receivable  represents policies for which the Company
has received notification that the insured has died and for which the Company is
awaiting collection of the face value.

         Payable  for  policies  purchased  represents  policies  for  which the
Company has become the holder,  owner or certificate  holder of the policy,  and
the beneficiary thereunder, but at the request of the insured or a related party
payment is deferred for a short period.

         Loans  receivable  on the balance  sheet at December 31, 1997 is net of
unearned income.  Unearned income represents fees paid to Allegiance  related to
loans and  commitment  fees collected by Allegiance for loans that have not been
funded by year end.

          n.  Profit Sharing Plan
              -------------------

         Point West has a profit  sharing plan (the  "Plan") for its  employees.
Each  employee who has been employed for at least one year becomes a participant
in the Plan. The Plan provides for discretionary  annual  contributions by Point
West for the  account  of each  participant.  In any  year in which  the Plan is
"top-heavy"  within the meaning of the Internal  Revenue Code (the "Code"),  the
Plan requires, consistent with the Code, that a minimum contribution be made for
non-key  employees.  The contribution is allocated among  participants  based on
their  compensation under an allocation formula integrated with Social Security.
Participants  vest  20% in their  Plan  accounts  after  two  years  of  service
(excluding  any service prior to 1993) and an  additional  20% after each of the
next four years of service.  Upon termination  following permanent disability or
on retirement at age 65, all amounts

                                       33

<PAGE>


                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements


     credited to a participant's  account are  distributed,  in a lump sum or in
     installments,  as directed  by the  participant.  Upon  death,  all amounts
     credited to a participant's account become fully vested and are distributed
     to the participant's surviving spouse or designated beneficiary. Each year,
     profit sharing contributions, if any, are determined by the Board. The Plan
     contribution  expenses  which are  included in  compensation  and  benefits
     during 1997, 1996 and 1995 were $86,000, $70,190 and $89,505, respectively.

         o.  Use of Estimates
             ----------------

         Management   of  the  Company  has  made  a  number  of  estimates  and
assumptions  relating  to the  reporting  of  assets  and  liabilities  and  the
disclosure  of contingent  assets and  liabilities  to prepare  these  financial
statements in conformity with generally accepted accounting  principles.  Actual
results could differ from those estimates.

         p.  Stock-Based Employee Compensation
             ---------------------------------

         The Company applies APB Opinion No. 25 in accounting for its two stock
compensation  plans. No compensation  cost has been recognized for these plans.
See Note 16.

         q.  Recent Accounting Developments
             ------------------------------

         During 1997, the Financial  Accounting  Standards Board ("FASB") issued
Financial  Accounting  Standard No. 130 ("SFAS  130"),  Reporting  Comprehensive
                                                        -----------------------
Income.  SFAS 130 is effective  with the  year-end  1998  financial  statements;
------
however,  the total comprehensive income is required in the financial statements
for interim  periods  beginning in 1998. FASB also issued  Financial  Accounting
Standard No. 131 ("SFAS 131"),  Disclosure  About  Segments of An Enterprise and
                                -----------------------------------------------
Related  Information.  SFAS 131 is effective  with the year-end  1998  financial
--------------------
statements. Management will comply with the disclosure requirements.

2.    Investment Securities
      ---------------------

         Financial Accounting Standards No. 115 ("SFAS No. 115"), Accounting for
                                                                  -------------
Certain Instruments in Debt and Equity Securities,  requires marketable debt and
-------------------------------------------------
equities to be classified into held-to-maturity,  available-for-sale and trading
categories.  Securities classified as held-to-maturity are reported at amortized
cost and  available-for-sale  securities  are reported at fair market value with
unrealized gains and losses as a separate component of stockholders'  equity net
of applicable taxes.  There were no trading securities at December 31, 1997. Any
realized  gains  and  losses,  declines  in value  of  securities  judged  to be
other-than-temporary  and accrued  interest and dividends on all securities will
be reported in the income statement as recognized.

                                       34



<PAGE>

                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements




         There were no investment  securities in 1996.  The amortized  costs and
estimated  fair value of  investment  securities  as of December 31, 1997 are as
follows:

<TABLE>
<CAPTION>


                                                            Gross            Gross
                                      Amortized Cost   Unrealized Gains    Unrealized
                                                                              Loss          Fair Value

<S>                                   <C>               <C>                <C>               <C>    


      Held-to-maturity
           Corporate bonds           $     2,220,000   $        75,000   $      (5,000)    $     2,290,000
                                     ---------------   ---------------   --------------    ---------------
      Total-held-to-maturity         $     2,220,000   $        75,000   $      (5,000)    $     2,290,000

      Available-for-sale
           Common stock              $       903,181   $     1,355,153   $          --     $     2,258,334
           Warrants                  $        96,819   $     1,242,190   $          --     $     1,339,009
                                     ---------------   ---------------   ---------------    ---------------                       
      Total available-for-sale       $     1,000,000   $    2,597,343     $         --     $     3,597,343                     
                                                                
                                                                
      
</TABLE>
                                                                         

         The Company  classifies  debt  securities for which it has the positive
intent and ability to hold to maturity as  held-to-maturity.  All investments in
debt  securities  classified  as  held-to-maturity  at  December  31,  1997 have
maturity  dates  ranging  from  one  to  five  years.   Warrants  classified  as
available-for-sale  have  expiration  dates ranging from one to five years.  The
value of the warrants was determined using the Black-Scholes Model.

         Unrealized  gains  on   available-for-sale   securities   (representing
differences  between  estimated fair market value and cost of $2.6 million) were
credited to a separate component of stockholders'  equity called "Net Unrealized
Investment Gains."

3.       Loans Receivable
         ----------------

         Loans  receivable  includes  loans made to  unaffiliated  third parties
through  Allegiance  and  Fourteen  Hill  Capital.  Such loans are  reported  at
amortized cost and interest is accrued as earned. All loans at December 31, 1997
were current and no reserves were considered necessary as of such date.

         Allegiance  provides  senior secured loans to funeral home and cemetery
owners. The loan outstanding at December 31, 1997 bore a fixed interest rate per
annum of  approximately  9.4% and matures in  approximately  fifteen  years with
monthly principal payments.

         Fourteen Hill Capital provides financing to small businesses.  The loan
outstanding at December 31, 1997 bore a fixed interest rate per annum of 14% and
matures in approximately five years. See Note 17.

                                       35

<PAGE>

                         Point West Capital Corporation

                   Notes to Consolidated Financial Statememts




4.       Assets Held for Sale and Related Sale Agreements
         ------------------------------------------------

         As a  result  of  the  Company's  decision  in  1996  to  sell  all  or
substantially  all of its assets,  it  reclassified  all assets owned as of such
date, other than the assets of DPFC, to a "held-for-sale" category. Accordingly,
such assets are  recorded on the balance  sheet as of December 31, 1997 and 1996
at the lower of carrying  value or fair value less  estimated  cost to sell.  In
connection with the decision to sell assets,  the Company  established a reserve
for loss on sale of assets in 1996 and  reevaluates  such reserve each  quarter.
During the third quarter of 1997, the Company recorded an additional  reserve in
the amount of $328,000 as a result of  difficulties  encountered  with insurance
companies  as  described  below in  transferring  the  ownership of 14 policies.
Assets held for sale consist of:

                              Assets Held for Sale
                              ====================

<TABLE>
<CAPTION>


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

<S>                                                           <C>                      <C>    


   Capitalized costs                                          $ 525,697               $ 14,089,124
   Earned discounts on life insurance policies                    2,482                    380,692
   Reserve for loss on sale                                    (398,845)                (2,949,713)
                                                             ----------------        -----------------
   Assets held for sale                                       $ 129,334               $ 11,520,103
                                                             ===============         =================

</TABLE>


         The calculation of reserve for loss on sale was calculated based on the
life  expectancy of the insured under each policy in relation to prices obtained
by the Company in  connection  with other  sales,  management's  estimate of the
current  saleability  of such policy,  the type of policy  (e.g.,  term or whole
life), the age of the insured and the premiums on such policy.  Any gain or loss
due to the difference  between actual proceeds (less any back end sourcing fees)
and the carrying  value after  giving  effect to the reserve for loss on sale of
assets is  reported  as a realized  gain or loss on assets  sold at the time any
sale proceeds are received.

         Through  December 1997, the Company entered into several  agreements to
sell portions of its portfolio of policies. None of the purchasers thereunder is
affiliated  with the  Company  or any of its  directors  or  officers.  The sale
agreements   provided  for  the  sale,  upon  the  issuing  insurance  company's
acknowledgment of transfer of ownership,  of an aggregate of 373 policies having
an aggregate face value of $29.2 million. Through December 31, 1997, the sale of
348 policies with an aggregate face value of $28.4 million had been consummated,
of which 104 policies with an aggregate  face value of $8.5 million were sold in
1996  (resulting  in a  realized  loss of  $180,000)  and 244  policies  with an
aggregate face value of $19.9 million were sold in 1997 (resulting in a realized
gain of $1.5 million).  Eleven policies covered by the sales agreements were not
sold  because  the  insured  died  prior  to  the  issuing  insurance  company's
acknowledgment  of transfer of ownership of the policy and the Company collected
the death benefit instead of selling these policies.

         The  policies  representing  "assets  held  for  sale"  consist  of the
policies under the  aforementioned  sales agreements.  The remaining 14 policies
(representing approximately $937,000 in face amount) were carried on the balance
sheet at December 31, 1997 at $129,000  after  giving  effect to the reserve for
loss on assets held for sale. The Company  experienced delays or difficulties in
transferring  the ownership of the remaining 14 policies and, due to contractual
provisions in the related sales agreements, the sales of these policies were not
consummated. However, the Company is pursuing other alternatives for the sale of
these policies.

5.       Investment In Convertible Preferred Shares
         ------------------------------------------

         On  November  4, 1996,  Point  West  purchased  21,517,100  convertible
preferred  shares for $3.0 million  (representing  a less than 50%  interest) in
American Information Company,  Inc. ("American  Information"),  a privately held
company which, among other things,  provides information services to individuals
owning or 

                                       36

<PAGE>


                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements


     purchasing automobiles. On March 18, 1997, Point West converted 8.2 million
     shares of  convertible  preferred  stock into 8.2 million  shares of common
     stock  of   American   Information and sold  such   non-marketable   shares
     (approximately   38%  of  Point  West's   equity   investment  in  American
     Information) to an unaffiliated third party for $1.83 million.  The Company
     recognized a $700,000  pre-tax gain on this transaction in 1997. Point West
     had  an  option  that  expired  on  October  26,  1997  to  purchase,   for
     approximately  $1.1 million,  8.2 million additional shares of common stock
     of American  Information.  Since Point West did not exercise this option, a
     $20,000 pre-tax loss was recognized in 1997. The Company  accounts for this
     investment using the cost method.


6.       Revolving Credit Facility
         ------------------------- 

         Until August 1996,  the Company had a revolving  credit  facility  with
advances  collateralized  by a security  interest in substantially  all of Point
West's assets (including  policies).  Interest under the credit facility accrued
on  outstanding  advances at the lender's  governing  rate plus 5.25 percent for
amounts not in excess of $2,000,000 and at the lender's governing rate plus 2.75
percent  for amounts in excess of  $2,000,000.  In the course of  obtaining  the
credit facility,  the Company  incurred and deferred total financing  charges of
$671,008 which were subsequently  reduced to $519,904 in February 1995, with the
issuance of the Senior Viatical  Settlement  Notes. This reduction in the amount
of  $151,104  of  financing  charges  was  transferred  to the  Senior  Viatical
Settlement  Notes and amortized.  Of the deferred  amount,  $94,042 and $118,617
were  amortized in the periods ended  December 31, 1996 and 1995,  respectively.
The Company  terminated  the facility on August 29, 1996 at which time it repaid
principal and accrued  interest in the amount of $3,301,328.  In connection with
such  repayment,  the Company  wrote off the remaining  $130,000 of  unamortized
financing costs.

7.       Long Term Notes Payable
         -----------------------

         The Senior Viatical  Settlement Notes,  Series 1995-A,  Stated Maturity
March 10, 2005 (the "Securitized Notes") issued by DPFC initially provided for a
maximum lending commitment of $50 million.  As a result of an early amortization
event in June 1996,  the  maximum  lending  commitment  was  reduced to the then
outstanding  principal  amount  ($45.5  million) and  principal  payments on the
Securitized  Notes began in July 1996.  Principal  and interest  payments on the
Securitized  Notes are payable solely from  collections on pledged  policies and
deposited funds. The Securitized Notes are reported on the balance sheet as long
term notes payable.  The  Securitized  Notes bear a fixed interest rate of 9.17%
per annum.

         The Securitized  Notes  represent the  obligations  solely of DPFC. The
Company's consolidated financial statements include the assets,  liabilities and
operations  of  DPFC;  however,  the  assets  of DPFC are not  available  to pay
creditors  of  Point  West.  The  assets  of DPFC are the  beneficial  ownership
interests in the life insurance  policies and funds which secure the Securitized
Notes.  However,  to the  extent  that the  losses  of DPFC  exceed  its  equity
(creating  a deficit),  the deficit  would be recorded by the Company as a loss.
Upon the  retirement  of the  Securitized  Notes at less  than book  value,  the
Company  would  recognize  a gain  for  the  difference  which  is  expected  to
approximate  the deficit of DPFC.  At December 31, 1997,  the equity of DPFC was
$2.3 million.

         Point West is the servicer of the policies  pledged under the indenture
pursuant  to which the  Securitized  Notes  were  issued  and  incurs  servicing
expenses  (which  are  reimbursed,  subject  to certain  priority  payments)  in
connection therewith.


                                       37



<PAGE>


                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements


8.       Income Taxes
         ------------ 

         The  components  of  the  provision  for  income  tax  included  in the
statements of operations for the years ended December 31, are as follows:

<TABLE>
<CAPTION>



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

                <S>                                              <C>               <C>                <C>    
                Federal:
                     Current (benefit)expense..............  $    --           $        --      $         --
                                    
                     Deferred (benefit) expense...........        --              (210,113)          432,196
                State:                                                                                                            
                     Current (benefit) expense .............   4,000                    --                --
                     Deferred (benefit) expense ...........       --              (315,598)          192,314
                                                            ------------        ------------      -------------
                                                                                                               
                                                                                                                             

                Total tax (benefit) expense...............   $ 4,000           $  (525,711)      $   624,510
                                                            =============     ==============      =============
</TABLE>
                

         The tax effects of temporary  differences that give rise to significant
portions of the deferred tax assets and deferred tax  liabilities as of December
31, are presented  below.  Amounts for the current year are based upon estimates
and assumptions as of the date of this report and could vary  significantly from
amounts shown on the tax returns as filed.  Accordingly,  the variances from the
amounts  previously  reported for 1996 are primarily a result of  adjustments to
conform to tax returns as filed.
<TABLE>
<CAPTION>

                                                                                            1997                1996
                                                                                             ----                ----
      
                      <S>                                                                      <C>                <C>   

          Deferred tax assets:
                         Revenue and expenses recognized on the cash
                            basis for tax purposes.......................................    $ 236,218        $    277,989
                          Depreciation, amortization and other...........................       14,965              20,169   
                          Provision for assets held for sale.............................      158,878           1,133,159
                          Provision for loss on investment in subsidiary ................      916,206           2,466,359
                          Net operating loss carryforwards...............................    4,116,990           2,505,842
                                                                                            --------------   -----------------
                                                                                             5,443,257           6,403,518
                          Valuation allowance ..........................................    (1,638,157)         (3,202,828)
                                                                                            --------------   ----------------- 
                          Deferred tax assets net of valuation allowance ..............      3,805,100           3,200,690

                Deferred tax liabilities:
                          Unrealized gain on securities available for sale                   1,034,522                 --          
                          Accretion recognized on a cash basis for tax purposes              2,776,578           3,206,690
                                                                                           -----------------  ------------------
                                                                                             3,811,100           3,206,690
                                                                                           -----------------  ------------------
                Net deferred tax asset (liability).....................................   $    (6,000)         $   (6,000)
                                                                                            ===============    =================
</TABLE>
                                                                               
                                                                                
         Prior to  September  30,  1996,  the Company had  provided for deferred
income taxes related to income  accrued on purchased  life  insurance  policies.
Based on the  provision  for loss on sale of assets  and the  reserve to reflect
estimated  loss of Point West's equity  interest in DPFC,  the Company  believes
that it does not have a federal tax  liability  related to these  assets and has
therefore  reversed all related  liabilities for 1996. The Company believes that
it does not  have a  federal  tax  liability  for  1997 as a  result  of the net
operating loss carry forward.  The Company has recorded a deferred tax liability
related to the unrealized appreciation for the marketable equity securities. The
Company has also  provided for  miscellaneous  state income  taxes.  A valuation
allowance has been recorded  equivalent to the portion of the deferred tax asset
for which  management  cannot  conclude that it is more likely than not that the
deferred tax asset will be realized.


                                       38


<PAGE>


                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements



         The difference  between the statutory income tax rate and the Company's
effective tax rate for the years ended December 31, are as follows:

<TABLE>
<CAPTION>


                                                                    1997              1996               1995
                                                                    ----              ----               ----
                    <S>                                           <C>                 <C>                 <C>    

               Tax expense at statutory rate (34%).........       344,976         $(3,476,564)       $ 678,484
                State taxes net of federal benefits.........      189,173            (627,622)         126,927
                Minority interest of limited partners.......           --                   --        (193,063)
                Change in valuation allowance (1)...........     (530,149)           3,431,001              --
                Other.......................................           --              147,474          12,162
                                                                 ----------        -------------      -------------   
                    Total tax (benefit) expense               $     4,000         $   (525,711)      $ 624,510
                                                                 ==========        =============      =============
                                                                           
</TABLE>
                                                                 
---
(1)      Note:  $1,034,522  of the change in tax  valuation  allowance  has been
         reflected  in the  statement  of  changes  in  stockholders  equity  in
         connection with the unrealized  gain on securities  available-for-sale.
         The   remaining   reduction  of  $530,149  is  based  on   management's
         determination  that the resulting  deferred assets are more likely than
         not to be realized.

         At December  31,  1997,  the Company has an  estimated  federal tax net
operating loss  carryforward of $11,151,894  expiring in the years 2009 to 2012,
and a California tax net operating loss carryforward of approximately $5,576,348
expiring in the years 1999 to 2002.

9.       General Partner Interests in Dignity Viatical Settlement Partners, L.P.
         ---------------------------------------------------------------------- 

         In 1993, Point West formed Dignity Viatical, a limited partnership, for
the purpose of financing the purchase of additional life insurance policies. The
capital  contributions  to  Dignity  Viatical  aggregated   approximately  $10.1
million.  Point  West,  as the  general  partner,  had a 1%  interest in Dignity
Viatical  and was  entitled to a  preference  in  distributions  of $233,597 for
providing   management  services   (management  fee)  during  the  life  of  the
partnership   (originally   estimated  to  be  approximately   four  years  from
formation).  Management  fees were  allocated to Point West as follows:  For the
years ended December 31, 1996 and 1995 -- $89,753 and $59,848, respectively. The
assets,  liabilities and operations of Dignity  Viatical have been  consolidated
with  those  of the  Company  for  presentation  in the  consolidated  financial
statements.  Point West, as the general partner of Dignity Viatical,  controlled
the operations of the partnership.  The minority interest  reflected in the 1995
consolidated  statement of operations  represents the former  limited  partners'
interest  in the net assets and income of Dignity  Viatical.  On June 25,  1996,
Point West  purchased  all of the limited  partnership  interests of the limited
partners in Dignity  Viatical for  approximately  $5.2  million.  This  purchase
resulted in the  elimination  of minority  interest and net income in connection
with  Dignity  Viatical on the balance  sheet and income  statement on and after
June 30, 1996.

         Summarized  financial  information  with  respect to  Dignity  Viatical
follows:
<TABLE>
<CAPTION>

                                                                 December 31   December 31
                                                                    1996         1995

                    <S>                                           <C>            <C>    


                   Total income.............................    $  269,300      $1,024,402
                   Total expense............................    $ (137,110)     $ (301,027)
                                                                -----------     ------------
                                     Net income.............    $  132,190      $   723,375
                                                                ==========      ===========
</TABLE>
                   
                                       39

<PAGE>


                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements


10.      Common Stock
         ------------

         In February 1996, the Company  completed an initial public  offering of
an  aggregate  of  2,702,500  shares of Point  West  Common  Stock at the public
offering price of $12.00 per share. Of such shares, 2,381,356 shares were issued
and sold by Point West and 321,144 shares  (representing all shares issuable and
issued  pursuant to the conversion in full of the Convertible  Preferred  Stock)
were sold by Bradley Rotter,  a director and Chairman of the Board.  The Company
did not receive any proceeds of the shares sold by Bradley Rotter.

         The Company  received the following  proceeds from the offering and 
such proceeds had been applied in 1996 for the following purposes:
<TABLE>
                        <S>                                           <C>                   <C>    

             Proceeds:
                         Proceeds, net of underwriters' discount   $26,575,933
                         Less offering expenses                     (1,301,965)
                                                                   ------------
                   Net Proceeds                                                            $25,273,968
                                                                                           ===========
             Uses:
                          Policy purchases                         $17,832,821
                          Payments to related party                  2,191,007
                          Accrued compensation payable                 833,750
                          Taxes on accrued and unpaid salaries          20,187
                          Repayment of other short term debt         1,162,170
                          Repayment of long term debt                3,234,033
                                                                     ----------    
                   Total uses                                                              $25,273,968
</TABLE>
                                                                              

        In October 1996, the Board approved a share repurchase program pursuant
to which  the  Company  was  authorized  to  purchase  from time to time up to 1
million shares of Common Stock at prevailing  market prices.  Such authority was
increased by the Board in June 1997 to 1.04 million  shares of Common Stock.  In
June  1997,  the  Company  completed  the  share  repurchase   program,   having
repurchased an aggregate of 1.04 million  shares at a weighted  average price of
$2.77 per share.

11.      Earned Discounts
         ----------------

         Earned  discounts  on life  insurance  policies  reflect  the amount of
accretion  recorded in the first six months of 1996 and for the twelve months of
1995.  With the  decision  to sell  all or  substantially  all of the  Company's
assets,  the unearned  discount  included in the unearned  income on the balance
sheet at June 30, 1996  relating to early  maturities on or before June 30, 1996
has now been recorded as earned discounts on prior maturities.  Any income since
the third  quarter  of 1996 has been  recorded  as earned  discounts  on matured
policies and recorded upon the notification of death of the insured.

12.      Earnings per Share
         ------------------

         SFAS No. 128 was issued in  February  1997 and is  effective  for years
ending  after  December 15,  1997.  The  Statement  specifies  the  computation,
presentation and disclosure  requirements for EPS. This Statement's objective is
to simplify the  computation of EPS and to make the U.S.  standard for computing
EPS more  compatible  with the EPS standards of other countries and with that of
the International Accounting Standards Committee. Under this approach, EPS is to
be calculated and reported as two separate  calculations:  Basic EPS, similar to
the previous primary earnings per share excluding common stock equivalents; and,
Diluted EPS, similar to the previous fully diluted earnings per share.

                                       40

<PAGE>

                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements




         The  weighted  average  number of common  stock  shares and  additional
common stock  equivalent  shares used in computing  earnings per share of common
stock are set forth below for the periods indicated.
<TABLE>
<CAPTION>


                                                                                   1997          1996          1995
                                                                                   ====          ====          ==== 

      <S>                                                                           <C>          <C>           <C>    


    Weighted average number of shares of common stock outstanding                3,521,736     3,942,166     1,589,324
    Additional common stock equivalents                                             83,938            --       313,158           
    Weighted average number of shares of common stock and                        ---------     ---------     ----------  
       common stock equivalents outstanding                                      3,605,674     3,942,166     1,902,482


</TABLE>


         Common Stock  equivalents  for 1997  include  employee  stock  options,
non-employee  director stock options and warrants issued to Jefferies & Company,
Inc.  which do not have an  anti-dilutive  impact.  EPS for 1996 do not  include
stock equivalents due to the anti-dilutive  effect. Common Stock equivalents for
1995 include the Convertible Preferred Stock.

13.      Commitments
         -----------

         a.  Leases
             ------

         The Company has a lease  obligation for its California  office space of
approximately  5,900 sq. ft. The lease expires on May 31, 1999,  and the monthly
rent is  $8,062,  of which the  Company  pays  $5,240 and The  Echelon  Group of
Companies, LLC ("New Echelon LLC") pays $2,822. Additionally,  the Company has a
lease obligation for its Nevada office space of 600 sq. ft. The lease expires on
September 30, 1998 and the monthly rent is $905.

         Future minimum rental  payments (less amounts to be paid by New Echelon
LLC) at December 31, 1997,  under  operating  leases with an initial term of one
year or more, are as follows:

            Year ended December 31, 1998 ..........     $    71,027
            Year ended December 31, 1999 ..........          26,202
            Year ended December 31, 2000 ..........              --
                                                        -----------
            Total .................................     $    97,229
           

         b.  Loans receivable
             ----------------

         Allegiance  issued a  commitment  letter on October  13, 1997 to make a
senior secured loan to an  unaffiliated  entity for $2.1 million.  This loan was
funded on January 7, 1998.

14.      Litigation
         ----------

         From time to time, the Company is involved in routine legal proceedings
incidental  to  its  business,  including  litigation  in  connection  with  the
collection of amounts owed by insurance company  obligors.  The Company does not
expect that these  proceedings,  individually  or in the aggregate,  will have a
material  adverse  effect on the  Company's  financial  position,  liquidity  or
results of operations.

         On  December  19,  1996,  a  complaint  was filed in the United  States
District  Court,  Northern  District of  California  (the  "Court")  (Docket No.
C96-4558)  against  Dignity  Partners,  Inc. and each of its  directors by three
individuals  purporting  to act on behalf of  themselves  and an  alleged  class
consisting of all  purchasers  of the  Company's  common stock during the period
February 14, 1996 to July 16, 1996.  The complaint  alleged that the  defendants
violated  Section  10(b) of the  Securities  Exchange Act of 1934 and Rule 10b-5
thereunder and Section

                                       41
<PAGE>
                         Point West Capital Coporation

                   Notes to Consolidated Financial Statements


11 of the  Securities  Act of 1933 and seeks,  among other things,  compensatory
damages,  interest,  fees and  costs.  The  allegations  were  based on  alleged
misrepresentations  in and omissions from the Company's  registration  statement
and  prospectus  related to its initial  public  offering and certain  documents
filed by the Company under the Exchange Act. On July 18, 1997, the Court granted
the  defendants'  motion to dismiss the complaint.  However,  the Court gave the
plaintiffs  permission to file an amended  complaint.  The  plaintiffs  filed an
amended  complaint  on  September 8, 1997 and on October 8, 1997 the Company and
other defendants filed a motion to dismiss the amended complaint. On December 5,
1997, the Court granted the defendants' motion to dismiss the amended complaint.
However,  the Court  gave the  plaintiffs  permission  to file a second  amended
complaint  in  connection  with claims  under  Section  10(b) of the  Securities
Exchange  Act of 1934 and Rule 10b-5  thereunder.  Following  an order  granting
permissive intervention of an additional plaintiff,  the plaintiffs were granted
leave to attempt to allege a claim  under  Section 11 of the  Securities  Act of
1933 in the second amended  complaint.  On March 2, 1998, the plaintiffs filed a
second  amended  complaint.  The  Company and each of the  defendants  intend to
continue to defend the action vigorously.

         On February 13, 1997,  a complaint  was filed in the Superior  Court of
California, City and County of San Francisco (Docket No. 984643) against Dignity
Partners,  Inc.,  and each of its  executive  officers and New Echelon LLC by an
individual  purporting  to  act on  behalf  of  himself  and  an  alleged  class
consisting of all  purchasers  of the  Company's  common stock during the period
February 14, 1996 to July 16, 1996.  The complaint  alleges that the  defendants
violated  section 25400 of the  California  Corporate  Code and seeks to recover
damages. The allegations are based on alleged misstatements,  concealment and/or
misrepresentations and omissions of allegedly material information in connection
with the Company's  initial  public  offering and  subsequent  disclosures.  The
Company and each of the defendants intend to defend the action vigorously.

15.      Fair Value of Financial Instruments
         -----------------------------------

         The following  methods and  assumptions  were used to estimate the fair
value of each class of financial instruments:

         Cash  and  cash   equivalents,   restricted   cash,   matured  policies
receivable,   accrued  expenses,  accounts  payable  and  payable  for  policies
purchased are stated at approximate  fair value because of the short maturity of
these instruments.
All balances have maturities within 60 days of the balance sheet date.

         Investment  securities  are stated at fair market value based on quoted
market prices.

         Loans  receivable  are stated at cost which  approximates  fair  market
value.

         Assets held for sale reflect management's estimate of fair market value
based on prices obtained by the Company in connection with other sales.

         The portfolio of purchased  life  insurance  policies is stated at cost
plus accretion through June 1996 which approximates fair market value.

         At December 31, 1997,  the long term notes  payable are stated at cost.
The long  term  notes  payable  bear an  fixed  interest  rate of 9.17%  and are
equivalent to newly acquired debt at 1% over prime interest rates.

16.      Stock-Based Compensation
         ------------------------

         The Company has two stock  option  plans.  Under the 1995 Stock  Option
Plan ("Employee Plan"),  Point West may grant options to its employees for up to
350,000  shares of common  stock.  Under the Stock Option Plan

                                       42
<PAGE>

                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements


For Non-Employee Directors ("Director Plan"), options for up to 75,000 shares of
common  stock may be  granted  to  non-employee  directors  of Point  West.  The
exercise  price of each  granted  option  equals the market  price of the Common
Stock on the date of grant,  with an  expiration  of ten years after grant date.
Under the Employee Plan,  granted options  generally vest 20% per year over five
years. Under the Director Plan, initially,  each new non-employee director, when
joining the board, is granted 10,000 options that vest over 3 years and then, at
each annual meeting, is granted 5,000 options that vest after one year.


         The fair value of each option is  estimated  on the date of grant using
the   Black-Scholes   option-pricing   model.  The  following   weighted-average
assumptions were used for grants in 1997:  expected volatility of 75%; risk-free
interest  rates of 5.8% for the Employee  Plan and 5.6% for the  Director  Plan;
expected  life of 7 years for the  Employee  Plan and 2 years  for the  Director
Plan. The following  weighted-average  assumptions were used for grants in 1996:
expected  volatility of 20%;  risk-free  interest rates of 6.3% for the Employee
Plan and 6.0% for the Director  Plan;  expected life of 7 years for the Employee
Plan and 4 years for the Director Plan. No options were granted in 1995.

<TABLE>
<CAPTION>

                                       1997                                              1996  
                                       ----                                              ----
                                    ================================          ===============================
                                                    Weighted-Average                        Weighted-Average
                                     Shares          Exercise Price           Shares          Exercise Price
                                     ------         ----------------          ------         ----------------         

<S>                                  <C>                    <C>               <C>                   <C>    


Outstanding at beginning of year     181,000                $ 3.33                 --                   --
Granted                               96,000                $ 3.44            407,000               $ 8.18
Exercised                                 --                    --                 --                   --
Forfeited                             (4,000)               $ 1.38            (75,000)              $ 12.18
Canceled                                  --                    --           (151,000)              $ 12.01
                                    ---------                                ---------
                                               
Outstanding at end of year           273,000                $ 3.40            181,000               $  3.33
                                     =======                                  =========

Options exercisable at year-end      58,533                 $ 6.20              6,667               $ 13.50
                                           
Weighted-average fair value of
     options granted during         $ 2.38                                    $ 3.11
     year
</TABLE>




         The following table  summarizes  information  about fixed stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>


                    Options Outstanding                            Options  Exercisable 
                    -------------------                            --------------------
           ----------------------------------------------- -----------------------------------------
          
                                          
                                            Weighted-A
    Range of             Number             Remaining         Weighted-Average           Number        Weighted-Average
   Exercisable         Outstanding at      Contractual Life      Exercise Price       Exercisable at     Exercise Price
     Prices              12/31/97                                                        12/31/97
  ------------         --------------      ----------------    ----------------       --------------   ------------------

     <S>                  <C>                <C>                   <C>                     <C>               <C>   


   $1.38 -  $1.38         147,000             8.00                  $ 1.38                30,200          $ 1.38
   $3.44 -  $3.44          96,000             9.90                  $ 3.44                 5,000          $ 3.44
  $12.38 - $13.50          30,000             8.00                  $13.13                23,333          $13.02
------------------        -------             ------                -------               -------         -------
  $1.38 -  $13.50          273,000            8.67                  $ 3.40                58,533          $ 6.20
                                                                            

</TABLE>

                                       43

<PAGE>

                         Point West Capital Corporation

                   Notes to Consolidated Financial Statements



         The Company applies APB Opinion No. 25 and related  Interpretations  in
accounting for its plans. Accordingly,  no compensation cost has been recognized
for its fixed stock option plans.  Had  compensation  cost for the Company's two
stock-based  compensation  plans been determined  consistent with FASB Statement
No. 123, the  Company's  net income (loss) and net income (loss) per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
          <S>                            <C>                      <C>                <C>                  <C>    


     Net income (loss)                    As reported          $   1,010,636    $    (9,699,477)    $     803,199
                                          Pro forma            $     799,444    $    (9,881,226)    $     803,199
     Basic earnings (loss) per share      As reported          $        0.29    $         (2.46)    $        0.51
                                          Pro forma            $        0.23    $         (2.51)    $        0.51
     Diluted earnings (loss) per share    As reported          $        0.28    $         (2.46)    $        0.42
                                          Pro forma            $        0.22    $         (2.51)    $        0.42
                                                                           
</TABLE>


         In addition to the above mentioned stock option plans, on September 16,
1996 Point West granted 300,000  warrants at a purchase price of $6.00 per share
to Jefferies & Company,  Inc. These  warrants are  exercisable  immediately  and
expire on September  16,  2001.  The expense for these  warrants was  determined
consistent with FASB Statement No. 123, and the Company's net income was reduced
by $92,167 in 1996.  The fair value of each  warrant is estimated on the date of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
weighted-average  assumptions:  expected  volatility of 20%;  risk-free interest
rate of 6.2%; and expected life of 5 years.

17.      Events Subsequent to the Balance Sheet Date
         -------------------------------------------

         On January 20, 1998, the small  business  entity to which Fourteen Hill
Capital  had  loaned  money  in 1997  paid  its  loan in full in the  amount  of
$250,000. The other small business entity in which Fourteen Hill had invested as
of December 31, 1997, issued a redemption  notice to call a warrant.  On January
26, 1998,  Fourteen  Hill  Capital  exercised  this  warrant for $1 million.  In
addition,  Fourteen Hill Capital made the following two new investments in 1998:
(i) $795,000 loan at an interest rate of 15% per annum on January 12, 1998;  and
(ii) $750,000 investment in convertible preferred stock with warrants on January
27, 1998.

                                       44
<PAGE>

                     

                                    PART III
                                    --------

ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------

         Information  regarding  directors  of the  Company  and  the  Executive
Officers  (each of whom is a  director)  will be set  forth  under  the  caption
"Directors and Executive  Officers" in the Company's proxy statement  related to
its  1998  annual  meeting  of  stockholders  (the  "Proxy  Statement")  and  is
incorporated herein by reference. Information required by Item 405 of Regulation
S-K  will  be set  forth  under  caption  "Section  16(a)  Beneficial  Ownership
Reporting  Compliance"  in the Proxy  Statement  and is  incorporated  herein by
reference.

ITEM 11--EXECUTIVE COMPENSATION
-------------------------------

         Information  required  by this item will be set forth under the caption
"Executive  Compensation" in the Proxy Statement and, except for the information
under  the  captions  "Executive  Compensation  --  Report  of the  Compensation
Committee on Executive  Compensation" and "Executive Compensation -- Performance
Graph," is incorporated herein by reference.

ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------

         Information  required  by this item will be set forth under the caption
"Security  Ownership of Certain  Beneficial  Owners and Management" in the Proxy
Statement and is incorporated herein by reference.

ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

         Information regarding certain relationships and related transactions of
directors  and executive  officers will be set forth under the caption  "Certain
Relationships   and  Related   Transactions"  in  the  Proxy  Statement  and  is
incorporated herein by reference.

                                     PART IV
                                     -------
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------

         (a)      1.       The following designated financial statements and the
                           report thereon of KPMG Peat Marwick, LLP dated 
                           February 26, 1998 are included herein at pages 24
                           through 44:

                                    Independent Auditors' Report.

                                    Consolidated  Balance  Sheets as of December
                                    31, 1997 and 1996.

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

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

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


                                       45

<PAGE>


                                    Notes to Consolidated Financial Statements.

                  2.       All  schedules  are  omitted   because  the  required
                           information  is not  presented  or is not  present in
                           amounts  sufficient  to  require  submission  of  the
                           schedule,  or because  the  required  information  is
                           included in the consolidated  financial statements or
                           notes thereto.

                  3.       Exhibits:

              Exhibit
              Number       Description of Document
              -----        -----------------------

                  3.1        Composite   of   Second    Amended   and   Restated
                             Certificate of  Incorporation,  as amended  through
                             August  1,  1997   (Incorporated  by  reference  to
                             Exhibit 3 of the Company's Quarterly Report on Form
                             10-Q for the quarter ended June 30, 1997).

                  3.2        Amended   and   Restated   Bylaws  of  the  Company
                             (Incorporated  by  reference  to Exhibit 3.2 of the
                             Company's   Registration   Statement  on  Form  S-1
                             (Registration No. 33-98708) (the Registration
                             Statement")).

                  4.1        Indenture,  dated  as  of  February  1,  1995  (the
                             "Indenture") among the Company, as Servicer,  DPFC,
                             as Issuer, and Bankers Trust Company,  as Indenture
                             Trustee   ("Bankers   Trust")    (Incorporated   by
                             reference  to  Exhibit  10.12  of the  Registration
                             Statement).

                  4.2        Amendment  No. 1 to  the  Indenture  (Incorporated
                             by  reference  to  Exhibit  10.13  of the
                             Registration Statement).

                  4.3        Amendment  No.  2 to  the  Indenture,  dated  as of
                             August 5, 1996.

                  4.4        Amendment No. 3 to the Indenture,  dated as of July
                             2, 1997 (Incorporated by reference to Exhibit 10 of
                             the Company's Quarterly Report on Form 10-Q for the
                             quarter ended June 30, 1997).

                  4.5        Amendment  No.  4 to  the  Indenture,  dated  as of
                             November 4, 1997.

                 10.1*       1995 Stock Option Plan  (Incorporated  by reference
                             to Exhibit 10.1 of the Registration Statement).

                 10.2*       Amendment No. 1 to the Company's  1995 Stock Option
                             Plan  (Incorporated  by reference to Exhibit 4.4 of
                             the Company's  Registration  Statement on Form S-8,
                             Registration No. 333-21825).

                 10.3*       Stock Option Plan for  Non-Employee  Directors  
                            (Incorporated  by reference to Exhibit 10.2 of
                             the Registration Statement).

                 10.4*       Form of option  agreement  dated November 17, 1997 
                             granted to each Bradley N. Rotter,  Alan B.Perper
                             and John Ward Rotter.

                 10.5        Office  Lease/Francisco  Bay Office  Park by and 
                             between HHC  Investments,  Ltd.  and Echelon
                             (Incorporated by reference to Exhibit 10.3 of the
                             Registration Statement).

                                       46

<PAGE>

                 10.6        Assignment and Assumption Agreement dated September
                             30,  1995  (Incorporated  by  reference  to Exhibit
                             10.16 of the Registration Statement).

                 10.7        Agreement  between  the Company and New Echelon LLC
                             regarding  allocation  of  costs  (Incorporated  by
                             reference  to  Exhibit  10.4  of  the  Registration
                             Statement).

                 10.8*       Profit Sharing Plan (Incorporated by reference to 
                             Exhibit 10.5 of the Registration Statement).

                 10.9        Contribution,    Sale   and   Servicing   Agreement
                             ("Servicing  Agreement")  dated as of  February  1,
                             1995  among the  Company,  DPFC and  Bankers  Trust
                             (Incorporated  by reference to Exhibit 10.14 of the
                             Registration Statement).

                 10.10       Amendment No.1 to Servicing Agreement(Incorporated 
                             by reference to Exhibit  10.15 of the Registration 
                             Statement).
                           
                 10.11       Amendment   No.  2  to  the   Servicing   Agreement
                             (Incorporated  by reference to Exhibit 10.10 of the
                             Company's Annual Report on Form 10-K for the fiscal
                             year ended December 31, 1995).

                 10.12       Master  Agreement  for  Purchase of Life  Insurance
                             Policies dated September 27, 1996  (Incorporated by
                             reference to Exhibit 10 of the Company's  Quarterly
                             Report on Form 10-Q for the quarter ended September
                             30, 1996).

                 10.13       Amendment  dated as of November  13, 1996 to Master
                             Agreement for Purchase of Insurance  Policies dated
                             as of September 27, 1996 (Incorporated by reference
                             to Exhibit 10.11 of the Company's  Annual Report on
                             Form 10-K for the fiscal  year ended  December  31,
                             1996).

                 10.14       Purchase and Sale Agreement dated as of January 16,
                             1997 (Incorporated by reference to Exhibit 10.12 of
                             the  Company's  Annual  Report on Form 10-K for the
                             fiscal year ended December 31, 1996).

                 10.15       Second  Master  Agreement for Purchase of Insurance
                             Policies dated as of February 10, 1997(Incorporated
                             by  reference  to  Exhibit  10.13 of the  Company's
                             Annual  Report  on Form  10-K for the  fiscal  year
                             ended December 31, 1996).

                 10.16       Third  Master  Agreement  for Purchase of Insurance
                             Policies dated as of March 24, 1997(Incorporated by
                             reference to Exhibit 10.14 of the Company's  Annual
                             Report  on Form  10-K  for the  fiscal  year  ended
                             December 31, 1996).

                 10.17       Indemnification   Agreement,  dated  September  30,
                             1995, between the Company (as successor to Echelon)
                             and New Echelon LLC  (Incorporated  by reference to
                             Exhibit 10.18 of the Registration Statement).

                 10.18       Limited  Liability  Company Agreement of Allegiance
                             Capital,  LLC (Incorporated by reference to Exhibit
                             10.1 of the Company's Quarterly Report on Form 10-Q
                             for the quarter ended September 30, 1997).
                                
                                       47

<PAGE>


                 10.19       Fourteen Hill Capital,  L.P.  Agreement of Limited 
                             Partnership  (Incorporated by reference to Exhibit 
                             10.2 of the Company's  Quarterly  Report on Form 
                             10-Q for the quarter ended  September 30, 1997).
                           
                 10.20       Fourteen Hill Management,  LLC Operating  Agreement
                             by Point West Capital and Fourteen Hill Management,
                             LLC as of June 9, 1997  (Incorporated  by reference
                             to Exhibit 10.3 of the Company's  Quarterly  Report
                             on Form 10-Q for the quarter  ended  September  30,
                             1997).

                  21.1       Subsidiaries of the Company.

                  23.1       Consent of Independent Certified Public 
                             Accountants.

                  24.1       Powers of Attorney.

                   27        Financial Data Schedule.

*        Management contract or compensation plan or arrangement.

         (b)      Reports on Form 8-K:


             Date         Item Reported             Matter Reported
             ----         -------------             ---------------

         October 3, 1997       5            On  October  3,  1997, the  Company
                                            issued a press  release regarding 
                                            the filing of an amended complaint.

         November 13, 1997     5            On November  13,  1997, the Company
                                            issued a press  release announcing 
                                            third   quarter   earnings  and new
                                            strategic direction.
 
                                      48



<PAGE>


                                   SIGNATURES

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

Dated March 27, 1998                             POINT WEST CAPITAL CORPORATION
                                                 /s/Alan B. Perper
                                                 -----------------------------
                                                  Alan B. Perper
                                                  President

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities indicated on March 27, 1998:


/s/ Alan B. Perper                                   *
-----------------------------                     -----------------------------
Alan B. Perper                                    John Ward Rotter
President and Director                            Executive Vice President,
(Principal Executive Officer)                     Chief Financial Officer
                                                  and Director
                                                  (Principal Financial and 
                                                  Accounting Officer)
                                    

    *                                                *
-----------------------------                     -----------------------------
Bradley N. Rotter                                 Stephen T. Bow
Chairman of the Board and Director                Director



    *
-----------------------------
Paul A. Volberding, M.D.
Director


*       The  undersigned  by signing his name  hereunto  has hereby  signed this
        report on  behalf  of the  above-named  directors,  on March  27,  1998,
        pursuant to a power of attorney executed on behalf of each such director
        and filed with the Securities and Exchange Commission as Exhibit 24.1 to
        this report.

By:   /s/ Alan B. Perper
     ---------------------
      Alan B. Perper

                                       49


<PAGE>



                                                                      Suqential
exhibit                                                                  Page
Number           Description of Document                                Number
-------          -----------------------                              ----------
                                                                           
  3.1           Composite of Second Amended and Restated  Certificate
                of  Incorporation,  as amended through August 1, 1997
                (Incorporated  by  reference  to  Exhibit  3  of  the
                Company's  Quarterly  Report  on  Form  10-Q  for the
                quarter ended June 30, 1997).


  3.2           Amended  and  Restated  Bylaws  of  the  Company
                (Incorporated  by  reference  to  Exhibit  3.2 of the
                Company's   Registration   Statement   on  Form   S-1
                (Registration   No.   33-98708)   (the   Registration
                Statement")).

  4.1           Indenture,   dated  as  of   February  1,  1995  (the
                "Indenture") among the Company, as Servicer, DPFC, as
                Issuer,  and  Bankers  Trust  Company,  as  Indenture
                Trustee ("Bankers Trust")  (Incorporated by reference
                to Exhibit 10.12 of the Registration Statement).

  4.2           Amendment  No. 1 to the  Indenture  (Incorporated  by
                reference  to  Exhibit  10.13  of  the   Registration
                Statement).

  4.3           Amendment No. 2 to the Indenture,  dated as of August
                5, 1996.

  4.4           Amendment No. 3 to the Indenture, dated as of July 2,
                1997  (Incorporated by reference to Exhibit 10 of the
                Company's  Quarterly  Report  on  Form  10-Q  for the
                quarter ended June 30, 1997).

  4.5           Amendment  No.  4  to  the  Indenture,  dated  as  of
                November 4, 1997.

 10.1*          1995 Stock Option Plan  (Incorporated by reference to
                Exhibit 10.1 of the Registration Statement).

 10.2*          Amendment  No. 1 to the  Company's  1995 Stock Option
                Plan (Incorporated by reference to Exhibit 4.4 of the
                Company's   Registration   Statement   on  Form  S-8,
                Registration No. 333-21825).

 10.3*          Stock   Option   Plan  for   Non-Employee   Directors
                (Incorporated  by  reference  to Exhibit  10.2 of the
                Registration Statement).
 
 10.4*          Form of option  agreement  dated  November  17,  1997
                granted to each Bradley N. Rotter, Alan B. Perper and
                John Ward Rotter.

 10.5           Office Lease/Francisco Bay Office Park by and between
                HHC  Investments,  Ltd. and Echelon  (Incorporated by
                reference  to  Exhibit   10.3  of  the   Registration
                Statement).

 10.6           Assignment and Assumption  Agreement  dated September
                30, 1995  (Incorporated by reference to Exhibit 10.16
                of the Registration Statement).

 10.7           Agreement  between  the  Company  and New Echelon LLC
                regarding   allocation  of  costs   (Incorporated  by
                reference  to  Exhibit   10.4  of  the   Registration
                Statement).
 

                                 50
<PAGE>


 10.8*          Profit  Sharing  Plan  (Incorporated  by reference to
                Exhibit 10.5 of the Registration Statement).

 10.9           Contribution,    Sale   and    Servicing    Agreement
                ("Servicing  Agreement") dated as of February 1, 1995
                among   the   Company,   DPFC   and   Bankers   Trust
                (Incorporated  by reference  to Exhibit  10.14 of the
                Registration Statement).

 10.10          Amendment No. 1 to Servicing Agreement  (Incorporated
                by  reference  to Exhibit  10.15 of the  Registration
                Statement).

 10.11          Amendment   No.   2  to   the   Servicing   Agreement
                (Incorporated  by reference  to Exhibit  10.10 of the
                Company's  Annual  Report on Form 10-K for the fiscal
                year ended December 31, 1995).

 10.12          Master  Agreement  for  Purchase  of  Life  Insurance
                Policies dated  September 27, 1996  (Incorporated  by
                reference  to Exhibit 10 of the  Company's  Quarterly
                Report on Form 10-Q for the quarter  ended  September
                30, 1996).

 10.13          Amendment  dated as of  November  13,  1996 to Master
                Agreement for Purchase of Insurance Policies dated as
                of September 27, 1996  (Incorporated  by reference to
                Exhibit 10.11 of the Company's  Annual Report on Form
                10-K for the fiscal year ended December 31, 1996).

 10.14          Purchase and Sale  Agreement  dated as of January 16,
                1997  (Incorporated  by reference to Exhibit 10.12 of
                the  Company's  Annual  Report  on Form  10-K for the
                fiscal year ended December 31, 1996).

 10.15          Second  Master  Agreement  for  Purchase of Insurance
                Policies  dated as of February 10, 1997 (Incorporated
                by reference to Exhibit 10.13 of the Company's Annual
                Report  on  Form  10-K  for  the  fiscal  year  ended
                December 31, 1996).

 10.16          Third  Master  Agreement  for  Purchase of  Insurance
                Policies dated as of March 24, 1997 (Incorporated  by
                reference to Exhibit  10.14 of the  Company's  Annual
                Report  on  Form  10-K  for  the  fiscal  year  ended
                December 31, 1996).

 10.17          Indemnification  Agreement, dated September 30, 1995,
                between the Company (as successor to Echelon) and New
                Echelon LLC  (Incorporated  by  reference  to Exhibit
                10.18 of the Registration Statement).

 10.18          Limited  Liability  Company  Agreement of  Allegiance
                Capital,  LLC  (Incorporated  by reference to Exhibit
                10.1 of the Company's  Quarterly  Report on Form 10-Q
                for the quarter ended September 30, 1997).

 10.19          Fourteen  Hill  Capital,  L.P.  Agreement  of Limited
                Partnership  (Incorporated  by  reference  to Exhibit
                10.2 of the Company's  Quarterly  Report on Form 10-Q
                for the quarter ended September 30, 1997).

 10.20          Fourteen Hill Management,  LLC Operating Agreement by
                Point West Capital and Fourteen Hill Management,  LLC
                as of June 9,  1997  (Incorporated  by  reference  to
                Exhibit  10.3 of the  Company's  Quarterly  Report on
                Form 10-Q for the quarter ended September 30, 1997).


                                 51


<PAGE>


21.1            Subsidiaries of the Company.

23.1            Consent of Independent Certified Public Accountants.

24.1            Powers of Attorney.

27              Financial Data Schedule.

*               Management contract or compensation plan or arrangement


                                 52