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                Annual Report For Small Business Issuers Subject
                     to the 1934 Act Reporting Requirements

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

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

                      For the Year Ended December 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 Commission File No. 0-21417


                            CAPITAL TITLE GROUP, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its charter)

         Delaware                                         87-0399785
-------------------------------                ---------------------------------
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

14555 North Scottsdale Road Suite 320, Scottsdale, Arizona          85254
----------------------------------------------------------        ---------
      (Address of principal executive offices)                    (Zip Code)

         Issuer's telephone number, including area code: (602) 483-8868

              Securities registered under Section 12(b) of the Act:
                                      NONE

              Securities registered under Section 12(g) of the Act:
                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of class)

Check  whether  the issuer  (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 [ ]

Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation  S-K is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated  by  reference  in Part  III of this  Form
10-KSB, or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year.  $23,206,225.

On March 12,  1999,  the  aggregate  market  value of the voting and  non-voting
common equity held by  non-affiliates  of the registrant was  $39,981,550.  This
figure was  estimated  based on March 12, 1999  closing  price of the  Company's
common stock. The number of shares of Common Stock outstanding on March 12, 1999
was 16,671,070.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Registrant's  Proxy  Statement  for the 1999 Annual  Meeting of
Stockholders  to be held on May 4, 1999 are  incorporated by reference into Part
III.
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                                     PART I
ITEM 1. BUSINESS

COMPANY HISTORY AND OVERVIEW

         Capital  Title Group,  Inc. (the  "Company") is a Delaware  corporation
which acts as the parent holding company of the following subsidiaries:

         Capital Title Agency,  Inc. ("Capital Title") is an Arizona corporation
         which has operated under the authority of the State Banking  Commission
         since November 1, 1981.  Capital Title is an  independent  title agency
         that provides escrow services and, as an agent for four title insurance
         companies,  issues title insurance policies to the real estate industry
         in Maricopa,  Yavapai and Mohave  Counties in Arizona.  As of March 12,
         1999 Capital Title  operated 28 offices  located  throughout  Maricopa,
         Yavapai and Mohave Counties in Arizona.

         New Century Title Company ("New  Century"),  a California  corporation,
         purchased a dormant  escrow and title  agency in San Diego,  California
         and began  operations as an independent  title agency in July 1998. New
         Century currently has two offices in San Diego County.

         New Century  Title  Company of  Northern  California  ("New  Century of
         Northern  California")  is  a  California  corporation  which  acquired
         Northwestern   Consolidated   Corporation   ("Northwestern")   and  its
         subsidiaries  in  November  1998.   Northwestern  had  operated  as  an
         independent title agency since 1959. New Century of Northern California
         is an independent title agency that provides escrow services and, as an
         agent for a title insurance company, issues title insurance policies to
         the real estate industry in Sonoma,  Contra Costa and Alameda  Counties
         in California.  New Century of Northern  California  currently operates
         nine offices in the San Francisco region.

         New Century Insurance Services,  Inc. ("NCIS"), an Arizona corporation,
         was formed in January  1998 as an  independent  property  and  casualty
         insurance  agency.  NCIS began  operations in April 1998.  Effective in
         January  1999,  the Company  decided to exit the  property and casualty
         insurance  market  and  accordingly,  sold an 80%  interest  in NCIS to
         NCIS's president.

         The Company  plans to  aggressively  continue its growth in Arizona and
California,  and  as  conditions  merit,  to  expand  into  other  southern  and
southwestern  states.  The Company intends to accomplish this planned  expansion
both through acquisition transactions and through recruitment of escrow officers
with significant existing revenue production based upon their relationships with
real estate  brokers,  mortgage  lenders and other  industry  participants.  The
Company will attempt to attract these significant  producers through  employment
packages that include commissions based on revenue generated and stock options.

         The principal  executive offices of the Company are located at 14555 N.
Scottsdale  Road,  Suite  320,  Scottsdale,  Arizona  85254  and  the  Company's
telephone number is (602) 483-8868.

COMPANY OPERATIONS

         The Company is an independent  title agency  providing  escrow services
and, as an agent for First American Title Insurance Company ("First  American"),
Chicago Title Corporation ("Chicago"),  Stewart Information Services Corporation
("Stewart"),  United  General  Insurance  Company  ("United  General")  and  Old
Republic Insurance Company ("Old Republic"),  issues title insurance policies to
service the real estate  industry in seven  counties in California  and Arizona.
Capital Title's operations commenced in 1981 in Prescott,  Arizona.  During 1995
and 1996, Capital Title began an expansion  program,  opening additional offices
in the Yavapai  County  population  centers of Prescott  Valley,  Cottonwood and
Sedona.
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         During 1996 and 1997,  Capital  Title opened  seven  branch  offices in
Maricopa  County,  Arizona.  During 1998 the Company  opened  additional  branch
offices in Maricopa  County and expanded into Mohave County,  Arizona along with
entering the California market.

         The  Company's  1998  operations   were  positively   impacted  by  the
geographic  locations in which it operates as Arizona and California  rank among
the top states in the nation in the rate of new job creation,  population growth
and gains in personal income. Additionally, these states are some of the highest
single family housing markets in the nation with Phoenix and San Diego currently
the 6th and 7th largest cities in the United States.

         The December  1998 market share  reports show Capital  Title as the top
title  insurer in Yavapai  County.  As of December  1998,  Capital  Title ranked
fourth in Maricopa  County market share,  having moved up from tenth in 1997 and
from  twentieth the year before.  The Company  believes that its  combination of
technology,  management and employee stock options will play a significant  role
in  positively  impacting  its  market  share  in the  locations  in which it is
currently operating and in the areas into which it expands.

INDUSTRY OVERVIEW

         Title  insurance  has become  accepted as the most  efficient  means of
determining  title to, and the priority of  interests  in, real estate in nearly
all parts of the United  States.  Virtually  all real property  lenders  require
their  borrowers to obtain title  insurance  policies at the time mortgage loans
are made.

         The title  insurance  industry  has  undergone  changes in the past few
years as a result of revenue  fluctuation  based on changes in  interest  rates.
Companies have focused on advancing technology in order to reduce costs, improve
accuracy and respond to the continuing pressures within the real estate industry
for faster and more cost effective processing of transactions. The major expense
of a title agency  company is the search and  examination  function in preparing
preliminary  title reports,  commitments and title policies,  and not from claim
losses  associated with said policies.  Technology has improved the accuracy and
consistency of information  and allowed  companies to maintain or increase their
number of closings with the same number of or fewer employees.

         The Company  possesses  advanced title report generation and processing
technology that combines title  information from multiple sources via electronic
data exchange.  The Company has implemented this  proprietary  technology in its
Arizona  operations  and in its San Diego County,  California  operations.  This
technology  facilitates  expansion  of  the  Company's  operations  in  existing
markets,  and management  believes it outperforms  the technology of other major
title companies that possess greater resources than the Company.

         In the past  twenty  years,  several  large,  national  companies  have
captured a little  over fifty  percent of the  market by  securing  the  capital
required to meet the regulatory  requirements of an insurance  company combining
with the retention of independent  agency  operations.  Larger  companies,  like
Chicago,  First American,  and Fidelity  National  Financial,  Inc. began on the
local  level,  operating  in a single city or county.  From this small  starting
point,  these  companies  grew to regional  leaders and  finally  into  national
leaders in the industry.

         TITLE POLICIES. Title insurance policies state the terms and conditions
upon  which  a  title  underwriter  will  insure  title  to  real  estate.   The
beneficiaries of title insurance  policies are generally buyers of real property
or secured lenders.

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         Title  insurance is different from other types of insurance  because it
relates to past events that affect  title to property at the time of closing and
not  unforeseen  future  events.  Prior to  issuing  policies  underwriters  can
eliminate future losses by accurately performing searches and examinations.  The
major  expense of a title  company is the search  and  examination  function  in
preparing  preliminary  reports,  commitments and policies and is not from claim
losses.  The premium for title  insurance  is due in full on the closing date of
the real estate transaction and is based upon the purchase price of the property
insured or the amount of the secured loan.  Coverage under the policy  generally
terminates upon resale or refinance of the property.  The terms of coverage have
become standardized in accordance with forms approved by trade associations such
as  American  Land Title  Association,  Land Title  Association  of Arizona  and
California Land Title Association.

         Title  insurance  policies  are  issued on the  basis of a  preliminary
report  or  commitment.  These  reports  are  prepared  after a search of public
records,  maps and other relevant documents to ascertain title ownership and the
existence of easements, restrictions, rights of way, conditions, encumbrances or
other  matters  affecting  the  title  to, or use of,  real  property.  A visual
inspection  of the  property  may also be made prior to the  issuance of certain
title insurance policies.

         To  facilitate  the  preparation  of  preliminary  reports  without the
necessity of manually searching public records,  copies of public records,  maps
and other  relevant  historical  documents  are compiled and indexed in a "title
plant." Each title plant relates to a particular county and is kept current on a
daily or other  frequent  basis by the addition of copies of recorded  documents
that affect rights in real property in the particular  county.  Title  companies
often  subscribe  to  independent  title  information  services to assist in the
updating of their title plants and the maintenance of title records.

         DIRECT VS. AGENCY SALES.  Preliminary  reports and commitments to issue
policies are prepared by title  underwriters  (direct  sales) or by  independent
agents on behalf of the  underwriters  (agency sales).  The terms and conditions
upon which the real property will be insured are  determined in accordance  with
the standard policies and procedures of the title underwriter.  In direct sales,
the title underwriter  issues the preliminary  report and commitment and retains
the entire title  premium paid in  connection  with the  transaction.  In agency
sales, the search and examination function is performed by the independent agent
and the  majority of the premium  collected  is retained by the agent,  with the
balance remitted to the title  underwriter.  Independent agents may select among
several title underwriters based upon the amount of the premium "split" offered,
the  overall   terms  and   conditions  of  the  agency   agreement,   including
indemnification  obligations  of the agent and the scope of services  offered to
the agent by the title underwriter. Agent commissions vary by geographic region.

         THE TITLE POLICY PROCESS. A brief description of the process of issuing
a title insurance policy is as follows:

       (i)    The  customer,  typically  a real  estate  salesperson  or broker,
              escrow agent or lender, places an order for a title policy.

       (ii)   Sales  personnel  note the  specifics  of the  order  and  place a
              request with the title department for a preliminary report.

       (iii)  After the  relevant  historical  data on the property is compiled,
              the title officer prepares a preliminary report that documents (a)
              the current status of title to the property,  (b) any  exemptions,
              exceptions and/or limitations that might be attached to the policy
              and (c) specific  issues that need to be addressed and resolved by
              the  parties to the  transaction  before the title  policy will be
              issued  (such as removal  of prior tax liens and  payment of prior
              loans on the property).  The  preliminary  report is circulated to
              all the parties for satisfaction of any specific issues.

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<PAGE>
       (iv)   After all specific issues identified in the preliminary report are
              satisfied,  the escrow agent closes the  transaction in accordance
              with the instructions of the parties and the policy conditions.

       (v)    Once the  transaction is closed and all monies have been released,
              the  policy is issued  (a) to the owner and the lender on a resale
              transaction   or  (b)  to  the  lender   only  on  a   refinancing
              transaction.

         LOSSES AND  RESERVES.  The maximum  amount of  liability  under a title
insurance  policy is  usually  the face  amount of the  policy  plus the cost of
defending the insurer's  title against an adverse  claim.  The reserve for claim
losses is based upon known claims as well as losses the insurer expects to incur
based on historical  experience and other factors,  including industry averages,
claims loss history,  current legal environment,  geographic  considerations and
type of policy written.  Because the Company operates an independent  agency, it
provides  title  insurance on behalf of third party  underwriters.  As such, the
Company's  losses and reserves are less than those carried by a title  insurance
underwriter (see Company Operations-Claims and Underwriting).

         ECONOMIC FACTORS AFFECTING INDUSTRY. Title insurance revenue is closely
related to the level of activity in the real estate market and the average price
of  real  estate  sales.   Real  estate  sales  are  directly  affected  by  the
availability of money to finance purchases.  Other factors affecting real estate
activity  include  demand,  mortgage  interest  rates,  family income levels and
general economic conditions.

         During 1998,  there was a significant  increase in the refinance market
as a result  of the  lowest  mortgage  interest  rates in  recent  history.  Low
mortgage rates coupled with a strong  economy also had a positive  impact on the
volume of residential home sales.

COMPANY STRATEGY

         The  Company's  strategy  is to pursue  aggressive  growth in the title
insurance industry in the Southwestern United States.  Essential elements of the
Company's strategy are as follows:

         COMMITMENT   TO   SERVICE.   The   Company  is  built  on  three  basic
entrepreneurial  premises:  (1) every employee is a salesperson for the Company;
(2) the  Company's  services are a one-stop,  computer-based  contact  point for
complete real estate transactions;  and (3) success is achieved through focus on
an unequaled quality of customer service.  Because title insurance  policies and
escrow  functions are generally  standardized,  the level of service provided is
the key differentiating  factor among competitors in the title industry.  One of
the Company's  objectives is to issue written title reports on substantially all
its transactions within two working days from the opening of escrow. Through its
commitment to customer service, the Company seeks to build lasting relationships
with its real estate industry clients.

         MARKET FOCUS.  The Company's market focus is on real estate brokers and
mortgage lenders as this business has historically been more consistent and less
prone to fluctuation than commercial,  new home sales or refinancing segments of
the market. To set itself apart as a service company,  the Company has developed
industry specific  information  technology that it provides to its clients.  The
Company is currently  developing a product called  "E*TitleGram" that will allow
real estate brokers access to the Company's services through the Internet.

                                       5
<PAGE>
         MANAGEMENT.  The Company  recognizes  that its  aggressive  growth plan
calls for executive management with extensive industry operational and expansion
experience.  The Company was  co-founded by Donald R. Head, and he has served as
Chairman of the Board and Chief Executive Officer since inception.  Mr. Head has
extensive  experience  as a developer  and  entrepreneur  within the real estate
industry  and has 18 years in the title  insurance  industry.  Additionally,  he
served as a board member on several U.S. and Canadian public companies and ran a
successful legal practice in Prescott, Arizona.

         The Company  appointed  Andrew Johns as President  effective  April 16,
1996.  Mr.  Johns,  the  former  President  of  Stewart  Title  for the State of
California, has nearly 30 years of industry experience,  including the expansion
of United Title's Orange County  operations  throughout the Southern  California
market.  The Company believes that Mr. Johns has the leadership,  experience and
industry contacts required to effect the Company's expansion into the California
Market.

         In February, 1998, the Company appointed Milton Ferrantelli,  Executive
Vice  President of Capital  Title Group and  President of Capital  Title Agency,
Inc.'s Arizona  operations.  Mr.  Ferrantelli  purchased  United Title Insurance
Agency in 1986 with two active  partners and served as its  President  and Chief
Executive  Officer prior to its acquisition by Norwest Financial in 1994. United
Title held the number one market share for title and escrow services in Maricopa
County from 1984 through 1994. Mr.  Ferrantelli  has over 25 years of experience
in the title and escrow industry in the Arizona marketplace.

         In addition,  the Company  employs eight managers to run the day-to-day
operations  in the  counties  the  Company  operates in and to support the above
mentioned  executives.  These managers  average over 20 years  experience in the
title and escrow industry.

         EQUITY PARTICIPATION BY ESCROW OFFICERS.  Escrow officers are the major
revenue  producers  for  title  insurance   companies.   It  is  their  business
relationships with real estate brokers,  lenders and other industry participants
whom are primarily  responsible  for the direction of escrow and title business.
The Company will seek to attract the most  successful  escrow  officers (and the
related revenue) through employment  packages that include  commissions based on
revenue produced and stock options as added motivational incentives. The Company
believes  such programs will also promote  Company  loyalty,  which will help to
insulate the Company's escrow officers from competitive recruiting efforts.

         EXPANSION.  The Company  intends to  accomplish  its planned  expansion
through  acquisitions  of existing  title  agencies  and opening  operations  in
California  and as  conditions  merit,  other  states  throughout  the South and
Southwest.  These  expanded  operations are expected to be enhanced by utilizing
the  Company's  recruiting  strategy  that has proven  extremely  successful  in
Arizona.

COMPANY OPERATIONS

         The Company  reported  record  revenues  for each  quarter in 1998 with
revenue up 178% for the year ended  December 31, 1998 compared to the year ended
December 31,  1997.  Revenue was $23.2  million for the year ended  December 31,
1998 compared to $8.3 million for the year ended December 31, 1997. Although the
Company  completed  a  significant  acquisition  in November  1998,  most of the
increase in the Company's  revenues in 1998 was attributable to internal growth.
Of the Company's  $14.9 million  revenue growth from 1997 to 1998,  $1.8 million
was  attributable  to  revenue  from  acquired   companies,   $1.8  million  was
attributable  to new start-up  operations and $11.3 million was  attributable to
increased revenue from expansion of existing operations.

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         For the fiscal years ended December 31, 1998 and 1997, revenue from the
issuance of title insurance policies represented 63% and 64%,  respectively,  of
the Company's consolidated revenues. Escrow and related fees for the years ended
December  31,  1998  and 1997  represented  30% and  26%,  respectively,  of the
Company's consolidated revenue.

         MARKETING. The Company believes that the primary source of its business
is from referrals  from  participants  in the real estate  industry such as real
estate brokers,  mortgage lenders,  developers and attorneys. In addition to the
referral market,  the Company markets its services directly to larger brokerages
and real  property  lenders.  Marketing  activities  are performed by the escrow
officers of the Company and marketing representatives whose sole function is the
solicitation of business from major real estate brokers, developers,  owners and
lenders.  Escrow officers, in addition to their escrow service duties,  maintain
and further develop relationships  established with current clients for on-going
business.  The  marketing  representatives  hold  educational  seminars for real
estate brokers,  offer the use of "Dataquick" as a service that provides ease in
placing  valuations  on  surrounding   property  and  train  brokers  and  their
assistants in the use of the Company's proprietary industry specific information
technology.

         ESCROW SERVICE.  The Company's  escrow  departments are responsible for
handling the consummation of real estate sales, exchanges and a variety of other
transactions  involving the sale or encumbrance  of real property,  refinance of
real  property,  sales of assets of  businesses  and sales of  promissory  notes
secured by deeds of trust.

         The escrow officer and assistant  typically  prepare  escrow  documents
pursuant to the real estate contract.  The escrow instructions  provide guidance
to all  concerned  parties as to the  conditions  required  for the real  estate
transaction.  Furthermore, the instructions provide authorization for the escrow
agent to request information concerning matters appearing of record, the receipt
of all earnest monies and closing funds,  the  disbursement of seller  proceeds,
payoff of underlying liens,  judgments,  real property taxes,  insurance and any
other  disbursement  as set forth in the  instructions  or by the parties to the
transaction.  The instructions also include  authorization to prepare and obtain
documents necessary to complete the real estate transaction.

         The escrow agent is held accountable by state governmental agencies for
strict  compliance  with its fiduciary  responsibilities  outlined by the escrow
instructions.  The officer must possess a high degree of skill,  professionalism
and confidentiality in the handling, preparation,  collecting and recordation of
all escrow  matters  between the buyer,  seller,  real estate  brokers and their
agents, developers, lenders and investors.

         TITLE  DEPARTMENT.  The primary function of the title department is the
accumulation  and analysis of various  documents from the many sources that make
up the  public  record.  From this  analysis,  a  preliminary  report is written
showing  the  present  condition  of title.  This  report is given to the escrow
officer  who, in turn,  distributes  it to the parties  involved in the purchase
agreement.  After the  preliminary  report has been read and approved by all the
parties and the requirements of the report have been fulfilled,  the escrow will
proceed to closing and a final title insurance policy will be issued.

         The  accumulation  of title data from public records which provides the
history of each parcel of real estate in a particular county is referred to as a
"title plant." The Company has entered into a multi-year  service agreements for
title plant access in the counties it operates. In certain counties, the Company
may be a partial owner in a title plant or own a title plant which contains data
prior to the time period  covered by a third party  title  plant  provider.  The
Company can use the  services  of a third party title plant  provider or acquire
additional  title plants for  purposes of  conducting  its title  research as it
expands into  additional  geographic  areas.  The cost of obtaining title plants
varies with economic and market  conditions in the geographic  area to which the

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title plants relate. The Company believes it will be able to obtain title plants
on terms and  conditions  that are  acceptable to it through the  acquisition of
title companies as the Company expands into other markets; however, there can be
no assurance in this regard.

         CLAIMS AND  UNDERWRITING.  The Company  provides title  insurance as an
agent of First  American,  United  General,  Chicago,  Old Republic and Stewart.
These services are provided  pursuant to  Underwriting  Agreements  with each of
these underwriters which state the conditions on which the Company is authorized
to issue a title insurance policy on behalf of the underwriter and prescribe the
circumstances  under  which the Company  may be liable to the  underwriter  if a
policy loss is  attributable  to errors made by the  Company.  The  underwriting
agreements  with First  American,  United  General,  Chicago,  Old  Republic and
Stewart  provide that the Company:  (1) must fully comply with all  requirements
relating to the issuance of title insurance within each of the counties in which
the Company does business and must comply with generally  accepted  standards of
underwriting;  (2) will be liable for any losses payable on a basis of erroneous
reports or in excess of the stated liability on the policy when an insured makes
a successful claim based on negligence;  (3) may not write a policy in excess of
the stated  contract  amount without prior approval from the insurance  company;
and (4) will be liable for the first  $5,000 of each loss,  unless  specifically
waived by the insurance company. The Company is not an exclusive agent for First
American, United General, Chicago, Old Republic or Stewart.

         Claims  against title  insurance  policies  normally arise out of human
error.  During the process of  accumulation  and analysis of the public  record,
certain  inaccuracies and  inconsistencies are encountered that sometimes result
in a situation in which interpretation of these documents could lead to a claim.
Such claims are reviewed by the Company's  staff and, if warranted,  sent to the
insurance carrier for final disposition.

         Underwriting  is the  process of  analyzing  risk  assumption.  As each
individual situation arises, the local staff makes a risk analysis. If the local
underwriting  staff decides that the risk assumption is outside its underwriting
authority, the insurance carrier is contacted for its underwriting approval.

         The Company  assumes the entire risk of losses  incurred in errors made
during the escrow process;  however,  it has secured insurance coverage to limit
any significant losses.

         ACCOUNT SERVICING. The account servicing department handles the receipt
and  disbursement  of monies for accounts with respect to which the Company acts
as servicing agent for a transaction. Its responsibility as trustee includes the
maintenance of all records reflecting receipts and disbursements, calculation of
total  interest,  principal  and  any  other  sums  due as  required  under  the
agreement/note  between the buyer and the seller. This information is summarized
and reported to the Internal  Revenue  Service  with the  appropriate  Form 1098
and/or  1099  supplied  to the buyer and the  seller.  Following  the  payoff of
accounts,  the servicing  agent prepares and records the  appropriate  documents
necessary  to  substantiate  accounts as paid in full in the  applicable  county
records.  Typically,  transactions  serviced by the Company  include  promissory
notes secured by deeds of trust and agreements of sale.

         FORECLOSURES.  Both  promissory  notes  secured  by deeds of trust  and
agreements of sale can be foreclosed  non-judicially  by the servicing agent. As
trustee of the  documents  being  serviced  by the  Company,  the seller  and/or
beneficiary can direct the servicing  agent, at the time of default,  to proceed
with foreclosure of the lien.

         The  maintenance of accurate  up-to-date  accounting and control of all
original   documents  enable  the   trustee/servicing   agent  to  expedite  the
non-judicial trustee sale or foreclosure.

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         ADMINISTRATION.  The Company's  administrative  staff  handles  general
accounting and finance,  human  resources,  purchasing,  management  information
systems and regulatory compliance.

CUSTOMERS

         The Company is not dependent  upon any single  customer or single group
of  customers.  The loss of any one customer  would not have a material  adverse
effect on the Company.

SEASONALITY

         The title  insurance  business is closely  related to overall levels of
real  estate  activity.  Historically,  real estate  activity  slows down in the
winter months with volumes  showing  significant  improvements in the spring and
summer months. In addition,  the title insurance business is cyclical due to the
effect of  interest  rate  fluctuations  on the level of real  estate  activity.
Periods of high  interest  rates  adversely  effect  real  estate  activity  and
therefore premium and escrow revenues.

COMPETITION

         The title  insurance  business is highly  competitive.  Companies  with
significant  market  share in Arizona and  California  include  First  American,
Chicago, Old Republic, Security Title, ATI Title Agency, Fidelity Title, Lawyers
Title, and American Title. The number and size of competing  companies varies in
different  geographic  areas.  In those  areas where the  Company  operates  and
intends  to operate  the  Company  will face  competition  from  major  national
insurance  underwriters  and  other  independent  agencies,  many of which  have
financial  and other  resources  greater than those of the Company.  The Company
believes that quality and timeliness of service are the key competitive  factors
in the  industry  because  parties  to a real  estate  transaction  are  usually
concerned with time schedules and costs associated with delays in the closing of
transactions.  In those states where prices are not  established  by regulation,
the price of title insurance is also an important competitive factor.

REGULATION

         The Company  conducts its business under licenses  granted by the State
Banking and Insurance  Departments of the State of Arizona and the Department of
Insurance in California. The title insurance and escrow businesses generally are
subject  to  extensive  regulation  under  applicable  state  laws.  These  laws
establish  supervisory  agencies with broad  administrative  powers  relating to
issuing and revoking  licenses,  regulating trade practices,  licensing  agents,
approving  policy forms and  approving  rate  schedules.  Failure to comply with
these  regulations  or an inability to secure or maintain any required  licenses
could materially  adversely affect the Company's business.  The Company believes
that it is in material  compliance with applicable laws and regulations and that
it will  maintain  and  obtain  all  licenses  required  for the  conduct of its
business.

EMPLOYEES

         As of December 31, 1998, the Company had a total of 477  employees,  of
which 296 are located in Arizona and 181 are in California. The Company believes
that its relations with its employees are excellent.

                                       9
<PAGE>
ITEM 2. PROPERTIES

         The Company conducts its business operations primarily in leased office
space. The Company currently leases offices at 38 locations with remaining lease
periods ranging from one to sixty months.  The Company's monthly rental payments
at the foregoing locations are approximately  $172,000. In addition, the Company
owns three buildings in Northern California totaling approximately 38,000 square
feet. The Company is currently constructing,  and will own, a 24,000 square foot
building  in  Phoenix,  Arizona  to house  its  corporate  headquarters  and its
Maricopa County operations.

ITEM 3. LEGAL PROCEEDINGS

         The  Company is involved in certain  legal  actions  which arise in the
normal  course of its title  business.  The Company  believes that none of these
claims are material, either individually or in the aggregate.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year ended December 31, 1998.

                                    PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS

          The  Company's  Common  Stock has been  quoted on The Nasdaq  SmallCap
Market  under  the  symbol  "CTGI"  since  September  21,  1998  and on the  OTC
Electronic Bulletin Board market from May 15, 1997 to September 20, 1998.

         The following table sets forth high and low bid prices of the Company's
Common Stock for the periods  indicated.  Bid quotations  represent  interdealer
prices,  without retail mark-up,  mark-down or commissions and may not represent
actual transactions.

                     Date                     High/Bid         Low/Bid
                     ----                     --------         -------
         1997
         Second Quarter (beginning May 15)     $3.00           $2.50
         Third Quarter                          2.38            1.50
         Fourth Quarter                         1.81            1.50
         1998
         First Quarter                          2.56            1.56
         Second Quarter                         3.62            2.63
         Third Quarter                          4.50            3.25
         Fourth Quarter                         4.06            3.38
         1999
         First Quarter (through March 19)       3.69            3.00

         As of  December  31,  1998,  the  Company  had issued  and  outstanding
16,926,791  shares of common stock. In addition,  2,400,000  shares are reserved
for issuance  under the Company's  1996 Stock Option Plan and 370,000 shares are
reserved for issuance under the Company's Directors Non-Employee Plan. (See Item
11  "Security  Ownership  of  Certain  Beneficial  Owners and  Management.")  At
December 31, 1998, there were 313 record holders of the Company's Common Stock.

                                       10
<PAGE>
         In March 1998, the Company issued 463,500  warrants in conjunction with
a private  placement.  Each warrant entitles the holder to purchase one share of
the  Company's  common stock at $2.50 until March 31, 2000.  In April 1998,  the
Company  issued  308,642  warrants to an  investment  banking firm that acted as
placement agent in connection with private placement.  Each warrant entitles the
holder to purchase one share of the Company's common stock at $1.62 until May 1,
2001.

         In February 1998, the Company issued $125,000 in convertible  notes for
the  purpose of  obtaining  capital to open one  additional  branch in  Maricopa
County,  Arizona.  The  convertible  notes require  payment of interest only for
eighteen  months at an interest rate equal to the prime rate plus 2 1/2%. At any
time  within  the  eighteen  months,  the note  holders  will have the option of
converting the  obligation  into common stock of the Company at $2.00 per share.
The  convertible  notes are secured by furniture and equipment in the respective
branch.

         The Company has never paid a dividend on its Common Stock.  The Company
does not anticipate  paying any dividends on its Common Stock in the foreseeable
future.  Rather,  the Company  anticipates  that its  earnings,  if any, will be
retained to fund the Company's  working capital needs and the planned  expansion
of its  business.  The  payment  of any  dividends  will be  dependent  upon the
discretion of the Board of Directors. Furthermore, under Delaware corporate law,
in the absence of current or retained  earnings,  the Company may be  prohibited
from paying dividends (whether in cash or otherwise).

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         The following discussion of the results of the operations and financial
condition  of the  Company  should  be read in  conjunction  with the  Company's
Consolidated  Financial  Statements and Notes thereto included elsewhere in this
report.  Historical results and percentage  relationships among accounts are not
necessarily an indication of trends in operating results for any future period.

OVERVIEW

         During 1998,  the Company's  primary  business was providing  title and
escrow services in Maricopa and Yavapai County,  Arizona. The significant growth
the Company  experienced  in 1998  resulted  from  acquisitions  in  California,
startup  operations  in  California  and  Mohave  County,  Arizona  and  further
expansion  and market share  increase in Maricopa and Yavapai  County,  Arizona.
Management  believes the expansion in existing operations results in part from a
recruitment program which allows each employee of the Company to become an owner
of the Company  through the Company's  employee  stock option plan, a management
philosophy which allows each branch manager to operate their branch as if it was
their own  company  and  superior  technology  which  allows for more  efficient
processing of title and escrow  services.  The Company will continue to use this
philosophy and technology as it continues to expand its operations.

                                       11
<PAGE>
RESULTS OF OPERATIONS

         The  following  table  sets  forth,  for  the  periods  indicated,  the
components of the Company's  revenue and expenses along with the percentage they
bear to total revenue:
<TABLE>
<CAPTION>
                                               For The Years Ended,
                         ----------------------------------------------------------
                            December 31,          December 31,       October 31,
                         ------------------   -----------------   -----------------
                             1998       %        1997       %        1996       %
                         -----------  -----   ----------  -----   ----------  -----
<S>                      <C>          <C>    <C>          <C>    <C>          <C>
Title insurance premiums $14,634,442   63.0%  $5,359,001   64.2%  $1,451,479   56.2%
Escrow and related fees    7,030,248   30.3    2,190,641   26.2      695,995   26.9
Account servicing            504,813    2.2      341,292    4.1      314,939   12.2
Other fees                   248,727    1.1      186,151    2.2       16,947     .7
Interest income              787,995    3.4      271,419    3.3      103,295    4.0
                         -----------  -----   ----------  -----   ----------  -----
                         $23,206,225  100.0%  $8,348,504  100.0%  $2,582,655  100.0%
                         ===========  =====   ==========  =====   ==========  =====

Personnel cost           $11,186,564   48.2%  $4,650,618   55.7%  $1,958,292   75.8%
Escrow commissions         2,249,468    9.7      519,670    6.2       24,768    1.0
Title remittance fees      1,459,452    6.3      494,776    5.9      170,933    6.6
Rent                       1,254,010    5.4      692,732    8.3      296,058   11.5
Other operating expenses   5,121,998   22.1    2,206,402   26.4    1,162,762   45.0
Interest expense              99,257     .4       71,458     .9       17,835     .7
                         ===========  -----   ==========  -----   ==========  -----
                         $21,370,749   92.1%  $8,635,656  103.4%  $3,630,648  140.6%
                         ===========  =====   ==========  =====   ==========  =====
</TABLE>

FISCAL 1998 COMPARED TO FISCAL 1997

         The Company's  revenues  increased by  $14,857,721 or 178% for the year
ended  December  31,  1998 as  compared  to the year ended  December  31,  1997.
Approximately $3,626,000 of this increase resulted from acquisitions and startup
operations.  The remaining  increase is attributable to the Company's  expansion
and  increased  market  share in  Maricopa  and  Yavapai  counties,  Arizona,  a
favorable real estate market and favorable interest rates.

         The Company's revenue from title insurance  premiums and escrow fees is
primarily from three  sources.  The largest  revenue source is from  residential
resales.  The current residential resale marketing  projections for the counties
in which the Company  operates predict that the resale market should continue to
be strong as new house  prices  continue to climb and  mortgage  interest  rates
remain at their current low levels. The Company's  marketing plan is to have the
vast  majority of the  Company's  title and escrow  revenue be derived  from the
resale business.  Historically, the resale business has been more consistent and
less subject to fluctuations  than  commercial,  new homes sales, or refinancing
segments of the market. The commercial,  new home sales and refinancing  markets
tend to be more influenced by interest rates and other economic conditions.

         Conventional  real  estate  lending  and  refinancing  make up the next
largest  component  of the  Company's  title and  escrow  revenue.  There was an
increase in the  refinance  market  during 1998 as a direct result of the lowest
mortgage  interest  rates in recent  history.  Included in this  category is the
conventional real estate lending business,  which, like residential  resales, is
less  affected  by  interest  rate  fluctuations.  The  Company  was in an ideal
position, due to its technological and service reputation,  to take advantage of
the strong refinance market in 1998.

                                       12
<PAGE>
         Commercial transactions made up less than 4% of the Company's title and
escrow revenue in 1998 compared to approximately 5% during 1997. The Company has
a separate  commercial  escrow  unit in Maricopa  County  which  accounts  for a
majority of the  Company's  commercial  business.  The  decrease  in  commercial
business as a percent of total  title and escrow  revenue is due to a higher mix
of  residential  resales  and  refinance  business,  as the  overall  volume  of
commercial business increased in 1998 compared to 1997.

         During the year  ended  December  31,  1998,  there were  approximately
$1,270,000 of operating expenses (net of revenue  recognized) related to startup
costs for the Company's San Diego,  California and Mohave County  operations and
from costs associated with the Company's property and casualty insurance agency.
Excluding the startup costs (net of revenue  recognized) of $1,270,000,  income,
before income  taxes,  from existing  operations  would have been  approximately
$3,105,000 for the year ended December 31, 1998.

         Personnel  costs,  including  commissions,  are  the  most  significant
component of the Company's operating expenses. Due to the growth the Company has
been  experiencing  since  initiating  its business  plan,  the number of people
employed  by the  Company  increased  from 175 on  December  31,  1997 to 477 on
December  31,  1998.  For the year ended  December  31,  1998,  personnel  costs
including  commissions  were 57.9% of total  revenue  compared to 61.9% of total
revenue for the year ended  December  31,  1997.  This  decrease was a result of
higher  productivity and the somewhat fixed nature of those expenses in relation
to the increase in revenue.

         Title  remittance  fees  relate to the amounts  paid  pursuant to title
insurance  underwriting  agreements  the  Company has with five  national  title
companies.  Title  remittance  fees as a  percentage  of revenue  have  remained
relatively unchanged when comparing 1998 results with fiscal year 1997.

         Rent expense  decreased  as a  percentage  of revenue in the year ended
December 31 1998 to 5.4% from 8.3% in 1997.  These  decreases were the result to
the fixed nature of these costs in relation to the increase in revenue.

         The  significant   components  of  other  operating   expenses  include
supplies,  utilities,  insurance,  depreciation,  title  plant  maintenance  and
access,  postage and professional  fees. Other operating expenses decreased as a
percentage of total  revenue to 22.1% in 1998 from 26.4% in 1997.  This decrease
was the  result of the  relatively  fixed  nature of most of these  expenses  in
relation to the increase in revenue.

         An income tax  provision  of $159,449  was  recorded for the year ended
December 31, 1998 based on the estimated  annual effective tax rate after giving
consideration to the available net operating loss  carryforward.  As of December
31, 1998, the Company's net operating loss carryforward has been fully utilized.

FISCAL 1997 COMPARED TO FISCAL 1996

         In  December  1996,  the  Company  elected  to change its year end from
October to December. These discussions compare the fiscal year ended October 31,
1996 to the calendar year ended December 31, 1997.

         The Company's  revenues  increased by $5,765,849 or 223% for the fiscal
year ended  December  31, 1997 as compared to the fiscal year ended  October 31,
1996. The revenue  increase is attributable to the Company's  expansion into and
increased  market share in Maricopa County,  Arizona,  increased market share in
Yavapai County,  Arizona,  a favorable real estate market and favorable interest
rates.

                                       13
<PAGE>
         Personnel  costs,  including  commissions,  are  the  most  significant
component of the Company's operating expenses. Due to the growth the Company has
been  experiencing  since initiating its growth plan,  personnel costs increased
137% for the fiscal year ended  December  31,  1997  compared to the fiscal year
ended October 31, 1996. The number of people  employed by the Company  increased
from 112 on December 31, 1996 to 175 on December  31, 1997.  For the fiscal year
ended December 31, 1997,  personnel  costs including  commissions  were 61.9% of
total revenue  compared to 76.8% of total revenue for the year ended October 31,
1996.

         Title  remittance  fees  relate to the amounts  paid  pursuant to title
insurance  underwriting  agreements the Company has. Title  remittance fees as a
percentage of revenue  decreased  when  comparing  1996 results with fiscal year
1997 due to more favorable terms in the underwriting agreements.

         Rent expense  decreased  as a  percentage  of revenue in the year ended
December 31, 1997 to 8.3% from 11.5% in 1996. These decreases were the result of
the fixed nature of these costs in relation to the increase in revenue.

         The  significant   components  of  other  operating   expenses  include
supplies,  utilities,  insurance,  depreciation,  title  plant  maintenance  and
access,  postage and professional  fees. Other operating expenses decreased as a
percentage of total  revenue to 26.4% in 1997 from 45.0% in 1996.  This decrease
was the  result of the  relatively  fixed  nature of most of these  expenses  in
relation to the increase in revenue.

LIQUIDITY AND CAPITAL RESOURCES

         Capital Title Group requires capital to expand its  geographical  base,
make acquisitions, further implement its market penetration program, recruit and
train new personnel and purchase  additional property and equipment to implement
its  expansion  program.  During the year ended  December 31, 1998,  the Company
financed its operating and business  development  activities  through  operating
revenue,  through the private placement of shares of common stock which resulted
in net proceeds to the Company of approximately $5,951,000 and through a private
placement  and  convertible  debentures  which  resulted in net  proceeds to the
Company of $125,000.

         On March 31, 1998, the Company completed a private placement of 463,500
units at $3.00 per unit. Each unit consisted of two shares of common stock and a
warrant  to  purchase  one share of common  stock at a per share  price of $2.50
within a two year period.  The net proceeds  from this  private  placement  were
approximately $1,300,000.

         On April 30, 1998 the Company completed a $5,000,000  private placement
of common stock in which  3,703,703  shares of common stock were issued at $1.35
per share. In addition,  the Company issued  three-year  warrants to purchase an
additional  308,642  shares of common stock at $1.62 per share to the investment
banking firm that acted as placement agent in the transaction.  The net proceeds
from this private placement of approximately $4,400,000 were used by the Company
to support  expansion of its business in Arizona and  California and for working
capital and general corporate purposes.

         On October 29, 1998,  the Company  issued 86,712 shares of common stock
to  developers  in a  transaction  to acquire a  build-to-suit  building for its
corporate  offices.  In addition,  the Company has obtained a loan commitment in
the amount of $3,650,000 to finance the building. This 10 year non-recourse loan
with a 25 year amortization will bear interest at approximately 7.4%.

                                       14
<PAGE>
         At  December  31,  1998,  the  Company  had  current  assets   totaling
$6,180,454 compared to current liabilities which totaled $3,853,655.  Management
believes  that  cash on hand  and  future  cash  flow  from  operations  will be
sufficient to meet the Company's  expansion  plans and to pay all obligations as
they become due.

         In February 1999, the Company secured a $5,000,000 credit facility from
a bank which will bear  interest on any  outstanding  balance at the prime rate.
This credit facility is comprised of a $2,000,000 revolving line of credit and a
$3,000,000  term loan to be used for future  acquisitions.  No amounts have been
drawn against this credit facility.

YEAR 2000 ISSUE

         Many older computer  programs use only two digits to identify a year in
the date field.  These programs were designed and developed without  considering
the  impact  of the  upcoming  change in the  century.  If not  corrected,  many
computer applications could fail or create erroneous results by the year 2000.

         The Company has examined its operating  systems and, with the exception
of nine offices  recently  acquired in Northern  California,  believes  that its
operations are currently year 2000 compliant.  The computer systems and programs
currently  used by the nine  offices  the  Company  acquired  from  Northwestern
Consolidated  Corporation  are not  year  2000  compliant;  however,  it was the
Company's  intentions  at the time of the  acquisition  to replace these systems
prior to December 1999 with technology and programs similar to those used in its
other operations.  It is estimated that the costs associated with purchasing and
installing  this  technology  will  be  approximately  $620,000.   These  costs,
consisting  primarily of hardware and software  purchased and installed by third
party vendors,  will be capitalized and will have a nominal impact on results of
operations.

         The  Company  has  initiated  formal  communications  with  all  of its
significant  suppliers,  larger customers and other parties of which the Company
electronically  interacts  to  determine  the  extent  to  which  the  Company's
interface  systems are vulnerable to those third  parties'  failure to remediate
their own year 2000 issues.  The Company is not aware of any significant  impact
on its  operations  that would result from third party year 2000 issues based on
presently  available  information.  However,  there can be no guarantee that the
systems of other  companies on which the  Company's  systems rely will be timely
converted and would not have an adverse effect on the Company's systems.

         The  Company's  business and  financial  transactions  are processed on
local area networks  comprised of relatively new personal computers and servers.
As a  contingency  plan,  in the  event of any  unforseen  problems  related  to
communications  or third party interface,  the Company could input,  process and
store data on stand-alone  networks until such problems could be remedied.  This
contingency  plan  would,  however,  be  negatively  impacted  in the event of a
catastrophic  failure in banking  systems and the failure of systems  related to
county recorders.

                                       15
<PAGE>
FORWARD-LOOKING STATEMENTS

     This  Annual  Report  on  Form  10-KSB  contains  certain   forward-looking
statements. The forward-looking statements contained herein are based on current
expectations  that involve a number of risks and  uncertainties.  Among  others,
these forward-looking statements are based on assumptions that (a) the volume of
real estate transactions in the Company's market areas will remain at sufficient
levels to  support  the  company's  business,  (b) the  Company  will be able to
successfully  integrate  acquired  businesses  and  the  results  of  operations
therefrom will support the acquisition  price, (c) that the Company will be able
to retain, and when needed, add key personnel,  (d) that the Company's forecasts
will  accurately  anticipate  market demand,  (e) that there will be no material
adverse changes in the Company's  existing  operations,  (f) the Company will be
able to obtain  sufficient  equity  or debt  funding  to  increase  its  capital
resources by the amount needed for new business acquisitions, if any and (g) the
Company will not suffer from problems  related to Year 2000 issues.  Assumptions
related to the foregoing  involve judgments with respect to, among other things,
future  economic,   competitive  and  market  conditions,  and  future  business
decisions,  all of which are beyond the  control of the  Company.  Although  the
Company believes that the assumptions underlying the forward-looking  statements
are reasonable,  any of the assumptions  could prove inaccurate and,  therefore,
there can be no  assurance  that the  results  contemplated  in  forward-looking
statements  will be realized.  In addition,  the business and  operations of the
Company  are  subject to  substantial  risks,  which  increase  the  uncertainty
inherent  in  such  forward-looking  statements.  In  light  of the  significant
uncertainties  inherent in the forward-looking  information included herein, the
inclusion of such information  should not be regarded as a representation by the
Company,  or any other person,  that the Company's  plans or objectives  will be
achieved.

                                       16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

                         Report of Independent Auditors

Shareholders and Board of Directors
Capital Title Group, Inc.

         We have audited the accompanying consolidated balance sheets of Capital
Title Group,  Inc. and  Subsidiaries  (the  Company) as of December 31, 1998 and
1997,  and the related  consolidated  statements  of  operations,  stockholders'
equity,  and cash flows for each of the two years in the period  ended  December
31, 1998. 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 audits to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  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 consolidated financial position of
the Company at December 31, 1998 and 1997, and the consolidated results of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 1998, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Phoenix, Arizona
March 5, 1999

                                       17
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                            December 31,
                                                        1998            1997
                                                    -----------     -----------
ASSETS
Current Assets:
  Cash and cash equivalents                         $ 4,833,826     $   198,903
  Accounts receivable, net                              364,725         109,906
  Notes and other receivables                           406,028          36,287
  Other current assets                                  575,875          16,554
                                                    -----------     -----------
     Total Current Assets                             6,180,454         361,650

Property and Equipment, net                           8,863,133       1,560,655

Other Assets:
  Notes receivable                                      231,531              --
  Investment in title plant                             520,249         175,000
  Deposits and other assets                             312,693          90,823
  Property held for investment                          161,270          65,696
  Goodwill                                              259,024              --
                                                    ===========     ===========
     Total Assets                                   $16,528,354     $ 2,253,824
                                                    ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current portion of long-term debt                 $   532,346     $   553,119
  Accounts payable                                      664,737         317,003
  Accrued expenses                                    2,656,572         150,647
                                                    -----------     -----------
     Total Current Liabilities                        3,853,655       1,020,769

Long-Term Debt                                        1,766,815         415,362
Other Liabilities                                       117,905              --

Stockholders' Equity:
  Common stock, $.001 par value, 50,000,000
   shares authorized,16,926,791 and 11,231,029
   shares issued and outstanding in 1998
   and 1997,  respectively                               16,927          11,231
Additional paid-in capital                           10,944,294       2,653,731
Accumulated deficit                                    (171,242)     (1,847,269)
                                                    -----------     -----------
     Total Stockholders' Equity                      10,789,979         817,693
                                                    -----------     -----------
       Total Liabilities and Stockholders' Equity   $16,528,354     $ 2,253,824
                                                    ===========     ===========

                   The accompanying notes are an integral part
                    of the consolidated financial statements

                                       18
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                      Year ended December 31,
                                                     1998              1997
                                                  -----------       -----------
REVENUE:
 Title insurance premiums                         $14,634,442       $ 5,359,001
 Escrow and related fees                            7,030,248         2,190,641
 Account servicing                                    504,813           341,292
 Other income                                         248,727           186,151
 Interest income                                      787,995           271,419
                                                  -----------       -----------
                                                   23,206,225         8,348,504
                                                  -----------       -----------
EXPENSES:
 Personnel costs                                   11,186,564         4,650,618
 Escrow commissions                                 2,249,468           519,670
 Title remittance fees                              1,459,452           494,776
 Rent                                               1,254,010           692,732
 Other operating expenses                           5,121,998         2,206,402
 Interest expense                                      99,257            71,458
                                                  -----------       -----------
                                                   21,370,749         8,635,656
                                                  -----------       -----------

 Income (loss) before income taxes                  1,835,476          (287,152)

 Income tax provision (benefit)                       159,449           (42,434)
                                                  -----------       -----------

 Net income (loss)                                $ 1,676,027       $  (244,718)
                                                  ===========       ===========
 Net income (loss) per common share:
      Basic                                       $       .11       $     (0.02)
                                                  ===========       ===========
      Diluted                                     $       .11       $     (0.02)
                                                  ===========       ===========
 Weighted average shares outstanding:
      Basic                                        14,566,390        11,088,029
                                                  ===========       ===========
      Diluted                                      15,938,041        11,088,029
                                                  ===========       ===========

                   The accompanying notes are an integral part
                    of the consolidated financial statements

                                       19
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                          Common Stock       Additional
                                     --------------------     Paid-in     Accumulated
                                       Shares    Par Value     Capital       Deficit
                                     ----------  ---------   -----------   -----------
<S>                                 <C>          <C>       <C>           <C>
Balance at December 31, 1996         10,316,029   $10,316   $ 1,757,346   $(1,602,551)

Shares issued in private placement,
net of costs of $17,700                 915,000       915       896,385            --

Net loss                                     --        --            --      (244,718)
                                     ----------   -------   -----------   -----------

Balance at December 31, 1997         11,231,029    11,231     2,653,731    (1,847,269)

Shares issued in private placements,
net of costs of $754,000              4,727,415     4,728     5,946,886            --

Shares issued in connection with
options exercised                         7,700         7         7,693            --

Shares issued in connection with
convertible debentures                  250,000       250       249,750            --

Shares issued in connection with
acquisitions                            710,647       711     2,086,234            --

Net income                                   --        --            --     1,676,027
                                     ----------   -------   -----------   -----------

Balance at December 31, 1998         16,926,791   $16,927   $10,944,294   $  (171,242)
                                     ==========   =======   ===========   ===========
</TABLE>


                   The accompanying notes are an integral part
                    of the consolidated financial statements

                                       20
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                        Year Ended December 31,
                                                         1998            1997
                                                     -----------     -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                    $ 1,676,027     $ (244,718)
Adjustments to reconcile net income (loss) to net
 cash provided (used) by operating activities:
 Depreciation and amortization                           678,658        293,212

Changes in operating assets and liabilities, net
 of effects from purchase of subsidiaries:
 Accounts receivable                                    (182,420)       (91,197)
 Income taxes receivable                                      --         25,796
 Notes and other receivables                            (102,836)        36,287
 Other current assets                                   (492,979)       (32,635)
 Deposits and other assets                               (97,052)       (32,124)
 Accounts payable                                        198,767       (232,563)
 Accrued expenses                                        753,728         79,437
 Other liabilities                                        39,905             --
                                                     -----------     ----------
Net Cash Flows - Operating Activities                  2,471,798       (198,505)
                                                     -----------     ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                   (3,192,277)      (746,922)
 Property held for sale                                       --        (21,500)
 Purchase of subsidiaries, net cash                      209,921             --
 Purchase of title plant                                 (97,447)            --
                                                     -----------     ----------
Net Cash Flows - Investing Activities                 (3,079,803)      (768,422)
                                                     -----------     ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Borrowings                                              125,000        401,126
 Debt service payments                                  (581,254)      (208,959)
 Proceeds from the issuance of stock, net              5,699,182        897,300
                                                     -----------     ----------
Net Cash Flows - Financing Activities                  5,242,928      1,089,467
                                                     -----------     ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS                                            4,634,923        122,540

CASH AT THE BEGINNING OF THE YEAR                        198,903         76,363
                                                     -----------     ----------

CASH AT THE END OF THE YEAR                          $ 4,833,826     $  198,903
                                                     ===========     ==========

                   The accompanying notes are an integral part
                    of the consolidated financial statements

                                       21
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     NATURE OF CORPORATION:

Capital Title Group,  Inc. (the "Company") is a Delaware  corporation which acts
as the parent holding company of the following subsidiaries.

Capital Title Agency, Inc. ("Capital Title") is an Arizona corporation which has
operated under the authority of the State Banking  Commission  since November 1,
1981.  Capital Title is an independent  title agency  providing  escrow services
and, as an agent for four title  insurance  companies,  issues  title  insurance
policies to the real estate industry in Maricopa, Yavapai and Mohave Counties in
Arizona.  As of  March  1,  1999  Capital  Title  operated  28  offices  located
throughout Maricopa, Yavapai and Mohave Counties in Arizona.

New Century Title Company ("New Century"), a California corporation, purchased a
dormant escrow and title agency in San Diego, California and began operations as
an independent title agency in July 1998.

New Century  Title  Company of  Northern  California  ("New  Century of Northern
California")   is  a  California   corporation   which   acquired   Northwestern
Consolidated  Corporation and its  subsidiaries in November 1998. New Century of
Northern  California is an independent  title agency  providing  escrow services
and, as an agent for a title insurance company,  issues title insurance policies
to the real estate  industry  in Sonoma,  Contra  Costa and Alameda  Counties in
California.  New Century of Northern California  currently operates nine offices
in the San Francisco region.

New Century Insurance  Services,  Inc.  ("NCIS"),  an Arizona  corporation,  was
formed in January 1998 as an independent property and casualty insurance agency.
NCIS began  operations  in April 1998.  Effective in January  1999,  the Company
decided to exit the property and casualty insurance market and accordingly, sold
an 80% interest in NCIS to NCIS's president.

     BASIS OF PRESENTATION:

The accompanying  consolidated  financial statements include the accounts of the
Company and its wholly-owned  subsidiaries.  All material inter-company accounts
and transactions have been eliminated in consolidation.

The  preparation  of  consolidated   financial  statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts  reported in the consolidated  financial
statements and the  accompanying  notes.  Actual results could differ from those
estimates.

     CASH AND CASH EQUIVALENTS:

Cash and cash equivalents  include all highly liquid investments  purchased with
an initial maturity of three months or less.

                                       22
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     ACCOUNTS RECEIVABLE:

The Company uses the allowance  method to account for  non-collectible  accounts
receivable.  The allowance is established  based upon a review of the individual
accounts  and  the  Company's  prior  collection  history.   The  allowance  for
non-collectible accounts was $27,942 and $13,752 in 1998 and 1997, respectively.

     INCOME RECOGNITION:

Title  insurance  premiums and escrow fees are recognized as revenue at the time
of closing of the related real estate transaction. Income from account servicing
and  other  fees is  recognized  when the  service  is  performed.  Income  from
insurance  recoveries is recognized when the dispute is settled and the money is
received.

     PROPERTY AND EQUIPMENT:

Property  and  equipment  are  stated  at cost and are  being  depreciated  on a
straight-line basis over estimated useful lives and consist of the following:

                                         Useful Lives      1998         1997
                                        --------------  -----------  ----------
    Land and construction in progress              N/A  $ 1,872,271  $       --
    Buildings and leasehold improvements    10-40years    4,174,975     285,113
    Office equipment                            5years    4,533,085   1,683,472
    Furniture and fixtures                      7years    2,583,289     273,048
    Vehicles                                    5years      270,098      61,418
                                                        -----------  ----------
                                                         13,433,718   2,303,051
    Less: accumulated depreciation and
          amortization                                   (4,570,585)   (742,396)
                                                        -----------  ----------
                                                        $ 8,863,133  $1,560,655
                                                        ===========  ==========

     CAPITAL LEASE OBLIGATION:

The Company is the lessee of office  equipment  under capital  lease  agreements
which expire throughout the year 2000. The asset and liability under the capital
lease  are  recorded  at the lower of the  present  value of the  minimum  lease
payments or the fair market value of the asset.  The asset is amortized over the
lower of its related lease term or its estimated productive life.

    TITLE PLANT:

Title  plants are  recorded  at the cost  incurred  to  construct  and  organize
historical  title  information  to the  point  it can be used to  perform  title
searches.  Cost  incurred  to  maintain,  update and  operate  title  plants are
expensed as incurred.  Title plants are not amortized as they are  considered to
have an indefinite life if maintained.

                                       23
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     GOODWILL:

The Company  recorded  approximately  $263,000  of  goodwill  related to cost in
excess of net assets acquired  pursuant to its purchase of a title agency in San
Diego, California. Goodwill is being amortized over twenty years and accumulated
amortization at December 31, 1998 was approximately $4,000.

     INCOME TAXES:

The Company and its subsidiaries file consolidated  federal and state income tax
returns.  The Company  accounts for income taxes in accordance with Statement of
Financial  Accounting  Standards  Statement No. 109 ACCOUNTING FOR INCOME TAXES.
Statement 109 provides that deferred tax assets and  liabilities  are recognized
for  the  future  tax  consequences  attributable  to  differences  between  the
financial  statement  carrying  amounts of existing  assets and  liabilities and
their  respective  tax basis,  and the  utilization  of the net  operating  loss
("NOL")  carryforwards.  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.

     EARNINGS PER SHARE:

In 1997,  the Financial  Accounting  Standards  Board issued  Statement No. 128,
EARNINGS PER SHARE.  Statement 128 replaced the calculation of primary and fully
diluted  earnings per share ("EPS") with basic and diluted EPS.  Unlike  primary
EPS,  basic  EPS  excludes  any  dilutive  effects  of  options,   warrants  and
convertible  securities.  Diluted EPS is very similar to the previously reported
fully diluted EPS.

The following table sets forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
                                                 For the year ended December 31,
                               ------------------------------------------------------------------
                                            1998                              1997
                               --------------------------------  --------------------------------
                                                      Per share                         Per share
                               Net income    Shares    amount    Net loss     Shares      amount
                               ----------    ------    ------    --------     ------      ------
<S>                            <C>         <C>          <C>      <C>         <C>          <C>
Basic EPS                      $1,676,027  14,566,390   $0.11    $(244,718)  11,088,029   $(0.02)
                                                        =====                             ======
Effect of Dilutive Securities:
 Stock options                         --   1,237,569                   --           --
 Warrants                              --     134,082                   --           --
                               ----------  ----------            ---------   ----------
Diluted EPS                    $1,676,027  15,938,041   $0.11    $(244,718)  11,088,029   $(0.02)
                               ==========  ==========   =====    =========   ==========   ======
</TABLE>

     FAIR VALUE OF FINANCIAL INSTRUMENTS:

The Company discloses fair value  information about financial  instruments where
it is practicable to estimate their value in accordance  with Statement No. 107,
DISCLOSURES  ABOUT FAIR VALUE OF FINANCIAL  INSTRUMENTS.  The Company  estimates
that the carrying value of its financial  instruments,  consisting of cash, cash
equivalents,  certificates  of deposit,  notes  receivable and debt  obligations
approximate their fair values at December 31, 1998 and 1997.

                                       24
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     RECLASSIFICATIONS:

Certain   reclassifications  have  been  made  to  the  prior  period  financial
statements to conform to the current period presentation.

2. ACQUISITION:

In November 1998, the Company acquired Northwestern Consolidated Corporation for
a purchase price of  approximately  $3.5 million in cash and 665,647  restricted
shares  of its  common  stock.  The  merger  which is being  accounted  for as a
purchase was effective November 1, 1998.

The assets acquired and liabilities assumed in this acquisition were as follows:

        Assets acquired at fair value               $7,917,911
        Liabilities assumed at fair value           (2,454,351)
                                                    ==========
                 Total purchase price               $5,463,560
                                                    ==========

The  unaudited  proforma  results of  operations,   assuming  this   acquisition
occurred  at the  beginning  of each  period  presented,  are  indicated  in the
following  table.  These  unaudited  proforma  results  have been  prepared  for
comparative  purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the combination been in effect
on the dates indicated.

                                         Year ended December 31,
                                         1998               1997
                                      -----------       -----------
      Revenue                         $31,583,000       $17,972,000
      Net income (loss)               $ 2,335,000       $  (323,000)
      Basic EPS                       $      0.15       $     (0.03)
      Diluted EPS                     $      0.14       $     (0.03)

3. CASH IN ESCROW:

The Company is the  custodian  of cash  deposited  by  customers  with  specific
instructions  as to its  disbursement  from  active  escrow,  trust and  account
servicing.  The  balances  in these  accounts  have not been  included  in these
financial statements.  As of December 31, 1998, the accounts contain balances of
approximately $82,938,000.

4. CONCENTRATION OF CREDIT RISK:

The  Company   maintains  cash  and  cash  equivalents  with  various  financial
institutions. Deposits not to exceed $100,000 at each institution are insured by
the Federal Deposit Insurance Corporation. At December 31, 1998, the Company had
uninsured cash and cash equivalents of approximately $1,297,000.

                                       25
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INCOME TAXES:

The income tax provision (benefit) consists of the following:

                                                 Year Ended December 31,
                                                    1998          1997
                                                  --------      --------
      Current tax provision (benefit)             $119,544      $(42,434)
      Deferred tax provision                        39,905            --
                                                  --------      --------
                                                  $159,449      $(42,434)
                                                  ========      ========

The income tax benefit for the year ended  December  31, 1997  related to income
tax refunds received from the IRS due to NOL carrybacks the Company utilized.

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the  Company's  deferred  tax  assets as of  December  31,  1998 and 1997 are as
follows:

                                                  1998             1997
                                                ---------       ---------
      Accounts receivable                       $   5,501       $   3,160
      Property and equipment                     (115,980)        (32,183)
      Alternative minimum credit                   70,574              --
      Loss carryforwards                               --         312,140
                                                ---------       ---------
                                                  (39,905)        283,117
      Less:  valuation allowance                       --        (283,117)
                                                =========       =========
                                                $ (39,905)      $      --
                                                =========       =========

At December 31, 1998,  the Company has fully  utilized  its net  operating  loss
carryforwards  of  approximately  $1,750,000  for federal  and state  income tax
purposes.

The reconciliation of the provision (benefit) for income taxes with the expected
income taxes based on the statutory federal income tax rate is as follows:

                                                   Year Ended December 31,
                                                      1998         1997
                                                    ---------    --------
      Expected  income tax  provision  (benefit)
      at the federal statutory rate                 $ 642,106    $(97,632)
      State income taxes net of federal benefit        16,154          --
      Effect of rate schedule                          (5,334)         --
      Effect of net permanent differences              15,612       7,547
      Effect of alternative minimum tax                70,574          --
      Utilization of net operating loss carryover    (579,663)         --
      Net operating loss unutilized                        --      47,651
                                                    ---------    --------
                                                    $ 159,449    $(42,434)
                                                    =========    ========

                                       26
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

6.  LONG TERM DEBT:

Long term debt consists of the following:
                                                       1998              1997
                                                    ----------         ---------
8.75%  note  payable  to  Imperial   Bank  of
California,     with    monthly     principal
installments of $1,417 plus accrued interest,
due February 2000; secured by building.             $1,523,969         $     --

8.2%  note   payable  to  Imperial   Bank  of
Arizona, with monthly installments of $11,000
including   principal   and   interest,   due
November  1999;   secured  by  furniture  and
equipment                                              105,978          223,980

8%  note  payable  to  an  individual,   with
monthly   installments  of  $435,   including
principal  and  interest,  due October  2011;
secured by land.                                        41,173           42,972

8.5% credit line to Imperial Bank of Arizona,
with   monthly    installments   of   accrued
interest,  credit line matures November 1999;
secured  by  furniture  and  equipment.   The
maximum credit line limit is $250,000.                      --          151,126

10% note  payable  to a related  corporation,
with  monthly  installments  of  $3,187,  due
January 2001, unsecured.                                    --          101,115

Note payable to Imperial Bank of  California,
with monthly interest  payments at prime plus
1%; principal due March 1999                            36,000               --

Various  notes  payable with  interest  rates
ranging  from  8.75%  to  10.5%;  secured  by
automobiles                                                 --           15,405

Convertible notes                                      125,000          250,000

Capital lease obligations, with varying rates
of  9%  to  13%  throughout  the  year  2000;
secured by equipment.                                  467,041          183,883
                                                    ----------         --------
                                                     2,299,161          968,481
Less:  current portion                                (532,346)        (553,119)
                                                    ----------         --------
                                                    $1,766,815         $415,362
                                                    ==========         ========

During  the year ended  December  31,  1997,  the  Company  issued  $250,000  in
convertible  notes for the purpose of  obtaining  capital to open two new escrow
branches.  The  convertible  notes require payment of interest only for eighteen
months at an interest  rate equal to the prime rate (in effect) plus 2 1/2%.  At
any time within the  eighteen  months,  the note holders will have the option of
converting the  obligation  into common stock of the Company at $1.00 per share.
On October 16,  1998,  holders of the  Company's  convertible  notes  elected to
convert $250,000 of the notes into 250,000 shares of the Company's common stock.

                                       27
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On February 2, 1998,  the Company issued  $125,000 in convertible  notes for the
purpose of obtaining  capital to open a new branch in Maricopa County,  Arizona.
The  convertible  notes  have the same terms as those  described  above with the
exception  that they are  convertible  into common stock of the Company at $2.00
per share.  The convertible  notes are secured by furniture and equipment in the
respective branch.

As of December 31, 1998 no amounts were drawn on the Company's  $250,000  credit
line;  however  $150,000 was committed for a standby  letter of credit  required
pursuant to an office lease.

In February 1999, the Company  secured a $5,000,000  credit facility from a bank
which will bear  interest on any  outstanding  balance at the prime  rate.  This
credit  facility is  comprised of a  $2,000,000  revolving  line of credit and a
$3,000,000  term loan to be used for future  acquisitions.  No amounts have been
drawn against this credit facility

The maturities of long-term Debt as of December 31, 1998 were as follows:

                         1999            $  532,346
                         2000             1,654,694
                         2001                60,777
                         2002                15,131
                         2003                 6,156
                      Thereafter             30,057
                                         ----------
                                         $2,299,161
                                         ==========

7. OPERATING LEASE COMMITMENTS:

The Company  leases offices at 38 locations.  The remaining  lease periods range
from one month to sixty  months with  renewal  options up to ten years.  For the
years  ended  December  31,  1998 and 1997 rental  expense  was  $1,254,010  and
$692,732 respectively.

The Company's  future minimum lease  commitments as of December 31, 1998 were as
follows:

                         1999            $1,626,620
                         2000             1,132,984
                         2001               912,671
                         2002               698,790
                         2003               415,391
                      Thereafter            119,925
                                         ----------
                                         $4,906,381
                                         ==========

                                       28
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. RELATED PARTY TRANSACTIONS:

During the years ended  December  31, 1998 and 1997 the Company paid $55,866 and
$41,260 respectively, to Dale A. Head for legal services. Dale A. Head is Donald
R. Head's brother.  In October 1998, the Company hired Dale A. Head as Executive
Vice President and General Counsel.

9. CONTINGENCIES AND UNCERTAINTIES:

The  Company  is a  defendant  in  various  lawsuits  and  claims,  which  it is
vigorously defending.  It is management's contention that such matters arise out
of the  normal  course  of  business,  primarily  related  to title  and  escrow
disputes.  While the results of litigation  cannot be predicted with  certainty,
management  believes,  based on the  advice  of legal  counsel,  that the  final
outcome of such lawsuits and claims will not have a material  adverse  effect on
the Company's financial  position,  results of operations,  or liquidity.  As of
December  31,  1998 and 1997,  the Company had  accrued  $173,000  and  $37,200,
respectively, for possible title and escrow losses.

10. SUPPLEMENTARY CASH FLOW INFORMATION:

The following  supplemental  cash flow  information  is provided with respect to
interest and tax payments,  as well as certain non-cash  investing and financing
activities.

                                                       Year Ended   December 31,
                                                          1998          1997
                                                       ----------   ------------
Cash paid (refunded) during the year:
 Interest                                              $ 99,257       $ 71,458
 Income taxes                                                --        (68,230)
Non-cash investing and financing activities:
 Equipment purchased under capital leases               372,270        141,612
 Conversion of convertible debt                         250,000             --
 Shares issued in connection with a building purchase   260,136             --
 Acquisition of New Century Title Company                95,000             --
 Acquisition of Northwestern Consolidated Corporation   806,556             --

11. EMPLOYEE BENEFIT PLAN:

     PROFIT SHARING PLAN:

The Company maintains a profit sharing plan under Section 401(k) of the Internal
Revenue Code. Under this plan,  substantially all full-time  employees may elect
to defer up to 15% of their salary. The Company contributes $.25 for every $1.00
the  employee  contributes,  up to a maximum of four  percent of the  employee's
earnings.  Vesting  of  matching  contributions  is  based  on  certain  service
requirements. Employees are fully vested after six years of service.

Employer  contributions  for the years  ended  December  31,  1998 and 1997 were
approximately $33,600 and $6,200, respectively.

                                       29
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     CAFETERIA PLAN:

The Company  maintains an Internal  Revenue Code Section 125 Cafeteria Plan as a
benefit to its employees.  The plan provides for employee and dependent coverage
to be paid from  before  tax  compensation.  As such,  there is no effect on the
financial statements.

12. PRIVATE PLACEMENTS OF COMMON STOCK:

On March 31, 1998, the Company completed a private placement of 463,500 units at
$3.00 per unit.  Each unit consisted of two shares of common stock and a warrant
to purchase one share of common stock at a per share price of $2.50 within a two
year period.  The net proceeds from this private  placement  were  approximately
$1.3 million.

On April 30, 1998 the Company  completed a $5.0  million  private  placement  of
common stock in which 3,703,703  shares of common stock were issued at $1.35 per
share.  In  addition,  the  Company  issued  three-year  warrants to purchase an
additional  308,642  shares of common stock at $1.62 per share to an  investment
banking firm that acted as placement agent in the transaction.  The net proceeds
from this  private  placement  of  approximately  $4.4  million were used by the
Company to support  expansion of its business in Arizona and  California and for
working capital and general corporate purposes.

On October  29,  1998,  the  Company  issued  86,712  shares of common  stock to
developers  in a  transaction  to  acquire  a  build-to-suit  building  for  its
corporate  offices.  In addition,  the Company has obtained a loan commitment in
the amount of $3.6 million to finance the  building.  This 10 year  non-recourse
loan with a 25 year amortization will bear interest at approximately 7.4%.

13. STOCK OPTION PLANS:

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related  Interpretations
in  accounting  for its 1996 Stock  Option Plan and the  Company's  Non-Employee
Directors Stock Option Plan because,  as discussed  below,  the alternative fair
value  accounting  provided for under FASB  Statement  No. 123,  ACCOUNTING  FOR
STOCK-BASED  COMPENSATION  (Statement  123)  requires  use of options  valuation
models that were not developed for use in valuing stock  options.  Under APB 25,
because the exercise  price of the  Company's  stock  options  equals the market
price of the underlying  stock on the date of grant, no compensation  expense is
recognized.

The Company's  1996 Stock Option Plan ("The Plan") has  authorized  the grant of
common stock  options to all the Company's  employees.  As of December 31, 1998,
2,372,150  shares have been granted under the Plan.  All options  granted have 5
year terms.  Fifty percent of the options can be exercised after two years,  the
remaining  shares can be  exercised  after three  years  provided  the  optionee
remains  employed with the Company at such vesting date.  Options  granted under
the Plan are not  transferable  and the per share exercise price of an incentive
stock option  granted  under the Plan may not be less than the fair market value
of the common stock on the date of grant.  At the Company's 1998 annual meeting,
the  stockholders  approved the reservation of 2,400,000  shares of Common Stock
for  issuance  pursuant  to the Plan.  The Company  intends to seek  stockholder
approval at its 1999 annual  meeting to increase  the number of shares  reserved
for issuance pursuant to the Plan to 3,900,000 shares.

                                       30
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company's  Non-Employee  Directors Stock Option Plan ("Directors  Plan") has
authorized  the  grant  of  options  to  non-employee  members  of the  Board of
Directors and advisory boards. As of December 31, 1998, 406,000 shares have been
granted under the Directors  Plan. At the  Company's  1998 annual  meeting,  the
stockholders  approved  the  reservation  of 370,000  shares of Common Stock for
issuance pursuant to the Directors Plan. The Company intends to seek stockholder
approval at its 1999 annual  meeting to increase  the number of shares  reserved
for  issuance  pursuant to the  Directors  Plan to 600,000  shares.  All options
granted have 5 year terms.  Fifty percent of the options can be exercised  after
two years,  the remaining shares can be exercised after three years provided the
optionee remains an eligible director at such vesting date. Upon election to the
Board of Directors  each board  member is granted the option to purchase  15,000
shares of common stock.  In addition to the foregoing  option grants,  each year
every non-employee director  automatically  receives an option to acquire 10,000
shares of the  Company's  common stock on the third  business day  following the
date the Company publicly announces its annual financial results;  provided that
such  director  has  attended  at  least  75% of the  meetings  of the  Board of
Directors  and the Board  Committees  of which such  non-employee  director is a
member in the preceding fiscal year.

A summary of the Company's  stock option  activity  pursuant to its stock option
plans, and related information for the years ended December 31, 1998 and 1997 is
as follows:

                                         1998                     1997
                                   -------------------     -------------------
                                              Weighted                Weighted
                                              Average                 Average
                                    Options    Price        Options    Price
                                    -------    -----        -------    -----
Outstanding - beginning of year    1,760,150   $1.10       1,215,100   $1.00
Granted                            1,104,600    2.25         617,850    1.30
Exercised                             (7,700)   1.00              --      --
Forfeited                            (78,900)   1.74         (72,800)   1.35
                                   ---------               ---------
Outstanding - end of year          2,778,150    1.53       1,760,150    1.09
                                   =========               =========

Exercisable at end of year           569,500    1.00              --      --
                                   =========               =========
Weighted - average fair value of
options granted during the year        $1.01                   $0.35
                                   =========               =========

Pro forma information regarding net income and earnings per share is required by
Statement  123, and has been  determined as if the Company had accounted for its
employee stock options under the fair value method of that  statement.  The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:  risk-free
interest rate for 1998 and 1997 of 4.5% and 5.25%, respectively; dividend yields
of 0%;  volatility  factors of the expected market price of the Company's common
stock  for 1998 and 1997 of .44 and .30,  respectively;  and a  weighted-average
expected life of the option of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition, option  valuation models require the input of highly
subjective assumptions including the expected stock price volatility.

                                       31
<PAGE>
                   CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Because the Company's stock options have characteristics significantly different
from  those of traded  options,  and  because  changes in the  subjective  input
assumptions  can  materially  affect the fair value  estimate,  in  management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the  options'  vesting  period.  If the Company had
accounted for its stock-based compensation plans using a fair value based method
of accounting the pro forma information would have been reported as follows:

                                                       Year ended   December 31,
                                                          1998          1997
                                                       ----------    ---------
      Pro forma net income (loss)                      $1,294,066    $(457,335)
      Pro forma net income (loss) per share-basic      $    0.09     $   (0.04)
      Pro forma net income (loss) per share-diluted    $    0.08     $   (0.04)

14. SEGMENT INFORMATION:

The  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 131,
"Disclosures  about  Segments of an Enterprise and Related  Information"  ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for  reporting  information  regarding  operating  segments in annual  financial
statements and requires selected  information for those segments to be presented
in interim financial  reports issued to stockholders.  SFAS 131 also establishes
standards for related  disclosures  about  products and services and  geographic
areas.  To date,  the  Company  has viewed its  operations  as  principally  one
segment; services and one geographic region; the Southwestern United States.

                                       32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not Applicable.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

     The  information  required by this Item is incorporated by reference to the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.

ITEM 10. EXECUTIVE COMPENSATION

     The  information  required by this Item is incorporated by reference to the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required by this Item is incorporated by reference to the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During the years ended  December 31, 1998 and 1997 the Company paid $55,866
and $41,260  respectively,  to Dale A. Head for legal services.  Dale A. Head is
Donald R. Head's brother. Mr. Head has discontinued his private law practice and
has served as the Company's Executive Vice President,  Corporate General Counsel
and Secretary since October 1998.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Index to Exhibits

Exhibit                                                                Method of
  No.                        Description                                 Filing
-------                      -----------                                 ------
  2        Share  Exchange  Agreement  between  Capital Title Agency,
           Inc. and Norvex, Inc. dated May 23, 1996                        (1)
  3.1      Certificate of Incorporation                                    (1)
  3.2      Amended and Restated Bylaws                                     (1)
  10.1     Underwriting  Agreement between Capital Title Agency, Inc.
           and Old Republic  National Title  Insurance  Company dated
           March 1, 1996                                                   (1)
  10.2     Underwriting  Agreement between Capital Title Agency, Inc.
           and First  American Title  Insurance  Company dated August
           16, 1996                                                        (1)
  10.3     Image Service Agreement between Capital Title Agency, Inc.
           and Security Union Title  Insurance  Company dated June 5,
           1996                                                            (1)
  10.4     Title  Plant  Service   Agreement  between  Capital  Title
           Agency,   Inc.  and   Diversified   Information   Services
           Corporation dated March 1, 1996                                 (1)
  10.5     Office Lease between  Capital Title Agency,  Inc. and 4808
           Corporation dated June 7, 1996                                  (1)
  10.6     Promissory Note between PWCC, Inc. and BankOne Arizona, NA
           dated January 5, 1996                                           (1)
  10.7     Assumption  Agreement  between Capital Title Agency,  Inc.
           and PWCC, Inc. dated January 5, 1996                            (1)
  10.8     Employment Agreement between Registrant and Donald R. Head
           dated June 1, 1996                                              (1)
  10.9     Employment  Agreement  between  Registrant  and  Andrew A.
           Johns dated June 1, 1996                                        (1)
  10.10    Promissory  Note between  Capital  Title  Group,  Inc. and
           Imperial Bank, dated November 15, 1996                          (2)
  10.11    Financial Advisor Agreement between  Registrant and Miller
           Capital Corporation dated June 17, 1997                         (2)
  10.12    Employment  Agreement  between Capital Title Agency,  Inc.
           and Milt Ferrantelli  dated June 17, 1997                       (2)

                                       33
<PAGE>
Exhibit                                                                Method of
  No.                        Description                                 Filing
-------                      -----------                                 ------
  10.13    Underwriting  Agreement between Capital Title Agency, Inc.
           and United  General  Insurance  Company  dated January 21,
           1998.                                                           (2)
  10.14    Credit Line  Agreement  between  Registrant  and  Imperial
           Bank, dated November 17, 1997                                   (2)
  10.15    Acquisition  Consulting  Agreement between  Registrant and
           Miller Capital Corporation, dated January 28, 1998.             (2)
  10.16    Issuing  Underwriting   Agreement  between  Capital  Title
           Agency,  Inc. and Chicago  Title  Insurance  Company dated
           April 1, 1998.                                                   *
  10.17    Placement Agent Agreement  between  Registrant and Sanders
           Morris  Mundy Inc.  dated  April 13,  1998.                      *
  10.18    Title Plant  Agreement  between  Registrant  and  Security
           Union Title Insurance Company dated April 29, 1998               *
  10.19    Amendment  to  Acquisition  Consulting  Agreement  between
           Registrant and Miller Capital  Corporation  dated June 12,
           1998.                                                            *
  10.20    Financial Advisor Agreement between  Registrant and Miller
           Capital Corporation dated June 16, 1998.                         *
  10.21    Purchase and Sale Agreement between Registrant and KDC-AZ,
           LLC dated July 1, 1998                                           *
  10.22    Merger    Agreement   among    Registrant,    Northwestern
           Consolidated  Corporation and related  subsidiaries  dated
           September 1, 1998.                                              (3)
  10.23    Credit  Agreement  between  Registrant  and Imperial  Bank
           dated February 1, 1999.                                          *
  21       Subsidiaries                                                     *
  23       Consent of Ernst & Young LLP                                     *
  27       Financial Data Schedule                                          *

----------
*    Filed herewith
(1)  Incorporated  by reference to the  Registrant's  Form 10-QSB filed with the
     Securities and Exchange Commission on September 20, 1996.
(2)  Incorporated  by  reference  to the  Registrant's  Form 10-KSB for the year
     ended December 31, 1997, filed with the Securities and Exchange  Commission
     on March 25, 1998.
(3)  Incorporated  by  reference  to the  Registrant's  Form 8-K filed  with the
     Securities and Exchange Commission on December 10, 1998.

     (b)  Reports on Form 8-K

          During the quarter  ended  December  31, 1998,  the Company  filed the
     following Current Reports on Form 8-K:

          Current Report of Form 8-K dated November 25, 1998-Pursuant to Item 2,
     the  Company  reported  the  consummation  of  transactions  under a Merger
     Agreement  dated  September  1, 1998 among the Company,  New Century  Title
     Company of Northern California,  Northwestern  Consolidated Corporation and
     certain of its  subsidiaries.  Pursuant  to Item  7(a)(4) of Form 8-K,  all
     required  historical  financial  statements  and  all  required  pro  forma
     financial  statements  were filed  pursuant to an amendment to this Current
     Report within 60 days  following the date on which this Current  Report was
     required to have been filed.

                                       34
<PAGE>
                                   SIGNATURES

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

                                             CAPITAL TITLE GROUP, INC.



                                             By /s/ Donald R. Head
                                               -------------------------------
                                                    Donald R. Head
                                                    Chief Executive Officer
Date: March 22, 1999

     In accordance with 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 and on the dates indicated.
<TABLE>
<CAPTION>
<S>                     <C>                         <C>                         <C>
Donald R. Head           Chairman of the Board        /s/ Donald R. Head          March 22, 1999
                                   and                -------------------------
                         Chief Executive Officer

Andrew A. Johns            President, Director        /s/ Andrew A. Johns         March 22, 1999
                                                      -------------------------

Mark C. Walker             Officer and Treasurer      /s/ Mark C. Walker          March 22, 1999
                     Vice President, Chief Financial  -------------------------

Richard A. Alexander             Director             /s/ Richard A. Alexander    March 22, 1999
                                                      -------------------------

Jeffrey P. Anderson              Director             /s/ Jeffrey P. Anderson     March 22, 1999
                                                      -------------------------

David Dewar                      Director             /s/ David Dewar             March 22, 1999
                                                      -------------------------

Theo F. Lamb                     Director             /s/ Theo F. Lamb            March 22, 1999
                                                      -------------------------

Robert B. Liverant               Director             /s/ Robert B. Liverant      March 22, 1999
                                                      -------------------------

Stephen A McConnell              Director             /s/ Stephen A McConnell     March 22, 1999
                                                      -------------------------

Ben T. Morris                    Director             /s/ Ben T. Morris           March 22, 1999
                                                      -------------------------
</TABLE>