SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                 FORM 10 - QSB

               QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE

                        SECURITIES EXCHANGE ACT OF 1934



FOR QUARTER ENDED SEPTEMBER 30, 1998    COMMISSION FILE NUMBER 0-17832

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


       Virginia                            54-1208450
(State of Incorporation)        (I.R.S. Employer Identification No)


2700 South Quincy Street, Suite 540, Arlington, VA    22206
(address of principal executive offices)           (zip code)



Registrant's Telephone Number, Including Area Code:  (703) 931-2274



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

2,323,683 Common Shares were outstanding as of September 30, 1998.



                         ALLSTATE FINANCIAL CORPORATION
                                   FORM 10-QSB
                                      INDEX

                                                                            Page
                                                                          Number
Part I - Financial Information

 Item 1 -  Financial Statements

  Consolidated Balance Sheets at September 30, 1998
  and December 31, 1997                                                     1-2

  Consolidated Statements of Operations for the Three and Six
  Months Ended September 30, 1998 and 1997                                   3

  Consolidated Statements of Shareholders' Equity for the Year Ended
  December 31, 1997 and Nine Months Ended September 30, 1998                 4

  Consolidated Statements of Cash Flows for the Nine Months Ended
  September 30, 1998 and 1997                                               5-6

  Notes to Consolidated Financial Statements                                7-10

 Item 2 -  Management's Discussion and Analysis of Results of
     Operations and Financial Condition                                    11-22


Part II - Other Information

     Item 1 - Legal Proceedings                                              23

     Item 2 - Changes in Securities and Use of Proceeds                      23

     Item 3 - Defaults Upon Senior Securities                                23

     Item 4 - Submission of Matters To a Vote of Security Holders            23

     Item 5 - Other Information                                              23

     Item 6 - Exhibits and Reports on Form 8-K                               24

     Signatures                                                              25


<PAGE>




        PART I - FINANCIAL INFORMATION



<PAGE>




                ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

<TABLE>
                           CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                         September 30,                December 31,
                                                                               1998                       1997*
                                                                          (Unaudited)
                                                      ASSETS

<S>                                                                         <C>                        <C>
     Cash                                                                   $ 2,824,527                $ 4,200,050

     Purchased Receivables - Net                                             25,638,345                 22,917,384

     Advances Receivable - Net                                               14,373,028                 12,914,926

     Other Receivables - Net                                                    218,863                  2,988,587

     Prepaid expenses                                                             6,347                    127,741

     Income Tax Receivable                                                      656,000                      -

     Deferred income taxes                                                    4,283,202                  1,056,688

     Furniture, Fixtures and Equipment, Net                                     179,938                    494,240

     Other Assets                                                             1,032,093                  2,219,031
                                                                           ------------              -------------

         TOTAL ASSETS                                                       $49,212,343                $46,918,647
                                                                            ===========                ===========



                                       LIABILITIES AND SHAREHOLDERS' EQUITY

     Accounts payable and accrued expenses                                  $ 2,129,149              $     720,356
     Credit balances of factoring clients                                     5,890,247                  2,985,974
     Notes payable                                                           18,938,993                 14,373,724
     Convertible Subordinated Notes and Other Notes                           4,961,000                  5,034,327
     Income taxes payable                                                       -                          240,226
                                                                      -----------------              -------------

         TOTAL LIABILITIES                                                   31,919,389                 23,354,607
                                                                            -----------                -----------


* Reclassified for Comparative Purpose



                                        1

<PAGE>



                                  ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                                            CONSOLIDATED BALANCE SHEETS
                                                    (continued)


                                                                       September 30,             December 31,
                                                                             1998                    1997
                                                                        (Unaudited)

COMMITMENTS AND CONTINGENCIES

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

     Common stock,  authorized  10,000,000
         shares with no par value;  3,107,560
         issued,  2,323,683  outstanding  at
         September 30, 1998 and 2,318,451 at
         December 31, 1997, exclusive
         of shares held in the Treasury                                          40,000                     40,000

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

     Treasury Stock (782,677 shares at September 30, 1998
         and 783,877 shares at December 31, 1997)                            (5,017,604)                (5,030,594)

     Retained Earnings                                                        3,396,376                   9,702,322
                                                                           ------------               -------------

TOTAL SHAREHOLDERS' EQUITY                                                   17,292,954                  23,564,040
                                                                            -----------                ------------

                                                                            $49,212,343                 $46,918,647
                                                                            ===========                 ===========

</TABLE>


                 See Notes to Consolidated Financial Statements

                                        2

<PAGE>


<TABLE>

                                      ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                        Three Months Ended September 30, Nine Months Ended September 30,
                                               1998            1997*          1998            1997*
                                          -------------   -------------   ------------     ---------
                                           (Unaudited)      (Unaudited)    (Unaudited)    (Unaudited)
<S>                                       <C>             <C>            <C>             <C>
REVENUE:
     Earned discounts and interest ....   $  1,831,083    $  1,546,155   $  6,846,331    $  5,335,750
     Fees and other income ............        244,966         784,451      1,253,401       1,809,075
                                          ------------    ------------   ------------    ------------

         TOTAL REVENUE ................      2,076,049       2,330,606      8,099,732       7,144,825
                                          ------------    ------------   ------------    ------------

EXPENSES:
     Compensation and fringe benefits .        700,026         753,637      2,640,356       2,215,833
     General and administrative expense      1,712,599         612,047      4,803,356       1,818,106
     Interest expense .................        482,308         201,675      1,341,463         829,002
     Provision for credit losses ......      3,865,502         362,621      9,323,503       1,038,411
                                          ------------    ------------   ------------    ------------

          TOTAL EXPENSES ..............      6,760,435       1,929,980     18,108,678       5,901,352
                                          ------------    ------------   ------------    ------------

(LOSS)/INCOME BEFORE INCOME TAXES .....     (4,684,386)        400,626    (10,008,946)      1,243,473

INCOME (BENEFIT)TAXES/ ................     (1,732,913)        148,232     (3,703,000)        460,086
                                          ------------    ------------   ------------    ------------

NET(LOSS)/INCOME  .....................   $ (2,951,473)   $    252,394   $ (6,305,946)   $    783,387
                                          ============    ============   ============    ============

NET (LOSS)/INCOME PER COMMON SHARE
                  Diluted .............   $      (1.27)   $        .11   $      (2.72)   $        .34
                                          ============    ============   ============    ------------
                  Basic ...............   $      (1.27)   $        .11   $      (2.72)   $        .34
                                          ============    ============   ============    ------------

WEIGHTED AVERAGE NUMBER OF SHARES
                  Diluted .............      2,320,966       2,318,139      2,321,195       2,317,993
                                          ============    ============   ============    ============
                  Basic ...............      2,320,966       2,318,139      2,321,195       2,317,993
                                          ============    ============   ============    ============

* Reclassified for comparitive purposes.
</TABLE>

<TABLE>

                                  ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                           YEAR ENDED DECEMBER 31, 1997
                                     AND NINE MONTHS ENDED SEPTEMBER 30, 1998

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


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

  Conversion of Convertible
     Subordinated Notes to 632
     shares of Common Stock ....           --             --            3,990            --             3,990

  Net Income ...................           --             --             --         1,033,513       1,033,513
                                   ------------   ------------   ------------    ------------    ------------


BALANCE - December 31, 1997 ....         40,000     18,852,312     (5,030,594)      9,702,322      23,564,040

  Conversion of Convertible
     Subordinated Notes to 1,732
     shares of Common Stock ....           --             --           12,990            --            12,990

1,000 Options Exercised at $5.62           --            5,620           --              --             5,620

2,500 Options Exercised at $6.50         16,250           --             --            16,250

Net (Loss) (Unaudited) .........           --             --             --        (6,305,946)     (6,305,946)
                                   ------------   ------------   ------------    ------------    ------------

BALANCE - September 30, 1998 ...   $     40,000   $ 18,874,182   $ (5,017,604)   $  3,396,376    $ 17,292,954
                                   ============   ============   ============    ============    ============
</TABLE>


                 See notes to consolidated financial statements.


                                        4



<PAGE>

<TABLE>

                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<CAPTION>
                                                     Nine Months Ended September 30,
                                                           1998             1997
                                                      --------------      ---------
<S>                                                  <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income/(Loss) ...........................   $  (6,305,946)   $     783,387
     Adjustments to reconcile net income
         to cash provided by operating activities:
         Depreciation - net ......................         313,000          146,900
         Disposition of Automobiles ..............          51,500             --
         Provision for credit losses .............       9,323,502        1,038,411
     Changes in operating assets and liabilities:
         Decrease in other receivables ...........       2,769,724        1,804,832
         Decrease in prepaid expenses ............         121,394           31,954
         (Increase)/Decrease in other assets .....       1,186,938       (1,182,624)
         Increase in accounts payable
              and accrued expenses ...............       1,408,795           18,007
         Decrease/(Increase) in income taxes
              accrued or receivable ..............      (4,122,742)       1,239,932
                                                     -------------    -------------


NET CASH PROVIDED BY
     OPERATING ACTIVITIES ........................       4,746,165        3,880,799
                                                     -------------    -------------


CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of finance receivables, including
         accounts receivable, secured advances,
         repurchases and life insurance contracts     (169,947,755)    (135,092,067)
     Collection of finance receivables, including
         accounts receivable, secured advances,
         repurchases and life insurance contracts      156,445,190      141,218,632
     Increase (Decrease) in credit balances
         of factoring clients ....................       2,904,273         (898,064)
     Purchase of furniture, fixtures and equipment         (50,197)         (88,056)
                                                     -------------    -------------

NET CASH (USED) PROVIDED BY
    INVESTING ACTIVITIES .........................     (10,648,489)       5,140,445
                                                     -------------    -------------
</TABLE>


                                        5

<PAGE>



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

<CAPTION>
                                                   Nine Months Ended September 30,
                                                         1998               1997
                                                    --------------       ---------
<S>                                                    <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from line of credit and
         other borrowings ...............              101,014,904       49,965,511
     Principal payments on line of credit
         and other borrowings ...........              (96,509,963)     (58,549,333)
     Exercise of Options ................                   21,870             --
     Treasury Stock Acquisition Costs ...                      (10)            --
                                                      -------------    -------------

NET CASH PROVIDED (USED) BY IN
     FINANCING ACTIVITIES: ..............                4,526,801       (8,583,822)
                                                      -------------    -------------

NET INCREASE (DECREASE) CASH ............                (1,375,523)        437,422

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

CASH, End of period .....................            $   2,824,527    $   2,062,321
                                                     =============    =============


SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:

     Interest paid ......................            $   1,341,463    $     818,033
                                                     =============    =============

     Income taxes paid ..................            $     418,051    $     300,000
                                                     =============    =============

     Transfer of finance and other
        receivables to other assets .....            $        --      $   1,800,000
                                                     =============    =============

     Issuance of Common Stock in exchange
        For Subordinated Notes ..........            $      12,990    $       2,000
                                                     =============    =============


</TABLE>



                 See notes to Consolidated Financial Statements.

                                        6

<PAGE>

<TABLE>

                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<CAPTION>
                                                     Nine Months Ended September 30,
                                                           1998             1997
                                                      --------------      ---------
<S>                                                  <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income/(Loss) ...........................   $  (6,305,946)   $     783,387
     Adjustments to reconcile net income
         to cash provided by operating activities:
         Depreciation -     ......................         313,000          146,900
         Loss on Disposition of Automobiles ......          51,497             --
         Provision for credit losses .............       9,323,503        1,038,411
     Changes in operating assets and liabilities:
         Decrease in other receivables ...........       2,769,724        1,804,832
         Decrease in prepaid expenses ............         121,394           31,954
         Decrease(Increase)/ in other assets .....       1,186,938       (1,182,624)
         Increase in accounts payable
              and accrued expenses ...............       1,408,795           18,007
         (Increase)Decrease/ in income taxes
              accrued or receivable ..............      (4,122,742)       1,239,932
                                                     -------------    -------------


NET CASH PROVIDED BY
     OPERATING ACTIVITIES ........................       4,746,165        3,880,799
                                                     -------------    -------------


CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of finance receivables, including
         accounts receivable, secured advances,
         repurchases and life insurance contracts     (169,947,755)    (135,092,067)
     Collection of finance receivables, including
         accounts receivable, secured advances,
         repurchases and life insurance contracts      156,445,190      141,218,632
     Increase (Decrease) in credit balances
         of factoring clients ....................       2,904,273         (898,064)
     Purchase of furniture, fixtures and equipment         (50,197)         (88,056)
                                                     -------------    -------------

NET CASH (USED) PROVIDED BY
    INVESTING ACTIVITIES .........................     (10,648,489)       5,140,445
                                                     -------------    -------------
</TABLE>


                                        5

<PAGE>



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

<CAPTION>
                                                   Nine Months Ended September 30,
                                                         1998               1997
                                                    --------------       ---------
<S>                                                    <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from line of credit and
         other borrowings ...............              101,014,904       49,965,511
     Principal payments on line of credit
         and other borrowings ...........              (96,509,963)     (58,549,333)
     Exercise of Options ................                   21,860             --
                                                      -------------    -------------

NET CASH PROVIDED (USED) BY IN
     FINANCING ACTIVITIES: ..............                4,526,801       (8,583,822)
                                                      -------------    -------------

NET (DECREASE)INCREASE  CASH ............               (1,375,523)        437,422

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

CASH, End of period .....................            $   2,824,527    $   2,062,321
                                                     =============    =============


SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:

     Interest paid ......................            $   1,341,463    $     818,033
                                                     =============    =============

     Income taxes paid ..................            $     418,051    $     300,000
                                                     =============    =============

     Transfer of finance and other
        receivables to other assets .....            $        --      $   1,800,000
                                                     =============    =============

     Issuance of Common Stock in exchange
        For Subordinated Notes ..........            $      12,990    $       2,000
                                                     =============    =============


</TABLE>



                 See notes to Consolidated Financial Statements.

                                        6

<PAGE>

 

                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  General.  The  consolidated   financial  statements  of  Allstate  Financial
Corporation and Subsidiaries  (the "Company")  included herein are unaudited for
the  periods  ended  September  30,  1998 and 1997;  however,  they  reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the results for the periods presented.  Certain information and note disclosures
normally included in financial  statements prepared in accordance with generally
accepted  accounting  principles have been condensed or omitted  pursuant to the
rules and  regulations  of the  Securities  and  Exchange  Commission.  Allstate
Financial  Corporation  believes that the  disclosures  are adequate to make the
information  presented not  misleading.  The results of operations  for the nine
months ended September 30, 1998 are not necessarily indicative of the results of
operations to be expected for the remainder of the year.

It is  suggested  that  these  consolidated  financial  statements  be  read  in
conjunction  with  the  consolidated  financial  statements  and  notes  thereto
included in Allstate  Financial  Corporation's  Annual Report on Form 10-KSB for
the year ended December 31, 1997.  Certain  amounts  related to the December 31,
1997  balances  have been  reclassified  to conform with the  September 30, 1998
presentation.

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


3. Line of Credit. As of September 30, 1998, the Company had approximately  $4.1
million  available under a $25.0 million secured  revolving line of credit.  The
revolving line of credit  contains  various sub facilities  which limit its use.
The entire  facility is  available  for  borrowings  by the  Company  secured by
Factored Accounts Receivable or Collateralized Advances backed by pledged client
receivables;  however,  the Company may (i) borrow only $5.0 million  secured by
Collateralized  Advances backed by client  machinery and equipment,  (ii) borrow
only $2.5 million secured by Collateralized Advances backed by client inventory,
and (iii) issue up to $5.0  million of letters of credit.  Borrowings  under the
credit  facility bear interest at a spread over the bank's base rate or a spread
over LIBOR, at the Company's election. The Company is subject to covenants which
are typical in revolving credit  facilities of this type. At September 30, 1998,
the  Company  was in  default of the  financial  covenants  related to  interest
coverage and net worth requirements,  and has received waivers of those defaults
from the  participants in the line of credit.  The current maturity date of this
credit facility is May 27, 2000.

                                       7

<PAGE>

4.  Convertible  Subordinated  Notes Payable.  As of both September 30, 1998 and
September  30, 1997,  the Company had  outstanding  approximately  $5 million in
aggregate principal amount of Convertible  Subordinated Notes issued in exchange
for shares of the  Company's  common  stock  (currently  held by the  Company as
treasury stock). The Convertible  Subordinated Notes were issued in exchange for
785,475  shares  of  common  stock.  The  Convertible  Subordinated  Notes had a
provision that upon the occurrence of certain "fundamental changes", the holders
had the right to have these notes redeemed at par. The election of the new Board
of Directors at the May 1998 shareholder  meeting was deemed to have constituted
a fundamental change under the provision. The Company advised all noteholders of
their right to redeem the notes at par. The company issued a new 10% Convertible
Subordinated Note due September 30, 2003, to a major shareholder, to provide the
Company with a funding  source to repurchase  all notes  tendered by noteholders
under the fundamental change provision.  Additionally the Company offered to all
noteholders,  who  were  accredited  investors,  that did not  request  that the
Company repurchase their notes, the opportunity to exchange their existing notes
for the new notes. The new Convertible  Subordinated Notes issued by the Company
have a maturity date of September 30, 2003, bear interest at a fixed rate of 10%
per annum, are not redeemable at the option of the Company,  and are convertible
into the Company's common stock at $6.50 per share of common stock.  Noteholders
tendered  $2.9  million of notes for  repurchase  at par and $1.7 million of old
notes were exchanged for new notes.  At September 30, 1998, the Company had $4.6
million of new notes (due September 30, 2003)  outstanding  and $364 thousand of
old notes (due  September 30, 2000)  outstanding.  The new notes have  financial
covenants  which are similar to but less  restrictive  than the covenants in the
line of credit.  The Company  was in default of the  covenant  which  relates to
interest  coverage  at  September  30,  1998,  and has  received a waiver of the
default from the required noteholders.

5. New  Accounting  Pronouncements.  In February  1997, The FASB issued SFAS No.
129,   Disclosure  of  Information  about  Capital   Structure.   SFAS  No.  129
consolidates the existing guidance from several other pronouncements relating to
an entity's capital structure. At September 30, 1998, the implementation of this
statement did not  materially  impact the  presentation  of any component of the
Company's financial statements and related footnote disclosures.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
pronouncement  establishes  standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general purpose  financial  statements.  SFAS No. 130 is effective for financial
statements  beginning  after  December  15,  1997.  For the  nine  months  ended
September 30, 1998 and 1997 net income equaled comprehensive income.

Additionally,  in June of 1997, the FASB issued SFAS No. 131,  Disclosures about
Segments of an  Enterprise  and Related  Information.  SFAS No. 131  establishes
standards for the way that public enterprises report information about operating
segments in the annual financial  statements and requires that those enterprises
report  selected  information  about  operating  segments  in interim  financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures  about products and services,  geographic areas and major customers.
SFAS No. 131 is effective for financial  statements beginning after December 15,
1997.  At September  30, 1998,  the  implementation  of this  statement  did not
materially  impact the presentation of any component of the Company's  financial
statements and related footnote disclosures.

                                       8
<PAGE>


6. Certain Contingencies.  The Company is a defendant in Gary Shikba v. Allstate
Financial  Corporation,  et. al.  (f/k/a White,  Trustee v.  Allstate  Financial
Corporation)  pending in the U.S.  Bankruptcy  Court for the Western District of
Pennsylvania.  The Company provided receivables financing and advances for Lyons
Transportation  Lines,  Inc.  ("Lyons").  Lyons was the  subject of a  leveraged
buy-out  and  subsequently  filed a  bankruptcy  petition.  In 1991,  the Lyons'
trustee  brought an action  against the Company  claiming,  among other  things,
fraudulent transfer and breach of contract.  In late 1994, the Company reached a
settlement  agreement  with the  Lyons'  trustee,  subject  to  approval  by the
bankruptcy court, which would have released the Company from all claims upon the
payment of $300 thousand.  In connection with the  settlement,  the Company paid
and charged $300 thousand to the provision for credit losses in 1994. A creditor
in the bankruptcy proceeding, Sherwin-Williams Company, objected to the proposed
settlement  amount  and, in March  1995,  the  objection  was  sustained  by the
bankruptcy  court.  The payment  previously  made by the Company was returned in
April  1996.  Because  of the  amount of time  that has  passed  litigating  the
objection,  the Company  believes that it is probable that some  additional loss
may be recognized in a future  period.  While the exact amount of the additional
loss is not known,  the Company has made a  reasonable  estimate of the probable
loss and the  accrued  interest  on the  probable  loss,  based  on  information
currently  available,  and has included the amount in the provision for loss for
the quarter  ending  September 30, 1998.  The matter is currently  scheduled for
trial on December 2, 1998.

In connection with the same  transaction,  the Company was also named in January
1994 as a  defendant  in  Sherwin-Williams  Company v. Robert  Castello  et. al.
pending in the United States  District Court for the Northern  District of Ohio.
Sherwin-Williams is suing all parties with any involvement in the transaction to
recover damages allegedly  incurred by  Sherwin-Williams  in connection with the
leveraged   buy-out   and   the   bankruptcy   litigation   arising   therefrom.
Sherwin-Williams  asserts that it has or will incur pension fund liabilities and
other  liabilities as a result of the transaction in the  approximate  amount of
$11 million and has  asserted  claims  against the Company in that  amount.  The
complaint  asserts,  among other things,  that the  purchasers of Lyons breached
their purchase agreement with  Sherwin-Williams  by pledging the assets of Lyons
to the  Company to obtain the down  payment.  The Company was not a party to the
purchase agreement. In response to the complaint,  the Company filed a motion to
dismiss  all claims.  In March 1997,  a Federal  magistrate  recommended  to the
District Court that the Company's  motion to dismiss the six claims contained in
the original complaint be granted.  However, the magistrate recommended that the
Company's motion to dismiss two new claims,  i.e.,  tortious  interference  with
contract and civil conspiracy to defraud,  contained in an amended  complaint be
denied.  The District  Court  sustained  the  magistrate's  recommendation.  The
Company  believes  it has  meritorious  defenses  to the claims  and  intends to
contest the suit. However, the probability of a favorable or unfavorable outcome
and the potential  amount of loss, if any,  cannot be determined or estimated at
this time. The case is scheduled for trial April 12, 1999.


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

                                       9
<PAGE>

arrangement.  In 1993,  AG  defaulted  on its  obligations  under the  financing
arrangement with the Company. Thereafter, the Company confessed judgment against
AG and  Guziczek in Virginia  and  commenced  actions in New York to enforce the
guaranties  and to attempt  recovery on the confessed  judgments.  In one of the
actions,  an  answer  and  counterclaim  against  the  Company  was  filed.  The
counterclaim  asserted  claims  for  usury,  diversion  of  proceeds  of  public
improvement  contracts,  and  overpayments  to the Company by AG in excess of $2
million (hereinafter the "Counterclaims").  No specific damage claims amount was
set forth in the Counterclaims.



On August 1, 1994,  Guziczek  filed a voluntary  Chapter 11  petition  under the
United States  Bankruptcy  Code and on June 14, 1995 the case was converted to a
Chapter 7 proceeding.  On January 3, 1996, AG filed a separate voluntary Chapter
7  petition.  No action was ever  taken by the  trustee  in the  Guziczek  or AG
bankruptcy proceedings to pursue the Counterclaims. On June 2, 1997, the trustee
for the AG bankruptcy  estate filed a motion to abandon  certain  claims against
the Company,  including all claims that the Company diverted  proceeds of public
improvement contracts.

 On October 7, 1997,  New York Surety  Company  (hereinafter  referred to as the
"Surety")  filed  pleadings  objecting to the abandonment of such claims against
the  Company.  The Surety  provided  the payment and  performance  bond to AG in
connection with the construction jobs performed for the City of New York. In its
pleadings,  the Surety  asserts that it is subrogated to AG's claims and thereby
seeks to intervene and file an intervenor's  complaint against the Company.  The
proposed complaint adopts the Counterclaims and seeks an accounting.  The Surety
asserts damages of  approximately  $4 million.  On April 9, 1998, the bankruptcy
court  remanded  the  matter  to  state  court.  The  Company  believes  it  has
meritorious  defenses to the  Counterclaims and intends to vigorously defend all
claims.  However,  the probability of a favorable or unfavorable outcome and the
potential  amount of loss,  if any,  cannot be  determined  or estimated at this
time.

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

Except as described above, the Company is not party to any litigation other than
routine proceedings  incidental to its business, and the Company does not expect
that these proceedings will have a material adverse effect on the Company.  From
time to time, the Company is required to initiate  litigation to collect amounts
owed by  former  clients,  guarantors  or  obligors.  In  connection  with  such
litigation,  the Company periodically  encounters  counterclaims by defendant(s)
for material amounts. Such counterclaims are typically without any factual basis
and,  management  believes,  are usually asserted for defensive  purposes by the
litigant.




                      [THIS SPACE INTENTIONALLY LEFT BLANK]


                                       6
<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Forward-Looking Information

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

General

The Company is a specialized  commercial finance company  principally engaged in
providing  financing to small- to medium-sized,  high risk growth and turnaround
companies, including  debtors-in-possession.  The Company's services include the
discounted purchase of accounts receivable ("Factored Accounts Receivable"), and
the making of  advances to its clients  collateralized  by accounts  receivable,
inventory,  equipment, real estate and other assets ("Collateralized Advances").
The Company may advance  funds  secured by the equity in the  client's  Factored
Accounts   Receivable  or  the  collateral  pledged  by  the  client  to  secure
Collateralized  Advances  ("Overadvances").  On occasion,  the Company will also
provide  other  specialized   financing  structures  which  satisfy  the  unique
requirements  of the  Company's  clients.  In  addition,  the  Company  provides
financial  assistance to clients in the form of  guaranties,  letters of credit,
credit  information,  receivables  monitoring,  collection  service and customer
status information.

In May 1997 the  Company  established  a new  division,  Allstate  Factors.  The
Allstate Factors division was engaged in traditional "non-recourse" factoring of
accounts  receivable  in which the  factor  typically  assumes  the risk that an
account debtor may become insolvent.  However,  due to a declining volume in the
division and the departure of primary  staff,  the Company  notified each of the
division's  clients that it would terminate  their  factoring  agreements in the
quarter ending December 31,1998. The Company does not anticipate any significant
negative impact on the collection of the purchased  receivables  associated with
the termination of the agreements.

The Company's  clients have annual revenues  typically between $600 thousand and
$30 million. The Company's clients do not typically qualify for traditional bank
or  asset-based   financing   because  they  are  either  too  new,  too  small,
undercapitalized  (over-leveraged),  unprofitable or otherwise unable to satisfy
the requirements of a bank or traditional asset-based lender. Accordingly, there
is a significant  risk of default and client  failure  inherent in the Company's
business.

                                       11

<PAGE>

The Company often competes  against  traditional  asset-based  lenders and small
independent  finance  companies,  as well as,  occasionally,  banks. The Company
anticipates  that  competition  will remain intense  through all of 1998 and may
continue to exert downward pressure on pricing.  In order to remain competitive,
the Company is, where  necessary and  appropriate,  offering lower rates than it
has  historically.  The Company believes that its ability to respond quickly and
to provide specialized, flexible and comprehensive financial arrangements to its
clients enables it to compete effectively. Although the Company has historically
been successful in replacing major clients, competition resulting in the loss of
one or more major clients and an inability to replace those clients could have a
material adverse effect on the Company.

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

Lifetime Options,  Inc., a Viatical Settlement Company ("Lifetime  Options"),  a
wholly-owned  subsidiary  of the Company,  was engaged in the business of buying
life insurance  policies at a discount from individuals  facing life threatening
illnesses.  During 1997,  Lifetime Options  curtailed any further  purchasing of
policies.  Due to  advances  in  medical  treatments  available  to  many of the
individuals  from  whom the  policies  were  purchased,  assumptions  about  the
discounts  made by  Lifetime  Options  at the times of  purchase  have had to be
revised by the Company,  and as a result no interest is being  recognized on the
policies.  Lifetime  Options may elect to  continue to collect  policies as they
mature or to sell some or all of its policies.

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

Year 2000 Compliance:  The inability of computers,  software and other equipment
utilizing   microprocessors  to  recognize  and  properly  process  data  fields
containing a two digit year is commonly  referred to as the Year 2000 Compliance
issue. The Company has identified all significant applications that will require
modifications  to ensure Year 2000 Compliance.  Internal and external  resources
are being  used to make the  required  modifications.  In  addition,  during the
quarter ending  December 31, 1998, the Company plans to communicate  with others
with whom it does significant  business,  particularly its clients, to determine
their Year 2000  Compliance  readiness  and the  extent to which the  Company is
vulnerable to any third party Year 2000 issues.  The Companys banks have advised
that they have  programs in place to assure  their Year 2000.  The total cost to
the Company of these Year 2000  compliance  activities  is  estimated to be less
than $50 thousand,  none of which has been expended through  September 30, 1998,
and,  thus,  would not be  material  to its  financial  position  or  results of
operations  in any given  year.  The  Company is in the  process of  preparing a
contingency  plan to handle the most  reasonably  likely worst case  scenario in
terms of these Year 2000 issues.  This  contingency  plan should be finalized by
the first quarter of 1999.

                                       12
<PAGE>

<PAGE>



Results of Operations

       The  following  tables set forth  certain items of income and expense for
the periods indicated and indicate the percentage  relationships of each item to
total income.
<TABLE>

<CAPTION>
                                                      For the Nine Months Ended September 30,
                                                              1998                    1997
                                                    (Unaudited)                 (Unaudited)

<S>                                                <C>             <C>         <C>          <C>
REVENUE:
   Earned discounts and interest                   $ 6,846,331     84.5%       $5,335,750   74.7%
   Fees and other revenue                            1,253,401     15.5         1,809,075   25.3
                                                    ----------    -----        -----------------
      TOTAL REVENUE                                  8,099,732    100.0%        7,144,825  100.0%
                                                    ----------    -----        ----------  -----

EXPENSES:
   Compensation and fringe benefits                 2,640,356      32.6         2,215,833   31.0
   General and administrative expense               4,603,356      56.8         1,818,106   25.5
   Interest expense                                 1,341,463      16.6           829,002   11.6
   Provision for credit losses                      9,523,503     117.6         1,038,411   14.5
                                                  -----------     -----        ----------  -----
      TOTAL EXPENSES                               18,108,678     223.6         5,901,352   82.6
                                                   -----------    -----        ----------  -----

INCOME/(LOSS) BEFORE INCOME TAXES                 (10,008,946)   (123.6)        1,243,473   17.4

INCOME TAXES (BENEFIT)                             (3,703,000)    (45.7)          460,086    6.4
                                                   -----------   -------       ----------  -----

NET INCOME/(LOSS)                                 $(6,305,946)    (77.9)%       $ 783,387 (11.0)%
                                                  ===========     ======         ========= ======

NET INCOME/(LOSS) PER COMMON SHARE
              Diluted                                     $(2.72)                       $0.34
                                                           ======                       =====
              Basic                                       $(2.72)                       $0.34
                                                           ======                       =====

WEIGHTED AVERAGE NUMBER OF SHARES
              Diluted                               2,319,930                   2,317,993
                                                    =========                   =========
              Basic                                 2,319,930                   2,317,993
                                                    =========                   =========


</TABLE>



                      [THIS SPACE INTENTIONALLY LEFT BLANK]

                                       13

<PAGE>
<PAGE>



Results of Operations

       The  following  tables set forth  certain items of income and expense for
the periods indicated and indicate the percentage  relationships of each item to
total income.
<TABLE>

<CAPTION>
                                                      For the Nine Months Ended September 30,
                                                              1998                    1997
                                                    (Unaudited)                 (Unaudited)

<S>                                                <C>             <C>         <C>          <C>
REVENUE:
   Earned discounts and interest                   $ 6,846,331     84.5%       $5,335,750   74.7%
   Fees and other revenue                            1,253,401     15.5         1,809,075   25.3
                                                    ----------    -----        -----------------
      TOTAL REVENUE                                  8,099,732    100.0%        7,144,825  100.0%
                                                    ----------    -----        ----------  -----

EXPENSES:
   Compensation and fringe benefits                 2,640,356      32.6         2,215,833   31.0
   General and administrative expense               4,803,356      59.3         1,818,106   25.5
   Interest expense                                 1,341,463      16.6           829,002   11.6
   Provision for credit losses                      9,323,503     114.1         1,038,411   14.5
                                                  -----------     -----        ----------  -----
      TOTAL EXPENSES                               18,108,678     223.6         5,901,352   82.6
                                                   -----------    -----        ----------  -----

INCOME/(LOSS) BEFORE INCOME TAXES                 (10,008,946)   (123.6)        1,243,473   17.4

INCOME TAXES (BENEFIT)                             (3,703,000)    (45.7)          460,086    6.4
                                                   -----------   -------       ----------  -----

NET INCOME/(LOSS)                                 $(6,305,946)    (77.9)%       $ 783,387 (11.0)%
                                                  ===========     ======         ========= ======

NET INCOME/(LOSS) PER COMMON SHARE
              Diluted                                     $(2.72)                       $0.34
                                                           ======                       =====
              Basic                                       $(2.72)                       $0.34
                                                           ======                       =====

WEIGHTED AVERAGE NUMBER OF SHARES
              Diluted                               2,321,195                   2,317,993
                                                    =========                   =========
              Basic                                 2,321,295                   2,317,993
                                                    =========                   =========


</TABLE>



                      [THIS SPACE INTENTIONALLY LEFT BLANK]

                                       13

<PAGE>

<TABLE>

<CAPTION>
                                                     For the Three Months Ended September 30,
                                                           1998                       1997
                                                        (Unaudited)                (Unaudited)

<S>                                              <C>              <C>          <C>            <C>
REVENUE:
   Earned discounts and interest                 $  1,831,083     88.2%        $1,546,155     66.3%
   Fees and other revenue                             244,966     11.8            784,451     33.7
                                                -------------    -----        -----------   ------
        TOTAL REVENUE                               2,076,049    100.0          2,330,606    100.0
                                                 ------------    -----         ----------    -----

EXPENSES:
   Compensation and fringe benefits                   700,026     33.7            753,637     32.3
   General and administrative expense               1,712,599     50.0            612,047     26.2
   Interest expense                                   482,308     23.2            201,675      8.7
   Provision for credit losses                      3,865,502    186.2            362,621     15.6
                                                -------------    -----        -----------    -----

         TOTAL EXPENSES                             6,760,435    325.6          1,929,980     82.8
                                                -------------    -----         ----------    -----

INCOME/(LOSS) BEFORE
   INCOME TAXES (BENEFIT)                           (4,684,386) (225.4)           400,626     17.2

INCOME TAXES (BENEFIT)                              (1,732,913)  (83.4)           148,232      6.4
                                                   ------------  ------         -----------  -----

NET INCOME/(LOSS)                                  $(2,951,473) (142.0)%        $  252,394    10.8%
                                                   ============   ======         ==========    ====

NET INCOME/(LOSS) PER COMMON SHARE
              Diluted                                      $(1.27)                     $0.11
                                                            ======                     =====
              Basic                                        $(1.27)                     $0.11
                                                            ======                     =====

WEIGHTED AVERAGE NUMBER OF SHARES
              Diluted                               2,320,966                   2,318,139
                                                    =========                  =========
              Basic                                 2,320,966                   2,318,139
                                                    =========                  ==========
</TABLE>

<PAGE>



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

<TABLE>
<CAPTION>

                                                          For the Nine Months Ended September 30,

                                                      1998                                      1997
                                                  (Unaudited)                               (Unaudited)
                                             Earned             % of Total                 Earned         % of Total
         Type of Transaction                 Income                Income                  Income           Income

<S>                                          <C>                     <C>                <C>                   <C>
Discount on Factored
     Accounts Receivable                     $3,733,476              46.1%              $3,582,944            50.1%
Earnings on Collateralized
     Advances                                 1,699,786               21.0                 697,856              9.8
Earnings on Overadvances                      1,413,069               17.4                 854,950             12.0
Earnings on Purchased Life
     Insurance Policies                           -                    -                   200,000              2.8
                                        ---------------           --------            ------------           ------
     Total                                    6,846,331               84.5               5,335,750             74.7
Fees and Other Income                         1,253,401               15.5               1,809,075             25.3
                                             ----------             ------             -----------            -----
     Total Revenue                           $8,099,732             100.0%              $7,144,825           100.0%
                                             ==========             =====               ==========           =====
</TABLE>


<TABLE>
<CAPTION>
                                                        For the Three Months Ended September 30,

                                                      1998                                     1997
                                                  (Unaudited)                               (Unaudited)
                                               Earned            % of Total             Earned           % of Total
         Type of Transaction                   Income               Income              Income              Income

<S>                                          <C>                     <C>               <C>                    <C>
Discount on Factored
     Accounts Receivable                     $1,117,357              53.8%             $1,100,130             47.2%
Earnings on Collateralized
     Advances                                   591,132               28.5                238,308              10.2
Earnings on Overadvances                        122,594                5.9                207,717               8.9
                                            -----------             ------           ------------            ------
     Total                                    1,831,083               88.2              1,546,155              66.3
Fees and Other Income                           244,966               11.8                784,451              33.7
                                            -----------             ------           ------------             -----
     Total Revenue                           $2,076,049             100.0%             $2,330,606            100.0%
                                             ==========             =====              ==========            =====
</TABLE>


         Total revenue increased 13.4% in the first nine months of 1998 from the
same period in 1997, from $7.1 million to $8.1 million;  total revenue decreased
10.9% for the third quarter of 1998 from the same period 1997, from $2.3 million
to $2.1 million.  Earned discounts from Factored Accounts  Receivable  increased
4.2%, from $3.6 million to $3.7 million in the first nine

                                       15

<PAGE>


months of 1998  versus the first nine  months of 1997.  In the third  quarter of
1998  and  1997,  earned  discounts  from  Factored  Accounts   Receivable  were
approximately the same at $1.1 million.  Earned discounts from Factored Accounts
Receivable as a percentage of total Factored Accounts Receivable  purchased were
3.2% and 3.0% in the first nine  months of 1998 and 1997,  respectively;  in the
third  quarters  of  1998  and  1997,  earned  discounts  were  3.6%  and  3.0%,
respectively,  of Factored Accounts Receivable. In the first nine months of 1998
and 1997, earned discounts from Factored Accounts Receivable accounted for 46.1%
and 50.1%, respectively, of total income. In the third quarters of 1998 and 1997
earned  discounts  from  Factored  Accounts  Receivable  accounted for 53.8% and
47.2%, respectively, of total income.


Interest earned on Collateralized Advances increased approximately 143.6% in the
first nine months of 1998 versus the comparable period in 1997, to approximately
$1.7 million from $698 thousand and increased  approximately 148.1% in the third
quarter of 1998 over the same quarter in 1997,  to  approximately  $591 thousand
from $238 thousand.  In the first nine months of 1998 and 1997,  interest earned
on   Collateralized   Advances   constituted   approximately   21.0%  and  9.8%,
respectively, of total income. The increase in interest earned on Collateralized
Advances in 1998 reflects a move towards  Collateralized  Advances,  as a larger
part of the  portfolio of our clients.  In the third  quarters of 1998 and 1997,
interest  earned  on  Collateralized   Advances  constituted  28.5%  and  10.2%,
respectively,  of total income. Collateralized Advances bear interest at a rate,
on  average,  of  approximately  1.5%- 2% per month,  or at a spread over prime,
calculated  generally on the average  outstanding  amount of the  Collateralized
Advance during the month. Interest earned on Collateralized Advances is required
to be paid in cash monthly in arrears. See Provision for Credit Losses below.

Interest  earnings on Overadvances  increased  approximately  65.3% in the first
nine months of 1998 versus the comparable period of 1997, to approximately  $1.4
million  from  $855  thousand  and  decreased  approximately  40.9% in the third
quarter of 1998 over the same quarter in 1997,  to  approximately  $123 thousand
from $208 thousand. In the first nine months of 1998 and 1997, interest earnings
on Overadvances  constituted  approximately  17.4% and 12.0%,  respectively,  of
total  income.  In the third  quarters  of 1998 and 1997,  interest  earnings on
Overadvances were 5.9% and 8.9%,  respectively,  of total income. Interest rates
charged on  Overadvances  are usually  greater  than on other types of advances.
Overadvances  are generally  short-term in nature and are repaid directly by the
client.  Interest is usually required to be paid in cash no less frequently than
monthly in arrears.  The increase in interest  earnings on  Overadvances  in the
first nine months ended  September 30, 1998 results  primarily  from activity in
the account of one client,  MGV  International,  Inc. See  Provision  for Credit
Losses below.

Fees and other  income  decreased  by 30.7% to $1.3  million  in the first  nine
months of 1998  from  $1.8  million  for the same  period in 1997.  In the third
quarter of 1998,  fees and other  income  were $245  thousand  compared  to $785
thousand in the third  quarter of 1997.  For 1997,  included in fee income is an
unusually  large  supplemental  discount in the amount of $165  thousand  and an
interest payment of approximately  $235 thousand  associated with the resolution
of a collection case.


Compensation  and Fringe  Benefits.  In the first nine  months of 1998 and 1997,
compensation  and fringe  benefits were $2.6 million (32.6% of total income) and
$2.2 million  (31.0% of total income),  respectively.  For the third quarters of
1998 and 1997,  compensation  and fringe  benefits were $700 thousand  (33.7% of
total income) and $754 thousand  (32.3% of total

                                       16
<PAGE>


income),  respectively.  Within  compensation  and  fringe  benefits,  executive
compensation  increased in the first nine months of 1998 as compared to the same
period in 1997,  from $652  thousand  (9.2% of total  income)  to $926  thousand
(12.6% of total income).  Executive  compensation decreased in the third quarter
of 1998 as  compared  to the same period in 1997,  from $221  thousand  (9.7% of
total income) to $207 thousand (11.1% of total income).  The higher compensation
and fringe benefits (including executive  compensation) during 1998 were chiefly
the result of expenses  associated  with the  severance  of key officers and the
payroll costs associated with Allstate Factors.


<TABLE>
<CAPTION>
                                                          Nine Months Ended                       Three Months Ended
                                                            September 30,                          September 30,
                                                           ---------------                         --------------
                                                          1998               1997                1998               1997
                                                         ------             ------              ------             -----
                                                      (Unaudited)        (Unaudited)         (Unaudited)        (Unaudited)
<S>                                                   <C>               <C>                 <C>                   <C>
Occupancy                                             $  581,085        $   361,382         $   343,245           $119,096
Office Expense                                           503,866            349,535             140,239            138,771
Selling Expenses                                         570,773            385,700             147,428            112,685
Client Litigation                                        914,096            302,130             284,475           (14,177)
Other Professional Fees                                  586,486            129,411             242,756            141,157
Restructuring                                            420,000               --               420,000         --
Proxy Contest                                            873,236               --                 2,712         --
Other                                                    353,814            289,948             131,743            114,515
                                                    ------------       ------------        ------------          ---------
Total General and Administrative                      $4,803,356         $1,818,106          $1,712,598           $612,047
                                                      ==========         ==========          ==========           ========
</TABLE>



Total  general and  administrative  expense  increased to $4.8 million from $1.8
million or $3.0 million  (164%) and to $1.7  million from $612  thousand or $1.1
million (180%),  respectively,  for the nine month and three month periods ended
September  30,  1998.  The  primary  components  of the  increases  were  client
litigation expense, professional fees, expenses related to the proxy contest and
restructuring  charges.  Occupancy expense increased $224 thousand for the three
months  ended  September  30, 1998 as  compared to the like period in 1997.  The
increase was primarily  due to the  write-off of computer  equipment and related
software  that  is now  obsolete.  Client  Litigation  expenses  increased  $556
thousand and $298 thousand for the respective three and nine-month periods ended
September 30, 1998.  The increases were  attributable  to legal fees incurred by
the Company in connection  with ongoing  legal cases to recover  monies owed the
Company or to defend  the  Company as a result of claims  made by  clients.  The
increase  principally related to four specific cases, two of which have recently
been concluded.  The remaining  significant open litigation is described in Note
6. For the nine month period ended September 30, 1998, Other  Professional  Fees
increased to $586  thousand  from $129  thousand or $457  thousand,  principally
related to recruiting fees paid to third parties to recruit  individuals to fill
specific executive and staff positions,  and legal and  administrative  fees for
the issuance of the

                                       17
<PAGE>




Interest  Expense.  Interest  expense was $1.3 million  (16.6% of total  income)
versus  $829  thousand  (11.6% of total  income) for the nine months of 1998 and
1997,  respectively,  and $482  thousand  (23.2% of total  income)  versus  $202
thousand  (8.7%  of total  income)  for the  third  quarters  of 1998 and  1997,
respectively.  The increase in interest expense is primarily attributable to the
Allstate  Factors  division.  Interest  expense on the Convertible  Subordinated
Notes was comparable in the first nine months and third quarter of 1998, to that
in the  first  nine  months  and  third  quarter  of  1997.  The  average  daily
outstanding  balance on the Company's  line of credit was $15.6 million and $4.9
million  for the first  nine  months of 1998 and 1997,  respectively,  and $18.5
million and $3.7 million for the three months ended September 30, 1998 and 1997,
respectively.  The average  interest rate paid on the  Company's  line of credit
decreased  to 8.07%  during the first nine months of 1998 from 8.89%  during the
nine months of 1997 and was 8.05%  during the third  quarter of 1998 as compared
to 8.45%  during the third  quarter of 1997.  The  increase  in the  outstanding
balance in the Company's line of credit reflects the increase in the portfolio.

Provision for Credit Losses. Credit loss experience,  the adequacy of underlying
collateral,  changes  in the  character  and size of the  Company's  receivables
portfolio  and  management's  judgment  are  factors  used  in  determining  the
provision for credit losses and the adequacy of the allowance for credit losses.
Other factors given  consideration  in determining the adequacy of the allowance
are the level of related  credit  balances of factoring  clients and the current
and anticipated  impact of economic  conditions on the  creditworthiness  of the
Company's clients and account debtors.  To mitigate the risk of credit loss, the
Company,  among other things: (i) thoroughly evaluates the collateral to be made
available by each client; (ii) usually collects its Factored Accounts Receivable
directly from account debtors,  which are frequently  (though not always) large,
creditworthy  companies or governmental  entities;  (iii) purchases,  or takes a
first  priority  security  interest in, all accounts  receivable of each client;
(iv) takes,  whenever  available,  blanket  liens on all of its  clients'  other
assets  and,  when  making  Collateralized  Advances,  employs  what  management
believes to be conservative loan-to-value ratios based on auction or liquidation
value appraisals performed by independent appraisers; (v) almost always requires
personal  guarantees  (either unlimited  guarantees or guarantees limited to the
validity  and   collectability   of  accounts   receivable)  from  its  clients'
principals;  and (vi)  actively  monitors its  portfolio of factored and pledged
accounts  receivable,  including  the  creditworthiness  of account  debtors and
periodically  evaluates the value of other  collateral  securing  Collateralized
Advances.


Management  recognizes  that  Collateralized  Advances  entail  different,   and
possibly  greater,   risks  to  the  Company  than  the  factoring  of  accounts
receivable. Risks associated with the making

                                       18


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



The making of  Overadvances  is  generally  considered  by the Company to entail
greater  risk than  either  factoring  of accounts  receivable  or the making of
Collateralized  Advances.  Overadvances  are secured  primarily by equity in the
clients  assets  which is in  excess  of the  formulas  used by the  Company  to
calculate  availability of advances for accounts  receivable  Factored  Accounts
Receivables or Collateralized  Advances.  In addition,  other assets,  including
those owned by the clients principals,  may be pledged.  Accordingly the Company
may be unable to realize the values of such  collateral  to repay  Overadvances.
The  Company  makes  Overadvances  after  determining   specific  uses  of  each
Overadvance  and agreeing  with the client on the  repayment  plan for each such
advance,  which is  usually  a  function  of a  future  purchase  of an  account
receivable or a Collateralized Advance to be made at a future date. Although the
Company  carefully  monitors each  Overadvance,  there can be no assurance  that
Overadvance activity, particularly if concentrated with a single account debtor,
could not have a material adverse effect on the Company.


The  provision  for credit  losses  increased  to $9.3 million in the first nine
months of 1998 from $1.0 million in the first nine months of 1997. The provision
for  credit   losses   during  the  third  quarter  of  1998  was  increased  by
approximately  $3.5  million,  to $3.9 million from $363  thousand.  In the nine
month period ending  September 30, 1998, the Company was negatively  impacted by
(i) the adverse result of litigation of  approximately  $900 thousand,  (ii) the
bankruptcy  of a major obligor of  approximately  $900  thousand,  and (iii) the
decline  in the value of  foreclosed  land based on new  market  information  of
approximately  $645  thousand.  Additionally,  one of the Companys major clients
experienced  severe  difficulties in the second quarter and ceased operations in
the third  quarter,  which  the  Company  believes  may lead to a  write-off  of
approximately  $3 million.  During the third  quarter,  the Company wrote off or
wrote  down  non-performing  assets  by  a  total  of  $300  thousand,  provided
additional  reserves  of  $3.2  million  for  specific  accounts  where  it  was
determined  that a loss in future  periods is likely  based on



                                       19
<PAGE>


specific  actions that occurred in the third  quarter,  and added  approximately
$600 thousand to the allowance for credit losses. The following table provides a
summary of activity  in the  Company's  allowance  for losses  accounts  for the
periods ending September 30, 1997 and 1998.


<TABLE>
<CAPTION>
                                       Nine Months Ended      Three Months Ended
                                     9/30/98     9/30/97    9/30/98     9/30/97
                                          (In Thousands)

<S>                                   <C>           <C>      <C>         <C>
Balance Beginning of Period
  Specific Allocation                 $1,461        $525     $3,625      $1,675
  Allowance for Credit Losses          1,279       2,054      1,165       1,536
Additions                              8,823       1,038      3,366         362
Write-Offs                            (3,740)     (1,120)      (307)       (760)
Recoveries                                40         330         14          14
Balance - End of Period
  Specific Allocation                  6,309       1,084      6,309       1,084
  Allowance for Credit Losses          1,554       1,743      1,554       1,743
</TABLE>

Although  the Company  maintains  an  allowance  for credit  losses in an amount
deemed by management to be adequate to cover potential  losses, no assurance can
be given that the allowance will in fact be adequate or that an  inadequacy,  if
any, in the allowance could not have a material  adverse effect on the Company's
earnings in future periods.  Furthermore,  although management believes that its
periodic  estimates of the value of "other  receivables"  and "other assets" are
appropriate,  no  assurance  can be given  that the  amounts  which the  Company
ultimately  collects with respect to other receivables and other assets will not
differ significantly from management's  estimates or that those differences,  if
any,  could not have a material  adverse  effect on the  Company's  earnings  in
future periods.

Impact of Inflation

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

Changes in interest rate levels do not generally affect the income earned by the
Company in the form of  discounts  charged  in its  factoring  business.  Rising
interest rates would,  however,  increase both the Companys  interest  income on
prime rate based  advances and  overadvances  and the Company's cost of borrowed
money based on its current borrowing  arrangements  which are prime or base rate
adjusted credit facilities.


                                       20
<PAGE>



Changes in Financial Condition

The  increase  in  total  assets  was  a  function  of  increases  in  purchased
receivables and advances receivable,  plus an increase in income tax receivable,
which  represents the estimated  future tax effects of the  carryforward  of net
operating losses.  These increases were partially offset by decreases in cash, a
decrease in other  receivables  and a decrease in other  assets.  The  increased
level of assets  was  financed  through  increases  in notes  payable,  accounts
payable and accrued expenses,  and credit balances of factoring clients. A chart
detailing the composition of purchased  receivables and advances  receivables at
September  30, 1998 and December 31, 1997  follows.  Non-performance  assets all
shown net of specific allocations of reserves.

<TABLE>
Analysis of Purchased Receivables and Advances Receivable

<CAPTION>
     Purchased Receivables                          09/30/98         12/31/97
                                                 -------------    -----------
<S>                                              <C>             <C>
    Invoices .................................   $ 23,329,863    $ 21,541,721
    Factors Division .........................      3,240,015       2,982,887
    Non-Performing - Net .....................      1,558,172       3,089,196
    Life Insurance Policies - Net ............      3,000,868       3,180,868
    Other - Net ..............................        267,453         601,906
                                                 ------------    ------------
                                                   31,396,371      31,396,578

         Less Participations .................       (639,763)     (1,768,959)
         Less Allowance for Credit Losses ....     (1,088,000)     (1,575,154)
         Less Unearned Discount ..............     (4,030,263)     (5,135,081)
                                                 ------------    ------------
             Total Purchased Receivables - Net   $ 25,638,345    $ 22,917,384
                                                 ============    ============

Advances Receivable
    Invoices .................................      3,055,541       1,292,023
    Inventory ................................      5,199,781       3,742,850
    Machinery & Equipment ....................      2,610,309       2,723,950
    Real Estate ..............................        804,318       1,040,067
    Overadvances .............................        921,007         753,089
    Other ....................................        942,141         619,437
    Non Performing - Net .....................      2,088,359       3,323,069
                                                 ------------    ------------
                                                   15,621,456      13,494,485

         Less Participations .................       (160,000)       (440,000)
         Less Allowance for Credit Losses ....       (465,752)           --
         Less Unearned Discount ..............       (622,676)       (139,559)
                                                 ------------    ------------
             Total Advances Receivable - Net .   $ 14,373,028    $ 12,914,926
                                                 ============    ============

</TABLE>


                                       21

<PAGE>

Liquidity and Capital Resources

The Company's  principal funding sources are the collection of Factored Accounts
Receivable  and  Advances,  shareholders  equity and  external  borrowings.  For
additional  detail  regarding  external  borrowings,  see  Notes  3 and 4 to the
unaudited financial statements contained in this Form 10-QSB.

The Company  believes that internally  generated funds and borrowings  under its
revolving  credit  facility will be sufficient to finance the Company's  funding
requirements for the next 12 months.










                      [THIS SPACE INTENTIONALLY LEFT BLANK]

                                       22

                           PART II - OTHER INFORMATION


ITEM 1. - LEGAL PROCEEDINGS

For details regarding legal proceedings,  see Note 6 to the unaudited  financial
statements contained in this Form 10-QSB.

ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS

On  September  14,  1998,  the  Company  issued  $2,896,000  of 10%  Convertible
Subordinated Notes due September 30, 2003 (New Notes) to Value Partners, Ltd. On
a private placement basis in reliance upon Section 4(2) of the Securities Act of
1933. The New Notes were sold for cash at par, and no underwriter  was used. The
New Notes are convertible  into the Companys common stock in whole or in part at
the rate of one share of common stock for each $6.50 principal amount of the New
Notes.  The proceeds  from the sale of the New Notes were used by the Company to
repurchase an equivalent principal amount of Convertible  Subordinated Notes due
September  30, 2000 (Old Notes) from holders of Old Notes who had elected to put
such notes to the Company.

On September 30, 1998, the Company issued an additional  $1,701,000 of New Notes
in  exchange  for Old Notes that were  tendered  to the  Company  by  accredited
investors. The exchange offer was also conducted on a private placement basis in
reliance upon Section 4(2) of the Securities Act of 1933, and no underwriter was
used in the exchange offer.

See also Note 4 to the  unaudited  financial  statements  contained in this Form
10-QSB.

ITEM 3. - DEFAULTS UPON SENIOR SECURITIES

As discussed in Notes 3 and 4 to the unaudited financial statements contained in
this Form 10- QSB, at September 30, 1998,  the Company was in default of certain
financial covenants related to interest coverage and net worth requirements with
respect to its line of credit and New Notes. The Company has received waivers of
such defaults. There can be no assurance that such defaults will not re-occur in
the future or that any future defaults will also be waived.

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

     Not applicable.

ITEM 5. - OTHER INFORMATION

     None.


                                       23
<PAGE>

ITEM 6(a). - EXHIBITS

Exhibit 10.1 Material Contracts

Indenture,  dated  September  14,  1998,  10%  Convertible  Subordinated  Notes,
incorporated  by reference to the Companys filing on Form 10-QSB for the Quarter
Ended September 30, 1998.


Exhibit 10.9.  Employment Contracts

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

Exhibit 27.  Financial Data Schedule

ITEM 6(b). - REPORTS ON FORM 8-K

None.


                                       24
<PAGE>

                                   SIGNATURES

In accordance with the  requirements of Securities and Exchange Act of 1934, the
Company  caused  this  report  to be signed  on its  behalf by the  undersigned,
thereunto duly authorized.

                         ALLSTATE FINANCIAL CORPORATION



Date:    November 16, 1998                /s/ David W. Campbell
                                          --------------------- 
                                          David W. Campbell
                                          Chairman
                                          Chief Executive Officer

Date:    November 16, 1998                /s/ Lawrence M. Winkler
                                          -----------------------
                                          Lawrence M. Winkler
                                          Secretary/Treasurer
                                          Chief Financial Officer





                                       25