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 JUNE 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 June 30, 1998.


<PAGE>




                         ALLSTATE FINANCIAL CORPORATION
                                   FORM 10-QSB
                                      INDEX

                                                                           Page
                                                                          Number
PART I - FINANCIAL INFORMATION

     Item 1 -  Financial Statements

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

      Consolidated Statements of Operations Six and Three Months Ended
      June 30, 1998 and 1997                                                 3

      Consolidated Statements of Shareholders' Equity Six
      Months Ended June 30, 1998 and Year Ended
      December 31, 1997                                                      4

      Consolidated Statements of Cash Flows Six Months Ended
      June 30, 1998 and 1997                                                 5-6

      Notes to Consolidated Financial Statements                            7-11

     Item 2 -  Management's Discussion and Analysis of Results of
      Operations and Financial Conditions                                  12-23


PART II - OTHER INFORMATION

     Item 1 - Legal Proceedings                                              24

     Item 2 - Changes in Securities                                          24

     Item 3 - Defaults Upon Senior Securities

     Item 4 - Submission of Matters to a Vote of Security Holders            24

     Item 5 - Other Information                                              24

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

     Signatures                                                              25



<PAGE>





















                         PART I - FINANCIAL INFORMATION









<PAGE>



<TABLE>
<CAPTION>
                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                                        June 30, December 31,
                                                        1998            1997
                                                     (UNAUDITED)
                                     ASSETS


<S>                                                 <C>             <C>        
CURRENT ASSETS:
     Cash ......................................    $ 1,911,073     $ 4,200,050
     Receivables:
         Finance Receivables - Net .............     39,155,483      33,742,276
         Receivables - Other - Net .............        724,488       2,988,927

     Prepaid expenses ..........................         33,539         127,741

     Income Tax Receivable .....................      1,970,087            --

     Deferred income taxes .....................      1,234,511       1,056,686
                                                    -----------     -----------

     TOTAL CURRENT ASSETS ......................     45,029,181      42,115,680

FURNITURE, FIXTURES AND EQUIPMENT, Net .........        432,053         494,240

OTHER ASSETS ...................................      2,529,121       4,203,727
                                                    -----------     -----------

                                                    $47,990,355     $46,813,647
                                                    ===========     ===========



                      LIABILITIES AND SHAREHOLDERS' EQUITY


CURRENT LIABILITIES:
     Accounts payable and accrued expenses .........  $ 1,282,022   $   420,356
     Notes payable .................................   16,329,214    14,373,724
     Income taxes payable ..........................         --         240,226
     Credit balances of factoring clients ..........    5,173,692     3,180,974
                                                       ----------   -----------

      TOTAL CURRENT LIABILITIES ....................   22,784,928    18,215,280


                                        1

<PAGE>



                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (continued)


                                                         June 30,   December 31,
                                                           1998           1997
                                                       (UNAUDITED)

NONCURRENT PORTION OF NOTES PAYABLE:
     Convertible Subordinated Notes and Other
         Non-Current Notes ............................ 4,961,000     5,034,327
                                                       -----------   ---------- 
                                                                                 
         TOTAL LIABILITIES ............................27,745,928    23,249,607
                                                       -----------   ----------
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 June 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 (782,145 shares at June 30, 1998
         and 783,877 shares at December 31, 1997) .....(5,017,604)   (5,030,594)

     Retained Earnings .................................6,347,849     9,702,322
                                                      ------------   -----------

         TOTAL SHAREHOLDERS' EQUITY .................  20,244,527    23,564,040
                                                      ------------   -----------                 
                                                     $ 47,990,355  $ 46,813,647
                                                      ============   ===========
</TABLE>




                 See Notes to Consolidated Financial Statements

                                        2

<PAGE>



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

                                                                   THREE MONTHS ENDED JUNE 30,        SIX MONTHS ENDED JUNE 30,
                                                                  1998                 1997             1998                  1997
                                                             -------------     ---------------     ------------            --------
                                                               (Unaudited)                          (Unaudited)          (Unaudited)

<S>                                                          <C>                 <C>                <C>                 <C>         
REVENUE:
     Earned discounts ................................       $  2,578,581        $  1,497,010       $  5,015,246        $  3,789,595
     Fees and other income ...........................            481,618             585,103          1,008,435           1,024,624
                                                             ------------        ------------       ------------        ------------

         Total Revenue ...............................          3,060,199           2,082,113          6,023,681           4,814,219
                                                             ------------        ------------       ------------        ------------

EXPENSES:
     Compensation and fringe benefits ................          1,128,096             730,246          1,940,330           1,462,196
     General and administrative expense ..............          2,027,668             501,210          2,895,784           1,039,947
     Interest expense ................................            448,824             223,330            859,155             627,327
     Provision for credit losses .....................          4,911,000             120,790          5,458,000             675,790
     Commissions .....................................             78,264              72,961            194,972             166,112
                                                             ------------        ------------       ------------        ------------

          Total Expenses .............................          8,593,852           1,648,537         11,348,241           3,971,372
                                                             ------------        ------------       ------------        ------------

INCOME/(LOSS) BEFORE INCOME TAXES ....................         (5,533,653)            433,576         (5,324,560)            842,847

INCOME TAXES/(BENEFIT) ...............................         (2,047,452)            160,452         (1,970,087)            311,852
                                                             ------------        ------------       ------------        ------------

NET INCOME/(LOSS) ....................................         (3,486,201)       $    273,124       $ (3,354,473)       $    530,995
                                                             ============        ============       ------------        ------------

NET INCOME/(LOSS) PER COMMON SHARE
                  Diluted ............................       $      (1.50)       $        .12       $      (1.44)       $        .23
                                                             ============        ============       ============        ------------
                  Basic ..............................       $      (1.50)       $        .12       $      (1.44)       $        .23
                                                             ============        ============       ============        ------------

WEIGHTED AVERAGE NUMBER OF SHARES
                  Diluted ............................          2,324,251           2,321,197          2,323,215           2,320,133
                                                             ============        ============       ============        ============
                  Basic ..............................          2,320,966           2,317,917          2,319,930           2,316,853
                                                             ============        ============       ============        ============

</TABLE>


<PAGE>



<TABLE>
<CAPTION>
                                  ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                           YEAR ENDED DECEMBER 31, 1997
                                        AND SIX MONTHS ENDED JUNE 30, 1998


                                                     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)                              -                  -               -            (3,354,473)       (3,354,473)
                                               ------------ ----------------- -----------------     ----------        -----------

BALANCE - June 30, 1998                             $40,000       $18,874,182      $(5,017,604)      $6,347,849       $20,244,427
                                                    =======       ===========      ============      ==========       ===========

</TABLE>



                                                                 4

<PAGE>



<TABLE>
<CAPTION>
                                  ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (Unaudited)

                                                                         SIX MONTHS ENDED JUNE 30,
                                                                            1998             1997

<S>                                                                  <C>              <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income/(Loss) ...........................................   $  (3,354,473)   $     530,995
     Adjustments to reconcile net income
         to cash provided by operating activities:
         Depreciation - net ......................................          75,000           98,000
         Disposition of automobiles ..............................          30,013             --
         Provision for credit losses .............................       5,458,000          675,790
     Changes in operating assets and liabilities:
         Decrease/(Increase) in other receivables ................       2,264,439        1,801,525
         Decrease in prepaid expenses ............................          94,202           11,422
         (Increase)/Decrease in other assets .....................       1,674,606       (1,342,966)
         (Decrease)/Increase in accounts payable
              and accrued expenses ...............................         861,666         (130,292)
         Decrease/(Increase) in income taxes
              accrued or receivable ..............................      (2,388,138)         592,728
                                                                     -------------    -------------


NET CASH PROVIDED BY
     OPERATING ACTIVITIES ........................................       4,715,315        2,237,202
                                                                     -------------    -------------


CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of finance receivables, including
         accounts receivable, secured advances,
         repurchases and life insurance contracts ................    (131,818,340)     (90,514,410)
     Collection of finance receivables, including
         accounts receivable, secured advances,
         repurchases and life insurance contracts ................     120,947,133      105,298,655
     Increase (Decrease) in credit balances
         of factoring clients ....................................       1,992,718       (1,632,492)
     Purchase of furniture, fixtures and equipment ...............         (42,826)         (60,163)
                                                                     -------------    -------------


NET CASH (USED) PROVIDED BY
    INVESTING ACTIVITIES .........................................      (8,921,315)      13,091,600
                                                                     -------------    -------------


                                                                                                  5

<PAGE>



                ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (continued)

                                                                           SIX MONTHS ENDED JUNE 30,
                                                                           1998               1997

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from line of credit and
         other borrowings ........................................      86,122,438       33,827,009
     Principal payments on line of credit
         and other borrowings ....................................     (84,227,275)     (48,647,885)
     Exercise of Options .........................................          21,870             --
     Treasury Stock Acquisition Costs ............................             (10)            --
                                                                     -------------    -------------

NET CASH PROVIDED (USED) BY IN
     FINANCING ACTIVITIES: .......................................       1,917,023      (14,820,876)
                                                                     -------------    -------------

NET INCREASE (DECREASE) IN CASH ..................................      (2,288,977)         507,926

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

CASH, End of period ..............................................   $   1,911,073    $   2,132,825
                                                                     =============    =============



SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:

     Interest paid ..............................................................   $     798,104    $     627,327
                                                                                    =============    =============

     Income taxes paid ..........................................................   $     418,051    $     150,000
                                                                                    =============    =============

     Supplemental Schedule of
     Noncash Activities

     Transfer of finance and other
        receivables to other assets .............................................   $        --      $   1,305,489
                                                                                    =============    =============

     Issuance of Convertible Subordinated
        Notes in exchange for Common Stock ......................................   $      12,990    $        --
                                                                                    =============    =============
</TABLE>


                                                         6

<PAGE>



                 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  GENERAL.  The  consolidated   financial  statements  of  Allstate  Financial
Corporation and subsidiaries  (the "Company")  included herein are unaudited for
all periods ended June 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 six months ended
June 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 the  Company's  Annual  Report on Form  10-KSB  for the year  ended
December 31, 1997.

Certain amounts related to 1997 have been  reclassified to conform with the 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
statements of operations.




3. LINE OF CREDIT.  As of June 30,  1998,  the  Company had  approximately  $8.0
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 the  purchase  of  accounts  receivable;
however,  the  Company  may (i)  borrow up to $5.0  million  for  collateralized
advances secured by machinery and equipment,  (ii) borrow up to $2.5 million for
collateralized advances secured by 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.  The  current  maturity  date of this  credit
facility is May 27, 2000.

Because of the net loss caused by the provision for credit losses in the quarter
ended June 30,1998, the Company was in technical default of covenants related to
interest coverage, net worth

                                        7

<PAGE>



requirements,  and net cash advanced to any one client. The Company has received
waivers  of  these  defaults  or  amendments  to those  covenants  from the bank
participants in the line of credit.

4.  CONVERTIBLE  SUBORDINATED  NOTES  PAYABLE.  As of June 30, 1998 and June 30,
1997,  the Company had  outstanding  approximately  $4,961,000  and  $4,978,000,
respectively,  in aggregate  principal amount of Convertible  Subordinated Notes
issued in exchange for shares of the Company's  common stock  (currently held by
the Company as treasury stock).  The Convertible  Subordinated Notes were issued
in exchange for 782,145  shares of common stock.  The  Convertible  Subordinated
Notes (i) mature on September 30, 2000,  (ii)  currently bear interest at a rate
of 9.5% per annum,  which rate of interest  fluctuates  with the prime rate, but
may not fall below 8% nor rise above 10% per annum,  (iii) are convertible  into
common stock of the Company at $7.50 per share,  (iv) are  subordinated in right
of payment to the  Company's  obligations  under its  secured  revolving  credit
facility and (v) were issued  pursuant to an indenture  which  contains  certain
covenants  which are less  restrictive  than those  contained  in the  Company's
secured revolving credit facility.  Upon the occurrence of certain  "fundamental
changes",  the holders of the Convertible  Subordinated  Notes have the right to
have their Notes redeemed at par. The election of the five persons  nominated by
the Independent Shareholders/Directors Committee in connection with the recently
concluded  proxy  contest was deemed to  constitute  a  "fundamental  change" as
defined in the Notes indenture. As a result, on June 17, 1998 the Company mailed
to  holders  of the Notes a Notice of  Fundamental  Change,  which  enables  the
holders of the Notes to elect by 5:00 p.m.,  Eastern time, on August 17, 1998 to
have their Notes  redeemed at par. The Company  intends to offer  existing  Note
holders who are accredited  investors  (including  those holders who rescind any
election to have their Notes  redeemed) the option of  exchanging  their current
Notes for new unsecured,  subordinated  notes having the same  principal  amount
(the "New Notes").  The New Notes will mature on September 30, 2003 (three years
later than the current Notes), will bear a fixed interest rate of 10% per annum,
will be  convertible  into  common  stock at $6.50  per  share,  and will not be
redeemable  by the Company.  The  Company's  largest  stockholder  has agreed in
principle  to exchange  its current $1.3 million of Notes for the same amount of
New Notes and also to subscribe to additional New Notes in an amount  sufficient
to fund all  redemptions  of  existing  Notes,  subject to the  negotiation  and
execution of final documents.

     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 June 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 six months
ended June 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


                                        8

<PAGE>



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

6.  CERTAIN  CONTINGENCIES.  The  Company is a  defendant  in WHITE,  TRUSTEE V.
ALLSTATE  FINANCIAL  CORPORATION  pending in the U.S.  Bankruptcy  Court for the
Western District of Pennsylvania. The Company provided receivables financing and
advances for Lyons Transportation  Lines, Inc. ("Lyons").  Lyons was the subject
of a leveraged buy-out and subsequently  filed a bankruptcy  petition.  In 1991,
the 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   $300,000.   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 $300,000
previously  paid by the  Company  was  returned  to the  Company in April  1996;
however,  the Company  continues to maintain a liability  for this  amount.  The
matter is currently  being  litigated in the District  Court.  It is anticipated
that the court  will set a trial date  later in 1998 or early  1999.  Management
does  not  believe  at this  time  that  the  Company  has a  material  exposure
(exclusive  of  potential  accrued  interest)  significantly  in  excess  of the
previously agreed upon settlement amount.

     In  connection  with the same  transaction,  the  Company was also named in
January 1994 as a defendant in  SHERWIN-WILLIAMS  COMPANY V. ROBERT CASTELLO ET.
AL.  pending in the United States  District  Court for the Northern  District of
Ohio.  Sherwin-Williams  is  suing  all  parties  with  any  involvement  in the
transaction  to  recover  damages  allegedly  incurred  by  Sherwin-Williams  in
connection  with the leveraged  buy-out and the  bankruptcy  litigation  arising
therefrom.  Sherwin-Williams  asserts  that it has or will  incur  pension  fund
liabilities  and  other  liabilities  as a  result  of  the  transaction  in the
approximate amount of $11 million and has asserted claims against the Company in
that amount. The complaint asserts,  among other things,  that the purchasers of
Lyons breached their purchase  agreement with  Sherwin-Williams  by pledging the
assets of Lyons to the Company to obtain the down payment. The Company was not a
party to the purchase agreement. 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  that it has  meritorious  defenses  and
intends to  vigorously  defend all claims.  However,  the  litigation  is in the
preliminary stage and the probability of a favorable or unfavorable  outcome and
the potential  amount of loss, if any, cannot be determined or estimated at this
time. The case is currently scheduled for trial in 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.


                                        9

<PAGE>



(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  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  $2,000,000  (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 $4,000,000. 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  litigation is in the  preliminary
stage  and  the  probability  of a  favorable  or  unfavorable  outcome  and the
potential  amount of loss,  if any,  cannot be  determined  or estimated at this
time.

     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.



                                       10

<PAGE>









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                                       11

<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 small- to medium-sized,  high risk, growth or turnaround companies,
including debtors-in-possession.  The Company purchases accounts receivable at a
discount  or  makes  advances  to its  clients  collateralized  by  receivables,
inventory,    equipment,   real   estate   and   other   assets   (collectively,
"Collateralized  Advances").  The Company may advance funds secured by equity in
the client's existing portfolio of Factored Accounts Receivable, equity in other
of the client's  principal(s) or accounts receivable  including property pledged
by the client's principal(s) or accounts receivable generated through the use of
the   proceeds  of  such  secured   advances   (such   advances,   collectively,
"Overadvances  Secured by General  Liens").  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  Allstate Factors.  Allstate Factors is
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 declining volume and the departure of primary staff,
it has been determined to transfer the remaining clients to another factor.  The
Company does not anticipate any significant  negative impact associated with the
closure of this operation.



                                       12

<PAGE>



     The Company's  clients are small- to  medium-sized,  high risk,  growth and
turnaround  companies  with  annual  revenues  typically  between  $600,000  and
$25,000,000. The Company's clients do not typically qualify for traditional bank
financing  because  they  are  either  too  new,  too  small,   undercapitalized
(over-leveraged),  unprofitable or otherwise  unable to satisfy the requirements
of a bank.  Accordingly,  there is a  significant  risk of  default  and  client
failure inherent in the Company's business.

     The Company often competes against banks,  traditional  asset-based lenders
and  small  independent   finance  companies.   The  Company   anticipates  that
competition  will remain  intense  through all of 1998 and may continue to exert
downward  pressure on pricing,  especially in the Company's  core  business.  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.  Additionally,  the Company's efforts to reduce the risk profile
of new  clients  and the total  amount  advanced  to any one  client may have an
adverse impact future earnings of 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.  Although the Company has historically been successful in replacing
major clients, the loss of one or more major clients and an inability to replace
those clients could have a material adverse effect on the Company.

     Lifetime Options, 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.

     None of the Company's  subsidiaries is currently  engaged in business which
could have a material effect on the Company.



                                       13

<PAGE>



RESULTS OF OPERATIONS

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


                                                                      FOR THE THREE MONTHS ENDED JUNE 30,
                                                                           1998                       1997
                                                                       (Unaudited)                (Unaudited)

<S>                                                                <C>            <C>         <C>           <C>  
REVENUE
   Earned discounts                                                2,578,581      84.3%       $1,497,010    71.9%
   Fees and other revenue                                            481,618      15.7          585,103     28.1
                                                                 -----------    ------      -----------   ------
        TOTAL REVENUE                                              3,060,199     100.0        2,082,113    100.0%
                                                                  ----------     -----       ----------    -----

EXPENSES
   Compensation and fringe benefits                                1,128,096      36.8           730,246    35.1
   General and administrative expense                              2,027,668      66.2           501,210    24.1
   Interest expense                                                  448,824      14.7           223,330    10.7
   Provision for credit losses                                     4,911,000     160.5           120,790     5.8
   Commissions                                                        78,264       2.6            72,961     3.5
                                                                ------------   -------      ------------   -----

         TOTAL EXPENSES                                            8,593,852     280.8         1,648,537    79.2
                                                                  ----------    ------        ----------   -----

INCOME (LOSS) BEFORE
   INCOME TAXES (BNEFIT)                                          (5,533,653)   (180.8)          433,576    20.8

INCOME TAXES (BENEFIT)                                            (2,047,452)    (66.9)          160,452     7.7
                                                                 ------------     -----         ----------- -----

NET INCOME (LOSS                                                 $(3,486,201)   (113.9)%         273,124    13.1%
                                                                  ===========    ======          ---------- =====

NET INCOME (LOSS) PER COMMON SHARE
              DILUTED                                                    $(1.50)                      $0.12
                                                                          ======                      =====
              BASIC                                                      $(1.50)                      $0.12
                                                                          ======                      =====

WEIGHTED AVERAGE NUMBER OF SHARES
              DILUTED                                              2,324,251                   2,321,187
                                                                   ==========                  ==========
              BASIC                                                2,320,966                   2,317,919
                                                                   ==========                  ==========
</TABLE>








                      [THIS SPACE INTENTIONALLY LEFT BLANK]

                                       14

<PAGE>

<TABLE>
<CAPTION>



                                                                           FOR THE SIX MONTHS ENDED JUNE 30,
                                                                             1998                       1997
                                                                         (Unaudited)               (Unaudited)

<S>                                                                <C>            <C>         <C>            <C>  
REVENUE
   Earned discounts                                                $5,015,246     83.3%       $3,789,595     78.8%
   Fees and other income                                            1,008,435     16.7         1,024,624     21.2
                                                                  -----------    -----       -----------  -------
      TOTAL REVENUE                                                 6,023,681    100.0%        4,814,219    100.0%
                                                                   ----------    -----       -----------    -----

EXPENSES
   Compensation and fringe benefits                                 1,940,330      32.2         1,462,196     30.4
   General and administrative expense                               2,895,784      48.1         1,039,947     21.6
   Interest expense                                                   859,155      14.3           627,327     13.0
   Provision for credit losses                                      5,458,000      90.6           675,790     14.0
      Commissions                                                     194,972       3.2           166,112      3.5
                                                                  -----------    ------      ------------     ----

      TOTAL EXPENSES                                               11,348,241     188.4         3,971,372     82.5
                                                                   ----------     -----       -----------    -----

INCOME (LOSS) BEFORE INCOME TAXES                                  (5,324,560)    (88.4)          842,847     17.5

INCOME TAXES (BENEFIT)                                             (1,970,087)    (32.7)          311,852      6.5
                                                                  -----------     -----        ------------   ------

NET INCOME (LOSS)                                                 $(3,354,473)    (55.7)%     $   530,995     11.0%
                                                                  ===========     ======         ==========   ====

NET INCOME (LOSS) PER COMMON SHARE
         DILUTED                                                          $(1.44)                      $0.23
                                                                          ======                       =====
         BASIC                                                            $(1.44)                      $0.23
                                                                          ======                       =====
WEIGHTED AVERAGE NUMBER OF SHARES
         DILUTED                                                     2,323,215                  2,320,133
                                                                    ==========                 ==========
         BASIC                                                       2,319,930                  2,317,919
                                                                    ==========                 ==========
</TABLE>



         TOTAL REVENUE.  Total revenue consists of (i) earned discounts and (ii)
fees and other income.  "Earned  discounts" consist primarily of income from the
purchase of accounts  receivable  and life  insurance  policies  and income from
Collateralized  Advances  and  Overadvances.  "Fees  and other  income"  consist
primarily of  application  fees,  commitment  or facility  fees,  other  related
financing  fees and  supplemental  discounts paid by clients who do not sell the
minimum  volume of  accounts  receivable  required by their  contracts  with the
Company  (including  as a result  of  "graduating"  to a lower  cost  source  of
funding).

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


                                                        15

<PAGE>




<TABLE>
<CAPTION>
                                                            For the Three Months Ended June 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                     $1,085,667              35.5%             $   835,726            40.1%
Earnings on Collateralized
     Advances                                   708,156               23.1                 365,501             17.6
Earnings on Overadvances                        784,758               25.7                 195,783              9.4
Earnings on Purchased Life
     Insurance Policies                          -                     -                   100,000              4.8
                                      -----------------           --------            ------------          -------
     Total                                    2,578,581               84.3               1,497,010             71.9
Fees and Other Income                           481,618               15.7                 585,103             28.1
                                           ------------             ------            ------------           ------
     Total Revenue                           $3,060,199             100.0%              $2,082,113           100.0%
                                             ==========             =====               ==========           =====
</TABLE>


<TABLE>
<CAPTION>

                                                           For the Six Months Ended June 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                     $2,616,119              43.5%              $2,320,053            48.2%
Earnings on Collateralized
     Advances                                 1,108,654               18.4                 836,744             17.4
Earnings on Overadvances                      1,290,473               21.4                 432,798              8.9
Earnings on Purchased Life
     Insurance Policies                           -                    -                   200,000              4.2
                                      ------------------           -------            ------------          -------
     Total                                    5,015,246               83.3               3,789,595             78.7
Fees and Other Income                         1,008,435               16.7               1,024,624             21.3
                                            -----------              -----             -----------           ------
     Total Revenue                           $6,023,681              100.0%             $4,814,219           100.0%
                                             ==========              =====              ==========           =====

</TABLE>


                                       16

<PAGE>



         Total revenue  increased  25.1% in the first half of 1998 from the same
period in 1997, from $4.8 million to $6.0 million; total revenue increased 47.1%
for the second  quarter of 1998 over the same period 1997,  from $2.1 million to
$3.1 million.  Earned discounts from finance  receivables  increased 12.8%, from
$2.3  million to $2.6 million in the first half of 1998 versus the first half of
1997. In the second quarter earned discounts from finance receivables  increased
29.9% to $1.1 million from $0.8 million.  The increase in earned  discounts from
factored accounts receivable in the second quarter of 1998 is largely the result
of  additional  volume of new clients (10 in 1998,  1 in 1997) during the second
quarter.  Earned discounts from factored accounts  receivable as a percentage of
total  factored  accounts  receivable  purchased were 2.8% and 3.1% in the first
halves of 1998 and 1997, respectively;  in the second quarters of 1998 and 1997,
earned  discounts  were  2.6%  and  3.1%,  respectively,  of  factored  accounts
receivable.  The  reduction  during  the first half of 1998  versus  1997 in the
average earned discount from factored accounts  receivable reflects the downward
pressure on pricing from  competition  in the Company's  core  business.  In the
first  halves  of  1998  and  1997,  earned  discounts  from  factored  accounts
receivable accounted for 43.5% and 48.2%, respectively, of total revenue. In the
second  quarters  of 1998 and 1997,  earned  discounts  from  factored  accounts
receivable accounted for 35.5% and 40.1%, respectively, of total revenue.

         Earned discounts from Collateralized  Advances increased  approximately
32.5% in the  first  half of 1998  versus  the  comparable  period  in 1997,  to
approximately $1.1 million from $0.8 million and increased  approximately  93.7%
in the second  quarter of 1998 over the same quarter in 1997,  to  approximately
$708 thousand from $366 thousand.  In the first halves of 1998 and 1997,  earned
discounts  from  Collateralized  Advances  constituted  approximately  18.4% and
17.4%,  respectively,  of total income.  In the second quarter of 1998 and 1997,
earnings on Collateralized Advances were 23.1% and 17.6%, respectively, of total
income.  The increase in earned discounts from  Collateralized  Advances in 1998
reflects  a move  towards  Collateralized  Advances,  as a  larger  part  of the
Company's receivables. In the second quarters of 1998 and 1997, earned discounts
from Collateralized Advances constituted 23.1% and 17.6%, respectively, of total
income.  Collateralized  Advances currently bear interest at a rate, on average,
of approximately 2% per month  calculated  generally on the average  outstanding
amount of the  Collateralized  Advance during the month.  Earned  discounts from
Collateralized Advances are required to be paid in cash monthly in arrears.
See Provision for Credit Losses below.

         Earnings on Overadvances  increased  approximately  198.2% in the first
half of 1998 versus the comparable period in 1997, to approximately $1.3 million
from $433 thousand and increased  approximately  300.8% in the second quarter of
1998 over the same quarter in 1997,  to  approximately  $785  thousand from $196
thousand.  In the  first  halves  of 1998 and  1997,  earnings  on  Overadvances
constituted approximately 21.4% and 8.9%, respectively,  of total income. In the
second  quarter of 1998 and 1997 earnings on  Overadvances  were 25.7% and 9.4%,
respectively, of total income. Earnings 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 earnings on
Overadvances  in the  quarter  and the half year  ended  June 30,  1998  results
primarily from activity in the account of one client,  MGV  International,  Inc.
See Provision for Credit Losses below.

        As of June 30, 1998 and December 31, 1997,  factored accounts receivable
included on the Company's  balance  sheet were $30.3  million  (59.4%) and $30.4
million (70.2%), respectively, of gross finance receivables. As of June 30, 1998
and December 31, 1997, Collateralized Advances included on the Company's balance
sheet were $9.7 million (19.0%) and $7.0 million (16.3%), respectively, of gross
finance receivables. As of June 30, 1998 and December 31, 1997,

                                       17

<PAGE>



Overadvances  included on the Company's  balance sheet were $3.9 million  (7.9%)
and  $604  thousand  (1.4%),   respectively,   of  gross  finance   receivables.
Approximately  $2.5 million as of June 30, 1998 and none as of December 31, 1997
were due from one client, MGV International, Inc.

         Fees and other income remained relatively constant,  approximately $1.0
million,  in the first half of 1998 as  compared to the same amount for the same
period in 1997. In the second  quarter of 1998,  fees and other income were $482
thousand compared to $585 thousand in 1997. For 1997,  included in fee income is
an unusually large supplemental discount in the amount of $165 thousand. This is
partially offset by an increase in various operational fees in 1998.

         COMPENSATION AND FRINGE  BENEFITS.  In the first half of 1998 and 1997,
compensation  and fringe benefits were $1.9 million (32.2% of total revenue) and
$1.5 million (30.4% of total revenue),  respectively. For the second quarters of
1998 and 1997,  compensation  and fringe  benefits  were $1.1 million  (36.9% of
total revenue) and $730 thousand (35.1% of total revenue), respectively.  Within
compensation and fringe benefits,  executive compensation increased in the first
half of 1998 as compared to the same period in 1997,  from $431  thousand (9% of
total revenue) to $719 thousand (11.9% of total revenue). Executive compensation
also  increased in the second  quarter of 1998 as compared to the same period in
1997,  from $209 thousand  (10.0% of total  revenue) to $497 thousand  (16.2% of
total revenue). The higher compensation and fringe benefits (including executive
compensation)  during 1998 were chiefly the result of expenses  associated  with
the severance of key employees  and the payroll costs  associated  with Allstate
Factors.

         GENERAL AND ADMINISTRATIVE EXPENSE.  General and administrative expense
was $2.9 million  (48.1% of total revenue) as compared to $1.0 million (21.6% of
total revenue) for the first half of 1998 and 1997, respectively. For the second
quarters of 1998 and 1997, general and  administrative  expense was $2.0 million
(66.2%  of  total  revenue)  and  $501  thousand   (24.1%  of  total   revenue),
respectively.  During the second  quarter of 1998,  general  and  administrative
expenses were significantly  increased by the proxy contest concluded during the
quarter.  The election of directors was held on May 12, 1998. In addition to the
slate of directors presented by the Company,  another slate was presented by the
independent shareholders/directors committee. The independent slate prevailed in
electing five directors,  which constituted the entire Board of Directors at the
time  (see  Part II,  Item 4. -  Submission  of  Matters  to a Vote of  Security
Holders). The fees and expenses of the proxy contest for the first six months of
1998 were $857 thousand  (14.6% of total revenue) and for the quarter ended June
30, 1998 the expenses were $679 thousand (22.2% of total revenue), including the
expenses of the independent  shareholders/directors  committee ($300  thousand),
which were  reimbursed  by the Company.  During the six and three months of 1998
the general and  administrative  expenses of the Allstate  Factors Division were
$291 thousand (4.8% of total revenue) and $152 thousand (5.0% of total revenue),
respectively,   without  any  corresponding  expenses  for  1997.  In  addition,
professional  fees and expenses in connection  with the  liquidation of clients'
portfolios  and collateral  were $629 thousand  (10.5% of total revenue) for the
six months ended June 30, 1998 versus $305 thousand  (6.3% of total revenue) for
the six months  ended June 30,  1997.  For the  quarter  ended June 30, 1998 and
1997, professional fees and expenses were $447 thousand (14.6% of total revenue)
versus $146 thousand (7.0% of total revenue).  The increase in professional fees
in 1998 is attributable  principally to litigation  expenditures associated with
legal procedures instituted in prior years. General and administrative  expenses
(exclusive of the proxy contest,  Allstate  Factors,  and professional  fees and
expenses)  for the six  months  ended June 30,  1998 and 1997 were $1.1  million
(18.6% of total revenue) versus $769 thousand (25.1% of total revenue).  For the
three months ended June 30, 1998 and 1997,  adjusted general and  administrative
expenses  were $462  thousand  (15.1% of total  revenue)  against $355  thousand
(17.1% of total revenue). The

                                       18

<PAGE>



increase in the balance of General and  Administrative  expenses ($350 thousand)
is principally comprised of increases in professional fees other ($220 thousand)
and recruitment fees ($95 thousand).

         INTEREST  EXPENSE.  Interest  expense was $859 thousand (14.3% of total
revenue)  versus $627  thousand  (13.0% of total  revenue) for the first half of
1998 and 1997,  respectively,  and $448 thousand (14.7% of total revenue) versus
$223 thousand (10.7% of total revenue) for the second quarters of 1998 and 1997,
respectively.  The increase in interest expense is primarily attributable to the
Allstate Factors Division which commenced operations during the third quarter of
1997.  Interest expense on the Convertible  Subordinated Notes was comparable in
the first half and second  quarter of 1998, to that in the first half and second
quarter  of  1997.  The  average  daily  outstanding  balance  on the  Company's
revolving  lines of credit  was $14.2  million  and $7.5  million  for the first
halves of 1998 and 1997,  respectively,  and $14.9  million and $3.3 million for
the three  months  ended  June 30,  1998 and  1997,  respectively.  The  average
interest rate paid on the Company's revolving lines of credit decreased to 8.07%
during the first  half of 1998 from 9.07%  during the first half of 1997 and was
8.04%  during the second  quarter of 1998 as compared to 9.16% during the second
quarter of 1997.  The  increase  in the  outstanding  balance  in the  Company's
revolving  credit line  reflects  the increase in the finance  receivables.  The
balance of the net  receivables  at June 30, 1998 was $40 million  versus  $19.6
million at June 30, 1997.

         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  guaranties  (either unlimited  guaranties or guaranties limited to the
validity and  collectability of factored accounts  receivable) from its clients'
principals,  and (vi)  actively  monitors  its  portfolio  of factored  accounts
receivable,  including  the  creditworthiness  of  account  debtors  and,  (vii)
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 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

                                       19

<PAGE>



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
client's  assets  which is in  excess of the  formulae  used by the  Company  to
calculate   availability  of  advances  for  accounts  receivable  factoring  or
Collateralized  Advances.  In addition,  other assets,  including those owned by
clients' principals,  may be pledged.  Accordingly the Company may find it to be
difficult 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 from $676 thousand (14.0% of
total  revenue)  in the  first  half of 1997 to $5.5  million  (90.6%  of  total
revenue) in the first six months of 1998. The provision for credit losses during
the second quarter of 1998 was increased by approximately  $4.3 million.  During
the  second  quarter,  the  Company  recorded  $3.2  million  of  writedowns  or
additional  reserves for nine non-performing  assets, a substantial  majority of
which had been  non-performing  at December 31, 1997,  because of adverse events
related to those assets.  Specifically,  during the second  quarter of 1998, the
Company lost a lawsuit for approximately $900 thousand and was confronted by the
bankruptcy of a major obligor for approximately $900 thousand.  The Company also
determined  that an appraisal  received during the quarter ended March 31, 1998,
did not properly reflect the value of the property because the appraiser did not
use  appropriate  comparable  sales of similar  properties  in  formulating  his
opinion of the property's  value.  As of June 30, 1998 and December 31, 1997 the
allowance for credit losses was 6.6% ($3.4  million) and 4.6% ($2.0  million) of
gross  finance  receivables,  respectively.  At June 30,  1998,  the  accrual of
earnings was suspended on $300 thousand of gross finance receivables as compared
to $829 thousand of gross finance receivables at December 31, 1997. In addition,
"other  receivables" and "other assets" appearing on the Company's balance sheet
typically do not accrue earnings for financial statement purposes. The following
table  provides a summary of the  Company's  gross  finance  receivables  (which
includes primarily  factored accounts  receivable,  Collateralized  Advances and
non-earning receivables), "other receivables" and "other assets" and information
regarding the allowance for credit losses as of the dates indicated.


                                       20

<PAGE>
<TABLE>
<CAPTION>

                                                     As of (or for                     As of or for the six
                                                    the Year Ended)                    Months Ended June 30,
                                                 DECEMBER 31, 1997                  1998                 1997
                                                 -----------------                 ------               -----
                                                                   (Dollars in thousands)

<S>                                                      <C>                      <C>                 <C>     
NON-EARNING RECEIVABLES, OTHER                                                                Unaudited
  RECEIVABLES AND OTHER ASSETS DATA:

Non-Earning Receivables                                  $   829                  $   373             $  4,587
Other Receivables                                          3,748                    1,719                2,592
Other Assets (excluding miscellaneous)                     3,941                    2,602                3,187
                                                         -------                  -------             --------
                                                          $8,518                   $4,694              $10,366
                                                          ======                   ======              =======
ALLOWANCE FOR CREDIT LOSSES:

Balance, January 1                                        $2,579                   $2,739               $2,579
Provision for credit losses                                1,594                    5,453                  676
Receivables charged off                                   (1,776)                  (3,428)                (360)
Recoveries                                                   342                       26                  316
Balance at December 31, 1997 and
   June 30, 1998 and 1997 (including
   $275,000 allocated to Life Insurance
   Contracts at December 31, 1997 and
   June 30, 1998)                                         $2,739                   $4,790               $3,211

ALLOWANCE FOR CREDIT LOSSES AS A PERCENT OF:

Gross Finance Receivables                                   6.32%                     9.40%              16.00%
Non-Earning Receivables                                   330.40%                 1,284.19%              70.00%
Non-Earning Receivables, Other
  Receivables and Other Assets:                            32.16%                   102.05%              30.98%

AS A PERCENT OF THE SUM OF GROSS
  FINANCE RECEIVABLES, OTHER
  RECEIVABLES AND OTHER ASSETS:

Non-Earning Receivables                                     1.63%                     0.68%              17.79%
Other Receivables                                           7.35%                     3.37%              10.00%
Other Assets                                                7.73%                     4.71%              12.36%

AMOUNT OF ALLOWANCE ALLOCATED TO:

Non-earning Receivables,
   Other Receivables and Other Assets                      $1,055                   $1,425              $1,675
   Life Insurance Contracts                                   275                      275                 -
</TABLE>



         In light of the  significant  charge-off of $3.4 million of receivables
during  the first  half of 1998 (of which  $3.2  million  was  during the second
quarter), the sum of non-earning receivables, other receivables and other assets
("non-performing  assets")  declined by $3.8 million or 44.9% from  December 31,
1997 to June 30, 1998.  As a result,  non-performing  assets as a percentage  of
total assets declined from 18.2% at December 31, 1997 to 9.6% at June 30, 1998.

         The $5.5 million  provision for credit losses in the first half of 1998
(of  which  $4.9  million  was in the  second  quarter),  reflects  Management's
intention  to  replenish  the  allowance  for  credit  losses  in  light  of the
significant  charge-offs  incurred.  A portion of the  reserve is  allocated  to
non-earning receivables,  other receivables, and other assets (see chart on page
21) and the balance is maintained at a level based on an assessment of the risks
inherent in the finance receivables portfolio. The reserve balance was increased
to reflect the higher level of Overadvances funded during the quarter, including
a higher than usual concentration with one client.

         Although the Company currently 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

                                       21

<PAGE>



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.

         COMMISSIONS.  Commission  expense  was  $195  thousand  (3.2%  of total
revenue) in the first six months of 1998 as compared to $166  thousand  (3.4% of
total  revenue)  in the first six months of 1997.  During the second  quarter of
1998,  commission expenses were $78 thousand (2.6% of total revenue) as compared
to $73  thousand  (3.5% of total  revenue) for the second  quarter of 1997.  The
increase in commission expense reflects the increase in earned discounts.

IMPACT OF INFLATION

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

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

CHANGES IN FINANCIAL CONDITION

         The Company's total assets  increased 2.5% to $48.0 million at June 30,
1998 from $46.8  million at December  31, 1997.  The  increase is primarily  the
result of a $5.4 million,  or 16.0%,  increase in net finance  receivables and a
$1.9  million  income tax  receivable,  partially  offset by  decreases  of $2.3
million in cash and $3.9  million in other  receivables  and other  assets.  The
decrease in other  receivables  is primarily a function of the write-off of $1.8
million of non-earning assets,  while the income tax receivable results from the
loss for the three  months  ended June 30,  1998.  The  decrease in other assets
comprises the collections of $725 thousand and the write-off of $625 thousand of
non-earning assets.

         The  increase  in assets  was  primarily  funded by  increases  of $2.0
million  in credit  balances  of  factoring  clients  and $2.0  million in notes
payable under the  Company's  revolving  credit  facility.  Current  liabilities
increased  by $4.6  million or 25.1% in the first half of 1998,  resulting  in a
decline in the Company's working capital ratio as disclosed below. Total debt as
a percentage of total equity  increased to 137.1% at June 30, 1998 from 98.7% at
December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's  principal funding sources are the collection of factored
accounts receivable,  retained cash flow 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.


                                                        22

<PAGE>



         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.

         At June 30, 1998 and December 31, 1997, the Company had working capital
of $22.2 million and $23.9 million,  respectively, and a ratio of current assets
to current liabilities of 1.98 to 1 and 2.31 to 1, respectively.






                      [THIS SPACE INTENTIONALLY LEFT BLANK]

                                       23

                                     <PAGE>



                           PART II - OTHER INFORMATION

ITEM 1. - LEGAL PROCEEDINGS

         For details  regarding legal  proceedings,  see Note 5 to the unaudited
financial statements contained in this Form 10-QSB.

ITEM 2. - CHANGES IN SECURITIES

         None.

ITEM 3. - DEFAULTS UPON SENIOR SECURITIES

         None.

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

         The Company's  annual meeting of shareholders was held on May 12, 1998.
         The shareholders voted as follows:

         Nominees elected as directors:
                                                       # OF VOTES
            C. Scott Bartlett                           1,214,320
            David W. Campbell                           1,214,320
            Edward A. McNally                           1,214,320
            William H. Savage                           1,214,320
            Lindsay R. Trittipoe                        1,214,705

         Nominees not elected as directors:
                                                       # OF VOTES
            Craig Fishman                                 838,095
            Alan L. Freeman                               838,095
            Wayne M. Lee                                  838.095
            John V. Pollock                               838,095
            David P. Bindeman                             838,095

ITEM 5. - OTHER INFORMATION

         None.

ITEM 6(a). - EXHIBITS

         EXHIBIT 10.9.  EMPLOYMENT CONTRACTS

         Severance Agreement with Craig Fishman dated July 2, 1998.

         EXHIBIT 27.  FINANCIAL DATA SCHEDULE

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

         None.

                                       24

<PAGE>


SIGNATURES

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

                                          ALLSTATE FINANCIAL CORPORATION


                                                     /S/ LAWRENCE M. WINKLER
                                                       -----------------------
                                                         Lawrence M. Winkler
                                                         Secretary/Treasurer
                                                        Chief Financial Officer 


Date:        August 14, 1998                                                    



                                       25

<PAGE>