As filed with the Securities and Exchange Commission on March 31, 1999

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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


[X] Annual  Report Under Section 13 or 15(d) of the  Securities  Exchange Act of
1934 For the Fiscal Year Ended December 31, 1998
       or

[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period from __________ to __________.
--------------------------------------------------------------------------------


                         Commission File Number 33-87570


                        American Church Mortgage Company

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


              (Exact name of small business issuer in its charter)

                            10237 Yellow Circle Drive
                              Minneapolis, MN 55343
                            Telephone: (612) 945-9455

                  I.R.S. Employer Identification No. 41-1793975

     State or other jurisdiction of incorporation or organization: Minnesota

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

Securities registered under Section 12(g) of the Exchange Act:  None

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

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

State issuer's revenues for its most recent fiscal year:      $782,013

State the  aggregate  market value of the voting and  non-voting  common  equity
stock held by  non-affiliates  computed by  reference  to the price at which the
common equity was sold, or the average bid and asked price of such common equity
stock, as of a specified date within the past 60 days:
      Not applicable.          

The number of shares outstanding of the issuer's $.01 par value common
stock as of February 26, 1999 was: 1,183,878

                   DOCUMENTS INCORPORATED BY REFERENCE: NONE
-------------------------------------------------------------------------------





<PAGE>




                        AMERICAN CHURCH MORTGAGE COMPANY
                                   FORM 10-KSB


                                      INDEX
                                                                            Page
                                                                             No.

                                     PART I

Item 1.    Description of Business...................................        3

Item 2.    Description of Property...................................       10

Item 3.    Legal Proceedings.........................................       10

Item 4.    Submission of Matters to a Vote of Security Holders.......       10

                                     PART II

Item 5.    Market for Registrant's Common Equity and
           Related Stockholder Matters...............................       10

Item 6.    Management's Discussion and Analysis
           or Plan of Operation......................................       12

Item 7.    Financial Statements:.....................................       14

                  Balance Sheet
                  December 31, 1998 and 1997.........................      F-2

                  Statement of Operations
                  Years Ended December 31, 1998 and 1997.............      F-4

                  Statements of Stockholders' Equity
                  December 31, 1998 and 1997.........................      F-5

                  Statements of Cash Flows
                  Years Ended December 31, 1998 and 1997.............      F-6

                  Notes to Financial Statements......................      F-8

Item 8.    Changes In and Disagreements With
           Accountants on Accounting and Financial Disclosure........       14

                                    PART III

Item 9.    Directors, Executive Officers, Promoters and Control
           Persons; Compliance With Section 16 (a) of the
           Exchange Act..............................................       15

Item 10.   Executive Compensation....................................       16

Item 11.   Security Ownership of Certain Beneficial Owners and
           Management................................................       17

Item 12.   Certain Relationships and Related Transactions............       18

Item 13.   Exhibits and Reports on Form 8-K..........................       20








<PAGE>



                                     PART I

          In  connection  with  the  "safe  harbor"  provisions  of the  Private
Securities  Litigation  Reform  Act of 1995,  readers of this  document  and any
document  incorporated by reference  herein,  are advised that this document and
documents  incorporated by reference into this document  contain both statements
of historical facts and forward looking  statements.  Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ  materially from those  indicated by the forward  looking  statements.
Examples  of forward  looking  statements  include,  but are not  limited to (i)
projections  of  revenues,  income or loss,  earning or loss per share,  capital
expenditures,  dividends,  capital  structure and other  financial  items;  (ii)
statements of plans and  objectives of the Company or its management or Board of
Directors,  including the on-going public sale of its shares by the Company,  or
estimates or  predictions  of actions by  borrowers,  competitors  or regulatory
authorities;   (iii)  statements  of  future  economic  performance;   and  (iv)
statements of assumptions  underlying  other statements and statements about the
Company or its business.

          This  document and  documents  incorporated  by reference  herein also
identify important factors which could cause actual results to differ materially
from  those   indicated  by  forward   looking   statements.   These  risks  and
uncertainties  include,  among other things,  interest rate fluctuations as they
effect the relative  yield of the  Company's  loan  portfolio and its ability to
compete  in making  loans to  borrowers;  payment  default  on loans made by the
Company,   which  could   adversely   affect  the  Company's   ability  to  make
distributions to its  Shareholders;  the actions of competitors;  the effects of
government  regulation;  and other factors which are described  herein and/or in
documents incorporated by reference herein.

          The  cautionary  statements  made  pursuant to the Private  Litigation
Securities  Reform Act of 1995 above and elsewhere by the Company  should not be
construed  as  exhaustive  or  as  any  admission   regarding  the  adequacy  of
disclosures made by the Company prior to the effective date of such Act. Matters
which are the subject of forward  looking  statements  are beyond the ability of
the Company to control and in many cases the Company cannot predict what factors
would cause  results to differ  materially  from those  indicated by the forward
looking statements.


Item 1.    Description of Business

General

           Incorporated as a Minnesota  corporation on May 27, 1994, the Company
operates  as a Real  Estate  Investment  Trust  ("REIT")  and is  engaged in the
business of making  mortgage  loans to churches and other  non-profit  religious
organizations.  The  Company  makes  loans  throughout  the United  States.  The
principal  amount of such loans ranges from $100,000 to $1,000,000.  The Company
may also invest up to 30% of its  Average  Invested  Assets in mortgage  secured
debt  securities  (bonds)  issued by  churches  and other  non-profit  religious
organizations.  Between the date upon which the Company  began  active  business
operations (April 15, 1996), and February 1, 1999, the Company has made 25 loans
to 22 churches in the  aggregate  amount of  $7,734,750,  with the average  size
being  $351,579.  Of the 25 loans  made by the  Company,  three  loans  totaling
$1,080,000,  have been repaid early by the borrowing  churches.  The Company has
also  purchased in the  secondary  market for $969,723  (which  includes $407 in
accrued interest) First Mortgage Church Bonds in the face amount of $977,300 and
purchased  for  $72,800  Second  Mortgage  Church  Bonds in the face  amount  of
$100,000.  Two of the First Mortgage  Church Bonds in the face amount of $33,300
have been  called  for  redemption  by the  issuing  organizations.  Subject  to
supervision of the Company's Board of Directors,  the business of the Company is
managed by Church Loan Advisors, Inc. (the "Advisor"), which provides investment
advisory and  administrative  services to the  Company.  The  principals  of the
Advisor include  principals of American  Investors  Group,  Inc., an NASD member
broker-dealer  which has served as underwriter of the Company's public offerings
of its common stock.

Public Offerings

           On July 11, 1995,  the Securities  and Exchange  Commission  declared
effective the Company's  first public  offering of 2,000,000  common shares at a
price of $10.00  per share  ($2,000,00)  under SEC File  33-87570.  The  Company
achieved the Minimum  Offering of at least 200,000 shares  ($2,000,000)  sold to
not less than 100 individuals (the "Minimum  Offering") on April 15, 1996. Until
the Minimum  Offering was  achieved,  the Company  could not commence its active
business of making mortgage loans to churches. Consequently, business operations
from inception (May 27, 1994) to completion of the Minimum  Offering  (April 15,
1996) were limited to daily business organizational efforts, activities relating
to the offering,  reviewing potential candidates for church mortgage loans to be
made by the Company  once the Minimum  Offering  was  achieved,  and  conducting
informational meetings with brokers and broker-dealers identified to the Company
by the Underwriter--American Investors Group, Inc. ("American"), an affiliate of
the Company.  The Company  concluded its initial public  offering on November 8,
1996. As of such date the Company had sold 335,481 shares to  approximately  281
individuals,  not including 20,000 shares ($200,000) previously purchased by the
Company's  initial  shareholder  -- DRM  Holdings,  Inc.,  an  affiliate  of the
Company.


     On September 26, 1997,  the  Securities  and Exchange  Commission  declared
effective the Company's  second public offering of 1,500,000  common shares at a
price of $10.00 per share ($15,000,000)  under SEC File 333-27601.  The Offering
was   co-underwritten   by  American  Investors  Group,  Inc.  and  LaSalle  St.
Securities, Inc., Chicago, Illinois ("LaSalle").  American acted in the capacity
of the Managing Underwriter and is an affiliate of the Company. The Offering was
conducted on a"best-efforts"
                                       
                                        3
<PAGE>

basis pursuant to applicable  rules of the  Securities and Exchange  Commission.
The Company concluded it second public offering on January 22, 1999. The Company
sold 799,759  shares during its second public  offering.  As of February 1, 1999
the Company has 1,175,979 shares  outstanding and  approximately  770 individual
shareholders.

The Company's Business Activities

           The  Company's  business  is managed by Church Loan  Advisors,  Inc.,
Minnetonka,   Minnesota  (the  "Advisor").  The  Advisor's  affiliate,  American
Investors  Group,   Inc.  has  been  engaged  since  1987  in  the  business  of
underwriting first mortgage bonds for churches  throughout the United States. In
underwriting  such  bonds,   American  reviews  financing  proposals,   analyzes
prospective borrowers' financial capability, and structures,  markets and sells,
mortgage-backed  securities which are debt obligations (notes) of such borrowers
to the investing  general public.  The  shareholders,  officers and directors of
American, have been engaged in the business of church financing since 1983, with
a combined  experience of  approximately  64 years in this  business.  Since its
inception,  American has underwritten  approximately 144 church bond financings,
in which  approximately  $211 million in first  mortgage bonds have been sold to
public investors. The average size of single church bond financings underwritten
by American since its inception is approximately $1.5 million.

           In the course of its business,  American has identified a demand from
potential borrowers for smaller loans of $100,000 to $1,000,000.  Because of the
regulatory  and  administrative  expenses  associated  with the  bond  financing
business,  American  determined  that the economic  feasibility  of this form of
financing has diminished for financings under $750,000. As a result, the Company
believes  that many  churches are forced to either  forego the project for which
their  financing  request  was made,  fund their  project  from cash flow over a
period  of time and at  greater  expense,  or seek bank  financing  at terms not
always favorable or available to them, due to the historic reticence of banks to
lend to churches for other than economic reasons.  The Company's objective is to
provide a lending  source to this segment of the industry,  capitalizing  on the
human  resources  and  experience  available at American and the Advisor and the
marketing, advertising and general goodwill of American.

Financing Business

           The Company's  primary  business is to make first  mortgage  loans in
amounts  ranging from $100,000 to $1,000,000,  to churches and other  non-profit
religious  organizations,  and selecting and investing in mortgage-secured  debt
instruments  ("Church Bonds") issued by churches and other non-profit  religious
organizations  throughout the United States. The Company applies essentially all
of its working  capital  (after  adequate  reserves  determined  by the Advisor)
toward making mortgage loans and investing in Church Bonds. The Company seeks to
enhance  returns on  investments on such loans by (i)  emphasizing  shorter-term
(0-5 years) and mid-term  (5-15 years) loans and  construction  loans  (although
there is no limit on the term of loans the  Company  will  make);  (ii)  seeking
origination  fees (i.e.  "points") from the borrower at the outset of a loan and
upon any renewal of a loan;  (iii)  making a limited  amount of  higher-interest
rate second mortgage loans to qualified borrowers; and (iv) purchasing a limited
amount of  mortgage-secured  debt securities having various maturities issued by
churches and other non-profit  religious  organizations.  The Company's policies
limit the  amount  of  second  mortgage  loans to 20% of the  Company's  Average
Invested  Assets on the date any  second  mortgage  loan is closed and limit the
amount of mortgage-secured  debt securities to 30% of Average Invested Assets on
the date of their  purchase.  All other  mortgage  loans made by the Company (or
Church Bonds purchased for  investment)  will be secured by a first mortgage (or
deed of trust) lien in favor of the  Company.  Although the Company will attempt
to make  mortgage  loans for terms of short (0-5 years) or medium  (5-15  years)
duration, and/or with variable interest rate provisions, it may make longer-term
fixed-rate  loans in its discretion,  in order to reduce the risk to the Company
of downward interest rate fluctuations.

           The   Company's   lending   and   investing   operations,   including
determination  of a prospective  borrower's  or church bond  issuer's  financial
credit worthiness,  are made on behalf of the Company by the Advisor.  Employees
and  agents of the  Advisor  conduct  all  aspects  of the  Company's  business,
including (i) marketing and  advertising;  (ii)  communication  with prospective
borrowers;  (iii)  processing  loan  applications;  (iv) closing the loans;  (v)
servicing the loans;  (vi)  shareholder  relations and (vii)  administering  the
Company's day-to-day business.  In consideration of its services to the Company,
the  Advisor  is  entitled  to  receive  a fee equal to 1 1/4%  annually  of the
Company's Average Invested Assets,  plus one-half of any origination fee charged
to borrowers on mortgage  loans made by the Company.  The  Advisor's  management
fees are computed and payable monthly.

Current First Mortgage Loan Terms

           The Company offers prospective borrowers a selection of "Loan Types,"
which  include a choice of fixed or variable  rates of  interest  indexed to the
"prime" rate of interest,  the U.S.  Treasury  10-Year Notes, or other generally
recognized  reference index,  and having various terms to maturity,  origination
fees and other terms and  conditions.  The Loan Types,  interest  rates and fees
offered and charged by the Company may from time-to-time be limited,  changed or
otherwise  unilaterally  amended by the Advisor in its discretion as a result of
such  factors  (among  others) as (i)  balance  of Loan  Types in the  Company's
portfolio;  (ii)  competition  from other  lenders;  (iii)  anticipated  need to
increase the overall yield to the Company on its mortgage loan  portfolio;  (vi)
local and national  economic  factors;  and (v) actual  experience in borrowers'
demand for the loans. In addition,  the Company may make mortgage loans on terms
other  than  those  identified  in its list of Loan  Types.  Subject  to change,
modification  or  elimination  at the complete  discretion  of the Company,  the
following  is a list  of the  Loan  Types  which  the  Company  currently  makes
available:


                                        4

<PAGE>

<TABLE>
<CAPTION>
  Loan Type                          Interest Rate (1)               Origination Fee (2)
<S>                                <C>                                    <C> 
15 Year Term (3)                   Fixed @ Prime + 2.00%                  4.0%
20 Year Term (3)                   Fixed @ Prime + 2.10%                  4.0%
20 Year Term (3)                   Variable Annually @ Prime + 1.25%      3.5%
Renewable Term  (4)                Fixed @ Prime plus:
     3 Year                               1.50%                           3.5%
     5 Year                               1.75%                           3.5%
     7 Year                               2.00%                           3.5%
Construction 1 Year Term           Fixed @ Prime + 3.25%                  2.0%
</TABLE>
========================           ================================   ==========



     (1)      "Prime" means the prime rate of interest charged to preferred
               customers, as published by a federally chartered bank chosen by
               the Company.

     (2)      Origination fees are based on the original principal amount of the
              loan and are collected  from the borrower at the  origination  and
              renewal of loans,  one-half  of which is payable  directly  to the
              Advisor. See "Compensation to Advisor and Affiliates."

     (3)      Fully amortized repayment term.

     (4)      Renewable  term loans are repaid  based on a 20-year  amortization
              schedule,  and are  renewable at the  conclusion  of their initial
              term for additional  like terms up to an aggregated  maximum of 20
              years. A fee of 1% is charged by the Company upon the date of each
              renewal. If renewed by the borrower, the interest rate is adjusted
              upon renewal to Prime plus a specified  percentage "spread," i.e.,
              one and a quarter percent (1.25%).

The above table describes  certain material terms of Loan Types,  interest rates
and fees  currently  offered  and  charged by the  Company.  The table does not,
however, purport to identify all possible Loan Types, terms, rates, and fees the
Company may offer from  time-to-time.  The Company may  determine at any time to
modify the terms  identified above and/or offer loan terms different than any of
the Loan Types,  interest  rates and fees  identified  above and does,  in fact,
negotiate these terms and fees with many of its borrowers.


Mortgage Loan Processing and Underwriting

     Mortgage  loan  applications  are prepared  and  verified by the  Advisor's
personnel  in  the  Company's  Loan  Origination  and  Underwriting  Department.
Verification procedures are designed to assure a borrower's  qualification under
the Company's  Financing  Policies which are specifically  identified herein and
include, among other things,  obtaining; (i) written applications (and exhibits)
signed and  authenticated  by the  prospective  borrower  in form and  substance
dictated by the  Company;  (ii)  financial  statements  in  accordance  with the
Company's Financing Policies;  (iii) corporate records and other  organizational
documents of the  borrower;  (iv)  preliminary  title report or  commitment  for
mortgagee title  insurance;  and (v) a real estate  appraisal in accordance with
the Financing Policies.  All appraisals and financial statements are prepared by
independent  third-party  professionals  who are  pre-approved  based  on  their
experience, reputation and education. Completed loan applications, together with
a written  summary are then  presented to the Company's  Underwriting  Committee
which is comprised of the Advisor's President and Vice-President,  the Company's
President  and  Chairman,  and the Director of  Underwriting  of  American.  The
Advisor may arrange for the  provision of mortgage  title  insurance and for the
services of professional  independent  third-party accountants and appraisers on
behalf of borrowers in order to achieve pricing efficiencies on their behalf and
to assure the efficient delivery of title commitments, preliminary title reports
and  title  policies,  and  financial  statements  and  appraisals  meeting  the
Company's  underwriting criteria. The Advisor may arrange for the direct payment
for such  professional  services and for the direct  reimbursement to it of such
expenditures by borrowers and prospective borrowers. Upon closing and funding of
mortgage  loans, a negotiable  origination  fee based on the original  principal
amount of each loan may be charged, of which one-half is payable to the Advisor.

 Loan Commitments

     Subsequent to approval by the Company's Underwriting  Committee,  and prior
to  funding  a loan,  the  Company  may  issue a loan  commitment  to  qualified
applicants.  A loan commitment  deposit is normally  required from the borrowing
church to commence the loan preparation  procedure.  These deposits are directly
applied by the Advisor to engage  accountants  and  appraisers  to prepare their
respective  reports  on  the  Church.  Commitments  indicate  the  loan  amount,
origination  fees,  closing  costs,  underwriting  expenses  (if  any),  funding
conditions,  approval  expiration  dates  and  interest  rate and  other  terms.
Commitments  generally set forth a "prevailing" interest rate that is subject to
change in accordance with market interest rate fluctuations until the final loan
closing  documents are prepared,  at which time the Company  commits to a stated
interest rate. In certain cases the Company may establish

                                        5

<PAGE>

("lock in") interest rate  commitments up to sixty (60) days from the commitment
to  closing;  however,  interest  rate  commitments  beyond  sixty days will not
normally be issued unless the Company  receives an appropriate fee premium based
upon the assessment of the risk associated with a longer period.

Loan Portfolio Management

     The Company's  portfolio of mortgage  loans and Church Bonds is managed and
serviced by the Advisor in accordance with the Advisory  Agreement.  The Advisor
is  responsible  for  all  aspects  of the  Company's  mortgage  loan  business,
including  closing and  recordation of mortgage  loans;  collecting  payments of
principal  and  interest  payments  regularly  and upon the  maturity of a loan;
enforcing loan payments and other lender's requirements; periodic review of each
mortgage  loan  file  and  determination  of  its  reserve  classification;  and
exercising  the  Company's   remedies  in  connection   with  any  defaulted  or
non-performing  loans. Fees and costs of attorneys,  insurance,  bonds and other
direct  expenses  incurred in connection  with the exercise of such remedies are
the  responsibility  of the  Company,  although  they may be  recouped  from the
borrower in the process of pursuing the Company's remedies. The Advisor will not
receive any additional  compensation  for services  rendered in connection  with
loan portfolio management or exercising the Company's remedies in the event of a
loan default.

Loan Funding and Bank Borrowing

     The Company's mortgage loans (and purchases of Church Bonds) will be funded
with  available  cash  resources  and, at the  discretion  of the Advisor,  with
borrowings under a line of credit with a commercial  lender or bank. The Company
does not  presently  have a line of  credit,  and does not  presently  intend to
obtain  one.  Nonetheless,  the Company may borrow up to 50% of the value of its
Average  Invested Assets to make loans  regardless of the Company's  capacity to
(i) sell the Shares on a continuing basis, or to (ii) reposition assets from the
maturity or early repayment of mortgage loans in its portfolio.  Initially,  the
cash resources available to the Company will be limited to the net proceeds from
the sale of the Shares,  minus  reserves for  operating  expenses,  and bad-debt
reserves,  as determined by the Advisor. As the business of the Company develops
and over the course of time, cash resources available to the Company for lending
purposes  will  include,  in addition to the net  proceeds  from future sales of
Shares (if any),  (i) principal  repayments  from borrowers on loans made by the
Company,  (ii) dividends reinvested in the Company by shareholders  electing the
Company's  Dividend  Reinvestment  Plan, and (iii) funds (if any) borrowed under
any line of credit arrangement, if obtained.

The Advisory Agreement

     The Company has entered  into a contract  with the Advisor  (the  "Advisory
Agreement")  under which the Advisor  will  furnish  advice and  recommendations
concerning the affairs of the Company,  provide  administrative  services to the
Company and manage the Company's  day-to-day  affairs.  Among other things,  the
Advisor:  (i) serves as the Company's  mortgage loan  underwriter and advisor in
connection with its primary  business of making loans to churches;  (ii) advises
and selects Church Bonds to be purchased and held for investment by the Company;
(iii) provides  marketing and  advertising and generates loan leads directly and
through its  Affiliates;  (iv) on behalf of the Company,  deals with  borrowers,
lenders,  banks,  consultants,   accountants,  brokers,  attorneys,  appraisers,
insurers and others; (v) supervises the preparation,  filing and distribution of
tax returns and reports to governmental agencies and to Shareholders and acts on
behalf of the Company in connection with  Shareholder  relations;  (vi) provides
office  space and  personnel as required for the  performance  of the  foregoing
services as Advisor; and (vii) as requested by the Company, makes reports to the
Company of its  performance  of the  foregoing  services and furnish  advice and
recommendations with respect to other aspects of the business of the Company. In
performing  its  services  under the  Advisory  Agreement,  the  Advisor may use
facilities,  personnel and support services of its Affiliates.  Expenses such as
legal and  accounting  fees,  stock transfer  agent,  registrar and paying agent
fees, and dividend  reinvestment  agent fees are direct  expenses of the Company
and are not provided for by the Advisor as part of its services.

     The Advisory  Agreement  is renewable  annually by the Company for one-year
periods, subject to a determination by the Company,  including a majority of the
Independent Directors,  that the Advisor's performance has been satisfactory and
that the compensation  paid the Advisor by the Company has been reasonable.  The
Advisory  Agreement may be terminated with or without cause by the Company on 60
days written notice. Upon termination of the Advisory Agreement by either party,
the  Advisor  may require the Company to change its name to a name that does not
contain  the  word  "American,"  "America"  or the  name of the  Advisor  or any
approximation or abbreviation  thereof,  and that is sufficiently  dissimilar to
the word "America" or "American" or the name of the Advisor as to be unlikely to
cause  confusion  or  identification  with  either the  Advisor or any person or
entity using the word "American" or "America" in its name, however,  the Company
may continue to use the word "church" in its name. In addition, upon non-renewal
or  termination  of the Advisory  Agreement  by the Company,  the Advisor may be
entitled to a termination fee. The Company's  Directors shall determine that any
successor  Advisor  possess  sufficient  qualifications  to perform the advisory
function  for the  Company  and justify  the  compensation  provided  for in its
contract with the Company.



                                        6

<PAGE>

     Pursuant to the Advisory  Agreement,  the Advisor is required to pay all of
the expenses it incurs in providing services to the Company,  including, but not
limited to, personnel  expenses,  rental and other office expenses,  expenses of
Directors,  officers and employees of the Advisor (except out-of-pocket expenses
of such persons who are  directors or officers of the Company  incurred in their
capacities as Directors  and officers of the  Company),  and all of its overhead
and  miscellaneous  administrative  expenses  relating  to  performance  of  its
functions under the Advisory Agreement.  The Company will be required to pay all
other expenses of the Company,  including the costs and expenses of reporting to
various  governmental  agencies  and  the  Shareholders  and of  conducting  its
operations as a mortgage  lender,  fees and expenses of  appraisers,  directors,
auditors, outside legal counsel and transfer agents, and costs directly relating
to closing of loan transactions.

     In the event that Total  Operating  Expenses of the  Company  exceed in any
calendar  year the  greater  of (a) 2% of the  Average  Invested  Assets  of the
Company or (b) 25% of the  Company's  net income,  the Advisor is  obligated  to
reimburse the Company, to the extent of its fees for such calendar year, for the
amount by which the aggregate annual operating  expenses paid or incurred by the
Company exceed the limitation.  The Independent Directors may, upon a finding of
unusual and non-recurring  factors which they deem sufficient,  determine that a
higher level of expenses is justified in any given year.

     The  Company's  Bylaws  provide  that  the  Independent  Directors  are  to
determine at least annually the  reasonableness  of the  compensation  which the
Company pays to the Advisor.  Factors to be considered in reviewing the Advisory
Fee  include  the size of the  fees of the  Advisor  in  relation  to the  size,
composition and profitability of the Company's loan portfolio, the rates charged
by other investment advisors performing comparable services,  the success of the
Advisor  in  generating   opportunities  that  meet  the  Company's   investment
objectives,  the amount of additional revenues realized by the Advisor for other
services performed for the Company, the quality and extent of service and advice
furnished by the Advisor,  the quality of the Company's  investments in relation
to  investments  generated by the Advisor for its own  account,  if any, and the
performance of the Company's investments.


     The Advisory Agreement  provides for  indemnification by the Company of the
Advisor and each of its  directors,  officers and employees  against  expense or
liability arising out of such person's  activities in rendering  services to the
Company,  provided  that  the  conduct  against  which  the  claim  is made  was
determined  by such person,  in good faith,  to be in the best  interests of the
Company and was not the result of negligence or misconduct.

Financing Policies

     The Company's business of mortgage lending to churches and other non-profit
religious  organizations  is  managed  in  accordance  with and  subject  to the
policies,   guidelines,   restrictions   and   limitations   identified   herein
(collectively, the "Financing Policy"). The intent of the Financing Policy is to
identify for its Shareholders not only the general business in which the Company
is  involved,  but the  parameters  of the  Company's  lending  business.  These
policies may not be changed (except in certain  immaterial  respects by majority
approval of the Board of  Directors)  without the  approval of a majority of the
Independent  Directors,  and the holders of a majority of the outstanding Shares
of the Company at a duly held meeting for that purpose:

     (i)      Loans made by the Company  will be limited to  churches  and other
              non-profit  religious  organizations,   and  will  be  secured  by
              mortgages. The total principal amount of all second mortgage loans
              funded by the Company shall be limited to 20% of Average  Invested
              Assets. All other loans will be first mortgage loans.

     (ii)     The loan amount  cannot exceed 75% of the value of the real estate
              and  improvements  securing each loan, such value being determined
              based on a written appraisal  prepared by an appraiser  acceptable
              to the Advisor. On loans over $500,000, the Company will require a
              written appraisal certified by a member of the Appraisal Institute
              ("MAI"), or a state-certified appraiser.

     (iii)    An ALTA (American Land Title  Association) or equivalent  Mortgage
              Title  Policy must be  furnished  to the  Company by the  borrower
              insuring the mortgage interest of the Company.

     (iv)     The borrower's long-term debt (including the proposed loan) cannot
              exceed four (4) times the borrower's gross income for the previous
              twelve (12) months.

     (v)      The borrower  must furnish the Company with  financial  statements
              (balance sheet and income and expense  statement) for the last two
              (2) complete fiscal years and a current financial  statement as of
              and for the period  within  ninety  (90) days of the loan  closing
              date. On loans equal to or less than  $500,000,  the last complete
              fiscal year must be reviewed by an independent accounting firm. On
              loans in  excess  of  $500,000,  the  last  complete  fiscal  year
              financial  statements  must be audited by an independent  auditor.
              Borrowers  in  existence  for less than  three  fiscal  years must
              provide  financial  statements  since  inception.  No loan will be
              extended  to a  borrower  in  operation  less  than two  years (24
              months)  absent  express   approval  by  the  Company's  Board  of
              Directors.

                                        7

<PAGE>



     (vi)     In its  discretion,  the Advisor,  on behalf of the  Company,  may
              require  the  borrower  to arrange  for  automatic  electronic  or
              drafting of monthly payments.

     (vii)    In its  discretion,  the Advisor,  on behalf of the  Company,  may
              require  (i)  key-man  life  insurance  on the life of the  senior
              pastor of a church;  (ii) personal  guarantees  of church  members
              and/or affiliates;  and (iii) other security  enhancements for the
              benefit of the Company.

     (viii)   The borrower must agree to provide to the Company  annual  reports
              (including  financial  statements)  within 120 days of each fiscal
              year end  beginning  with the fiscal year end next  following  the
              funding of the loan.

     (ix)     In its  discretion,  the Advisor,  on behalf of the  Company,  may
              require the  borrower to grant to the Company a security  interest
              in all  personal  property  located  and to be  located  upon  the
              mortgaged premises (excluding property leased by the borrower).

         These Financing Policies are in addition to the prohibited  investments
and activities  identified  hereinafter and which are set forth in the Company's
By Laws.

Prohibited Investments and Activities

         The Company's  Bylaws impose certain  prohibitions  and restrictions on
various   investment   practices  and  activities  of  the  Company,   including
prohibitions against:

         (i)      Investing more than 10% of its total assets in unimproved real
                  property or mortgage loans on unimproved real property;

         (ii)     Investing in commodities or commodity  futures contracts other
                  than  "interest  rate  futures"  contracts  intended  only for
                  hedging purposes;

         (iii)    Investing in mortgage loans (including  construction loans) on
                  any  one  property  which  in the  aggregate  with  all  other
                  mortgage  loans  on  the  property  would  exceed  75%  of the
                  appraised   value   of   the   property   unless   substantial
                  justification   exists   because  of  the  presence  of  other
                  underwriting criteria;

         (iv)     Investing  in  mortgage  loans  that  are  subordinate  to any
                  mortgage or equity interest of the Advisor or the Directors or
                  any of their Affiliates;

         (v)      Investing in equity securities;

         (vi)     Engaging  in any short  sales of  securities  or in  trading,
                  as distinguished from investment activities;

         (vii)    Issuing redeemable equity securities;

         (viii)   Engaging  in   underwriting  or  the  agency  distribution  of
                  securities issued by others;

         (ix)     Issuing  options  or  warrants  to  purchase  its Shares at an
                  exercise  price less than the fair market  value of the Shares
                  on the date of the issuance or if the issuance  thereof  would
                  exceed 10% in the aggregate of its outstanding Shares;

         (x)      Issuing debt securities  unless the debt service  coverage for
                  the most recently completed fiscal year, as adjusted for known
                  changes, is sufficient to properly service the higher level of
                  debt;

         (xi)     Investing  in  real  estate  contracts  of  sale  unless  such
                  contracts  are  in  recordable  form  and  are   appropriately
                  recorded in the chain of title;

         (xii)    Selling or leasing to the Advisor, a Director or any Affiliate
                  thereof unless approved by a majority of Directors  (including
                  a majority of Independent Directors), not otherwise interested
                  in such  transaction,  as  being  fair and  reasonable  to the
                  Company;

         (xiii)   Acquiring  property  from  any  Advisor  or  Director,  or any
                  Affiliate thereof, unless a majority of Directors (including a
                  majority of Independent Directors) not otherwise interested in
                  such  transaction  approve the  transaction  as being fair and
                  reasonable  to the  Company  and at a price to the  Company no
                  greater than the cost of the asset to such  Advisor,  Director
                  or any Affiliate thereof, or if the price to the Company is in
                  excess of such

                                        8

<PAGE>
                  cost, that substantial justification for such excess exists
                  and such excess is reasonable.  In no event shall the cost of
                  such asset to the Company exceed its current appraised value;

         (xiv)    Investing or making  mortgage  loans unless a  mortgagee's  or
                  owner's  title  insurance  policy  or  commitment  as  to  the
                  priority of the mortgage or condition of title is obtained; or

         (xv)     Issuing its shares on a deferred payment basis orother similar
                  arrangement.

         The  Company  does not  intend  to invest  in the  securities  of other
issuers for the purpose of  exercising  control,  to engage in the  purchase and
sale of investments  other than as described in this Report, to offer securities
in exchange for property  unless deemed  prudent by a majority of the Directors,
to issue  senior  securities  or to make  loans to other  persons  except in the
ordinary course of its business as described herein.

         The  Company in the future  will not make loans to or borrow  from,  or
enter into any contract,  joint  venture or  transaction  with,  any director or
officer of the Company,  the Advisor or any  Affiliate  of any of the  foregoing
unless a majority of the  Directors,  including  a majority  of the  Independent
Directors,  approves the  transaction  as fair and reasonable to the Company and
the transaction is on terms and conditions no less favorable to the Company than
those available from unaffiliated  third parties.  Any investment by the Company
in  any  property,  mortgage  or  other  real  estate  interest  pursuant  to  a
transaction  with the Advisor or any Directors or officers thereof will be based
upon an appraisal  of the  underlying  property  from an  independent  qualified
appraiser selected by the Independent  Directors and will not be made at a price
greater than fair market value as determined by such appraisal.

Competition

         The real estate financing industry generally is highly competitive. The
Company  will  compete  within its  geographic  areas of  operation  with a wide
variety of  investors  and other  lenders,  including  banks,  savings  and loan
associations,  insurance  companies,  pension funds and fraternal  organizations
which may have investment  objectives  similar to those of the Company. A number
of these competitors have greater financial resources,  larger staffs and longer
operating histories than those of the Company.  The Company competes principally
by limiting  its business  "niche" to lending to churches  and other  non-profit
religious organizations, offering loans with competitive and flexible terms, and
emphasizing the expertise of the Company in the specialized  industry segment of
lending to churches and other religious organizations.

Employees

         The Company has no employees, as it will be managed by the Advisor on a
"turn-key"  basis using  employees  of the  Advisor  and/or its  affiliates.  At
present,  certain  officers  and  directors  of  American  and the  Advisor  are
providing  services to the Company at no charge and which will not be reimbursed
to them.  These  services  include,  among others,  legal and analytic  services
relating to the  development of the Company's  business plan,  organization  and
incorporation of the Company, development and preparation of reports to be filed
under the Securities  Exchange Act, and  development and drafting of proprietary
forms and  documents  to be  utilized  by the  Advisor  in  connection  with the
Company's business operations.

         Subject to the  supervision  of the Company's  Board of Directors,  the
business  of  the  Company  is  managed  by  Church  Loan  Advisors,  Inc.  (the
"Advisor"),  which provides investment  advisory and administrative  services to
the  Company and is owned by V. James  Davis,  David G.  Reinhart  and Philip J.
Myers.  Mr. Reinhart and Mr. Davis are officers and directors of the Company and
directors  of the  Advisor.  Philip J. Myers is  President of the Advisor and of
American. The Advisor is not a registered advisor under the Investment Advisor's
Act of 1940,  nor is the  Company  a  registered  investment  company  under the
Investment  Company  Act of 1940.  As of the date of this  Report,  the  Advisor
employs  three  persons on a part-time  or other  basis.  The  Company  does not
presently expect to directly employ any persons in the foreseeable future, since
all  administrative  functions and operations will be contracted for through the
Advisor.  However, legal and accounting services to the Company will be provided
by outside  professionals  and paid for  directly  by the  Company.  See Item 11
"Security  Ownership of Certain  Beneficial  Owners and Management," and Item 12
"Certain Relationships and Related Transactions."

Operations

         The Company's operations currently are located in the 8,400 square foot
offices of the Advisor's affiliate, American Investors Group, Inc., 10237 Yellow
Circle Drive,  Minnetonka,  Minnesota  55343.  These facilities are owned by DRM
Holdings,  Inc.  which is the parent  company of  American.  The  Company is not
charged  any  rent for its use of these  facilities,  or for its use of  copying
services,  telephones,  facsimile machines,  postage service, office supplies or
employee services, since these costs are covered by the advisory fee paid to the
Advisor. The Advisor pays rent and other fees to DRM Holdings, Inc. on a monthly
basis.  The Company  believes that the terms of this arrangement are at least as
favorable to the Company as those available from  unaffiliated  third parties on
an arm's-length basis.

                                        9

<PAGE>

Item 2.   Description of Property

         The Company's  operations are located in the leased offices of American
Investors  Group,  Inc., in Minnetonka,  Minnesota.  It is expected that for the
foreseeable future the Company's  operations will continue to be housed in these
or similar  leased  premises along with  American's  operations and those of its
Affiliates.  The Company is not  directly  charged  for rent,  nor does it incur
other costs  relating to such leased space,  since the Advisor is including this
expense in the Advisory Fee. The office  building is owned by American's  parent
corporation, DRM Holdings, Inc.

Item 3.   Legal Proceedings.

         Not applicable.


Item 4.   Submission of Matters to a Vote of Security Holders.

         Not applicable.


                                     PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters.

         Market Information

         As of February  26,  1999,  1,163,878  shares of the  Company's  common
shares were issued and outstanding in the public,  excluding 20,000 shares owned
by the Company's  initial  shareholder DRM Holdings,  Inc. The Company's initial
public  offering  (SEC file  33-87570)  which  began  July 11,  1995 was  closed
November 8, 1996 with 335,481 shares having been sold. In addition, on September
26,  1997,  the  Securities  and  Exchange  Commission  declared  effective  the
Company's secondary offering of 1,500,000 common shares at a price of $10.00 per
share ($15,000,000) under SEC File 33-87570. The Offering was co-underwritten by
American  Investors Group, Inc. and LaSalle St. Securities,  Inc.,  ("LaSalle").
American acted in the capacity of the Managing  Underwriter  and is an affiliate
of the Company. The Offering was conducted on a"best-efforts"  basis pursuant to
applicable  rules  of  the  Securities  and  Exchange  Commission.  The  Company
concluded  it second  public  offering on January  22,  1999.  The Company  sold
799,759 shares in its second public offering.

         Lack of Liquidity and Absence of Public Market Price.

         There currently is no market for the Company's  common shares and there
can be no  assurance  that a market  will  develop.  It is not  expected  that a
material  market for the shares will  develop any time soon.  In  addition,  the
market for REIT  securities  historically  has been less  liquid  than  non-real
estate types of  publicly-traded  equity  securities.  Further,  because of such
illiquidity and the fact that the shares would be valued by market-makers  (if a
market  develops)  based on market forces which consider  various factors beyond
the Company's  control,  there can be no assurance  that the market value of the
shares at any given  time would be the same or higher  than the public  purchase
price of the shares.  In addition,  the market  price,  if any  develops,  could
decline  if the  yields  from other  competitive  investments  exceed the actual
dividends paid by the Company on the shares.  The common stock of the Company is
not  listed  on any  exchange  and is not yet  qualified  for  quotation  on the
National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ").

         Repurchase of Shares by the Company

         Although the Company's common shares are not redeemable by the Company,
the Company may at its complete  discretion,  repurchase shares offered to it by
Shareholders.  In such event,  the Company  may pay  whatever  price the Advisor
deems  appropriate  and  reasonable,  and any such  shares  repurchased  will be
re-designated  as  "unissued,"  will no longer be  entitled to  distribution  of
dividends and will cease to having voting rights.

         Holders of the Company's Common Shares

         As of February 26, 1999, there were 773 record holders of the Company's
$.01 par common stock,  including DRM Holdings,  Inc., a Minnesota  corporation,
which owns 20,000 shares for which it paid $200,000 ($10.00 per share).


                                       10

<PAGE>

         Dividends

         The  Company  paid  dividends  for the prior  fiscal year on its common
stock as follows:

<TABLE>
<CAPTION>

 Distribution Date:         For Quarter Ended:       Dollar Amount Distributed     Annualized Yield Per
                                                      Per Share:                    Share Represented:
<S>                        <C>                       <C>                                  <C>  
   April 30, 1998             March 31, 1998         $.23125                              9.25%
    July 30, 1998             June 30, 1998          $.23125                              9.25%
  October 30, 1998          September 30, 1998       $.2125                               8.50%
  January 30, 1999          December 31, 1998        $.2250                               9.00%
</TABLE>

         As a Real Estate  Investment Trust, the Company makes regular quarterly
distributions  to  Shareholders  in an  amount  equal  to at  least  95%  of the
Company's  "real  estate  investment  trust  taxable  income."  Such  amount are
estimated for the first three quarters of each fiscal year and adjusted annually
based upon the Company's audited year-end  financial report.  Cash available for
distribution to Shareholders will be derived primarily from the interest portion
of monthly  mortgage  payments  received from churches  borrowing money from the
Company,  from  origination  and other fees paid to the Company by  borrowers in
connection  with such loans,  interest  income from  mortgage-backed  securities
issued by churches and other non-profit  religious  organizations  purchased and
held by the Company  for  investment  purposes,  and  earnings on any  Permitted
Temporary Investments made by the Company. All dividends are paid by the Company
at the  discretion  of the Board of Directors  and will depend upon the earnings
and financial  condition of the Company,  maintenance of real estate  investment
trust status, funds available for distribution,  results of operations, economic
conditions, and such other factors as the Board of Directors deems relevant.

          During any period where shares of the Company's common stock are being
offered  and sold and the  proceeds  therefrom  accumulated  for the  purpose of
funding loans made by the Company, the relative yield generated by such capital,
and, thus, dividends (if any) to Shareholders,  could be less than expected once
the Company has fully invested such funds in accordance  with its business plan.
The Company  intends to ameliorate to some extent the  possibility of low yields
during the periods where it is selling shares by (i)  collecting  from borrowers
an  origination  fee at the  time a loan  is  made  (of  which  one-half  of any
origination  fee  charged  in  connection  with a loan is paid  directly  to the
Advisor  as  additional  compensation--the  other  one-half  is  payable  to the
Company), and (ii) timing its lending activities to coincide as much as possible
with sales of the Shares. However, there can be no assurance that either or both
of these  strategies  will improve  current yields to Shareholders in periods of
the Company's business  operations when capital is being raised through the sale
of  additional  common  shares.  In  order to  qualify  for the  beneficial  tax
treatment  afforded real estate  investment trusts by the Internal Revenue Code,
the  Company is  required  to pay  dividends  to holders of its Shares in annual
amounts which are equal to at least 95% of the Company's "real estate investment
trust taxable  income." For the fiscal year ended  December 31, 1998 the Company
distributed 99.9% of its taxable income to shareholders in the form of quarterly
dividends. The Company intends to continue distributing all or a portion of such
income to the  Shareholders  on a quarterly  basis,  subject to (i)  limitations
imposed by  applicable  state law, and (ii) the factors  identified  above.  The
portion of any dividend that exceeds the Company's  earnings and profits will be
considered  a return of  capital  and will not  currently  be subject to federal
income tax to the extent that such dividends do not exceed a Shareholder's basis
in the Shares.

         Funds available to the Company from the repayment of principal (whether
at maturity or  otherwise)  of loans made by the Company,  or from sale or other
disposition of any properties or any of its other  investments may be reinvested
in additional loans to churches,  invested in mortgage-backed  securities issued
by  churches  or  other  non-profit  organizations,  or in  Permitted  Temporary
Investments,  rather than distributed to the Shareholders.  The Company can pass
through the capital gain character of any income  generated by computing its net
capital  gains  and  designating  a  like  amount  of  its  distribution  to the
Shareholders as capital gain dividends. The distribution requirement to maintain
qualification as a real estate investment trust does not require distribution of
net capital  gains,  if generated.  Thus, the Company has a choice of whether to
distribute  any such gains.  Undistributed  net  capital  gains (if any) will be
taxable to the  Company.  The Board of  Directors,  including  a majority of the
Independent Directors, will determine whether and to what extent the proceeds of
any disposition of property will be distributed to Shareholders.



                                       11

<PAGE>

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


         The following  discussion  regarding  the  financial  statements of the
Company  should be read in conjunction  with the financial  statements and notes
thereto included in this Report beginning at page F-1.

         Financial Condition

         During the year ended  December  31,  1998 total  assets of the Company
increased by $4,902,931  due primarily to sale of the Company's  common stock in
its second  "best  efforts"  public  offering.  Total  liabilities  increased by
$136,126 due to deferred  income and  dividends  declared but not yet paid as of
December 31, 1998.

         Results of Operations-1996-1997

         The Company commenced active business  operations on or about April 15,
1996, therefore,  results of operations through December 31, 1996 are reflective
of approximately 255 days of operations. Between the date upon which the Company
began active  business  operations and December 31, 1996, the Company made loans
to seven churches in the aggregate  amount of  $2,802,000,  with an average loan
size being  $400,000.  The Company also  purchased in the  secondary  market for
$46,412 (which includes $407 in accrued interest) First Mortgage Church Bonds in
the face amount of $50,000 and  purchased  for $72,800  Second  Mortgage  Church
Bonds in the face amount of $100,000.

         As of December 31, 1997,  the Company  completed  its first full fiscal
year of operations.  During the fiscal year ended  December  31,1997 the Company
funded an additional  five first mortgage loans and three second  mortgage loans
to churches for an aggregate amount of $2,665,712 and purchased $2,000 principal
amount of First Mortgage Church Bonds for a purchase price of $871.

         Results of Operations - 1998

         During the fiscal year ended  December  31, 1998 the Company  funded an
additional six first  mortgage  loans and two second  mortgage loans to churches
totaling  $1,793,750  and  $355,000  respectively.  The Company  also  purchased
$925,300 principal amount of First Mortgage Church Bonds for a purchase price of
$922,445. In addition, during the fiscal year ended December 31, 1998, two first
mortgage loans and one second mortgage loan in the aggregate amounts of $730,000
and $350,000 respectively, have been repaid early by the borrowing churches. All
interest and principal  has been repaid in full in accordance  with the terms of
each loan.  The Company  also had two First  Mortgage  Church  Bonds  called for
redemption by the borrowing organizations.  The two bonds paid all principal and
interest  entitled to the  Company.  The face amount of the  combined  bonds was
$33,000, The Company's original combined purchase price was $29,225.

         Between December 31, 1998 and February 1, 1999 the Company financed one
additional  second  mortgage  loan for $235,000 and purchased  18,000  principal
amount of First Mortgage Church Bonds for a purchase price of $17,720. All loans
made by the Company range in interest  rate charged to the borrowers  from 9.75%
to 11.25%  representing loans with repayment schedules of up to twenty years. As
of  February  1, 1999,  the  average,  principal-adjusted  interest  rate on the
Company's portfolio of loans was 10.96%. The Company's portfolio of bonds has an
average current yield of 9.69%.

         Operating  income for the Company's fiscal year ended December 31, 1998
was $705,365 on total revenues of $782,013  compared to $347,814 and $145,386 on
total  revenues of $384,118 and  $217,390 for the years ended  December 31, 1997
and 1996  respectively  . Interest  income earned on the Company's  portfolio of
loans was $655,219 for the year ended December 31, 1998 compared to $343,695 and
$152,259 for 1997 and 1996  respectively.  This increase is due to the fact that
eight new loans were originated both in fiscal years ended December 31, 1998 and
1997 . Excluded from revenue for the year ended  December 31, 1998 is $61,822 of
origination  income, or "points," received by the Company,  recognition of which
under generally accepted  accounting  principles  ("GAAP") must be deferred over
the  expected  life of each loan.  However,  under tax  principles,  origination
income is recognized in the period received. Accordingly,  because the status of
the Company as a real estate investment trust requires,  among other things, the
distribution to shareholders of at least 95% of "Taxable  Income," the dividends
declared and paid to  Shareholders  for the quarters ended March 31, 1998,  June
30, 1998,  September 30, 1998 and December 31, 1998 included  origination income
even though it was not recognized in its entirety for the period under GAAP.

         The  Company's  Board of  Directors  declared  quarterly  dividends  of
$.23125 for each share held of record on March 31, 1998,  $.23125 for each share
held of record June 30, 1998, $.2125 for each share held of record September 30,
1998, and $.225 for each share held of record on December 31, 1998. Based on the
four  quarters of  operations  for the quarters  ended March 31, 1998,  June 30,
1998,  September 30, 1998, and December 31, 1998, the dividends paid represented
a 9.25%,  9.25%,  8.50% and 9.00% annualized yield to Shareholders  respectively
for an effective overall annual dividend yield of 9.00%. Total dividends paid

                                       12

<PAGE>

in 1998  represented a 9.00% annual rate of return on each share of common stock
owned and purchased for $10 per share.  Total  dividends paid by the Company for
fiscal year 1997, its first full fiscal year of operations,  represented a 9.48%
annual rate of return on each share of common stock owned.

         Since its  inception,  the Company  experienced  its highest  quarterly
dividend  payment for the quarter ended  December 31, 1997 and  experienced  its
lowest quarterly  dividend payment for the quarter ended September 30, 1998. The
quarterly  dividend  paid for each share held of record on December 31, 1997 was
$.25625 per share  representing  an  annualized  yield of 10.25%.  The quarterly
dividend  payment for each share held of record on September 30, 1998 was $.2125
representing an annualized yield of 8.50%. The dividend payment for December 31,
1997 was significantly  higher than the average dividend amount due to the large
number of loans funded  during the quarter.  Each loan funded during the quarter
generates  origination  income  which  is due and  payable  to  shareholders  as
"Taxable  Income"  even  though  origination  income was not  recognized  in its
entirety for the period under "GAAP". The dividend payment made to September 30,
1998  shareholders  of record was  directly  related to large cash  balances the
Company  received  in its  second  stock  offering  and  held  in  money  market
instruments pending deployment in new loans to churches. Because interest earned
in the  Company's  money market  account is  substantially  lower than  interest
earned  on its  mortgage  loans,  interest  income  earned  was  lower  than  is
anticipated to be earned once the offering  proceeds are fully deployed into new
loans.

         Total assets of the Company  increased  from  $3,414,977 as of December
31, 1996 to  $5,363,396  as of December 31, 1997. As of December 31, 1998 assets
had  increased  to  $10,266,327.  The primary  reason for the  increase in total
assets from December 31, 1996 through December 31, 1998 was a result of the sale
and  issuance  of the  Company's  common  stock  pursuant  to its second  public
offering,  the proceeds of which are deployed  into new mortgage  loans and cash
and cash equivalent  money market  obligations.  Shareholders'  Equity rose from
$3,280,141  at December 31, 1996 to $5,141,579 at December 31, 1997 and again to
$9,906,384 at December 31, 1998 for the same reasons.  Company  liabilities  for
all periods  after  December  31, 1995 are  primarily  comprised  of a "Deferred
Income" item,  reflecting the Company's  practice of recognizing its origination
income -- fees charged to borrowers at the commencement of its loans -- over the
life of each loan. Another material liability for all periods after December 31,
1995 includes  dividends  declared as of the end of the period  reported on, but
not paid until the 30th day of the ensuing month.

         During the one-month  period ended January 31, 1999 total assets of the
Company  increased by $661,408 due primarily to the continued public sale of the
Company's common stock. The Company's second public offering  concluded  January
22, 1999. A total of 779,759 shares were sold during the Company's second public
Offering.  The Company has 1,175,979 shares  outstanding as of February 1, 1999.
During the  first-month  period ending  January 31, 1999 the Company  funded one
additional second mortgage loan of $235,000. In addition,  the Company purchased
$18,000  principal amount of First Mortgage Church Bonds for a purchase price of
$17,720.  All loans made by the Company range in annual interest rate charged to
the  borrowers  from 9.75% to 11.25%.  As of  February  1,  1999,  the  average,
principal-adjusted interest rate on the Company's portfolio of loans was 10.96%.
The Company's portfolio of bonds has an average current yield of 9.69% .

Liquidity and Capital Resources

         The Company's revenue is derived  principally from interest income, and
secondarily,  origination fees and renewal fees generated by mortgage loans that
it makes.  The  Company  also earns  income  through  interest on funds that are
invested  pending  their  use in  funding  mortgage  loans or  distributions  of
dividends to its  Shareholders,  and on income  generated on church bonds it may
purchase and own. The Company generates revenue through (i) permitted  temporary
investments  of the  net  proceeds  from  the  sale  of  the  shares,  and  (ii)
implementation  of its business  plan of making  mortgage  loans to churches and
other non-profit religious organizations.  The principal expenses of the Company
are Advisory Fees,  legal and  accounting  fees,  communications  costs with its
Shareholders,  and the  expenses  of its stock  transfer  agent,  registrar  and
dividend reinvestment agent.

         The  Company's  future  capital  needs  are  expected  to be met by (i)
additional  sale of its  shares to the  public  (ii)  prepayment,  repayment  at
maturity and renewal of mortgage  loans made by the Company,  and (iii) borrowed
funds.  The  Company  believes  that the  "rolling"  effect  of  mortgage  loans
maturing,  together  with  dividends  reinvested  under the  Company's  Dividend
Reinvestment  Plan,  will provide a  supplemental  source of capital to fund its
business operations in future years. Nevertheless,  the Company believes that it
may be desirable, if not necessary, to sell additional shares of common stock in
order to enhance its  capacity to make  mortgage  loans on a  continuous  basis.
There can be no  assurance  that the  Company  will be able to raise  additional
capital on terms  acceptable for such purposes.  Although the Company may borrow
funds in an amount not to exceed 50% of its Average  Invested Assets in order to
increase its lending capacity,  it has no present intention of doing so, nor has
it secured a source  for such  borrowing.  Because  the  Company  has not itself
borrowed  funds,  the Company  does not believe  that  inflation at the national
level as experienced  over the past three years has made a material  impact upon
its  operations,  nor does it  believe  that  currently  anticipated  levels  of
inflation in 1999 would have a material  impact on its  business.  However,  the
relatively low inflation rates of recent years has contributed to lower interest
rates,  which in turn,  has caused the  Company to lower the  interest  rates it
charges  church  borrowers  on its  loans.  This in turn,  has and  likely  will
continue  to impact  interest  income the  Company  will earn and,  accordingly,
influence dividends declared by the Company's Board of Directors.

                                       13

<PAGE>

         Nevertheless,  if the  rate  of  inflation  increased  materially,  the
Company could  reasonably  expect  interest  rates  generally to increase,  thus
possibly making the yield to investors in the Shares less attractive as compared
to alternative fixed-income  investments.  Conversely,  if the rate of inflation
decreases  materially,  it could  reasonably  be expected  that  interest  rates
generally would decline or remain at current levels. A decline in interest rates
generally would require the Company to offer lower rates to borrowers  which, in
turn, would eventually result in lower yields to investors in the Shares. During
the Company's 1998 fiscal year, the Federal Reserve Board cut the prime interest
lending  rate  three  times to a  current  prime  interest  rate of  7.75%.  The
reduction of the prime interest required the Company to reduce its lending rates
to levels that remained competitive with other lending organizations in order to
attract qualified potential borrowers.

Year 2000 Issue

         The  "Year  2000  Issue"  is a data  management  problem  that may have
significant  financial  consequences for some companies.  Many computer programs
use only two digits to identify the year in the date field.  As a result,  those
programs cannot distinguish between the year 2000 and the year 1900. On or after
January 1, 2000, these programs may  inaccurately  process data, or in the worst
case scenario, stop processing entirely.

         Although the Company depends upon computer-based  financial software to
process its books and  records,  the  software  utilized by the Company will not
impact  the  Company  financially,  if at all,  with  respect  to the "Year 2000
Issue." The financial  software  utilized by the Company  requires that the date
field be completed in its entirety. For example: the year "1900" must be entered
as "1900" and the year  "2000"  must be entered  as  "2000".  Therefore,  a date
cannot be entered as "00" causing problems in many programs as to what year "00"
is representing, either "1900" or "2000." The Company utilizes Windows(TM)-based
"off-the-  shelf"  software  to process its books and  records.  "Off-the-shelf"
software  implies its public use and  availability.  It can be purchased at most
computer or retail  stores at minimal  cost,  is easy to use and can be replaced
inexpensively  if a "Year 2000 Issue"or  other  factors  unique to the Company's
needs, becomes  problematic.  Finally,  "off-the-shelf"  software is continually
being upgraded by the software  manufacturer  and the "Year 2000 Issue" has been
addressed by many of these companies,  including the Company's  current software
product, in the form of new upgrades or new versions of the software.  Companies
most affected by the "Year 2000 Issue" are primarily large companies with assets
and resources  substantially greater than the Company's which utilize customized
software residing on large "main-frame"  systems to meet specific needs of their
company or industry.

         The Company  currently  requires each borrower to make monthly payments
by automatic funds transfer (automatic  deduction or "ACH" ) from the borrower's
checking or savings account as stated in the terms of the loan  agreements.  The
Company  intends to communicate  with each borrower during the fourth quarter of
1999  regarding  the  potential of "Year 2000  Issues." The  communication  will
address the  potential,  among  other  things,  that "ACH"  payments on or after
December 31, 1999 may be effected  and, if so, the borrowing  organization  will
need to be prepared  to submit  payments by  overnight  mail or other  expedient
means drawn on good funds from the borrowing  organization's current checking or
savings account.

         Finally,  the Company  utilizes  the  services of Gemisys  Corporation,
Englewood,  Colorado for its shareholder services and as its transfer,  dividend
and proxy  disbursement  agent.  Gemisys has represented to the Company that its
current  "Universe"  platform has been programmed so that any date in the system
as "00" (e.g.,  2/1/00) will be interpreted as the year 2000, not 1900.  This is
due to the fact that  Gemisys  uses an "internal  date" that  correlates  to the
actual date.  These "internal  dates" are in sequential  order and not repeated.
This includes any data conversions to Gemisys's  system.  The Company as well as
its  shareholder  services  agent have  addressed the "Year 2000 Issue" and have
determined this issue will not affect its continuing operations.


Item 7.  Financial Statements.

         Financial  Statements  required by this item can be found  beginning on
page F-1 of this Form-10KSB and are deemed incorporated herein by reference.


Item 8.  Changes in and Disagreements With Accountants on Accounting and
              Financial Disclosure.

         Not Applicable




                                       14

<PAGE>

                                    PART III


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

         (a)  Directors  are  elected  for a term  expiring  at the next  annual
meeting of the  Company's  Shareholders  and serve for one-year  terms and until
their successors are duly elected and qualified. Annual Shareholder Meetings are
typically  held in May.  Officers of the Company serve at the  discretion of the
Company's Board of Directors. Among other requirements, in order to maintain its
REIT status, a majority of the Company's  directors must be  "independent."  The
Company's executive officers and Directors are as follows:


<TABLE>
<CAPTION>
            Name                 Age       Office                                        Director Since

<S>                               <C>      <C>                                                <C> 
   David G. Reinhart              46       President, Treasurer and Director                  1994
   V. James Davis                 54       Vice-President, Secretary and Director             1994
   Kirbyjon H. Caldwell           46       Independent Director                               1994
   Robert O. Naegele, Jr.         58       Independent Director                               1994
   Dennis J. Doyle                47       Independent Director                               1994
   John M. Clarey                 57       Independent Director                               1994
</TABLE>


     David G. Reinhart,  has been a Director of the Company since its inception,
and has served as President and Treasurer of the Company since January 19, 1999.
He served as  Vice-President  and  Secretary of the Company  from the  Company's
inception  until January 19, 1999. He is also Chairman of the Board of Directors
of American  Investors Group,  Inc., a Director and Officer of the Advisor,  and
President,  director and shareholder of DRM Holdings,  Inc. ("DRM"),  the parent
corporation  of American.  Mr.  Reinhart  has served as legal  counsel to banks,
trust  companies  and  broker-dealers  in the  area  of  church  financings  and
otherwise since  approximately  March 1984. He currently acts as counsel for the
Managing  Underwriter.  He was  employed in the St.  Paul firm of  Reinhart  Law
Offices,  P. A.  from  November  1985 to  February  1987,  and from July 1983 to
November  1985 he was  employed as an  Associate  Attorney  with the law firm of
Robins, Kaplan, Miller & Ciresi,  Minneapolis,  Minnesota. Mr. Reinhart received
his Juris Doctor degree,  cum laude, in May 1979, from Hamline University School
of Law, St. Paul,  Minnesota and received his Bachelor of Science  degree in May
1976, from Northern Michigan University,  Marquette,  Michigan. Mr. Reinhart has
practiced law in the areas of corporate  finance and general  business law since
1979 and has developed expertise in the area of church financing. He is employed
from time-to-time as Adjunct Professor of Law, Hamline University School of Law.

V. James Davis, has been a Director of the Company since its inception,  and has
served as the  Vice-President  and  Secretary of the Company  since  January 19,
1999.  He served as President  and  Treasurer of the Company from the  Company's
inception  until January 19, 1999.  From November 1986 to October 1996 he served
as President and a Director of American Investors Group, Inc. Prior to November,
1986,  he was  employed  as  President  of Keenan & Clarey,  Inc.,  Minneapolis,
Minnesota, a church bond underwriter and broker-dealer,  where he also served as
Financial and Operations Principal and as a Director. From January 1976 to March
1984, Mr. Davis was employed as Administrative Vice-President, and Financial and
Operations  Principal,  by  Offerman  & Co.,  Inc.,  Minneapolis,  Minnesota,  a
national  broker-dealer and originator of corporate bond financing projects. Mr.
Davis has been in the securities business since 1970 and was previously employed
with other securities firms in Appleton,  Wisconsin and Rockford,  Illinois.  He
holds a  Bachelor  of  Science  degree in Liberal  Arts from the  University  of
Wisconsin  -Whitewater  (1967) and completed  course work at St. Joseph College,
Rensselaer,  Indiana. Mr. Davis holds a General Operations Principal license and
a Financial  Operations  Principal  license  with the  National  Association  of
Securities Dealers, Inc.

     Kirbyjon H. Caldwell,  has served as an Independent Director of the Company
since  September  1994. He currently is Senior Pastor of Windsor  Village United
Methodist Church and St. John's United  Methodist  Church in Houston,  Texas, in
which   capacities  he  has  served  since  January  1982  and  September  1992,
respectively.  Membership in both churches is  approximately  7,500 combined and
their ministries reach a broad segment of the Houston region.  Kirbyjon Caldwell
received his B.A. degree in Economics from Carlton College (1975),  an M.B.A. in
Finance from the University of  Pennsylvania's  Wharton  School (1977),  and his
Masters in  Theology  from  Southern  Methodist  University  School of  Theology
(1981).  He is a member  of the  Boards  of  Directors  of Texas  Commerce  Bank
(Houston),  Hermann Hospital (Houston),  Greater Houston Partnership, The United
Way of The Texas Gulf Coast,  and the American  Cancer  Society.  He is also the
founder  and  member of  several  foundations  and other  community  development
organizations.





                                       15

<PAGE>

     Robert O.  Naegele,  Jr.,  has  served as an  Independent  Director  of the
Company since September 1994. Mr.  Naegele's  professional  background  includes
advertising,  real estate  development,  and consumer  products,  with a special
interest  in  entrepreneurial  ventures  and small  developing  companies.  Most
recently, he led a group of investors to apply for, and receive an NHL Expansion
Franchise,  the  Minnesota  Wild,  to begin  play in a new  arena  in St.  Paul,
Minnesota,  in the Fall of the year 2000. Mr. Naegele and his wife, Ellis, lived
in Minneapolis through 1993 and now reside in Naples, Florida.

     Dennis J. Doyle, has served as an Independent Director of the Company since
September  1994.  He is the  owner  and  co-founder  of Welsh  Companies,  Inc.,
Minneapolis,  Minnesota  -- a  full-service  real  estate  company  involved  in
property management,  brokerage,  investment sales, construction and residential
and commercial development. Welsh Companies was co-founded by Mr. Doyle in 1980,
and has five regional  offices and 220 employees.  Mr. Doyle is the recipient of
numerous civic awards  relating to his business  skills.  He also is a member of
the Board of  Directors of HEART (a  non-profit  organization),  The  Children's
Theater (Minneapolis) and Grow Biz International,  a publicly-owned  company. He
is also a member of the Board of Advisors of the Minnesota Real Estate  Journal,
and a member  of the  International  Commercial  Realty  Services  ("ICRS")  and
National Association of Office and Industrial Parks ("NAIOP").

     John M. Clarey, has served as an Independent  Director of the Company since
September 1994. Since January 1992, he has been employed as First Vice President
of Miller & Schroeder Financial, Inc., a Minneapolis, Minnesota based investment
banking firm and NASD-member broker-dealer.  From February 1991 through December
1991, Mr. Clarey was a general partner of the Clarepoint Partners, LP, a private
venture  capital firm,  of which he was one of the  founders.  From July 1989 to
February  1991,  he was a Senior Vice  President  of Miller,  Johnson and Kuehn,
Inc., a  Minneapolis-based  broker-dealer.  From November 1980 to July 1989, Mr.
Clarey  served as  President  and Chief  Executive  Officer of  Allison-Williams
Company, a  Minneapolis-based  investment banking firm specializing in municipal
and corporate finance.  From September 1965 to November 1970, he was employed as
Executive Vice President of Keenan & Clarey,  Inc., a Minneapolis  broker-dealer
specializing  in  structuring  and  development  of  corporate  debt  issues and
financings for churches and other non-profit corporations.  During his career in
the  securities  and finance  industry,  Mr.  Clarey has been active as a senior
officer and director of local,  regional,  and national  trade and  professional
associations  and has served as a  volunteer  officer  and  director  of various
charitable  organizations.  He graduated from Marquette  University,  Milwaukee,
Wisconsin (1963) with a B.A. in economics.

     Administration  of the day-to-day  operations of the Company is provided by
the Advisor  under the  Advisory  Agreement.  See "The  Advisor and the Advisory
Agreement."  The Company  currently has no employees and the Company's  officers
receive no compensation  for their services,  other than through their interests
in the Advisor and affiliates of the Company.  See  "Compensation to Advisor and
Affiliates."  The  Company's  officers  have no  employment  contracts  with the
Company or the  Advisor  and are  considered  employees  "at will." The  Company
believes  that,  because  of the  depth of  management  of the  Advisor  and its
Affiliates, the loss of one or more key employees of the Advisor, or one or more
officers  of the  Company,  would not have a material  adverse  effect  upon its
operations. As required by the Company's Bylaws, a majority of the Directors are
Independent  Directors in that they are otherwise  unaffiliated  with and do not
receive  compensation  from  the  Company  (other  than  in  their  capacity  as
Directors) or from the Advisor or the Managing Underwriter.

     The Directors are responsible  for  considering and approving,  by majority
vote,  the policies of the Company and meet as often and devote such time to the
business of the Company as their oversight  duties may require.  Pursuant to the
Company's  Bylaws,   the  Independent   Directors  have  the  responsibility  of
evaluating the capability and  performance of the Advisor and  determining  that
the compensation being paid to the Advisor by the Company is reasonable.

     Directors and officers are  permitted to engage in other  activities of the
type  conducted  by  the  Company,   and  neither  the  Company's   Articles  of
Incorporation  or Bylaws nor any policy of the  Company  restricts  officers  or
Directors  from  conducting,  for their  own  account  or on  behalf of  others,
business  activities  of the type  conducted by the Company.  See  "Conflicts of
Interest."

     The Directors and officers are nevertheless not relieved of their duties of
loyalty to the Company and its  Shareholders.  The Directors may be removed by a
majority  vote of all  Shares  outstanding  and  entitled  to vote at any annual
meeting or special meeting called for such purpose.

Item 10.    Executive Compensation.

     The Company's two executive  officers do not receive  compensation from the
Company,  however,  Mr. Davis and Mr. Reinhart each own a one-third  interest in
the Advisor.  The Advisor receives Advisory Fees under the terms of its Advisory
Agreement  with the  Company.  See Item 12  Certain  Relationships  and  Related
Transactions.

     The Company currently pays each Independent Director a fee of $500 for each
board meeting  ($200 for  telephonic  meetings),  limited to $2,500 per year. In
addition,  the Company  reimburses  directors  for travel  expenses  incurred in
connection  with their duties as Directors of the Company.  The Company also has
adopted a Stock  Option Plan for  Directors  and the  Advisor,  under which each
Director and the Advisor's  president are granted  annually  options to purchase
3,000  Shares each of the  Company's  common  stock at a price equal to the fair
market value at the date of the grant.

                                       16

<PAGE>

Warrants and Options

     On September 30, 1994,  the Board of Directors  adopted a Stock Option Plan
for  Directors  and the Advisor (the "Option  Plan") to be  administered  by the
Directors,  which  provides for a grant of an option to purchase 3,000 shares of
$.01 par value Common Stock, subject to certain adjustments,  to a Director upon
his or her  appointment  or election and upon each  re-election  (directors  are
elected  annually) or to the Advisor upon the  Advisor's  appointment  or annual
re-appointment. The purchase price of the Common Stock granted under each option
shall be the fair market  value,  as defined in the Option Plan, at the time the
option is granted.  On November  15, 1994,  and each year  through  November 15,
1998,  the Company has issued  options  under the Option Plan to each of the six
Directors  and the president of the Advisor,  to purchase  3,000 shares each (an
aggregate of 105,000 shares) at a price of $10 per share. These options vest and
are thus  exercisable on or after November 15, 1995 and expire November 15, 1999
through November 15, 2003.

     The Company may, from time to time, grant full-time  employees and existing
Directors and officers of the Company and the Advisor warrants,  options,  stock
purchase  rights,  incentive  stock options or similar  arrangements to purchase
shares of Common Stock of the Company.  In accordance with applicable state law,
the Company  has agreed to limit the number of options or  warrants  issuable to
the Advisor,  Affiliates or any Director to ten percent (10%) of the outstanding
Shares of the  Company  on the date of grant of any  options  or  warrants.  The
purchase price of Shares issuable  pursuant to such warrants or options will not
be less than the fair market value at the time of the grant.

     The Company may refuse to allow the exercise of a warrant into Common Stock
if the effect of such  exercise or conversion  would,  in the opinion of counsel
for  the  Company,  disqualify  or  jeopardize  the  Company  as a  real  estate
investment trust under the Code.

Item 11.      Security Ownership of Certain Beneficial Owners and Management.

              The following  table sets forth as of February 1, 1999, the number
of Shares  beneficially owned by each Director and by all executive officers and
Directors  as a group and the  beneficial  owner of 5% or more of the  Company's
outstanding  stock . Unless otherwise noted,  each of the following  persons has
sole voting and  investment  power with respect to the Shares set forth opposite
their respective names.

<TABLE>
<CAPTION>
                                                  Number of Shares             Percent
     Name of Beneficial Owner (1)               Beneficially Owned (2)         Of Class 
     ----------------------------               ----------------------        ----------

<S>                                                    <C>                         <C>  
        Iron Workers Local #498....................    107,295 (3)                 9.12%
        David G. Reinhart .........................     10,420 (4)                  .89%
        Robert O. Naegele, Jr......................     5,000                       .43%
        V. James Davis.............................     1,215                       .10%
        Kirbyjon H. Caldwell.......................      ----                      ----
        Dennis J. Doyle............................      ----                      ----
        John M. Clarey.............................      ----                      ----
        All Executive Officers and Directors
             as a Group (five individuals).........    16,635                      1.42%
</TABLE>
        ------------------------------------------

(1)  The address for the  Directors is 10237 Yellow  Circle  Drive,  Minnetonka,
     Minnesota 55343.

(2)  Excludes 15,000 Shares which each Director and the President of the Advisor
     have an option to purchase  pursuant to the Stock Option Plan for Directors
     and the Advisor,  which options vest beginning November 15, 1995 and expire
     beginning November 15, 1999. See "Management -- Warrants and Options."

(3)  As of February 1, 1999,  the Iron  Workers  Local 498 Pension Plan and Iron
     Workers Local 498 Health and Welfare  Fund,  4749 W. Lincoln  Drive,  Suite
     202,  Matteson  Illinois  60443,  owns  collectively  72,129  Shares.  This
     beneficial  owner may not own more than 9.8% of the Shares  outstanding  at
     any time. The Company's Articles of Incorporation provide that in the event
     any person  acquires  Excess Shares,  such Excess Shares may be redeemed by
     the Company, at the discretion of the Board of Directors.

(4)  Shares  indicated  are owned of record by DRM  Holdings,  Inc., a Minnesota
     corporation  ("DRM")  which owns a total of 20,000  shares of the Company's
     stock for which it paid  $200,000  ($10.00  per  share).  These  shares are
     "restricted  securities"  and  may not be  sold,  transferred  or  assigned
     without  compliance with state and federal rules and regulations  governing
     the  transfer of  securities  considered  "restricted,"  and may be further
     subject to additional restrictions imposed by states in which the Shares in
     this Offering are being  offered.  DRM is owned by David G.  Reinhart,  the
     Company's President,  Treasurer and a Director; and by Philip J. Myers, the
     Advisor's  President.  Mssrs.  Reinhart and Myers are also directors of the
     Advisor.  The  number  of  shares  and  percentages  set  forth  above  are
     calculated  by  multiplying  the total number of Shares owned by DRM by the
     percentage such individuals' ownership of stock in DRM relates to the total
     outstanding  shares  of  stock  of DRM.  Philip  J.  Myers,  the  Advisor's
     President, could be considered the beneficial owner of 9,580 shares.

                                       17

<PAGE>

Item 12.      Certain Relationships and Related Transactions.

The Advisor

     Subject  to the  supervision  of the  Company's  Board  of  Directors,  the
business of the Company is managed by the  Advisor,  which  provides  investment
advisory  and  administrative  services  to the  Company.  The  Advisor is owned
equally by V. James Davis, David G. Reinhart and Philip J. Myers. Messrs.. Davis
and Reinhart are officers and  Directors of the Company.  Messrs..  Reinhart and
Myers are also shareholders, officers and directors of DRM Holdings, Inc., which
owns 100% of American Investors Group, Inc. Messrs.  Reinhart and Myers together
own all  outstanding  common stock of DRM Holdings,  Inc. As of the date of this
Report,  the  Advisor  employed,  directly  or  otherwise,  three  persons  on a
part-time basis, including Philip J. Myers, President and Scott J. Marquis, Vice
President of the Company.

         Pursuant to the  Advisory  Agreement,  the Company must pay the Advisor
certain  advisory  fees and  expenses,  as  defined in the  agreement  and remit
one-half of any  origination  fee collected  from a borrower in connection  with
mortgage loans made or renewed by the Company.

American Investors Group, Inc.

     Pursuant to the  Underwriting  Agreement in  connection  with the Company's
second public offering which commenced  September 26, 1997 and concluded January
22, 1999, the Company paid the Managing  Underwriter and Co-Underwriter  selling
commissions  equal to $332,185 and $143,672  respectively.  The Company has paid
non-accountable   expenses  of  the  Managing  Underwriter  (American)  and  the
Co-Underwriter  ("LaSalle") $63,983 and $13,000 respectively.  In addition,  the
Company  has  agreed  to  indemnify  the  Underwriters   against  certain  civil
liabilities,  including liabilities under the Securities Act of 1933. The public
offering price of the Shares was determined by negotiations  between the Company
and the Managing  Underwriter  based on the price paid ($10.00 per share) by the
Company's  initial  shareholder  and  shareholders  who purchased  shares in the
Company's  initial  public  offering  completed  November 8, 1996.  The Managing
Underwriter  (American) is an affiliate of the Advisor. The following table sets
forth the name and positions of certain officers and all directors of American:

      Name                                                      Position

 Philip J. Myers                             President, Secretary and Director
 Scott J. Marquis                            Vice President
 David G. Reinhart                           Chairman, Board of Directors

         In the course of its  business,  it is expected  that the Company  will
purchase  church bonds being  underwritten  and sold by  American.  Although the
Company would not pay any commissions, American would benefit from such purchase
as a result of commissions paid to it by the issuer of such bonds. American also
would benefit from mark-ups on bonds bought from it and mark-downs on bonds sold
through it by the Company on the secondary market. Any church bonds purchased by
the Company in an initial  offering  will be purchased for  investment  purposes
only at the public  offering  price.  Church bonds  purchased  in the  secondary
market,  if any,  will be  purchased  at the best  price  available,  subject to
customary  markups  (or in the  case of sales  --  markdowns),  on terms no less
favorable  than those  applied to other  customers  of  American,  and would not
exceed  industry  standards  or in any  event  (in  the  case  of  mark-ups  and
mark-downs  on secondary  bond sales and  purchases)  exceed five percent of the
principal  amount of bonds purchased or sold.  Principals of the Company and the
Advisor may receive a benefit in connection with such  transactions due to their
affiliation with the Managing  Underwriter.  It is the policy of the Company not
to invest in excess of 30% of its Average Invested Assets in Church Bonds.

Church Loan Advisors, Inc.

         Church Loan Advisors,  Inc., a Minnesota  corporation  (the "Advisor"),
was organized on May 27, 1994 to engage in the business of rendering lending and
advisory services solely to the Company,  and to administer the business affairs
and operations of the Company. The Advisor's offices are located at 10237 Yellow
Circle Drive, Minnetonka, Minnesota 55343.

         The following  table sets forth the names and positions of the officers
and directors of the Advisor:

    Name                                          Position

Philip J. Myers                             President, Treasurer and Director
Scott J. Marquis                            Vice President, Secretary
V. James Davis                              Director
David G. Reinhart                           Director


                                       18

<PAGE>




         Philip J. Myers, age 42, is President,  Treasurer and a Director of the
Advisor,  having  served  in such  capacities  since its  inception.  He is also
currently employed full-time as President,  Secretary and a Director of American
Investors Group,  Inc. Mr. Myers earned his Bachelor of Arts degree in Political
Science  in 1977 from the State  University  of New York at  Binghamton  and his
Juris Doctor Degree from the State  University of New York at Buffalo  School of
Law in 1980.  From 1980 until 1982,  Mr.  Myers  served as an attorney  with the
Division of Market Regulation of the U. S. Securities and Exchange Commission in
Washington,  D. C. and,  from 1982 to 1984,  as an attorney with the Division of
Enforcement  of the Securities  and Exchange  Commission in San Francisco.  From
August  1984 to  January  1986,  he was  employed  as an  attorney  with the San
Francisco  law firm of  Wilson,  Ryan and  Compilongo  where he  specialized  in
corporate finance,  securities and broker-dealer  matters.  From January 1986 to
January 1989 when he became affiliated with American  Investors Group, Inc., Mr.
Myers was  engaged as Senior  Vice-President  and General  Counsel of  Financial
Planners Equity  Corporation  ("FPEC"),  a 400 broker securities dealer formerly
located in Marin County,  California. He is a member of the New York, California
(inactive  status) and  Minnesota  Bar  Associations,  and a registered  General
Securities Principal.

         Scott J.  Marquis,  age 41,  is  Vice-President  and  Secretary  of the
Advisor,  having served in such  capacities  since December 13, 1994. He is also
currently  employed full-time as Vice-President and of American Investors Group,
Inc.,  where he has been employed since  February 1987.  Prior to his employment
with American  Investors Group, Inc., Mr. Marquis was employed for approximately
seven years with the Minneapolis-based broker-dealer,  Piper, Jaffray Companies,
in the capacity of supervisor of its trade clearance department.  Mr. Marquis is
a  licensed  financial  principal  and  registered  representative  of  American
Investors  Group,  Inc.,  and holds his  Series 7, 63 and 27  licenses  from the
National Association of Securities Dealers, Inc.

         See  Item 9 above  for a  description  of the  positions  and  business
experience of V. James Davis and David G.  Reinhart,  both of whom are Directors
of the Advisor.

         The Advisory  Agreement.  The Company has entered into a contract  with
the Advisor  (the  "Advisory  Agreement")  under which the Advisor  will furnish
advice  and  recommendations  concerning  the  affairs of the  Company,  provide
administrative  services  to the  Company  and manage the  Company's  day-to-day
affairs.  In performing its services under the Advisory  Agreement,  the Advisor
may use facilities,  personnel and support services of its Affiliates.  Expenses
such as legal and accounting  fees,  stock transfer agent,  registrar and paying
agent fees,  and  dividend  reinvestment  agent fees are direct  expenses of the
Company and are not provided for by the Advisor as part of its services.

         The  Advisory  Agreement  is  renewable  annually  by the  Company  for
one-year  periods,  subject  to a  determination  by the  Company,  including  a
majority of the Independent  Directors,  that the Advisor's performance has been
satisfactory and that the compensation  paid the Advisor by the Company has been
reasonable.  The Advisory  Agreement may be terminated  with or without cause by
the  Company  on 60  days  written  notice.  Upon  termination  of the  Advisory
Agreement  by either  party,  the  Advisor may require the Company to change its
name to a name that does not contain the word "American,"  "America" or the name
of the  Advisor  or any  approximation  or  abbreviation  thereof,  and  that is
sufficiently  dissimilar to the word  "America" or "American" or the name of the
Advisor as to be unlikely to cause confusion or  identification  with either the
Advisor or any person or entity  using the word  "American"  or "America" in its
name,  however,  the Company may continue to use the word  "church" in its name.
The Company's  Directors  shall  determine  that any successor  Advisor  possess
sufficient  qualifications  to perform the advisory function for the Company and
justify the compensation provided for in its contract with the Company.

         Pursuant to the Advisory Agreement,  the Advisor is required to pay all
of the expenses it incurs in providing services to the Company,  including,  but
not limited to, personnel expenses,  rental and other office expenses,  expenses
of  Directors,  officers  and  employees  of the Advisor  (except  out-of-pocket
expenses of such persons who are  directors or officers of the Company  incurred
in their  capacities as Directors  and officers of the Company),  and all of its
overhead and  miscellaneous  administrative  expenses relating to performance of
its functions under the Advisory  Agreement.  The Company is required to pay all
other expenses of the Company,  including the costs and expenses of reporting to
various  governmental  agencies  and  the  Shareholders  and of  conducting  its
operations as a mortgage  lender,  fees and expenses of  appraisers,  directors,
auditors, outside legal counsel and transfer agents, and costs directly relating
to closing of loan transactions.

         In the event that Total Operating Expenses of the Company exceed in any
calendar  year the  greater  of (a) 2% of the  Average  Invested  Assets  of the
Company or (b) 25% of the  Company's  net income,  the Advisor is  obligated  to
reimburse the Company, to the extent of its fees for such calendar year, for the
amount by which the aggregate annual operating  expenses paid or incurred by the
Company exceed the limitation.  The Independent Directors may, upon a finding of
unusual and non-recurring  factors which they deem sufficient,  determine that a
higher level of expenses is justified in any given year.

         The  Company's  Bylaws  provide that the  Independent  Directors are to
determine at least annually the  reasonableness  of the  compensation  which the
Company pays to the Advisor.  Factors to be considered in reviewing the Advisory
Fee  include  the size of the  fees of the  Advisor  in  relation  to the  size,
composition and profitability of the Company's loan portfolio, the rates charged
by other investment advisors performing comparable services,  the success of the
Advisor  in  generating   opportunities  that  meet  the  Company's   investment
objectives,  the amount of additional revenues realized by the Advisor for other
services performed for the Company, the quality and extent of service and advice
furnished by the Advisor,  the quality of the Company's  investments in relation
to  investments  generated by the Advisor for its own  account,  if any, and the
performance of the Company's investments.

                                       19

<PAGE>




Item 13.        Exhibits and Reports on Form 8-K

(a)    Exhibits

       3.1      Articles of Incorporation*
       3.2      By-Laws*
       4        Specimen Certificate*
       10.1     Advisory Agreement*
       10.2     Dividend Reinvestment Plan of Company*
       10.3     Stock Option Plan for Directors and Advisor (with Exhibits)*
       10.4     Gemisys Corporation Agreement to act as Transfer Agent,Registrar
                 & Dividend Reinvestment Agent*
       10.5     Advisory Agreement between Registrant and Church Loan Advisors,
                 Inc.*
       EX-27    Financial Data Schedule*

     *  Incorporated  herein  by  reference  to  the  Registrant's  Registration
Statement on Form S-11 (Commission File No. 33-87570).

         (b)    Reports on Form 8-K

                No reports on Form 8-K were filed during the last quarter of the
period covered by this report.

                                       20

<PAGE>





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


                                   SIGNATURES

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


                        AMERICAN CHURCH MORTGAGE COMPANY

Dated:  March 31, 1999

                          By:   /s/ David G. Reinhart                          
                          David G. Reinhart, President, Treasurer
                         (Chief Executive Officer and Chief Accounting Officer)

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities indicated.

By:       /s/ David G. Reinhart         
         David G. Reinhart
         President , Treasurer and a Director

By:       /s/ V. James Davis             
         V. James Davis
         Vice-President, Secretary  and a Director

By:       /s/ Dennis J. Doyle                            Date:     03/31/99  
         Dennis J. Doyle, Director

By:      /s/  John M. Clarey                             Date:     03/31/99  
         John M. Clarey, Director

By:      /s/ Robert O. Naegele, Jr.                      Date:     03/31/99   
         Robert O. Naegele, Jr.,  Director

By:      /s/ Kirbyjon H. Caldwell                        Date:     03/31/99    
         Kirbyjon H. Caldwell, Director




















                                       21

<PAGE>











                        AMERICAN CHURCH MORTGAGE COMPANY

                             Minneapolis, Minnesota

                              Financial Statements

                           December 31, 1998 and 1997






<PAGE>













                         REPORT OF INDEPENDENT AUDITORS



Board of Directors
American Church Mortgage Company
Minneapolis, Minnesota

We have  audited the  accompanying  balance  sheet of American  Church  Mortgage
Company  as of  December  31,  1998  and  1997  and the  related  statements  of
operations,  stockholders' equity and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of American  Church  Mortgage
Company as of December 31, 1998 and 1997,  and the results of its operations and
its cash flows for the years then ended, in conformity  with generally  accepted
accounting principles.



                                   Boulay, Heutmaker, Zibell & Co. P.L.L.P.
                                   Certified Public Accountants

Minneapolis, Minnesota
February 17, 1999

                                       F-1


<PAGE>



                                             AMERICAN CHURCH MORTGAGE COMPANY

                                                      Balance Sheet





<TABLE>
<CAPTION>
                                                                                                     December 31
                      ASSETS                                                                   1998                  1997

Current Assets

<S>                                                                                      <C>                     <C>        
    Cash and equivalents                                                                 $  2,941,530            $   291,815
    Accounts receivable                                                                        28,777
    Current maturities of mortgage loans receivable                                           237,242                103,505
    Current maturities of bond portfolio                                                       12,000         
                                                                                          -----------              ---------
            Total current assets                                                            3,219,549                395,320

Mortgage Loans Receivable, net of current  maturities                                       5,994,620              4,808,803


Bond Portfolio                                                                              1,011,997                125,809


Deferred Tax Asset                                                                             40,000                 33,000


Organizational Expenses, net                                                                      161                    464
                                                                                           ----------              ---------

            Total assets                                                                  $10,266,327             $5,363,396
                                                                                           ==========              =========
</TABLE>


Notes to Financial Statements are an integral part of this Statement.












                                                          F-2


<PAGE>



                                             AMERICAN CHURCH MORTGAGE COMPANY

                                                      Balance Sheet





<TABLE>
<CAPTION>
                                                                                                       December 31
        LIABILITIES AND STOCKHOLDERS' EQUITY                                                     1998                  1997

Current Liabilities
<S>                                                                                      <C>                  <C> 
    Accounts payable                                                                                          $       2,645
    Management fee payable                                                               $       12,759              12,845
    Deferred income                                                                              21,772              17,301
    Dividends payable                                                                           233,004             127,899
                                                                                              ---------           ---------
            Total current liabilities                                                           267,535             160,690

Deferred Income                                                                                  92,408              61,127

Stockholders' Equity
    Common stock, par value $.01 per share
        Authorized, 30,000,000 shares
        Issued and outstanding, 1,087,646 at December 31, 1998
            and 571,615 shares at December 31, 1997                                              10,876               5,716
    Additional paid-in capital                                                                9,973,200           5,184,882
    Accumulated deficit                                                                         (77,692)            (49,019)
                                                                                             ----------            --------
            Total stockholders' equity                                                        9,906,384           5,141,579
                                                                                             ----------           ---------

            Total liabilities and equity                                                    $10,266,327          $5,363,396
                                                                                             ==========           =========
</TABLE>


Notes to Financial Statements are an integral part of this Statement.















                                                          F-3


<PAGE>



                                             AMERICAN CHURCH MORTGAGE COMPANY

                                                 Statement of Operations





<TABLE>
<CAPTION>
                                                                                                  Years Ended December 31
                                                                                                 1998                  1997

<S>                                                                                            <C>                  <C>     
Interest Income                                                                                $782,013             $384,118

Operating Expenses                                                                               76,648               36,304
                                                                                                -------              -------

Operating Income                                                                                705,365              347,814

Benefit from Income Taxes                                                                        (7,000)             (13,000)
                                                                                                -------              ------- 

Net Income                                                                                     $712,365             $360,814
                                                                                                =======              =======

Basic and Diluted Income Per Common Share                                                      $    .86             $    .91
                                                                                                =======              =======

Weighted Average Common Shares Outstanding                                                      825,176              398,160
                                                                                                =======              =======
</TABLE>


Notes to Financial Statements are an integral part of this Statement.



















                                                          F-4


<PAGE>



                                             AMERICAN CHURCH MORTGAGE COMPANY

                                            Statement of Stockholders' Equity





<TABLE>
<CAPTION>
                                                                                               Additional
                                                                   Common Stock                 Paid-In           Accumulated
                                                            Shares            Amount            Capital             Deficit

<S>                                                        <C>              <C>                <C>                  <C>        
Balance, December 31, 1996                                 359,791          $  3,598           $3,306,437           ($  29,894)


    Issuance of 211,824 shares of
        common stock, net of
        offering costs                                     211,824             2,118            1,878,445


    Net income                                                                                                         360,814

    Dividends declared                                                                                                (379,939)
                                                          --------            ------            ---------              -------

Balance, December 31, 1997                                 571,615             5,716            5,184,882              (49,019)


    Issuance of  516,031 shares of
        common stock, net of
        offering costs                                     516,031             5,160            4,788,318

    Net income                                                                                                         712,365

    Dividends declared                                                                                                (741,038)
                                                         ---------            ------            ---------            --------- 

Balance, December 31, 1998                               1,087,646           $10,876           $9,973,200           ($  77,692)
                                                         =========            ======            =========             ========
</TABLE>


Notes to Financial Statements are an integral part of this Statement.







                                                          F-5


<PAGE>



                                             AMERICAN CHURCH MORTGAGE COMPANY

                                                 Statement of Cash Flows





<TABLE>
<CAPTION>
                                                                                                Years Ended December 31
                                                                                               1998                   1997

<S>                                                                                       <C>                    <C> 
Cash Flows from Operating Activities
    Net income                                                                            $   712,365            $   360,814
    Adjustments to reconcile net income to net cash
        from operating activities:
        Deferred income taxes                                                                  (7,000)               (13,000)
        Amortization                                                                              303                    303
        Change in assets and liabilities
            Accounts receivable                                                               (28,777)
            Accounts payable                                                                   (2,731)                 7,009
            Deferred income                                                                    35,752                 32,498
                                                                                            ---------              ----------
            Net cash from operating activities                                                709,912                387,624

Cash Flows from Investing Activities
    Investment in mortgage loans                                                           (2,498,750)            (2,315,712)
    Collections on mortgage loans                                                           1,179,196                 64,228
    Investment in bonds                                                                      (931,188)                (5,169)

    Proceeds from bonds called                                                                 33,000      
                                                                                           ----------              ---------
            Net cash used for investing activities                                         (2,217,742)            (2,256,653)

Cash Flows from Financing Activities
    Proceeds from stock offering, net                                                       4,793,478              1,880,563
    Dividends paid                                                                           (635,933)              (332,463)
                                                                                            ---------              ---------
            Net cash from financing activities                                              4,157,545              1,548,100
                                                                                            ---------              ---------

Net Increase (Decrease) in Cash and Equivalents                                             2,649,715               (320,929)

Cash and Equivalents - Beginning of Year                                                      291,815                612,744
                                                                                            ---------             ----------

Cash and Equivalents - End of Year                                                         $2,941,530            $   291,815
                                                                                            =========             ==========
</TABLE>

                                                      - Continued -


Notes to Financial Statements are an integral part of this Statement.


                                                          F-6


<PAGE>



                                             AMERICAN CHURCH MORTGAGE COMPANY

                                           Statement of Cash Flows - Continued





<TABLE>
<CAPTION>
                                                                                   Years Ended December 31
                                                                                 1998                    1997

Supplemental Schedule of Noncash Financing and
    Investing Activities

    Offering costs reclassified to additional
<S>                                                                            <C>                    <C>     
        paid-in capital                                                        $  71,751              $118,106
                                                                                 =======               =======
    Dividends payable                                                          $ 233,004              $127,899
                                                                                 =======               =======

Supplemental Cash Flow Information
    Cash paid during the year for
        Interest                                                               $      59              $      -
                                                                                ========               =======
        Income taxes                                                           $      -               $      -       
                                                                                ========               =======
</TABLE>


Notes to Financial Statements are an integral part of this Statement.






















                                                          F-7


<PAGE>



                        AMERICAN CHURCH MORTGAGE COMPANY

                          Notes to Financial Statements

                           December 31, 1998 and 1997





1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

American Church Mortgage Company, a Minnesota  corporation,  was incorporated on
May 27, 1994.  The Company was organized to engage  primarily in the business of
making  mortgage loans to churches and other nonprofit  religious  organizations
throughout  the United  States,  on terms  that it  establishes  for  individual
organizations.  Loans  have been  made to  churches  located  in 10 states as of
December 31, 1998.

Accounting Estimates

Management   uses  estimates  and   assumptions  in  preparing  these  financial
statements in accordance with generally accepted  accounting  principles.  Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent  assets and liabilities,  and the reported revenues
and expenses. Actual results could differ from those estimates.

Cash

The Company  considers  all highly  liquid  debt  instruments  purchased  with a
maturity of three months or less to be cash  equivalents.  At December 31, 1998,
approximately  $2,700,000 of cash equivalents  consisted of investments in money
market funds.

The Company maintains some cash in bank deposit accounts which, at times, exceed
federally  insured  limits.  The Company has not  experienced any losses in such
accounts.

Marketable Securities

The  Company  accounts  for  its  debt  securities  under  Financial  Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities."

The Company  classifies its  marketable  debt  securities as  "held-to-maturity"
because it has the  intent  and  ability  to hold the  securities  to  maturity.
Securities classified as held-to-maturity are carried at amortized cost.


                                       F-8


<PAGE>



                        AMERICAN CHURCH MORTGAGE COMPANY

                          Notes to Financial Statements

                           December 31, 1998 and 1997





1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Allowance for Mortgage Loans Receivable

The Company  follows a policy of  providing  an  allowance  for  mortgage  loans
receivable.  However,  at December  31, 1998 and 1997,  management  believes the
mortgage  loans  receivable  to be  collectible  in all material  respects,  and
therefore, no allowance is presently provided.

Organizational Expenses

Organizational expenses are stated at cost net of amortization and are amortized
using the straight-line method over five years.

Deferred Income

Deferred income  represents loan  origination fees which are recognized over the
life of the loan as an adjustment to the yield on the loan.

Income Taxes

Income taxes are provided  for the tax effects of  transactions  reported in the
financial  statements  and consist of taxes  currently due plus  deferred  taxes
related  primarily to differences in recognition of income from loan origination
fees for financial and income tax  reporting.  Deferred taxes are recognized for
operating losses that are available to offset future taxable income.

The Company has elected to be taxed as a Real Estate  Investment  Trust  (REIT).
Accordingly, the Company will not be subject to Federal income tax to the extent
of  distributions  to its shareholders if the Company meets all the requirements
under the REIT provisions of the Internal Revenue Code.

Income Per Common Share

No adjustments  were made to income for the purpose of calculating  earnings per
share.  Stock  options had no effect on the  weighted  average  number of shares
outstanding.




                                       F-9


<PAGE>



                        AMERICAN CHURCH MORTGAGE COMPANY

                          Notes to Financial Statements

                           December 31, 1998 and 1997




2.  MORTGAGE LOANS AND BOND PORTFOLIO

At December 31, 1998, the Company had first mortgage loans  receivable  totaling
$6,231,862.  The loans bear interest  ranging from 9.25% to 15.00%.  At December
31, 1997, the Company had first mortgage loans  receivable  totaling  $4,912,308
which bore interest ranging from 9.75% to 15.00%.

The Company also has a portfolio of forty-seven  church bonds, which are carried
at cost plus  amortized  interest  income.  The bonds pay either  semi-annual or
quarterly  interest  ranging  from 6.35% to 10.70%.  The  combined  principal of
$1,044,000 at December 31, 1998 is due at various maturity dates between June 1,
1999 and November 1, 2018. One bond issue  comprised 86% of total bond portfolio
at December 31, 1998.


The maturity schedule for mortgage loans and bonds receivable as of December 31,
1998 is as follows:

<TABLE>
<CAPTION>
                                                                Mortgage Loans          Bond Portfolio


<S>                                                              <C>                     <C>         
1999                                                             $   237,242             $     12,000
2000                                                                 350,554                   17,000
2001                                                                 172,924                  125,000
2002                                                                 192,953                   21,000
2003                                                                 215,305                   23,000
Thereafter                                                         5,062,884                  846,000
                                                                   ---------                ---------
                                                                                            1,044,000
            Less discounts from par                                                           (20,003)
                                                                                            ---------
            Totals                                                $6,231,862               $1,023,997
                                                                   =========                =========
</TABLE>


3.  STOCK OPTION PLAN

The Company has adopted a Stock Option Plan granting each member of the Board of
Directors and the president of the Advisor (Note 4) an option to purchase  3,000
shares of common stock  annually upon their  re-election.  The purchase price of
the stock will be the fair market value at the grant date. On November 15, 1994,
the Company began the annual grant of options to purchase an aggregate of 21,000
shares  of common  stock at $10 per  share.  These  options  became  exercisable
November 15, 1995 and expire  November 15, 1999. No options have been  exercised
as of December 31, 1998.






                                      F-10


<PAGE>



                        AMERICAN CHURCH MORTGAGE COMPANY

                          Notes to Financial Statements

                           December 31, 1998 and 1997





3.  STOCK OPTION PLAN - Continued

The Company has chosen to account for stock  based  compensation  in  accordance
with APB Opinion 25.  Management  believes that the disclosure  requirements  of
Statement  of  Financial  Accounting  Standards  No. 123 are not material to its
financial statements.

4.  TRANSACTIONS WITH AFFILIATES

The  Company  has  an  Advisory  Agreement  with  Church  Loan  Advisors,  Inc.,
Minnetonka, Minnesota ("Advisor"). The Advisor is responsible for the day-to-day
operations of the Company and provides office space, administrative services and
personnel.

Upon  non-renewal  or  termination  of the  Advisory  Agreement,  the Company is
required to pay the Advisor a termination  fee equal to two percent of the value
of the average  invested  assets of the  Company as of the date of  termination,
subject to limitations set forth in the Advisory Agreement.

Under the terms of the  Advisory  Agreement,  the  Company  pays the  Advisor an
annual base management fee of 1.25 percent of average invested assets (generally
defined as the  average of the  aggregate  book value of the assets  invested in
securities and equity  interests in and loans secured by real estate),  which is
payable on a monthly  basis.  The  Advisor  will also  receive  one-half  of the
origination  fees paid by a mortgage loan borrower in connection with a mortgage
loan made or renewed by the Company.  The Company paid to the Advisor management
and  origination  fees  totaling  $101,944  and  $61,525  during  1998 and 1997,
respectively.  During  1998 and 1997 the  Advisor  waived  fees of  $15,223  and
$23,119, respectively.

The Advisor and the Company are  related  through  common  ownership  and common
management. See Note 6.

5.  INCOME TAXES

The income tax benefit consists of the following components:
<TABLE>
<CAPTION>
                                                                                 1998            1997
                                                                                 ----            ----


<S>                                                                             <C>             <C>    
Current                                                                          $   -          $   -
Deferred                                                                         (7,000)        (13,000)
                                                                                  -----          ------

            Total tax benefit                                                   ($7,000)       ($13,000)
                                                                                  =====          ======
</TABLE>



                                      F-11


<PAGE>



                        AMERICAN CHURCH MORTGAGE COMPANY

                          Notes to Financial Statements

                           December 31, 1998 and 1997





5.  INCOME TAXES - Continued

As discussed in Note 1, a REIT is subject to taxation to the extent that taxable
income exceeds dividend distributions to its shareholders.  In order to maintain
its status as a REIT,  the Company is required to distribute at least 95% of its
taxable  income.  In 1998,  the  Company  had  pretax  income  subject to tax of
$705,365 and  distributions  to shareholders in the form of dividends during the
tax year of $741,038.  The  expected tax expense to the Company,  pre-dividends,
would have been $241,524.  In 1997, the Company had pretax income subject to tax
of $347,814 and  distributions  to shareholders in the form of dividends  during
the  tax  year  of   $379,939.   The   expected  tax  expense  to  the  Company,
pre-dividends, would have been $118,257.

The  following  reconciles  the income tax benefit with the  expected  provision
obtained by applying statutory rates to pretax income:

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


<S>                                                                        <C>                <C>     
Expected tax expense (benefit)                                               $241,524           $118,257
Benefit of REIT distributions                                                (248,524)          (131,257)
                                                                              -------            -------

            Totals                                                         ($   7,000)        ($  13,000)
                                                                             ========           ========
</TABLE>

The components of deferred income taxes are as follows:

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


<S>                                                                           <C>                <C>    
Loan origination fees                                                         $40,000            $33,000
                                                                               ======             ======
</TABLE>
6.  PUBLIC OFFERINGS OF THE COMPANY'S COMMON STOCK

The Company filed a  Registration  Statement  with the  Securities  and Exchange
Commission  for a public  offering  of its  common  stock in 1997.  The  Company
offered  to sell  1,500,000  shares  of its  common  stock at a price of $10 per
share. The offering was underwritten by a managing  underwriter (an affiliate of
the Advisor) and a co-underwriter on a "best efforts" basis, and no minimum sale
of stock was  required.  The stock sale  commenced  on  September  26,  1997 and
concluded  on January 22, 1999.  A total of 799,759  shares were sold,  of which
710,339 were sold through December 31, 1998.



                                      F-12


<PAGE>



                        AMERICAN CHURCH MORTGAGE COMPANY

                         Notes for Financial Statements

                           December 31, 1998 and 1997





6.  PUBLIC OFFERINGS OF THE COMPANY'S COMMON STOCK - Continued

The Company  intends to file a  Registration  Statement  with the Securities and
Exchange Commission for a third public offering of its common stock in 1999.

Pursuant  to the terms of the  Underwriting  Agreements,  the  Company  paid the
managing   underwriter   and   participating   broker-dealers   commissions  and
non-reimbursable expenses of approximately $331,000 and $162,600 during 1998 and
1997, respectively.

7.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company's financial  instruments,  none of which
are held for trading purposes, are as follows at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                          1998                                         1997                 
                                         ---------------------------------------    --------------------------------------
                                                 Carrying              Fair                Carrying             Fair
                                                  Amount              Value                Amount               Value     


<S>                                              <C>                <C>                <C>                 <C>        
Cash and equivalents                             $2,941,530         $2,941,530         $   291,815         $   291,815

Accounts receivable                                  28,777             28,777
Mortgage loans receivable                         6,231,862          6,231,862           4,912,308           4,912,308
Bond portfolio                                    1,023,997          1,023,997             125,809             125,809
</TABLE>

The carrying value of cash and  equivalents  approximates  fair value.  The fair
value of the mortgage  loans  receivable and the bond portfolio are estimated by
discounting  future cash flows using  current  discount  rates that  reflect the
risks associated with similar types of loans.










                                      F-13


<PAGE>