U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB
(Mark One)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

For the fiscal year ended: December 31, 1996

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
     OF 1934

For the transition period from                  to               .
                               -----------------   --------------
Commission file Number:  0-27156

                         WESTERN FIDELITY FUNDING, INC.
                 (Name of small business issuer in its charter)

        Colorado                                        84-1148454
(State or other jurisdiction                (I.R.S. Employer Identification No.)
 of incorporation or organization)

4704 Harlan Street, Suite 260, Denver, Colorado                    80212
(Address of principal executive offices)                         (Zip Code)

Issuer's telephone number: 303-477-8404

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

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
                                                               value $0.001  per
                                                               share

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,  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 contained in this form, and no disclosure  will be contained,  to
the best of Issuer'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]

The Issuer's revenues for its most recent fiscal year were $6,362,791.

The aggregate market value of the Issuer's voting stock held as of June 9, 1997,
by nonaffiliates of the Issuer was $721,095.37.

As of June 9,  1997,  the Issuer  had  2,637,500  shares of its $0.001 par value
common stock issued and outstanding.

Documents incorporated by reference:  None.
Transitional small business disclosure format: YES [ ]   NO  [X]



<PAGE>

                         WESTERN FIDELITY FUNDING, INC.
                        1996 ANNUAL REPORT ON FORM 10-KSB
                                TABLE OF CONTENTS



PART I                                                                  Page No.
------                                                                  --------
Item 1.    Description of Business.........................................    1

Item 2.    Description of Property.........................................   13

Item 3.    Legal Proceedings...............................................   13

Item 4.    Submission of Matters to Vote of Security Holders...............   15

PART II

Item 5.    Market for Common Equity and Related Stockholder Matters........   16

Item 6.    Management's Discussion and Analysis or Plan of Operation.......   17

Item 7.    Financial Statements............................................   21

Item 8.    Changes In and Disagreements with Accountants on
           Accounting and Financial Disclosure.............................   21

Part III

Item 9.    Directors, Executive Officers, Promoters and Control
           Persons; Compliance with Section 16(a) of the Exchange Act......   21

Item 10.   Executive Compensation..........................................   24

Item 11.   Security Ownership of Certain Beneficial Owners and Management..   26

Item 12.   Certain Relationships and Related Transactions..................   28

Item 13.   Exhibits and Reports on Form 8-K ...............................   30

           Signatures......................................................   37


<PAGE>

                                     PART I


Item 1.  Description of Business.

General

     From 1990 until April 1997, Western Fidelity Funding,  Inc. (the "Company")
was a specialized  consumer finance company engaged in the acquisition of dealer
originated retail installment loan contracts ("Contracts").  From May 1994 until
March 1997, the Company also operated a used car retail sales  facility  through
which the Company sold used cars and light trucks.

     At the end of  January  1997,  the  financial  institution  from  which the
Company had previously  obtained a $20 million secured credit facility presented
the  Company  with a proposal to increase  the  secured  credit  facility to $50
million.  In mid  February  1997,  the  financial  institution  withdrew the $50
million proposal because of financial  difficulties  publicly  reported by other
companies  engaged in the same  business  as the  Company.  In April  1997,  the
financial  institution advised the Company that the financial  institution would
provide no additional  funding  under the $20 million  secured  credit  facility
because the Company was in default  thereof as a result of the  violation by the
Company  of  certain  financial  covenants  contained  in  the  credit  facility
agreement provided by the financial institution to the Company. As a result, the
Company   discontinued   acquiring   Contracts   and   reduced  its  staff  from
approximately 184 employees on March 31, 1997, to 55 employees on June 9, 1997.

     The Company has also received  notice from the financial  institution  that
provided the Company with an unsubordinated loan of approximately $10 million on
August 2, 1996,  that the Company is in default of the  provisions of such loan.
The Company has also defaulted on required  payments on insurance company loans.
Further,  the  Company is in default on the payment on the loans from the G.E.O.
Income Trusts III, IV and V. For the year ended  December 31, 1996,  the Company
suffered a significant  loss from  operations of $10,154,677  and as of December
31, 1996, the Company had an accumulated deficit of $11,328,311. The independent
auditors' report on the consolidated financial statements of the Company for the
year ended December 31, 1996,  contains a paragraph  raising a substantial doubt
about the Company's ability to continue as a going concern.  The Company did not
pay dividends on the Company's outstanding preferred stock for the quarter ended
March 31, 1997.

     In May, 1997, the Company engaged Key Capital Markets, Inc., a wholly-owned
subsidiary of KeyCorp,  to explore  strategic  business options and alternatives
for the Company's business.  If the Company is unable to enter into satisfactory
arrangements  with its creditors,  obtain  additional  financing or enter into a
business  combination,  it is  likely  that the  Company  will  have to file for
protection from its creditors under the United States Bankruptcy Code.

                                       1
<PAGE>

     The  information  hereinafter  contained in Item 1 of this Annual Report on
Form 10- KSB is presented for historical  purposes only due to the fact that the
Company's business operations have been curtailed as described above.

     Contracts  acquired by the Company were either retained and serviced by the
Company or sold by the Company.  The Company also acquired Contracts through the
sale and  financing  of  automobiles  from the  Company  owned  retail  used car
facility.  The  Company,  which  was  incorporated  in June  1990 and  commenced
operations  in August  1990,  primarily  purchased  Contracts in the central and
eastern  regions of the United  States.  Such  Contracts  were  entered  into by
automobile  dealers  with  borrowers  who did not have  access  to  credit  from
traditional sources. The Company decreased its total Contract portfolio (finance
receivables  after  allowance  for  credit  losses) by 29.9% to  $14,941,703  at
December 31, 1996,  from  $21,319,223 at December 31, 1995. For the fiscal years
ended  December 31, 1994,  1995,  and 1996,  the Company  generated  revenues of
$2,065,115, $5,155,724, and $6,362,791, respectively, and net a income (loss) of
$(505,484), $579,160, and $(10,154,677), respectively.

     The automobile dealer business is highly fragmented and includes businesses
selling  principally  new  automobiles,  which  also  operate a used  automobile
business, that are franchised by automobile manufacturers ("franchised dealers")
and  businesses  that  are  not  affiliated  with  an  automobile   manufacturer
("independent dealers") selling exclusively used automobiles. As of December 31,
1996,  approximately  15%  of  the  Contracts  purchased  by  the  Company  were
originated  by  franchised  dealers and the  remaining  85% were  originated  by
independent  dealers. Of the approximately 600 dealers who had signed agreements
with the Company,  during the same period,  the Company was actively  purchasing
Contracts from 310 dealers located in 20 states:  Colorado,  Delaware,  Georgia,
Kansas, Kentucky,  Illinois, Indiana, Iowa, Missouri,  Nebraska, New Mexico, New
Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee,
Texas and West Virginia. None of the nonaffiliated dealers with whom the Company
conducted  business accounted for greater than 10% of the Company's total number
of Contracts  purchased  during the fiscal year ended December 31, 1996.  During
the year ended  December 31, 1996,  approximately  52% and 19% of all  Contracts
purchased were from the states of Texas and Colorado, respectively.

     The  Contracts  purchased  by the  Company  were  primarily  with  nonprime
borrowers  who did not have access to  traditional  sources of  consumer  credit
because  they  did not meet  the  credit  standards  imposed  by other  types of
lenders.  Nonprime borrowers are generally relatively higher credit risks due to
various  factors,  including  their past  credit  experience  and the absence or
limited extent of their credit history. Typical nonprime borrowers include young
borrowers  (18 to 25 years old) who are trying to  establish  an initial  credit
rating,  previously  bankrupt  borrowers  who have  reestablished  their  credit
rating,  slow payers of credit cards and department store accounts and borrowers
who desire  payment  terms  slighter  longer than the maximum term  permitted by
traditional  sources of consumer  credit.  The Company charged an average annual
percentage  rate ("APR") of  approximately  20% in fiscal 1996 to such  nonprime
borrowers,  while, in contrast,  commercial banks,  financing arms of automobile
manufacturers and other traditional  sources of consumer credit typically impose
more stringent credit requirements and generally charge lower interest rates.

                                       2
<PAGE>

     On October 19, 1994, the Company  incorporated O&S Finance,  Inc. under the
laws of Colorado as a wholly owned  subsidiary.  This  subsidiary  does not have
independent  operations  and was  formed  for the sole  purpose of acting on the
Company's  behalf  in  connection  with  one  agreement  involving  the  sale of
Contracts to an institutional purchaser.

     On December 30, 1996, the Company  incorporated  Western Fidelity  Finance,
Inc.,  which was formed as a wholly  owned,  special  purpose  subsidiary of the
Company under the laws of Delaware.

The Industry

     The nonprime  automobile retail installment loan finance industry is highly
fragmented  and  historically  has  been  serviced  by a  variety  of  financial
entities,   including   captive  finance   subsidiaries   of  major   automobile
manufacturers,  banks,  savings  and  loan  institutions,   independent  finance
companies and small loan companies.  Of late, the industry has suffered problems
due to  increasing  competition,  the  deterioration  in the  credit  quality of
nonprime auto loans and unexpected loan losses.  Certain other companies engaged
in the same  business as the Company  publicly  reported  profits for 1996 while
certain others reported losses and financial  difficulties.  Reported losses for
1996 of which the Company is aware have ranged from  approximately $7 million to
as high as approximately  $41 million.  Consequently,  many nonprime  automobile
retail  installment  loan companies are tightening  underwriting  guidelines and
significantly  increasing  loss  reserves  due to the  rise in  delinquency  and
repossession rates and the deterioration of credit quality.

Business Methods

     Marketing to Dealers.  The Company purchased Contracts from dealers instead
of making  direct  loans to  nonprime  borrowers.  By  focusing  directly on the
dealer,  the Company was able to obtain  large  volumes of  Contracts  in a cost
effective manner,  while  simultaneously  increasing the dealer's efficiency and
effectiveness in selling  automobiles.  The Company believes that its guidelines
and procedures  allowed it to respond quickly to dealers.  The Company typically
responded to credit applications on the date received,  in many cases within two
hours,  and generally paid the dealer within 24 hours after the Company received
all  required  complete  and accurate  documentation  from the dealer.  Based on
discussions  with  dealers,  the  Company  believed  that  because of its prompt
response and ability to assist a dealer in structuring a loan to maximize dealer
profit,  dealers conducted business with the Company instead of with competitors
that charged  lower  discounts  than the Company.  This discount was intended to
protect the  Company  from  losses  resulting  from the failure of a borrower to
repay the amount due under a Contract and was not refundable to the dealer.

                                       3
<PAGE>

     Credit  Guidelines  and  Procedures.  The  Company  has  developed  uniform
guidelines and procedures for evaluating credit  applications in connection with
the purchase of Contracts from dealers.  The Company's guidelines and procedures
relate to such  matters as the  borrower's  stability of  residence,  employment
history, credit history, capacity to pay, income,  discretionary income and debt
ratio, as well as the value of the collateral. The Company used a scoring system
as part  of its  standardized  credit  criteria.  Within  these  guidelines  and
procedures,  each  underwriter  was  authorized  to  approve  or  reject  credit
applications.  All underwriters were employees of the Company. However, all such
applications were reviewed for final approval by a member of management.

     Active Collection Management. With respect to all Contracts serviced by the
Company,  it pursues a policy of active  collection  management  with respect to
both  current  and  delinquent   accounts,   including   activities  related  to
collections,   borrower   inquiries   and,  if  necessary,   delinquencies   and
repossessions.  The Company  sends the  borrower a letter  which  describes  the
procedures  and  schedules  for repaying  the  Contract.  With the  exception of
repossession  activities  and  the  distribution  of  monthly  customer  billing
statements, for which the Company engages outside agencies, the Company services
all aspects of its Contracts, including collections, account receivable tracking
and  delinquency  resolution.  Any Contract  which is 10 or more days overdue is
treated as a past due account for  collection  purposes.  The Company  generally
will commence repossession procedures after an account reaches 60 days past due.
Management believes that active collection management is critical in maintaining
a low level of delinquencies and charge offs.

Contract Profile

     During 1996 the Company purchased 3,275 Contracts with an aggregate initial
principal  balance of $32,430,763.  Of the $32,430,763 in Contracts,  $5,950,045
were purchased from the Company's used car facility. The Contracts purchased had
an average initial principal balance of $10,915, and an average initial contract
term of 53 months. The annual percentage rate paid by borrowers in 1996 was 20%.

Contract Acquisition Process

     The  following  is a summary  of the  process  that the  Company  typically
followed in connection with its acquisition of a Contract.

     Dealer Solicitation. The Company solicited business from automobile dealers
through  its  business  development  efforts  and  with  independent   marketing
representatives.  The Company  evaluated each dealer with which it established a
financing  relationship  to ensure that the  Company  purchased  Contracts  from
reputable  automobile dealers carrying an inventory of quality used automobiles.
Generally,  the Company  evaluated  the  prospective  dealers to  determine  the
viability of each dealer and assessed  the length of service and  reputation  of
prospective dealers.  The Company  periodically  inspected the dealer's physical
premises to determine  whether such dealer appeared to be operating its business
satisfactorily.

                                       4
<PAGE>

     The  Company  provided  the dealer a training  and  orientation  program to
promote a  mutually  profitable  and  efficient  relationship.  The goals of the
training and  orientation  program were to introduce  dealers to and familiarize
dealers  with the  Company's  procedures  and to  enable  dealers  to  prescreen
borrowers and thereby expedite the credit underwriting process.

     Contracts were purchased at a discount by the Company and generally without
recourse  to the  dealer.  Each  dealer  with which the  Company  established  a
financing relationship entered into a nonexclusive written standardized purchase
agreement with the Company governing the Company's  Contract  purchases from the
dealer.  In all cases, the dealer made certain  warranties as to the validity of
the  Contract,  certificates  of title and  compliance  with certain  laws,  and
indemnified the Company for any claims, losses, and damages that may be assessed
against the Company.

     Credit Evaluation Procedures. If a nonprime borrower elected to finance the
purchase  of an  automobile  through a  dealer,  the  dealer  would  submit  the
borrower's credit application to the Company for review of the borrower's credit
worthiness and proposed  2transaction  terms.  The Company used a uniform credit
underwriting policy for evaluating a2pplications.  An underwriter conducted such
review  in  accordance  with the  Company's  guidelines  and  procedures,  which
generally took into account,  among other things, the individual's  stability of
residence,   employment  history,  credit  history,   ability  to  pay,  income,
discretionary income and debt ratio, as well as the value of the collateral.  In
addition,  a credit bureau report was evaluated in order to determine if (i) the
individual's  credit quality was  deteriorating,  (ii) the  individual's  credit
history  suggested a high  probability  of default or (iii)  the88  individual's
credit  experience was too limited for the Company to assess the  probability of
performance.  The  Company  also  used a scoring  system  as part of its  credit
criteria to ev8aluate applications. Within these guidelines and procedures, each
underwriter  was authorized to approve or reject credit  applications.  However,
all  such  applications  were  reviewed  for  final  approval  by  a  member  of
management.

     Approval  Process.  After  reviewing  the credit  application  the  Company
notified the dealer by facsimile  whether or not the Company would be willing to
purchase the  Contract  upon sale of the  automobile  to the  applicant.  If the
customer was  approved,  the  notification  specified the terms of the approval,
including  the monthly  payment.  The Company  typically  responded to submitted
dealer  applications  within 2 hours,  in some  cases  within  30  minutes.  The
Company's  credit strategy was to determine and approve a monthly payment amount
based on the  borrower's  ability  and  desire to pay.  After such an amount was
determined,  the dealer  could  identify  an  automobile  that met such  payment
parameters.  In fiscal  1996,  the  Company  approved  approximately  32% of all
submitted credit  applications and purchased  approximately 10% of such approved
Contract  applications.  The  difference  between  the  number  of  applications
approved  and the number of  Contracts  purchased  is due  primarily to industry
practice  whereby the dealer submits credit  applications for the same purchaser
to more than one finance  company and then  selects the finance  company that is
willing to provide the most favorable terms.

                                       5
<PAGE>

     Since  inception,  the  nonrefundable  discount  charged by the Company has
averaged approximately 15% of the financed portion of the Contracts.  Generally,
the Company did not advance to the dealer more than 115% of the retail  value of
the  automobile  based upon industry  publications  and required that a borrower
make a down payment of at least 10% of the purchase price.

     Contract  Purchase.  Upon final  confirmation of the terms by the borrower,
the dealer  consummated  the sale of the  automobile to the borrower.  After the
dealer  delivered  all  required  complete  and  accurate  documentation  to the
Company, the Company performed an interview and collateral verification with the
customer.  This verification detected misrepresen tations to the borrower by the
dealer or any  misstatement  of the  description of the  collateral.  It is only
after this verification that the Company remitted funds to the dealer, generally
within 24 hours. Upon purchase of the Contract, the Company acquired a perfected
security interest in the financed  automobile.  The Company's  security interest
was perfected by a first priority lien on certificates  of title.  The Company's
practice was to cause such lien to be noted on the  certificate of title or have
physical  possession of the certificate of title, as appropriate  under the laws
of the state in which the automobile was registered. Each Contract required that
the  automobile  be  properly  insured  and that the  Company be named as a loss
payee.  Compliance with insurance  requirements  was again verified prior to the
remittance of funds to the dealer.

     Contract Servicing and Collection.  Borrowers obligated under the Company's
Contracts are expected to remit their monthly payments using the monthly billing
statement  provided  to them by the  Company.  In the  event  that a  borrower's
payment is not received on its due date, historically, the Company mailed a past
due notice on the 10th day after such due date to the  borrower.  If the payment
was not received  typically on the 16th day past due, the Company contracted the
borrower by telephone as a follow up to the written  notice.  In March 1996, the
Company  implemented  new  collection  procedures  in  which  the  borrower  was
contacted  by  telephone  three to five days after the payment  due date.  As of
December 1996, the Company began  contacting the borrower five to ten days prior
to the first payment due date to remind the borrower of the payment date. If the
payment has not been  received on its due date,  the borrower is contacted  that
day  with  the  past  due  notice  mailed  on the 5th  day.  In the  event  of a
delinquency  beyond such dates,  the Company's  trained  collection  specialists
attempt to stay in regular  contact with the borrower  until the  delinquency is
cured.  If the borrower  does not cure the  delinquency  and misses a subsequent
payment, the Company typically repossesses the automobile promptly.

     Prior to March  1997,  when the  Company  closed its used car retail  sales
facility,  if  economically  feasible,   repossessed  automobiles  were  usually
transported  back to the Company's  used car retail sales  facility for disposal
after the lapse of the  applicable  redemption  period,  if any. If  repossessed
automobiles  were not returned to the used car retail sales facility,  they were
either placed on  consignment  with dealers for disposal at retail value or sold


                                       6
<PAGE>

at public auction. Contracts are generally charged off prior to becoming 90 days
delinquency  or,  if  earlier,  upon  repossession  of the  automobile.  Once an
automobile is  repossessed,  the automobile is carried on the Company's books as
inventory on hand at a value equal to wholesale value.

Delinquency Control and Collection

     The  Company  generally  reviews  Contracts  that are  past  due to  assess
collection  efforts  to  date  and  to  refine  the  collection   strategy,   if
appropriate.  The  collection  personnel,  together with  management,  generally
design a collection strategy that includes a specific deadline within which each
delinquent  obligation  should  be  collected.  Contracts  that  have  not  been
collected  during such period are again reviewed and,  unless there are specific
circumstances  which warranty further  collection  efforts,  vehicles under such
Contracts  are assigned to an outside  agency for  repossession.  The  Contracts
provide that, upon  repossession,  the principal  balance is accelerated and due
from the borrower. In certain  jurisdictions,  a discount for prepayment must be
applied to the amount accelerated. Since March 1997, when the Company closed its
used car rental sales facility,  repossessed  vehicles have been returned to the
Company  and  offered  for sale at public  auction.  The  elapsed  time  between
repossession  and resale is generally 30 days,  including  passage of the period
during  which the law of the  applicable  jurisdiction  permits the  borrower to
redeem the  automobile.  Typically,  after  repossession,  the borrower  will be
pursued for any deficiency, subject to applicable legal limitations.

Automobile Sales

     The  Company  operated  its used car  retail  sales  facility,  located  in
Lakewood,  Colorado,  from May 1994 until March 1997. The Company sold used cars
and light trucks and typically financed  borrowers'  purchases from its used car
retail sales  facility.  The Company's used car retail sales facility  typically
carried  inventories  from 45 to 100  retail  and  repossessed  automobiles  and
offered a variety of makes and models from  approximately  two to six years old.
For 1995 and 1996,  vehicle sales have ranged from 11 to 91 units per month. The
Company  financed  almost all of the  vehicles  sold at the  Company's  used car
retail  sales  facility.  Contracts  purchased  at the  used car  facility  were
discounted at rates  approximately  10% to 15%. Of the  $32,430,763 in Contracts
purchased by the Company for fiscal 1996,  $5,950,045  were  purchased  from its
used car facility.

Competition

     The automobile finance business is very fragmented and highly  competitive.
The Company believes that there are numerous competitors  providing,  or capable
of providing,  financing  through dealers to purchasers of automobiles.  Because
the  Company  purchased  Contracts  from  dealers  that  provided  financing  to
borrowers who did not qualify for  traditional  financing,  the Company does not
believe that it competed with commercial banks,  savings and loan  institutions,


                                       7
<PAGE>

credit  unions,  financing arms of automobile  manufacturers  and other consumer
lenders  that apply more  traditional  lending  criteria to the credit  approval
process.  Historically,  these traditional sources of used automobile  financing
(some of which are larger,  have significantly  greater financial  resources and
have  relationships  with captive dealer networks) have not consistently  served
the Company's  market  segment.  If such a competitor  had entered the Company's
market segment,  the Company would have been materially  adversely affected.  In
addition,  if the  Company  had  experienced  increased  competition  from other
traditional or nontraditional  sources of credit, such increased competition may
have  resulted  in a reduction  in the amount of discount  which the Company was
able to charge to dealers.  The Company believes that it competed principally on
the basis of service to participating dealers.

Financing

     Integral to the Company's  business and growth strategy was the maintenance
of  sufficient  capital  resources  to support  its  operations.  The  Company's
external capital resources consisted of the following:

     Trust Loans.  From inception  through March of 1995, the Company  primarily
financed the  acquisition of Contracts  through the  organization of five trusts
("Trusts").  G.E.O.  Income Trust 1991-I ("GEO I"), G.E.O. Income Trust II ("GEO
II"), G.E.O. Income Trust III ("GEO III"), G.E.O. Income Trust IV ("GEO IV") and
G.E.O.  Income  Trust V ("GEO V").  The  Trusts,  with the  exception  of GEO I,
offered to investors  two year and four year recourse  promissory  notes ("Trust
Notes") bearing a rate of interest of 8% and 11% per annum, respectively.  GEO I
offered  two year and four year Trust Notes  bearing  interest at 8% and 12% per
annum, respectively.  The Trusts provided financing to the Company through loans
under master promissory notes ("Master Notes").  The Master Notes are secured by
the pledge of the Company's security interests in Contracts, the restricted cash
in the reserve  account,  and the insurance on Contracts  pledged as security to
the Trusts.  In August of 1995, the Company exchanged 321,540 shares of Series A
Preferred  Stock for  $1,607,700  principal  amount of Trust  Notes.  The unpaid
principal balance owed by the Company to the Trusts under the Master Notes as of
December 31, 1996 was $4,021,389.  At December 31, 1996, the Company's financial
statements  reflect a liability for Master Notes of $2,608,689  which represents
the unpaid  principal  balance of  $4,021,389  less an offset for the  principal
balance of Trust Notes owned by the Company in the amount of  $1,412,700.  GEO I
and GEO II have  been  paid in full.  The  Company  has  defaulted  on  required
payments due to GEO III, GEO IV and GEO V. Each of the Trusts has an independent
trustee  who is not  affiliated  with  the  Company.  As of  June 4,  1997,  the
principal amount of the Contracts  securing the Master Notes was $1,224,111 less
than the  principal  amount of the Master Notes not owned by the  Company.  This
occurred because some of the payments made on certain  Contracts  pledged to the
Trusts  and  proceeds  from  the  sale of  vehicles  underlying  certain  of the
Contracts were used as operating capital by the Company. There are no provisions
in the agreements between the Company and the Trusts which specifically  require
that the principal amount of Contracts securing the Master Notes equal or exceed
the principal amount of the Master Notes.

                                       8
<PAGE>

     Insurance  Company Loans.  Between December,  1994 and February,  1997, the
Company has obtained  loans from several  insurance  companies in the  aggregate
amount of approximately  $13,500,000.  The terms of these loans range from 36 to
51 months,  and these loans bear  interest at fixed rates  ranging from 9.85% to
10.5%. The Company has defaulted on the required  payments on these loans.  Each
of these loans was supposed to have been  collateralized  with Company Contracts
which were required to have  principal  balances and interest  provisions  which
equal or exceed the  principal  balance and interest  provisions  payable by the
Company to the insurance  companies.  In the event of a default under a Contract
collateralizing  any of these loans, the Company is required to substitute a new
Contract as  Collateral.  Each of these loans  requires that the Company  obtain
insurance   against  loss  in  the  event  of  defaults   under  the   Contracts
collateralizing  the loans.  As of June 4,  1997,  the  principal  amount of the
Contracts collateralizing these loans was approximately $2,502,000 less than the
aggregate  principal  balances of these loans. This occurred because some of the
payments  made on certain  Contracts  pledged  to the  insurance  companies  and
proceeds from the sale of vehicles underlying certain of the Contracts were used
as operating  capital by the Company.  The insurance  companies  have filed suit
against the Company regarding the loans. See "Item 3. Legal Proceedings."

     Arrangement  Involving Contract Portfolio Sales and Loans. During 1990, the
Company entered into an agreement to sell  Contracts,  on an ongoing basis, to a
financial  institution.  The Company  sold  $4,114,286  in  principal  amount of
Contracts to this  institution  under this  agreement.  During May,  1994,  this
agreement was changed to a loan agreement  under which this  institution has the
right to loan a minimum of $300,000  each month to the  Company  with such loans
being  secured  with an equal  principal  amount of  Contracts  purchased by the
Company.  The terms of the loans correspond to the average term of the Contracts
securing the loans, the Company is required to replace Contracts collateralizing
the loans which go into default,  the Company obtains  insurance against loss in
the event of defaults under the Contracts collateralizing the loans, the Company
pays  interest on these loans equal to the greater of 15% or the prime rate plus
5%, and the Company pays this lender 10% of the spread between interest received
by the Company on the Contracts  collateralizing  the loans and interest paid to
the lender on such loans.  This  institution is not affiliated  with the Company
and the reason the  Company  pays these high rates to this lender is because the
original  agreement  was entered into during 1990 when the Company was beginning
its business. As of April 10, 1996, the Company had paid off the loans with this
institution.  This  agreement  was changed in May,  1994,  from a Contract  sale
agreement  to a loan  agreement  because  this  financial  institution  was  not
properly  servicing the Contracts  purchased  from the Company on a timely basis
which  resulted in delays in taking  action with respect to past due loans.  The
Company has filed a lawsuit against this institution regarding this transaction.
See "Item 3. Legal Proceedings."

                                       9
<PAGE>

     Contract  Portfolio  Sales. The Company has sold pools of Contracts in five
separate transactions.

     1. On  February 9, 1994,  the Company  entered  into an  agreement  to sell
Contracts to a financial  institution.  During 1994, the Company sold $3,621,212
in principal amount of Contracts under this agreement at a purchase price of 97%
of such principal amount. The holdback percentage amount will not be received by
the Company until the borrowers pay the final amounts due on the Contracts sold.

     2. In November,  1994, the Company entered into an agreement to sell, on an
ongoing  basis,  Contracts  with a principal  balance of up to  $12,000,000 to a
financial  institution.  Contracts  are sold  under  this  agreement  for a cash
payment  on the  date  of  sale  equal  to 96% of the  principal  amount  of the
Contracts sold and future  monthly  payments over the life of the Contracts sold
based  upon a formula  contained  in the  agreement.  Under  this  formula,  the
Company's monthly payment will equal any amount remaining after deduction of the
following  amounts from the monthly  payments of  principal  and interest on the
Contracts sold: custodial and servicing fees, 95% of principal payments received
during the month,  88%  (10.58% per annum) of 96% of the  outstanding  principal
balance on the Contracts,  and any required  deposits into the reserve  account.
Under this  agreement,  the Company is required to maintain in a reserve account
an amount  equal to 5% of the  outstanding  principal  balance of the  Contracts
until the final 5% of  payments  are made on the  Contracts.  The  Company  will
receive any amounts remaining in the reserve account when all payments have been
made by the  borrowers  on the  Contracts.  The  reserve  account  protects  the
purchaser in the event of defaults by the borrowers under the Contracts.

     3. In January and  February  of 1996,  the Company  entered  into  multiple
agreements  to  sell  Contracts  with  a  principal   balance  of  approximately
$2,000,000 to a financial  institution.  Under these agreements,  Contracts were
sold without recourse at 88% of principal balance at the date of purchase.

     4. In February and April, 1996, the Company sold Contracts with a principal
balance of approximately  $5,100,000 and $4,200,000 to a financial  institution,
respectfully.  Under this agreement, Contracts were sold without recourse at 90%
of the  principal  balance  on the  date of sale.  In  addition,  the  financial
institution has the first right of refusal to purchase any Contracts offered for
sale by the Company up to a total of $50,000,000.

     5. In March,  1997, the Company sold  Contracts to a financial  institution
with a principal  balance of  approximately  $4,400,000.  Under this  agreement,
Contracts were sold at 90% of the principal  balance on the date of sale less an
additional  holdback  percentage  equal to 5% of the  principal  balance  of the
Contracts  purchased.  The 5% is  refundable  to the Company after all Contracts
sold to the financial  institution have met a three payment  requirement and the
Company has delivered all title documentation to the institution.

                                       10
<PAGE>

     Unsecured  Subordinated  Loan. On August 2, 1996, the Company  obtained the
net  proceeds  of a  $10,000,000  unsecured  subordinated  loan from a financial
institution.  The approximately  $9,600,000 net proceeds from the loan have been
used by the Company to purchase  automobile  retail  installment  contracts  and
vehicle inventories and as working capital.

     Under the terms of the loan,  interest  only is paid  quarterly  during the
first two years at a rate of 12% per annum and,  thereafter,  the  principal and
interest are payable quarterly until July 31, 2001, when the balance is due. The
Company has received  notice of default under the terms of the loan. The Company
also issued five year  warrants to purchase  263,750  shares of common  stock at
$3.93 per share to the placement agent in connection with the loan.

     Securitization.  On December  30,  1996,  Western  Fidelity  Finance,  Inc.
("Finance"),  a Delaware  corporation that was formed as a wholly owned, special
purpose  subsidiary  of  the  Company,   transferred  to  the  Western  Fidelity
Receivables  Trust 1996-A  ("Trust")  receivables  with an aggregate  receivable
balance  of  approximately  $17,200,000  and  the  Trust  issued  Pass-  Through
Certificates  in a private  Rule 144A  offering in four  classes  consisting  of
$19,640,000  of  7.5%  Class  A  Certificates,   $2,455,000  of  8.50%  Class  B
Certificates,  $1,227,500  of 12% Class C  Certificates,  and  $1,227,500 of 15%
Class D  Certificates.  The  Class A  Certificates  are rated  "A",  the Class B
Certificates  are rated "BBB" and the Class C and D Certificates  are rated "BB"
and "B", respectively,  by Duff & Phelps. Each of the certificates is represents
fractional  undivided  interests in the Trust.  The assets of the Trust include,
among other things, (i) a pool of motor vehicle receivables, evidenced by retail
installment contracts and security agreements ("Receivables"), all of which were
transferred  to  Finance  by  the  Company,  and  all  monies  received  on  the
Receivables  allocable  to the  principal  of such  Receivables  and all  monies
allocable  to interest  thereon,  (ii) the  interest of Finance in the  security
interests  in vehicles  financed  thereby  (iii)  amounts  held in a  prefunding
account of  approximately  $7,300,000  which will be used to acquire  additional
Receivables which were sold on February 4, 1997, (iv) the interest of Finance in
any recourse relating to dealer agreements  concerning the Receivables,  (v) all
right,  title and  interest  of Finance in and to the  transfer  and  assignment
agreement  between  Finance and the Company and (vi) the proceeds of any and all
of the foregoing.

     The  Receivables  were  originally  acquired by the Company  directly  from
automobile dealers and the Company will continue to service the Receivables. The
average life of the Receivables  pool is approximately 48 months. A reserve fund
was  established  including a 5% initial  deposit.  The excess spread is used to
increase  the  reserve  fund until  over  collateraliza  tion  reaches 7% of the
outstanding pool balances.  The 7% will be increased to 10% if the pool does not
achieve certain  performance  standards.  If a permanent increase in the reserve
fund is required,  then the Company's  residual  interest in the  securitization
will be impaired by  approximately  $400,000.  Approximately  45% of the pool is
concentrated in Texas.

                                       11
<PAGE>

     The issuance of the Class A  Certificates,  Class B  Certificates,  Class C
Certificates  and Class D Certificates  was the Company's  first  securitization
transaction. The Company purchased all of the Class D Certificates.

     Insurance  Coverage and Restricted  Cash Account.  The Company has obtained
vehicle single  interest  insurance  coverage on certain  Contracts owned by the
Company. This insurance,  which is obtained by most lenders,  requires a premium
of .003% of the monthly principal balance of the Contract portfolio and protects
the Company  against loss  resulting  from  uninsured  damage to or theft of the
vehicle  purchased  and the inability of the Company to locate and repossess the
financed vehicle.  In addition,  the Company has obtained an indemnity insurance
policy under which certain  Contracts  owned by the Company are insured  against
loss as a result of default by the borrower.  The premium for this  insurance is
3% of the principal  balance of the insured  Contract,  and the insurer requires
that the Company  deposit cash equal to 7% of the  principal  balance of insured
Contracts into a restricted  reserve account.  Losses on insured Contracts under
the indemnity policy are first reimbursed from the reserve account. To date, the
insurer has not made any payments  under the indemnity  policy.  The Company has
insured most Contracts  collateralizing  the Trust Notes, the insurance  company
loans and Contracts pledged to a financial institution.

     Secured Credit. The Company obtained a $20,000,000  secured credit facility
with a financial  institution.  The credit  facility  was used by the Company to
purchase  Contracts  and as working  capital.  Under the terms of the  facility,
interest  is paid at a  floating  rate  equivalent  to  LIBOR  plus  3.25%  or a
specified  bank  alternative  base rate plus 1%.  The  facility  is  secured  by
Contracts  and will mature on June 23, 1998.  As of June 4, 1997,  the principal
amount  of  the  Contracts  collateralizing  the  secured  credit  facility  was
approximately  $1,300,000  less  than the  aggregate  principal  balance  of the
secured credit facility.  This occurred because certain Contracts pledged to the
financial  institution  became  ineligible  under the borrowing base because the
Contracts  remained due and unpaid for more than 60 days.  Borrowings  under the
facility were initiated in July 1996 and terminated by the financial institution
in April  1997  because  of  default  by the  Company.  See "Item 1.  Business--
General."

     In  August  1996,  the  Company  entered  into an  agreement  with  another
financial  institution for a $5,000,000  secured credit facility.  This facility
bears  interest  at the prime  rate plus  3.75%.  The  facility  is  secured  by
automobile retail installment  contracts and will mature on August 12, 1997. The
Company  has filed  suit  against  this  financial  institution  regarding  this
transaction. See "Item 3. Legal Proceedings."

Regulation

     The  business  the  Company was  conducting  until April 1997 is subject to
regulation  and licensing  under various  federal,  state and local statutes and
regulations.  The Company's  business  operations  were  conducted  with dealers
located in many  states,  and,  accordingly,  the laws and  regulations  of such


                                       12
<PAGE>

states governed the Company's operations. Most states where the Company operated
(i) limit the interest  rate,  fees and other charges that may be imposed by, or
prescribe certain other terms of, the Contracts that the Company purchased, (ii)
governed the sale and type of insurance  products offered by the dealers and the
insurers  for which the dealer  acted as agent and (iii)  defined the  Company's
rights to repossess and sell collateral.  In addition,  the Company was required
to be licensed or registered to conduct its finance operations in certain states
in which the Company  purchased  Contracts.  Numerous federal and state consumer
protection  laws  and  related   regulations   impose   substantive   disclosure
requirements upon lenders and services involved in automobile financing. Some of
the federal  laws and  regulations  to which the Company is subject  include the
Truth-in-Lending  Act,  the Equal  Credit  Opportunity  Act,  the Federal  Trade
Commission  Act,  the  Fair  Credit  Reporting  Act,  the Fair  Debt  Collection
Practices  Act, the  Magnuson-Moss  Warranty  Act, the Federal  Reserve  Board's
Regulations B and Z, and the Soldiers and Sailors Civil Relief Act.

     In  addition,   the  Federal  Trade   Commission   ("FTC")  has  adopted  a
holder-in-due-course rule which has the effect of subjecting persons who finance
consumer credit  transactions (and certain related lenders and their assigns) to
all claims and defenses  which the purchaser  could assert against the seller of
the goods and services. With respect to used automobiles specifically, the FTC's
rule on sale of used  vehicles  requires  that all  sellers of used  automobiles
prepare,  complete  and display a buyer's  guide  which  explains  the  warranty
coverage  for such  automobiles.  The credit  practices  rules of the FTC impose
additional restrictions on sales contract provisions and credit practices.

Employees

     As of June 9, 1997,  the  Company  employed 55 persons on a full time basis
and no persons  on a part time  basis,  none of whom is covered by a  collective
bargaining  agreement.  The Company  provides basic medical  insurance and other
benefits for eligible employees.

Item 2.  Description of Property.

     The  principal  executive  office of the  Company  is  located  in  Denver,
Colorado in office facilities containing  approximately 13,300 square feet which
are leased from an  unaffiliated  person pursuant to leases expiring in 1997 and
1999. The Company  leases a used car storage lot on a month to month basis.  The
Company  currently  pays aggregate  rent for these  facilities of  approximately
$11,800 per month.

Item 3.  Legal Proceedings.

     In February,  1997,  the Company filed a breach of contract  action against
Princeton  Capital  Credit  Corporation  ("Princeton")  in the District Court of
Jefferson  County,  State of Colorado.  In this action,  the Company has alleged
that Princeton  breached its  obligations  under an agreement in which Princeton
agreed to finance the repurchase, by the Company, of approximately $8,000,000 of
automobile  loans from a third  party.  The  Company  is seeking  damages in the
amount of $2,265,539 plus costs, fees and interest.

                                       13
<PAGE>

     In September,  1996, the Company filed a lawsuit against Berjac of Colorado
("Berjac") for, inter alia, breach of contract in Denver District Court. In this
action,  the Company has alleged that Berjac  breached a financing  agreement in
which Berjac agreed to finance  retail  installment  contracts  purchased by the
Company by failing to  surrender  the  original  notes and  vehicle  titles from
certain retail installment  contracts purchased by the Company and by failing to
properly credit payments to reduce the outstanding  balances due by the Company.
The Company is seeking the return of the original notes and vehicle  titles,  an
order  from  the  Court  declaring  the  credit  payments  properly  paid and an
accounting  of  certain  activities  of Berjac.  Berjac has filed a third  party
complaint  against Gene E. Osborn and a counterclaim  against the Company for an
accounting  of  certain  information,  attorneys'  fees and a return of  certain
security.

     In December,  1996,  Nationwide  Equipment  Company Profit  Sharing/Pension
Plan,  Richard D.  Ernst,  Frieda J.  Hopkins  Trust and Frank S. Ungar  filed a
lawsuit against the Company, Insight Sales and Marketing,  Inc., Gene E. Osborn,
Leonard L. Skerjanc and John J. Scordo,  II in the United States  District Court
for the District of Colorado. In the complaint,  the plaintiffs allege that they
invested an  aggregate  of  approximately  $97,500 in the Insight  Income  Trust
("Trust")  which then  loaned the funds plus funds from other  investors  in the
Trust to Insight Sales and  Marketing,  Inc.  ("Insight"),  that in 1995 Insight
defaulted  on the loans from the Trust,  that the Company also  borrowed  monies
from  the GEO I,  II,  III,  IV and V  Trusts,  that  the  Company  subsequently
conducted a public offering of the Company's common stock, that Messrs.  Osborn,
Skerjanc and Scordo were the principal officers of the Company and Insight, that
in connection with the sales of the Insight,  Company,  GEO I, II, III, IV and V
Trust  securities,  the defendants  failed to disclose  material facts as to the
uses of the proceeds  therefrom,  that the proceeds  from the Insight loans were
used to further  business  of the  Company  and to  personally  benefit  Messrs.
Osborn,  Skerjanc and Scordo, that Messrs. Osborn,  Skerjanc and Scordo breached
their duty of fidelity to Insight and that the conduct of the  defendants  was a
violation  of  the  securities  laws,  the  Racketeer,  Influenced  and  Corrupt
Organizations  Act and the Colorado  Organized  Crime Control Act. The complaint
claims an unspecified  amount of actual damages,  treble  damages,  interest and
attorneys' fees.

     In April, 1997, Durrett Motor Company  Incorporated filed a lawsuit against
the  Company  for breach of contract  in the  District  Court of Harris  County,
Texas.  In this  action,  the  Plaintiffs  allege  that the  Company  breached a
purchase  agreement with Plaintiff relating to the sale of certain motor vehicle
installment  contracts.  The  Plaintiffs  are  seeking  damages in the amount of
$239,401.68  plus costs,  fees and interest.  A writ of  garnishment  on monthly
payments of thirteen  Contracts  purchased  by the Company  from  Durrett  Motor
Company Incorporated was issued by the court in this case in May, 1997.

                                       14
<PAGE>

     In May, 1997, Pekin Life Insurance Company,  Farmers  Automobile  Insurance
Company,  Western  Fraternal Life  Association and Grinnell  Mutual  Reinsurance
Company filed a lawsuit  against the Company in the United States District Court
for the  Northern  District of  Illinois,  Eastern  Division,  for  declaratory,
injunctive  and other relief.  In this action,  the  Plaintiffs  allege that the
Company defaulted on 14 separate loan transactions  pursuant to which Plaintiffs
cumulatively  loaned the  Company  $12,500,000.  The  Plaintiffs  are  seeking a
declaratory  judgment from the court finding that each  Plaintiff is entitled to
immediate  delivery of collateral  pertaining  to each loan, a  preliminary  and
permanent injunction ordering delivery of the collateral, an accounting from the
Company of all current  funds  received  under the notes and an  inspection  and
examination of the books and records of the Company.

     In May,  1997,  Equity  Participation,  Inc.  filed a lawsuit in the United
States District Court for the District of Colorado against the Company, Insight,
D&O, Inc., Gene E. Osborn,  Leonard L. Skerjanc and John J. Scordo, II, alleging
mail fraud,  securities  fraud,  violations  of the  Racketeer,  Influenced  and
Corrupt  Organizations  Act and the Colorado  Organized  Crime  Control Act. The
lawsuit also contains  claims against Messrs.  Osborne,  Skerjanc and Scordo for
violations  of their duty of  fidelity  to Insight  noteholders  and  commercial
bribery.  In the complaint,  Plaintiff  alleges that  Plaintiff  agreed to raise
capital for Insight  through the Trust in return for royalty  payments  from the
sales of an automobile  security  device  ("Product"),  that Insight and Messrs.
Osborne,  Skerjanc and Scordo failed to maintain distribution of the Product due
to  misappropriation  of funds, that Insight and Messrs.  Osborne,  Skerjanc and
Scordo made  misstatements  about the quality of a  replacement  of the Product,
that in connection with various  offerings  Insight and Messrs Osborn,  Skerjanc
and  Scordo  failed to  disclose  material  facts as to the use of the  proceeds
therefrom,  that the monies were used for purposes  other than  represented  and
that the  proceeds  were used to further  the  business  of the  Company  and to
personally  benefit  Messrs.  Osborn,  Skerjanc and Scordo.  The lawsuit further
claims that Messers.  Osborn,  Skerjanc and Scordo violated their fiduciary duty
to  Plaintiff  in the  distribution  of the  assets  of D&O,  Inc.,  a  Colorado
corporation to which Plaintiff  claims certain assets of Insight were improperly
transferred.  The  Plaintiff  requests  the  remedy of a  constructive  trust be
imposed on Mr.  Osborn's  interest in D&O, Inc. and on the business of D&O, Inc.
and an unspecified amount of actual, treble and exemplary damages,  interest and
attorneys' fees.

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

     No matter was submitted to a vote of the Company's  shareholders during the
quarter ended December 31, 1996.

                                       15
<PAGE>

                                     Part II

Item 5.  Market for Common Equity and Related Stockholder Matters.

     Since  November  21,  1995,  the Common Stock has been quoted on the Nasdaq
SmallCap  Market  under the  symbol  "WFFI."  The  Company  currently  is not in
compliance  with the Nasdaq  SmallCap Market  maintenance  requirements  and the
Company's Common Stock ceased to be quoted on the Nasdaq SmallCap Market on June
13, 1997.  As of June 9, 1997,  there were 15 holders of record of the Company's
Common Stock. The declaration of dividends on the Common Stock is subject to the
discretion of the Company's  board of directors and will depend upon a number of
factors,  including the payment of dividends on the Series A Preferred Stock and
the  future  earnings,  capital  requirements  and  financial  condition  of the
Company.  Additionally,  the Company's  loan  agreement  for the secured  credit
facility  prohibits the payment of dividends on the Company's  Common Stock. The
Company  has  not  declared  dividends  on its  Common  Stock  in the  past  and
management currently  anticipates that retained earnings,  if any, in the future
will be applied to the payment of dividends on the Series A Preferred  Stock and
for the Company's operations rather than the payment of dividends.

     The  following  table sets forth the range of the high and low  closing bid
prices of the Common Stock as reported for the  quarters  indicated.  The prices
represent  quotations  between  dealers  without  retail  markup,  markdown,  or
commission  and may not  represent  actual  transactions.  The  quotations  were
provided by NASDAQ.  Prior to November 21, 1995, no  established  public trading
market existed for the Common Stock.

         Quarter Ended             Low Bid       High Bid
         -------------             -------       --------

         December 31, 1995 .....   $ 8.00        $ 11.50
         March 31, 1996 ........   $ 3.75        $  8.75
         June 30, 1996 .........   $ 5.25        $  7.00
         September 30, 1996 ....   $ 2.50        $  5.375
         December 31, 1996 .....   $ 2.125       $  3.50
         March 31, 1997 ........   $ 3.25        $  4.875

Recent Sales of Unregistered Securities

     On August 2, 1996,  the  Company  issued  five-year  warrants  to  purchase
263,750 shares of the Company's $0.001 par value common stock at $3.93 per share
to a  placement  agent in  connection  with a loan the Company  obtained  from a
financial institution. The placement agent was Western International Securities,
Inc. The issuance of the warrants was made in reliance upon the  exemption  from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
The warrants  issued to the placement  agent were  impressed  with a restrictive
legend advising that the securities  represented by the warrants may not be sold


                                       16
<PAGE>

or transferred  without having first been  registered or the  availability of an
exemption from registration established.  The warrants may be exercised in whole
or in part at any time or from time to time until July 31, 2001.

     On December  30,  1996,  Western  Fidelity  Finance,  Inc.  ("Finance"),  a
Delaware  corporation  that  was  formed  as  a  wholly-owned,  special  purpose
subsidiary of the Company, transferred to the Western Fidelity Receivables Trust
1996-A   ("Trust")   receivables  with  an  aggregate   receivable   balance  of
approximately $17,200,000 and the Trust issued Pass-Through Certificates in four
classes consisting of 19,640,000 of 7.5% Class A Certificates, 2,455,000 of 8.5%
Class B Certificates, 1,227,500 of 12% Class C Certificates and 1,227,500 of 15%
Class D Certificates.  Each of the certificates  represents fractional undivided
interests  in the Trust.  Structured  Capital  Management,  a division  of First
Southwest  Company,  acted  as  placement  agent  and  received  a  selling  and
underwriting  commission  equal to $266,982 plus  expenses.  The issuance of the
Certificates was made in reliance upon the exemption from registration  provided
by Section 4(2) of the Securities Act of 1933, as amended. The Certificates were
issued only to accredited investors and can only be transferred pursuant to Rule
144A of the Securities Act of 1933, as amended.

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

     From 1990 until April 1997, the Company was a specialized  consumer finance
company  engaged in the  acquisition  of Contracts.  From May 1994,  until March
1997, the Company also operated a used car retail sales  facility  through which
the Company sold used cars and light trucks.

     In the  fall of  1995,  with  increased  access  to  capital,  the  Company
increased its purchase of Contracts by 275% from  approximately  $7.2 million in
1994 to approximately $29 million in 1995. Additionally, the Company completed a
public offering in November 1995. The Company originally  anticipated  closing a
$20 million  credit  facility with a financial  institution  by the end of 1995.
However, the Company was unable to finalize this credit facility or secure other
financing  sources until June 1996.  As a result of this delay,  the Company was
forced to substantially  decrease its Contract purchases in the first and second
quarters of 1996.

     In late June 1996,  the Company  finally  obtained the $20 million  secured
credit  facility  from the  financial  institution  and the  Company's  Contract
purchases  increased from approximately $29 million in 1995 to approximately $33
million in 1996.  The majority of the increased  purchases in 1995 occurred from
September  through  December  and  in  1996  from  July  through  December.  The
significant  growth in Contracts  purchased in the relatively  short time period
when  coupled  with other  changes  in the  marketplace,  caused the  Company to
experience a number of related operational problems.

                                       17
<PAGE>

     At time same time as the  Company was  experiencing  its growth in 1995 and
1996,  several new companies began to engage in the same business as the Company
and  certain  existing  competitors  substantially  increased  their  volume  of
Contract purchases.  This increased competition caused a decrease in the overall
quality  of the  Contracts  being  acquired  by the  Company  and  others in the
marketplace. Additionally, the Company was not able to sufficiently increase and
adequately  train the  Company's  underwriting  staff to handle the  significant
increase  in  Contracts   purchased   resulting  in  certain  of  the  Company's
underwriting  criteria being interpreted  incorrectly.  Further, the Company was
not able to rapidly increase its  infrastructure  in the collections,  servicing
and accounting  areas.  Since the overall quality of the Contracts was less than
what it had been in the past, a greater  emphasis was  essential in these areas.
Also, the collections department was significantly understaffed and at one point
in time in early  1996 had only one  collector  per 1,000  Contracts  instead of
having the industry  average of one collector for each 300  Contracts.  Although
the Company was increasing the servicing department personnel,  they were unable
to keep up with the volume of Contracts in a timely manner.

     During this time period,  the Company retained the services of a consulting
firm to subprime lenders to review the Company's infrastructure and policies and
procedures.  The firm recommended strengthening of the servicing and collections
departments  in both  staffing and in computer  hardware and software to achieve
maximum efficiency and competitiveness. The Company undertook the task of hiring
the employees and completing the  infrastructure  associated  with servicing and
collections.  Additionally, the Company's accounting department did not have the
required  structure to generate and supply  management  with timely and accurate
reports  related  to the  status of  Contracts  purchased  and  serviced.  Thus,
information  concerning the performance of Contracts was not being identified in
a timely fashion.  Consequently,  the Company's  management was unable to timely
monitor the Company's  default rate and average loss per Contract.  In addition,
the  combination of the Company's  growth,  deterioration  in the quality of the
underlying  Contracts  due  to  increased  competition  in the  industry  and an
inadequate  infrastructure  in the  servicing  and  collection  departments  and
inadequate generation of information  contributed to the Company incurring a net
loss of $10,154,677 in 1996 compared to net income of $579,160 in 1995. The bulk
of the loss in 1996 can be attributed to three areas.

     The first area is related to the Company's  used car retail sales  facility
that was closed in March  1997.  The  primary  reason the used car retail  sales
facility  was closed was the loss of the credit  facility to fund the  Contracts
generated  from the  sale of  repossessed  vehicles.  This  created  the lack of
capital to support the used car retail sales facility.  During 1996, the Company
suffered losses of approximately $1,000,000 as a result of the operations of the
used  car  retail  sales  facility.  The loss was  mainly  due to a  significant
increase in  repossession  of vehicles by the Company that resulted in a need by
the Company to  significantly  increase the  efficiency of the operations of the
used car retail sales  facility  which did not occur.  The used car retail sales
facility  continued to sustain  losses  through its closing.  As a result of the
closure of the used car retail sales  facility,  the provision for credit losses
was significantly increased.

                                       18
<PAGE>

     Second,  in late 1996,  the  Company  determined  to adopt the static  pool
method of determining credit losses. In addition, management of the Company made
two other  changes that had an impact on the provision  for credit  losses.  The
first was its decision to close the used car retail sales  facility as discussed
above and dispose of  repossessed  vehicles  at public  auction.  This  decision
increased  the average  loss  incurred by the Company  from $2,500 to $6,500 per
repossessed  vehicle.  In addition,  the static pool analysis  revealed that the
Company's  Contract  default rate  dramatically  increased from the fall of 1995
through 1996.  The Company had been  projecting a default rate of  approximately
25%. Actual projected  losses based on the specific pool analysis  revealed that
default  rates  were  in  the  35% to 40%  range.  This  high  default  rate  is
attributable  to the fact  that in 1996 the  Company  sold to third  parties  or
through securitizations  approximately  $22,000,000 in Contracts which generally
had a better  performance  history  than  Contracts  that were  retained  by the
Company.  These changes caused the Company to incur approximately  $5,700,000 in
additional  credit losses.  Approximately  $4,000,000 of this was related to the
increase in average loss per  repossessed  vehicle from $2,500 to $6,500 and the
balance  was  related to an  increased  default  rate due to the  quality of the
Contract portfolio that was retained by the Company.

     The other significant item that affected the Company's  performance in 1996
related to the write-off of its interest participation in a sale of Contracts to
a financial institution.  In 1995, the Company sold approximately $12,000,000 of
Contracts to this financial  institution and retained an interest  participation
in the  excess  cash  flow.  When  the  Contracts  were  sold  to the  financial
institution,  the financial  institution engaged a third-party servicing company
to service  the  Contracts.  It is the  Company's  belief  that this third party
inadequately serviced the Contracts due to lack of follow-up and poor collection
efforts. The Contracts experienced  approximately a 50% default rate. Due to the
default rate,  any residual  interest of the Company in the excess cash flow was
impaired and in the fourth  quarter of 1996 the Company  wrote off the Company's
remaining interest (approximately $1,700,000) in the excess cash flow.

     Other  significant  changes  from 1995 to 1996 related to interest and loan
costs. These costs approximately doubled due to the Company obtaining borrowings
to purchase Contracts.  The primary sources of new borrowings were obtained with
the $20  million  secured  credit  facility in late June 1996 and $10 million of
subordinated debt in late July 1996.

     Administrative   costs  increased   $1,300,000  in  1996  over  1995.  This
represents the Company's growth in the number of employees  engaged in servicing
and collections,  accounting and the used car retail sales facility,  and growth
in facilities expense and professional fees.

                                       19
<PAGE>

     At the end of  January  1997,  the  financial  institution  from  which the
Company had previously  obtained a $20 million secured credit facility presented
the  Company  with a proposal to increase  the  secured  credit  facility to $50
million.  In mid  February  1997,  the  financial  institution  withdrew the $50
million proposal because of financial  difficulties  publicly  reported by other
companies  engaged in the same  business  as the  Company.  In April  1997,  the
financial  institution advised the Company that the financial  institution would
provide no  additional  funding  under the existing $20 million  secured  credit
facility because the Company was in default thereof as a result of the violation
by the Company of certain financial  covenants  contained in the credit facility
agreement provided by the financial institution to the Company. As a result, the
Company   discontinued   acquiring   Contracts   and   reduced  its  staff  from
approximately 184 employees on March 31, 1997, to 55 employees on June 9, 1997.

     The Company has also received  notice from the financial  institution  that
provided the Company with  subordinated  debt of approximately  $10 million that
the Company is in default of the  provisions of such loan.  The Company has also
defaulted on required payments on insurance company loans.  Further, the Company
is in default on the payment on the loans from the G.E.O.  Income Trusts III, IV
and V. As of  December  31,  1996,  the Company  had an  accumulated  deficit of
$11,328,311.  The  independent  auditors  report on the  consolidated  financial
statements  of the  Company for the year ended  December  31,  1996,  contains a
paragraph raising a substantial doubt about the Company's ability to continue as
a going  concern.  The Company did not pay  preferred  stock  dividends  for the
quarter ended March 31, 1997.

     In May, 1997, the Company engaged Key Capital Markets, Inc., a wholly-owned
subsidiary of KeyCorp,  to explore  strategic  business options and alternatives
for the Company's business.  If the Company is unable to enter into satisfactory
arrangements  with its creditors,  obtain  additional  financing or enter into a
business  combination,  it is  likely  that the  Company  will  have to file for
protection from its creditors under the United States Bankruptcy Code.

     The foregoing discussion contains certain forward-looking statements within
the meaning of Section 27A of the  Securities Act of 1933 and Section 21E of the
Securities  Exchange  Act of 1934,  which are intended to be covered by the safe
harbors created thereby.  These  statements  include the plans and objectives of
management for future operations, including plans and objectives relating to the
development. The forward-looking statements included herein are based on current
expectations  that  involve  numerous  risks  and  uncertain  ties.  Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future  economic,   competitive  and  market   conditions  and  future  business
decisions,  all of which are difficult or impossible to predict  accurately  and
many of which are  beyond the  control  of the  Company.  Although  the  Company
believes that the  assumptions  underlying  the  forward-looking  statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this Form 10-KSB
will prove to be accurate. In light of the significant uncertainties inherent in


                                       20
<PAGE>

the   forward-looking   statements   included  herein,  the  inclusion  of  such
information  should not be  regarded as a  representation  by the Company or any
other person that the objectives and plans of the Company will be achieved.

Item 7.  Financial Statements

                  WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARY
                                TABLE OF CONTENTS

                                                                          Page
                                                                          Number
                                                                          ------
Independent Auditors' Report                                               F-1

Consolidated Financial Statements

Consolidated Balance Sheets - December 31, 1996 and 1995                   F-2

Consolidated Statements of Operations - For the Years Ended                F-3
   December 31, 1996 and 1995

Consolidated Statements of Stockholders Equity - For the Years             F-4
   Ended December 31, 1996 and 1995

Consolidated Statements of Cash Flows - For the Years Ended                F-5
   December 31, 1996 and 1995

Notes to the Consolidated Financial Statements                             F-6

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

     There were no changes of the Company's  principal  independent  accountants
during the Company's last two fiscal years.

                                    Part III

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

     The following table sets forth the names and ages of the current  directors
and executive  officers of the Company and the  principal  offices and positions
with the Company held by each such person.  Each director serves a one year term
and until the  director's  successor is elected or until the  director's  death,


                                       21
<PAGE>

resignation  or  removal.  The  executive  officers  of the  Company are elected
annually by the Company's board of directors. The executive officers serve terms
of one year or until their death,  resignation or removal by the Company's board
of directors.

     The directors and executive officers of the Company are as follows:


     Name                             Age     Position With the Company
     ----                             ---     -------------------------
     Gene E. Osborn                   60      President
                                              Director
     Leonard L. Skerjanc              49      Executive Vice President
                                              Chief Operating Officer
                                              Director
     John J. Scordo, II               51      Executive Vice President
                                              Director
     Marya L. Brancio                 32      Vice President and Secretary

     Gene E. Osborn.  Mr.  Osborn has been the  president  and a director of the
Company since 1990. Mr. Osborn has been involved in the automotive  industry for
over 30 years,  and has owned and  operated  automobile  dealerships  including,
Toyota and Lincoln Mercury dealerships in Colorado Springs, Colorado, Chevrolet,
Lincoln Mercury and Mazada dealerships in Aurora, Colorado and Subaru, AMC Jeep,
and Hyundai  dealerships in Denver,  Colorado.  Mr. Osborn devotes a majority of
his time to the Company.  Mr.  Osborn  devotes some of his time to D&O,  Inc., a
company  which is engaged  in the  marketing  of a  protective  coating  for the
exterior  paint of  vehicles.  Mr.  Osborn is an officer,  director and majority
shareholder of D&O, Inc.

     Leonard L. Skerjanc.  Mr. Skerjanc has been the executive vice president of
the Company since 1994, the chief operating  officer of the Company since April,
1996 and a director of the Company since 1991. Mr.  Skerjanc also served as vice
president  of the  Company  from 1990 to 1996.  He has been  involved in retail,
lease and wholesale automotive financing for 25 years. Mr. Skerjanc was employed
by General Motors Acceptance  Corporation  between 1969 and September 1985 where
he held  numerous  positions  including  credit  manager  and  dealer  relations
manager.  In September 1985, Mr. Skerjanc joined Toyota Motor Credit Corporation
as  assistant  branch  manager,  a position he held until  October  1990 when he
joined the  Company.  Mr.  Skerjanc  received a  Bachelor  of Science  degree in
Business  Administration from the University of Southern Colorado.  Mr. Skerjanc
devotes his full time to the Company.

                                       22
<PAGE>

     John J. Scordo,  II. Mr. Scordo has been  executive  vice  president of the
Company  since April 26, 1996,  and a director of the Company since 1991. He has
been  involved  in  the  ownership,  operation,  and  management  of  automobile
dealerships  for over 25 years.  Mr.  Scordo was the general  manager of Menlove
Dodge-Toyota  in  Bountiful,  Utah from 1976 to 1978,  and co-owned and acted as
general manager for a Chrysler  dealership in Castle Rock, Colorado from 1977 to
1980. From 1980 to 1984 Mr. Scordo was a general  manager of several  automobile
dealerships in Colorado.  From 1984 until joining the Company,  Mr. Scordo was a
consultant  for  automobile  dealerships  and  related  businesses.  Mr.  Scordo
received a Bachelor  of Science  degree from the  University  of  Colorado.  Mr.
Scordo currently devotes his full time to the Company.

     Marya L. Brancio. Mrs. Brancio has been the vice president and secretary of
the Company since April 1996 and the general counsel for the Company since 1995.
Ms.  Brancio was engaged in the  practice of law from the  beginning  of 1993 to
1995 and served as  in-house  counsel to  Oversight  Management  Company,  a due
diligence  firm, in 1991 and 1992. Ms. Brancio  graduated from the University of
Denver  College  of Law in 1990  and from  Moorhead  State  University  in 1987,
receiving a Bachelor of Arts degree.  Ms.  Brancio  devotes her full time to the
Company.

     There are no family relationships among any of the officers or directors of
the Company.

     The  Company has  obtained  and pays the annual  premiums on $500,000  "key
person" life insurance  policies on the lives of Leonard L. Skerjanc and John J.
Scordo,  II. The death  benefit  proceeds of these  policies  are payable to the
Company. The Company is considering obtaining a similar $1,000,000 policy on the
life of Gene E. Osborn.

Compliance with Section 16(a) of the Securities Exchange Act of 1934.

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
the Company's  directors and executive officers and persons who beneficially own
more than 10% of a registered class of the Company's  equity  securities to file
various  reports with the  Securities  and Exchange  Commission and the National
Association  of  Securities  Dealers,  Inc.  concerning  their  holdings of, and
transactions  in,  securities  of the Company.  Copies of these  filings must be
furnished to the Company.

     Based on a review of the copies of such forms  furnished to the Company and
written  representations  from the Company's executive  officers,  directors and
persons who beneficially own more than 10% of the Company's  outstanding  Common
Stock,  the Company  believes that none of such persons  failed to timely file a
Form 3, 4 or 5 required by Section  16(a) under the  Securities  Exchange Act of
1934 during the Company's fiscal year ended December 31, 1996.

                                       23
<PAGE>

Item 10.  Executive Compensation.

     The following table provides certain compensation  information for services
rendered in all  capacities  to the Company  during each of the  Company's  last
three fiscal years by Gene E. Osborn,  the president of the Company,  and by the
only other executive  officers whose salary and bonus from the Company  exceeded
$100,000 in 1996.

                           Summary Compensation Table

<TABLE>
<CAPTION>

                                                                                          Long Term
                                                                Annual Compensation      Compensation
                                                        -------------------------------- ------------
                                                                                          Securities
Name and Principal                                                         Other Annual  Underlying     All Other
Positions at 12/31/96                          Year     Salary    Bonus    Compensation    Options    Compensation
----------------------------------------    ----------  -------  --------  ------------  -----------  -------------

<S>                                            <C>    <C>       <C>             <C>         <C>          <C>    
Gene E. Osborn                                 1996   $187,500  $17,604        -0-          136,670      $24,886
                                               1995   $180,000  $10,000        -0-          100,000      $25,107
                                               1994   $179,429    -0-          -0-            -0-        $26,552

Leonard L. Skerjanc                            1996   $100,000  $ 8,802        -0-          86,666         -0-
                                               1995   $ 84,416  $ 7,000        -0-          50,000         -0-
                                               1994   $ 74,062  $ 6,062        -0-            -0-          -0-

John J. Scordo, II                             1996   $100,000  $ 8,802        -0-          86,666         -0-
                                               1995   $ 74,666  $ 7,000        -0-          50,000         -0-
                                               1994   $ 30,000   $ 531         -0-            -0-          -0-
------------------
</TABLE>

     (1) The remuneration does not include use of Company owned automobiles.

     (2) Represents  life insurance  premiums of $17,900,  $15,000,  and $18,523
paid by the Company in 1996, 1995 and 1994, respectively, and amounts of $6,986,
$10,107, and $8,029 paid by the Company in 1996, 1995 and 1994, respectively, to
a country club.

Option Grants in the Last Fiscal Year

<TABLE>
<CAPTION>

                                                           Individual Grants
                         ---------------------------------------------------------------------------------------
                         Number of Securities        % of Total Options            Exercise
                         Underlying Options          Granted to Employees          or Base          Expiration
Name                     Granted (#)                 in Fiscal Year                Price ($/sh)     Date
----                     --------------------        --------------------          -----------      -----------
<S>                           <C>                          <C>                       <C>            <C>   <C> 
Gene E. Osborn                134,680(1)                   26.9%                     $3.7125        12/29/2001
Gene E. Osborn                  1,990(2)                     .4%                     $3.375         12/29/2001
Leonard L. Skerjanc            86,666(1)                   17.3%                     $3.7125        12/29/2001
John J. Scordo, II             86,666(1)                   17.3%                     $3.375         12/29/2001
</TABLE>

                                       24
<PAGE>

     (1)  Represents  incentive  stock  options  granted  pursuant  to the  1996
Incentive  and  Nonstatutory  Stock  Option  Plan.  See "Report on  Repricing of
Options."

     (2)  Represents  nonstatutory  stock options  granted  pursuant to the 1996
Incentive  and  Nonstatutory  Stock  Option  Plan.  See "Report on  Repricing of
Options."

Value of Options at December 31, 1997
<TABLE>
<CAPTION>

                                            Aggregate Fiscal Year End Option Values
                              ----------------------------------------------------------------------
                              Number of Securities                         Value of Unexercised
                              Underlying Unexercised                       In-the-Money Options
                              Options at Fiscal Year End                   at Fiscal Year End
                              Exercisable/Unexercisable                    Exercisable/Unexercisable
                              --------------------------                   -------------------------
    <S>                             <C>                                          <C>
     Gene E. Osborn                  0/136,670                                    0/0
     Leonard L. Skerjanc             0/ 86,660                                    0/0
     John J. Scordo, II              0/ 86,660                               0/$25,566.47
</TABLE>

     The  value is based on the  closing  sale  price of $3.67 of the  Company's
Common Stock on December 31, 1996 minus the exercise price of the options.

     No options to purchase the Company's Common Stock were exercised by Messrs.
Osborn,  Skerjanc or Scordo during the Company's  fiscal year ended December 31,
1996.

Compensation of Directors

     The Company  currently does not compensate its directors for acting in such
capacity.

Employment Contracts and Termination of Employment and Changes-In-Control

     The Company has not entered into any employment,  termination of employment
or change-in-control agreements with its officers.

Report on Repricing of Options

     The Company has cancelled the 1995 Incentive and Nonstatutory  Stock Option
Plan  ("Option  Plan") which  authorized  the Company to issue  incentive  stock
options within the meaning of Section 422 of the Internal  Revenue Code of 1986,
as amended,  and other  nonstatutory  stock options to purchase up to a total of
250,000  shares of Common  Stock.  Options to  purchase up to a total of 150,000
shares of Common  Stock at an  exercise  price of $5.50 per share and options to
purchase up to a total of 100,000 shares of Common Stock at an exercise price of
$5.00 per share had been granted  pursuant to the Option  Plan.  Included in the


                                       25
<PAGE>

total  options  granted  pursuant  to the Option  Plan were  options to purchase
100,000 shares,  50,000 shares and 50,000 shares that were  exercisable at $5.00
per share and that had been granted to Gene E. Osborn,  Leonard L.  Skerjanc and
John J.  Scordo,  II,  respectively.  All of the options  were  forfeited by the
optionees in connection with the grants set forth below.

     The  Company  has  adopted,  subject  to  shareholder  approval,  the  1996
Incentive and Nonstatutory  Stock Option Plan ("1996 Plan") which authorizes the
Company to grant  incentive  stock options  within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended,  and to grant  nonstatutory stock
options.  The 1996 Plan  relates to a total of 500,000  shares of Common  Stock.
Incentive  stock  options  relating  to  498,010  shares of common  stock of the
Company have been granted as incentive  stock options of which options  relating
to 359,678 shares were granted to the current officers of the Company, including
Gene E. Osborn, Leonard L. Skerjanc and John J. Scordo, II, who received options
to purchase 134,680 shares, 86,666 shares and 86,666 shares, respectively, under
the 1996 Plan.  The options will become  exercisable  on the earlier of the date
that the 1996 Plan is approved by the  shareholders or December 29, 1997.  Also,
nonstatutory  stock  options  relating to 1,990 shares of the  Company's  Common
Stock were granted to Gene E. Osborn. The options are exercisable on the earlier
of the date the 1996 Plan is approved by the  shareholders or December 29, 1997.
Mr.  Osborn's   options  are  exercisable  at  $3.7125  and  $3.375  per  share,
respectively,  Mr. Skerjanc's options are exercisable at $3.7125, per share, Mr.
Scordo's  options are  exercisable at $3.375 per share and the other options are
exercisable  at $3.375  per  share.  All of the  options  must be  exercised  by
December 29, 2001.

     As stated previously,  the options that were granted pursuant to the Option
Plan had  exercise  prices of $5.00 per  share  and $5.50 per share  which  were
significantly  above the current  market price of the Company's  Common Stock in
December 1996. The Board of Directors of the Company  believed that the previous
options granted  pursuant to the Option Plan were no longer an incentive for the
holders  thereof  because  of the fact that the  exercise  prices  thereof  were
significantly  higher than the then market price of the Common Stock.  The Board
of Directors also believed that it would be  appropriate to reward  employees in
recognition  of the fact that in December  1996 the  Company had a record  month
regarding Contracts purchased. Therefore, the Board of Directors granted the new
options  pursuant to the 1996 Plan as bonuses and  incentives  for the Company's
employees.

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

     The  following  table sets forth  certain  information  as of June 9, 1997,
regarding the beneficial ownership of the Company's Common Stock, its only class
of outstanding  voting securities by (i) each person who is known to the Company
to own  beneficially  more  than 5% of the  outstanding  Common  Stock  with the
address of each such person,  (ii) each of the Company's directors and officers,
and (iii) all of the Company's directors and officers as a group.

                                       26
<PAGE>
<TABLE>
<CAPTION>

Name of Beneficial Owner
or Name of Officer or                              Amount and Nature of                     Percent
Director and Addresses                             Beneficial Ownership(1)                  of Class(2)
----------------------                             ----------------------                   ----------
<S>                                                      <C>                                 <C>  
Gene E. Osborn ..................................        1,624,170(3)(7)                     58.5%
4704 Harlan Street, Suite 260
Denver, Colorado 80212

Leonard L. Skerjanc .............................          261,666(4)                         9.6%
4704 Harlan Street, Suite 260
Denver, Colorado 80212

John J. Scordo, II ..............................          174,166(4)                         6.4%
4704 Harlan Street, Suite 260
Denver, Colorado 80212

Marya L. Brancio ................................           51,666(5)                         1.9%
4704 Harlan Street, Suite 260
Denver, Colorado 80212

All Officers and Directors as a .................        2,111,668(6)                        70.4%
Group (4 Persons)
</TABLE>

     (1) The beneficial owners listed have sole voting and investment power with
respect to the shares of Common Stock.

     (2) Assumes no shares of Series A Preferred Stock are converted into Common
Stock and that each individual's stock option is exercised.

     (3) Includes  136,670  shares of Common Stock  underlying  options  granted
pursuant to the 1996 Plan which will not be exercisable until the earlier of the
date the 1996 Plan is approved by the shareholders or December 29, 1997.

     (4) Includes  86,666 shares of Common Stock  underlying  an option  granted
pursuant to the 1996 Plan which will not be exercisable until the earlier of the
date the 1996 Plan is approved by the shareholders or December 29, 1997.

     (5) Represents shares of Common Stock underlying an option granted pursuant
to the 1996 Plan which will not be exercisable until the earlier of the date the
1996 Plan is approved by the shareholders or December 29, 1997.

     (6)  Includes  275,002  shares  of  Common  Stock  underlying  the  options
described above.

                                       27
<PAGE>

     (7) Mr. Osborn has entered into an installment  payment  agreement with the
IRS which  requires  Mr.  Osborn and his wife to pay  approximately  $770,000 of
taxes owed for the years 1989, 1990 and 1991. The monthly installment payment is
about $4,900 and the IRS has filed a tax lien with regard to such unpaid  taxes.
The tax  liability  arose  primarily  as a result of  deductions  claimed by Mr.
Osborn  when he sold  various  automobile  dealerships  which were  subsequently
disallowed by the IRS. Mr. Osborn  beneficially owns approximately  56.4% of the
outstanding Common Stock of the Company.  This stock constitutes the major asset
of Mr.  and Mrs.  Osborn.  If Mr.  and Mrs.  Osborn  should  default  under  the
installment  payment  agreement,  the IRS could bring a judicial  proceeding  to
enforce  the  federal  tax lien and  attempt  to levy on and sell  enough of the
Common  Stock of the Company  owned by Mr.  Osborn to pay the amount owed by Mr.
and Mrs.  Osborn to the IRS. Mr. Osborn has pledged 200,000 shares of his Common
Stock of the Company as security for the payment of any amounts which may become
due under an indemnification agreement between Mr. Osborn and the Company.

Item 12. Certain Relationships and Related Transactions.

     The Company  borrowed  $11,000  from  family  members of Gene E. Osborn and
provided the family members with a demand note with a 15% stated  interest rate.
Interest is paid monthly, and the unpaid principal balance of the demand note at
December 31, 1996 was $11,000. The demand note was paid in full in April 1997.

     Between  March,  1992 and  June,  1995  the  Company  loaned  approximately
$418,175  to  Outcome  Sales and  Marketing,  Inc.,  a company  owned by Gene E.
Osborn,  ("Outcome").  Of that amount,  approximately $131,844 was repaid to the
Company.  Gene E. Osborn and Mr.  Skerjanc are directors and officers of Outcome
and Mr.  Scordo is an officer of Outcome.  Outcome,  which was formed by Gene E.
Osborn to market  vehicle  security and safety related  products,  was initially
capitalized with $600,000 borrowed from an investor trust.  After expending this
capital, Outcome borrowed the additional funds described above from the Company.
Outcome's  business has been a failure.  During the periods  ended  December 31,
1993,  1994 and,  1995, the remainder of this loan in the amount of $301,200 was
uncollectible and was charged off by including it in distributions to affiliates
in shareholders' equity during such periods. On November 7, 1995, the trustee of
this  investor  trust  notified  Outcome  that he was  declaring  the notes from
Outcome  to this  trust in the amount of  $600,000  to be in default  because of
alleged  breach  of  indenture  covenants  and  warranties,  including  improper
expenditure  of trust  assets;  improper  distributions  of trust  assets to the
noteholders  of the trust;  failure to pay  compensation  to and expenses of the
trustee; and failure to indemnify the trustee. Outcome has paid all interest due
on these  notes.  The Company  became  aware that this  trustee,  in a letter to
noteholders of this trust, has stated his intention to cause the trust to file a
legal action  against  Outcome,  the Company,  and other unnamed  persons.  This
trustee has been subsequently removed by the noteholders.  Because of this treat
of legal  action  against  the  Company,  Gene E.  Osborn  has  entered  into an
indemnification  and  pledge  agreement  with the  Company in which he agrees to
indemnify the Company  against any monetary  loss,  including  attorney's  fees,


                                       28
<PAGE>

resulting from this threatened litigation and in which he pledges 200,000 shares
of Common  Stock of the Company  owned by him as security for the payment of any
obligations which may arise under such agreement. If the Company acquires shares
from Mr. Osborn under the pledge agreement, the Company would retain such shares
thereby reducing the number of shares  outstanding.  Under the pledge agreement,
such shares would be reacquired at a discount of 20%.

     The Company  loaned  $26,000 to D & O, Inc., a company that is owned 51% by
Gene E. Osborn and 49% by an  unaffiliated  party.  The directors of D & O, Inc.
are Gene E. Osborn,  Leonard L. Skerjanc,  and the unaffiliated  party. The loan
was represented by a promissory note bearing interest at a rate of 7% per annum.
As of September 30, 1995, the principal and accrued interest on this loan in the
amount of $29,289  was  charged off by  including  such amount in  stockholders'
equity.

     As of June 1, 1995, the Company entered into a Management  Agreement with a
corporation which is wholly owned by James A. Osborn, the son of Gene E. Osborn.
Under this Agreement,  the  corporation  managed and operated the Company's used
car  retail  sales  facility  for a fee of $3,800  per month plus 20% of the net
profit of such facility.  This Agreement was terminated in April 1997, after the
Company closed its used car retail sales  facility.  Management fees paid during
the year ended December 31, 1996 were approximately $283,000. James A. Osborn is
also an employee of the Company.  On August 28, 1995, the Company  granted James
A. Osborn a nonstatutory  stock option entitling him to purchase 3,400 shares of
Common Stock during a five year period at $5.00 per share.  The Company  granted
this option to James A. Osborn to provide him with an additional incentive under
the  Management  Agreement.  This  option has been  subsequently  forfeited  and
replaced by an incentive  stock option to purchase  40,066 shares at an exercise
price of $3.375 per share pursuant to the 1996 Plan.

     The Company has and will continue to make travel arrangements through First
World  Travel,  a travel  agency  which is owned and  operated by  Rosemarie  E.
Osborn,  the wife of Gene E. Osborn.  The Company purchased airline tickets from
First World Travel in the  following  amounts:  $24,500  during 1996 and $24,000
during 1995.  First World Travel received  customary  industry  commissions with
respect to such ticket purchases by the Company.

     Although the Company  believes that the terms of the  Management  Agreement
involving  Gene E.  Osborn's  son and the terms under which the Company uses the
travel  agency owned by Gene E.  Osborn's  wife were fair and  reasonable to the
Company, the Company has not obtained an independent  determination with respect
to the fairness and reasonableness of these  arrangements.  The Company's belief
with  respect  to the  Management  Agreement  is based upon the  experience  and
knowledge of the Company's  directors  other than Mr.  Osborn in the  automobile
used car retail sales business, and the Company's belief with respect to the use
of the travel agency is based upon the Company's  directors'  knowledge of rates
and fees charged by unaffiliated  travel agencies.  Any transaction  between the
Company and a member of  management  or a relative or  affiliate  of a member of
management  involves  obvious  inherent  conflicts  of  interest.  The  board of
directors  has  adopted a  resolution  that  provides  that any future  proposed


                                       29
<PAGE>

transaction between the Company and any member of management of the Company or a
relative  or  affiliate  of a  member  of  management  of the  Company  must  be
determined  by an  independent  person to be fair and  reasonable to the Company
before the Company enters into such proposed  transaction.  The directors of the
Company have adopted a resolution which requires that all compensation  matters,
including the grant of stock options,  relating to any member of management must
be approved by a majority of the directors  who do not have a personal  interest
in such determination.

     The  board of  directors  of the  Company  has  adopted a  resolution  that
provides that the areas of business in which the Company shall be interested for
the purpose of the doctrine of corporate  opportunities shall be the business of
acquiring  and  servicing  automobile  retail  installment  loan  contracts  for
purchases of late model used automobiles  (cars and light trucks) and purchasing
and selling used automobiles.  Any business  opportunity which falls within such
areas of interest must be brought to the attention of the Company for acceptance
or rejection prior to any officer or director of the Company taking advantage of
such opportunity. Any business opportunity outside such areas of interest may be
entered  into by any officer or  director of the Company  without the officer or
director first offering the business opportunity to the Company.  Gene E. Osborn
and Mr. Skerjanc are involved,  and in the future intend to become involved,  in
other  businesses  independent  of the  Company,  and  intend to engage in other
businesses that provide financing other than in connection with the financing of
automobiles.  Also,  Mr. Scordo may become  involved in other  businesses in the
future  which do not  compete  with the  Company's  business.  To the extent Mr.
Osborn, Mr. Skerjanc or Mr. Scordo engage in such other activities,  the time he
devotes to the Company will be diminished. However, Mr. Osborn, Mr. Skerjanc and
Mr.  Scordo each  currently  estimate that he will devote at least a majority of
his time to the affairs of the  Company.  No  shareholder  of the  Company  will
benefit from any of the  independent  business  activities  of Mr.  Osborn,  Mr.
Skerjanc or Mr. Scordo or any of the other officers or directors of the Company.

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

     (a) The following documents are filed as part of this Report:

     1. Financial Statements

                                                                      Page of
                                                                     this Report
                                                                     -----------
        Independent Auditors' Report........................................ F-1

        Consolidated Balance Sheets December 31, 1996 and 1995.............. F-2


                                       30
<PAGE>

        Consolidated Statements of Operations For The Years
        Ended December 31, 1996 and 1995.................................... F-3

        Consolidated Statement of Stockholders' Equity For
        The Years Ended December 31, 1996 and 1995.......................... F-4

        Consolidated Statements of Cash Flows For The Years
        Ended December 31, 1996 and 1995.................................... F-5

        Notes to Consolidated Financial Statements.......................... F-6


     2. Financial Statement Schedules:

     All  other  statements  or  schedules  for which  provision  is made in the
applicable  regulation  of the  Securities  and  Exchange  Commission  have been
omitted  because  they  are  not  required  under  related  instructions  or are
inapplicable,  or the  information  is shown  in the  financial  statements  and
related notes.

     3. Exhibits:


Exhibit No. Description and Method of Filing
----------  ---------------------------------
(3.1)       Restated Articles of Incorporation of Registrant*
(3.2)       Articles  of Amendment  to the Restated Articles of Incorporation of
            Registrant*
(3.3)       Bylaws of Registrant*
(4.1)       Form of Underwriting Agreement*
(4.2)       Form of Representative's Warrants*
(10.1)      Master Notes  issued by  Registrant  to G.E.O.  Income Trust 1991-1,
            G.E.O. Income Trust I, G.E.O. Income Trust III, G.E.O. Income Trust
            IV, G.E.O. Income Trust V on June 30, 1995*
(10.2)      Promissory Note dated August 18, 1992, by and between Registrant and
            James R. Osborn and Reta Bailey*
(10.3)      Contract  Purchase  Agreement  between  O  &  S  Finance,  Inc.  and
            Registrant dated as of November 23, 1994*
(10.4)      Master Purchase  Agreement between  O & S Finance, Inc. and Greyrock
            Capital Group, Inc. dated as of November 23, 1994*


                                       31
<PAGE>

Exhibit No. Description and Method of Filing
----------  ---------------------------------
(10.5)      Promissory Note dated December 12, 1994, from  Registrant to Farmers
            Automobile  Insurance  Company,  Pekin  Life  Insurance  Company and
            Grinnell  Mutual  Reinsurance  Company;  and  Pledge  Agreement  and
            Security Agreement both dated December 9, 1994, among Registrant and
            Farmers Automobile Insurance Company,  Pekin Life Insurance Company,
            and Grinnell Mutual Reinsurance Company*
(10.6)      Promissory  Note dated April 19, 1995, from Registrant to Pekin Life
            Insurance Company*
(10.7)      Promissory Note  dated  May 12, 1995,  from  Registrant  to  Farmers
            Automobile Insurance Company*
(10.8)      Promissory Note dated June 9, 1995,  from  Registrant  to Pekin Life
            Insurance Company*
(10.9)      Promissory  Note  dated  September  13,  1995,  from  Registrant  to
            Grinnell Mutual Reinsurance Company*
(10.10)     Promissory  Note  Dated  September  13,  1995,  from  Registrant  to
            Grinnell Mutual Reinsurance Company*
(10.11)     Promissory  Note  dated  September  21,  1995,  from  Registrant  to
            Grange Mutual Casualty Company*
(10.12)     Promissory  Note  dated  September  21,  1995,  from  Registrant  to
            Farmers Automobile Insurance Company*
(10.13)     Promissory  Note  dated  September  21,  1995,  from  Registrant  to
            Pekin Life Insurance Company*
(10.14)     Loan  Sale  Agreement  dated as of  February 9, 1994, by and between
            Registrant  and  NAFCO  Auto  Funding,  L.P.  and  Exhibit A to such
            Agreement*
(10.15)     Financing  Agreement  dated as  of July 27,  1990, between Berjac of
            Colorado, Registrant,  and Gene  E. Osborn and the Amendment thereto
            dated February 6, 1991*
(10.16)     Master Policy dated March 28, 1994, issued by Empire Fire and Marine
            Insurance Company/Empire Indemnity Insurance Company*


                                       32
<PAGE>

Exhibit No. Description and Method of Filing
----------  ---------------------------------
(10.17)     Agreement  dated  June  22,  1995,  between  Empire  Fire and Marine
            Insurance Company/Empire Indemnity Insurance Company and Registrant*
(10.18)     Trust/Escrow Agreement dated June 22, 1995, among the First National
            Bank of Omaha,  Nebraska,  Empire Fire and  Marine Insurance Company
            of Omaha/Empire Indemnity Insurance Company and Registrant*
(10.19)     Management Agreement dated September 20,  1995,  between  Registrant
            and Christopher Creations, Inc.*
(10.20)     Form of Selling Agent's Warrants to Purchase Common Stock*
(10.21)     Promissory Note dated July 26, 1995, from D & O, Inc. to Registrant*
(10.22)     1995 Incentive and Nonstatutory Stock Option Plan*
(10.23)     1996 Incentive and Nonstatutory Stock Option Plan
(10.24)     Office Sublease dated May 11, 1995, between Registrant and Bank One,
            Denver N.A.*
(10.25)     Office  Leases  dated  October  11,  1995,  between  Registrant  and
            Lakeside Office, Ltd. and Western Terrace Investment Co., Ltd.*
(10.26)     Agreement dated November 15, 1992, between Registrant and J. D. Mull
            & Co.*
(10.27)     Letter  Agreement  dated  November  29, 1994, between Registrant and
            Joseph Roberts & Co., Inc.*
(10.28)     Termination Agreement dated October 13, 1995*
(10.29)     Form of Purchase Agreement between Registrant and Dealers*
(10.30)     Promissory Note dated October 18, 1995, from Registrant to  Grinnell
            Mutual Reinsurance Company*
(10.31)     Promissory Note dated October 20, 1995, from  Registrant  to Farmers
            Automobile Insurance Company*
(10.32)     Promissory Note  dated October 20,  1995,  from Registrant  to Pekin
            Life Insurance Company*


                                       33
<PAGE>

Exhibit No. Description and Method of Filing
----------  ---------------------------------
(10.33)     Master  Notes  issued  by  Registrant to G.E.O. Income Trust 1991-I,
            G.E.O. Income Trust II, G.E.O. Income Trust III, G.E.O. Income Trust
            IV and G.E.O. Income Trust V on September 30, 1995*
(10.34)     Form  of  Notes issued by  Registrant to G.E.O. Income Trust 1991-I,
            G.E.O. Income Trust II, G.E.O. Income Trust III, G.E.O. Income Trust
            IV, and G.E.O. Income Trust V*
(10.35)     Trust Indenture dated as of October 1,  1991, and Security Agreement
            dated December 5, 1991, between Registrant and G.E.O.  Income  Trust
            1991-I*
(10.36)     Trust  Indenture  dated as of July  27, 1992, and Security Agreement
            dated September  2, 1992, between Registrant and G.E.O. Income Trust
            II*
(10.37)     Trust Indenture  dated as of  March 22, 1993, and Security Agreement
            dated May 28, 1993, between Registrant and G.E.O. Income Trust III*
(10.38)     Trust  Agreement  dated  as  of  December  24,  1993,  and  Security
            Agreement  dated  February  7,  1994,  between Registrant and G.E.O.
            Income Trust IV*
(10.39)     Trust  Indenture  dated  as of  September  15,  1994,  and  Security
            Agreement  dated  October  13,  1994,  between Registrant and G.E.O.
            Income Trust V*
(10.40)     Amendments  dated  May  16,  1994,  and  June  1, 1994, to Berjac of
            Colorado Agreement dated July 27,  1990,  which was previously filed
            as Exhibit (10.15)*
(10.41)     Trust Notes Exchanged for Series A Preferred Stock*
(10.42)     Letter  dated  June  26, 1995, from Empire Fire and Marine Insurance
            Company to the Registrant*
(10.43)     Indemnification and  Stock Pledge Agreement dated November 13, 1995,
            between Gene E. Osborn and Registrant*
(10.44)     Used Car Facility Lease dated April 3, 1996,  between Registrant and
            D&J Investments, Colorado General Partnership**
(10.45)     Loan  Purchase  Agreement  dated  February  28, 1996, by and between
            Registrant and Primus Automotive Financial Services, Inc.**


                                       34
<PAGE>

Exhibit No. Description and Method of Filing
----------  ---------------------------------
(10.46)     Loan  Purchase  Agreement  dated  April  3,  1996,  by  and  between
            Registrant and Primus Automotive Financial Services, Inc.**
(10.47)     Transfer  and  Assignment  dated  as  of  December  30, 1996, by and
            between Western Fidelity Funding, Inc. and Western Fidelity Finance,
            Inc.***
(10.48)     Servicing  Agreement  dated  as  of December 30,  1996, by and among
            Western  Fidelity  Finance,  Inc.,  Texas  Commerce  Bank,  National
            Association, and Western Fidelity Funding, Inc.***
(10.49)     Pooling  and  Servicing  Agreement  dated  as  of December 30, 1996,
            between  Western  Fidelity  Finance,  Inc. and  Texas Commerce Bank,
            National Association****
(10.50)     Facilities Agreement and Subscription dated July 31, 1996****
(10.51)     12% Subordinated Note - Due July 31, 2001****
(10.52)     Selling Agent's Class A Common Stock Purchase Warrant dated July 31,
            1996****
(10.53)     Revolving Credit and Security Agreement dated June 24, 1996, between
            Western Fidelity Funding, Inc. and BNY Financial Corporation*****
(10.54)     Three Promissory Notes Aggregating $1,522,713.10 from  Registrant to
            Western Fraternal Life Association
(10.55)     Auto Loan Warehouse Credit and Security  Agreement dated  August 12,
            1996, between Princeton Capital Credit Corporation and Registrant
(10.56)     Purchase  Agreement  dated  March  14,  1997  between Registrant and
            Mountain Parks Financial Services, Inc.
(10.57)     Business  Lease  dated  January  22,  1997,  between  Ramsey  Family
            Partnership and Registrant
(10.58)     Office Lease dated July 18, 1997 between Bank One-Colorado, N.A. and
            Registrant
(21)        Subsidiary of Registrant
(27)        Financial Data Schedule

                                       35
<PAGE>

*        Incorporated by reference to the Registrant's Registration Statement on
         Form SB-2 and all amendments  thereto, as filed with the Securities and
         Exchange Commission Registration No. 33-98116-D, and which was declared
         effective on November 21, 1995.

**       Incorporated  by reference to the Issuer's Annual Report on Form 10-KSB
         as filed with the  Securities  and Exchange  Commission  for the fiscal
         year ended December 31, 1995.

***      Incorporated  by reference to the Issuer's  Current Report on Form 8-K,
         as filed with the  Securities  and Exchange  Commission on December 30,
         1996.

****     Incorporated by reference to the Issuer's Current Report on Form 8-K as
         filed with the Securities and Exchange Commission on August 7, 1996.

*****    Incorporated  by reference to the  Issuer's  Current  Report on Current
         Form 8-K as filed with the Securities  and Exchange  Commission on July
         2, 1996.

     (b) A Current Report on Form 8-K was filed on December 30, 1996,  reporting
under Item 5 the transfer of  receivables  of  approximately  $17,200,000 to the
Western  Fidelity  Receivables  Trust  1996-A and the  issuance  by the Trust of
Pass-Through Certificates and filing under Item 7 the exhibits relating thereto.


                                       36
<PAGE>

                                   SIGNATURES


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

                                          WESTERN FIDELITY FUNDING, INC.,
                                          a Colorado corporation



                                          By:/s/ Gene E. Osborn
                                             -----------------------------------
                                             Gene E. Osborn,
                                             President, Chief Executive Officer,
                                             Chief Financial Officer and
                                             Principal Accounting Officer


                                           Date: July 8, 1997



     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated:



/s/ Gene E. Osborn                                                  July 8, 1997
------------------------------------
Gene E. Osborn, Director



/s/ Leonard L. Skerjanc                                             July 8, 1997
------------------------------------
Leonard L. Skerjanc, Director



/s/ John J. Scordo, II                                              July 8, 1997
------------------------------------
John J. Scordo, II, Director


                                       37
<PAGE>


                                  EXHIBIT INDEX


<TABLE>
<CAPTION>

Exhibit No. Description and Method of Filing                                              Page
----------  --------------------------------                                              ----
<S>                                                                                       <C>

(3.1)       Restated Articles of Incorporation of Registrant*                             N/A
(3.2)       Articles  of Amendment  to the Restated Articles of Incorporation of
            Registrant*                                                                   N/A
(3.3)       Bylaws of Registrant*                                                         N/A
(4.1)       Form of Underwriting Agreement*                                               N/A
(4.2)       Form of Representative's Warrants*                                            N/A
(10.1)      Master Notes  issued by  Registrant  to G.E.O.  Income Trust 1991-1,
            G.E.O. Income Trust I, G.E.O. Income Trust III, G.E.O. Income Trust
            IV, G.E.O. Income Trust V on June 30, 1995*                                   N/A
(10.2)      Promissory Note dated August 18, 1992, by and between Registrant and
            James R. Osborn and Reta Bailey*                                              N/A
(10.3)      Contract  Purchase  Agreement  between  O  &  S  Finance,  Inc.  and
            Registrant dated as of November 23, 1994*                                     N/A
(10.4)      Master Purchase  Agreement between  O & S Finance, Inc. and Greyrock
            Capital Group, Inc. dated as of November 23, 1994*                            N/A
(10.5)      Promissory Note dated December 12, 1994, from  Registrant to Farmers
            Automobile  Insurance  Company,  Pekin  Life  Insurance  Company and
            Grinnell  Mutual  Reinsurance  Company;  and  Pledge  Agreement  and
            Security Agreement both dated December 9, 1994, among Registrant and
            Farmers Automobile Insurance Company,  Pekin Life Insurance Company,
            and Grinnell Mutual Reinsurance Company*                                      N/A
(10.6)      Promissory  Note dated April 19, 1995, from Registrant to Pekin Life
            Insurance Company*                                                            N/A
(10.7)      Promissory Note  dated  May 12, 1995,  from  Registrant  to  Farmers
            Automobile Insurance Company*                                                 N/A
(10.8)      Promissory Note dated June 9, 1995,  from  Registrant  to Pekin Life
            Insurance Company*                                                            N/A
(10.9)      Promissory  Note  dated  September  13,  1995,  from  Registrant  to
            Grinnell Mutual Reinsurance Company*                                          N/A

<PAGE>

<CAPTION>

Exhibit No. Description and Method of Filing                                              Page
----------  --------------------------------                                              ----
<S>                                                                                       <C>

(10.10)     Promissory  Note  Dated  September  13,  1995,  from  Registrant  to 
            Grinnell Mutual Reinsurance Company*                                          N/A
(10.11)     Promissory  Note  dated  September  21,  1995,  from  Registrant  to
            Grange Mutual Casualty Company*                                               N/A
(10.12)     Promissory  Note  dated  September  21,  1995,  from  Registrant  to
            Farmers Automobile Insurance Company*                                         N/A
(10.13)     Promissory  Note  dated  September  21,  1995,  from  Registrant  to
            Pekin Life Insurance Company*                                                 N/A
(10.14)     Loan  Sale  Agreement  dated as of  February 9, 1994, by and between
            Registrant  and  NAFCO  Auto  Funding,  L.P.  and  Exhibit A to such
            Agreement*                                                                    N/A
(10.15)     Financing  Agreement  dated as  of July 27,  1990, between Berjac of
            Colorado, Registrant,  and Gene  E. Osborn and the Amendment thereto
            dated February 6, 1991*                                                       N/A
(10.16)     Master Policy dated March 28, 1994, issued by Empire Fire and Marine
            Insurance Company/Empire Indemnity Insurance Company*                         N/A
(10.17)     Agreement  dated  June  22,  1995,  between  Empire  Fire and Marine
            Insurance Company/Empire Indemnity Insurance Company and Registrant*          N/A
(10.18)     Trust/Escrow Agreement dated June 22, 1995, among the First National
            Bank of Omaha,  Nebraska,  Empire Fire and  Marine Insurance Company
            of Omaha/Empire Indemnity Insurance Company and Registrant*                   N/A
(10.19)     Management Agreement dated September 20,  1995,  between  Registrant
            and Christopher Creations, Inc.*                                              N/A
(10.20)     Form of Selling Agent's Warrants to Purchase Common Stock*                    N/A
(10.21)     Promissory Note dated July 26, 1995, from D & O, Inc. to Registrant*          N/A
(10.22)     1995 Incentive and Nonstatutory Stock Option Plan*                            N/A
(10.23)     1996 Incentive and Nonstatutory Stock Option Plan
(10.24)     Office Sublease dated May 11, 1995, between Registrant and Bank One,
            Denver N.A.*                                                                  N/A

<PAGE>

<CAPTION>

Exhibit No. Description and Method of Filing                                              Page
----------  --------------------------------                                              ----
<S>                                                                                       <C>

(10.25)     Office  Leases  dated  October  11,  1995,  between  Registrant  and
            Lakeside Office, Ltd. and Western Terrace Investment Co., Ltd.*               N/A
(10.26)     Agreement dated November 15, 1992, between Registrant and J. D. Mull
            & Co.*                                                                        N/A
(10.27)     Letter  Agreement  dated  November  29, 1994, between Registrant and
            Joseph Roberts & Co., Inc.*                                                   N/A
(10.28)     Termination Agreement dated October 13, 1995*                                 N/A
(10.29)     Form of Purchase Agreement between Registrant and Dealers*                    N/A
(10.30)     Promissory Note dated October 18, 1995, from Registrant to  Grinnell
            Mutual Reinsurance Company*                                                   N/A
(10.31)     Promissory Note dated October 20, 1995, from  Registrant  to Farmers
            Automobile Insurance Company*                                                 N/A
(10.32)     Promissory Note  dated October 20,  1995,  from Registrant  to Pekin 
            Life Insurance Company*                                                       N/A
(10.33)     Master  Notes  issued  by  Registrant to G.E.O. Income Trust 1991-I,
            G.E.O. Income Trust II, G.E.O. Income Trust III, G.E.O. Income Trust
            IV and G.E.O. Income Trust V on September 30, 1995*                           N/A
(10.34)     Form  of  Notes issued by  Registrant to G.E.O. Income Trust 1991-I,
            G.E.O. Income Trust II, G.E.O. Income Trust III, G.E.O. Income Trust
            IV, and G.E.O. Income Trust V*                                                N/A
(10.35)     Trust Indenture dated as of October 1,  1991, and Security Agreement
            dated December 5, 1991, between Registrant and G.E.O.  Income  Trust
            1991-I*                                                                       N/A
(10.36)     Trust  Indenture  dated as of July  27, 1992, and Security Agreement
            dated September  2, 1992, between Registrant and G.E.O. Income Trust
            II*                                                                           N/A
(10.37)     Trust Indenture  dated as of  March 22, 1993, and Security Agreement
            dated May 28, 1993, between Registrant and G.E.O. Income Trust III*           N/A
(10.38)     Trust  Agreement  dated  as  of  December  24,  1993,  and  Security
            Agreement  dated  February  7,  1994,  between Registrant and G.E.O.
            Income Trust IV*                                                              N/A

<PAGE>

<CAPTION>

Exhibit No. Description and Method of Filing                                              Page
----------  --------------------------------                                              ----
<S>                                                                                       <C>

(10.39)     Trust  Indenture  dated  as of  September  15,  1994,  and  Security
            Agreement  dated  October  13,  1994,  between Registrant and G.E.O.
            Income Trust V*                                                               N/A
(10.40)     Amendments  dated  May  16,  1994,  and  June  1, 1994, to Berjac of
            Colorado Agreement dated July 27,  1990,  which was previously filed
            as Exhibit (10.15)*                                                           N/A
(10.41)     Trust Notes Exchanged for Series A Preferred Stock*                           N/A
(10.42)     Letter  dated  June  26, 1995, from Empire Fire and Marine Insurance
            Company to the Registrant*                                                    N/A
(10.43)     Indemnification and  Stock Pledge Agreement dated November 13, 1995,
            between Gene E. Osborn and Registrant*                                        N/A
(10.44)     Used Car Facility Lease dated April 3, 1996,  between Registrant and
            D&J Investments, Colorado General Partnership**                               N/A
(10.45)     Loan  Purchase  Agreement  dated  February  28, 1996, by and between
            Registrant and Primus Automotive Financial Services, Inc.**                   N/A
(10.46)     Loan  Purchase  Agreement  dated  April  3,  1996,  by  and  between
            Registrant and Primus Automotive Financial Services, Inc.**                   N/A
(10.47)     Transfer  and  Assignment  dated  as  of  December  30, 1996, by and
            between Western Fidelity Funding, Inc. and Western Fidelity Finance,
            Inc.***                                                                       N/A
(10.48)     Servicing  Agreement  dated  as  of December 30,  1996, by and among
            Western  Fidelity  Finance,  Inc.,  Texas  Commerce  Bank,  National
            Association, and Western Fidelity Funding, Inc.***                            N/A
(10.49)     Pooling  and  Servicing  Agreement  dated  as  of December 30, 1996,
            between  Western  Fidelity  Finance,  Inc. and  Texas Commerce Bank,
            National Association****                                                      N/A
(10.50)     Facilities Agreement and Subscription dated July 31, 1996****                 N/A
(10.51)     12% Subordinated Note - Due July 31, 2001****                                 N/A
(10.52)     Selling Agent's Class A Common Stock Purchase Warrant dated July 31,
            1996****                                                                      N/A
(10.53)     Revolving Credit and Security Agreement dated June 24, 1996, between
            Western Fidelity Funding, Inc. and BNY Financial Corporation*****             N/A

<PAGE>

<CAPTION>

Exhibit No. Description and Method of Filing                                              Page
----------  --------------------------------                                              ----
<S>                                                                                       <C>

(10.54)     Three Promissory Notes Aggregating $1,522,713.10 from  Registrant to
            Western Fraternal Life Association
(10.55)     Auto Loan Warehouse Credit and Security  Agreement dated  August 12,
            1996, between Princeton Capital Credit Corporation and Registrant
(10.56)     Purchase  Agreement  dated  March  14,  1997  between Registrant and
            Mountain Parks Financial Services, Inc.
(10.57)     Business  Lease  dated  January  22,  1997,  between  Ramsey  Family
            Partnership and Registrant
(10.58)     Office Lease dated July 18, 1997 between Bank One-Colorado, N.A. and
            Registrant
(21)        Subsidiary of Registrant
(27)        Financial Data Schedule
</TABLE>

*        Incorporated by reference to the Registrant's Registration Statement on
         Form SB-2 and all amendments  thereto, as filed with the Securities and
         Exchange Commission Registration No. 33-98116-D, and which was declared
         effective on November 21, 1995.

**       Incorporated  by reference to the Issuer's Annual Report on Form 10-KSB
         as filed with the  Securities  and Exchange  Commission  for the fiscal
         year ended December 31, 1995.

***      Incorporated  by reference to the Issuer's  Current Report on Form 8-K,
         as filed with the  Securities  and Exchange  Commission on December 30,
         1996.

****     Incorporated by reference to the Issuer's Current Report on Form 8-K as
         filed with the Securities and Exchange Commission on August 7, 1996.

*****    Incorporated  by reference to the  Issuer's  Current  Report on Current
         Form 8-K as filed with the Securities  and Exchange  Commission on July
         2, 1996.




<PAGE>
                         WESTERN FIDELITY FUNDING, INC.
                                AND SUBSIDIARIES

                        Consolidated Financial Statements
                                       and
                          Independent Auditors' Report
                           December 31, 1995 and 1996



<PAGE>

                 WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARIES





                                Table of Contents
                                -----------------

Independent Auditors' Report................................................ F-1

Consolidated Financial Statements

         Consolidated Balance Sheets........................................ F-2

         Consolidated Statements of Operations.............................. F-3

         Consolidated Statement of Stockholders' Equity (Deficit)........... F-4

         Consolidated Statements of Cash Flows.............................. F-5

Notes to Consolidated Financial Statements.................................. F-6




<PAGE>
                                                                        Ehrhardt
                                                                           Keefe
                                                                       Steiner &
                                                                      Hottman PC

                          INDEPENDENT AUDITORS' REPORT

                                                    Certified Public Accountants
                                                                 and Consultants
To the Board of Directors and Stockholders
Western Fidelity Funding, Inc. and Subsidiaries
Denver, Colorado


We have audited the  consolidated  balance sheets of Western  Fidelity  Funding,
Inc.  and  Subsidiaries  as of  December  31,  1995  and  1996  and the  related
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows for the years then ended. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Western
Fidelity Funding, Inc. and Subsidiaries as of December 31, 1995 and 1996 and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern.  As further discussed in Note
2 to the consolidated financial statements, the Company has incurred losses from
operations of $10,154,677 resulting in an accumulated deficit of $11,328,311, at
December  31,  1996.  In addition  the Company is currently in default or out of
trust on  significantly  all of its debt  totaling  $26,021,077  at December 31,
1996.  These factors among others raise  substantial  doubt about its ability to
continue as a going concern. Management's plans in regard to these matters
are also  described  in Note 2. The  consolidated  financial  statements  do not
include any  adjustments  that might result if the Company is unable to continue
in existence.

                                         /s/ Ehrhardt Keefe Steiner & Hottman PC
                                             Ehrhardt Keefe Steiner & Hottman PC

April 2, 1997, except for Note 14, as to which
 the date is May 31, 1997
Denver, Colorado

                                       F-1

          7979 E. Tufts Avenue, Suite 400 Denver, Colorado 80237-2843
                         303 740-9400 Fax 303 740-9009
              Member of DFK International and PKF International--
                     Providing Services in Cities Worldwide
<PAGE>

<TABLE>
<CAPTION>

                 WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets



                                                                                                    December 31,
                                                                                                 -------------------
                                                                                                 1995           1996
                                                                                                 ----           ----
                                                  Assets
<S>                                                                                        <C>             <C>         
Cash ...................................................................................   $    480,838    $    361,362
   Restricted cash (Note 6) ............................................................        891,065       2,326,203
Finance receivables - net (Notes 3, 4, 5 and 7) ........................................     21,319,223      14,941,703
Other receivables ......................................................................           --           385,781
Residual interest in Securitization (Note 5) ...........................................           --         1,195,000
Prepaid expenses .......................................................................        665,486       1,257,419
Vehicles held for sale (Notes 3 and 4) .................................................        982,156       3,109,326
   Furniture and equipment - net of accumulated depreciation
 of $39,839 (1995) and $188,079 (1996) .................................................         85,642         642,362
   Loan origination fees - net of accumulated amortization
 of $201,487 (1995) and $731,510 (1996) ................................................        689,473       1,252,940
                                                                                            -----------    ------------
                                                                                           $ 25,113,883    $ 25,472,096
                                                                                            ===========    ============
                                   Liabilities and Stockholders' Equity (Deficit)

Checks written in excess of bank balance ...............................................   $       --      $    316,745
   Accounts payable ....................................................................      3,147,430       1,220,112
   Accrued liabilities .................................................................        445,572         614,368
Note payable - related party (Note 7) ..................................................         11,000          11,000
Master notes (Note 7) ..................................................................      4,157,993       2,608,689
Notes payable - other (Note 7) .........................................................     12,542,106      26,021,077
                                                                                            -----------    ------------
                                                                                             20,304,101      30,791,991
                                                                                            -----------    ------------
Commitments (Notes 8, 12 and 14)

Stockholders' equity (deficit) (Note 11)
             Preferred stock; 2,000,000 shares authorized
                  Series A, 10% convertible, $.0001 par value;
                  400,000 shares designated, 328,540 shares issued
                  and outstanding (liquidation preference of
                  $1,642,700) ..........................................................             33              33
             Common stock, $.0001 par value; 10,000,000 shares
                  authorized, 2,637,500 issued and outstanding..........................            264             264
        Additional paid-in capital .....................................................      5,983,119       6,008,119
        Accumulated deficit ............................................................     (1,173,634)    (11,328,311)
                                                                                            -----------    ------------
                                                                                              4,809,782      (5,319,895)
                                                                                            -----------    ------------
                                                                                           $ 25,113,883    $ 25,472,096
                                                                                            ===========    ============
</TABLE>
                 See notes to consolidated financial statements.

                                      F - 2

<PAGE>

<TABLE>
<CAPTION>

                 WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

                                                                                             For the Year Ended
                                                                                                  December 31,
                                                                                          ------------------------
                                                                                             1995            1996
                                                                                             ----            ----
<S>                                                                                     <C>            <C>   
Revenue
     Interest and fee income (Note 5) ...............................................   $  2,295,441   $  4,902,074
          Gain on sales of retail contracts .........................................      2,512,463      2,461,262
          Gain (loss) on retail sales facility ......................................        336,247     (1,000,545)
                                                                                         -----------    -----------
          Total revenues ............................................................      5,144,151      6,362,791
                                                                                         -----------    -----------

Expenses
          Interest and loan commission expense ......................................      1,996,200      3,652,000
     Provision for credit losses ....................................................        291,200      6,780,120
     Salaries and employee benefits .................................................      1,121,970      1,698,730
     Insurance on contracts .........................................................        236,580        459,485
     Loss on interest participation .................................................           --        1,637,131
     Other administrative expenses ..................................................        864,284      2,125,732
                                                                                         -----------    -----------
          Total expenses ............................................................      4,510,234     16,353,198
                                                                                         -----------    -----------

Net income (loss) ...................................................................        633,917     (9,990,407)

Preferred stock dividends (Note 11) .................................................         54,757        164,270
                                                                                         -----------    -----------

  Net income (loss) applicable to common shareholders ...............................   $    579,160   $(10,154,677)
                                                                                         ===========    ===========

  Net income (loss) per common share ................................................   $        .30   $      (3.85)
                                                                                         ===========    ===========

  Weighted average common shares outstanding ........................................      1,923,150      2,637,500
                                                                                         ===========    ===========
</TABLE>
                 See notes to consolidated financial statements.

                                      F - 3


<PAGE>
<TABLE>
<CAPTION>
                 WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARIES
            Consolidated Statement of Stockholders' Equity (Deficit)

                                                                    Series A Preferred Stock       Common Stock
                                                                    ------------------------    --------------------
                                                                      Shares       Amount       Shares        Amount
                                                                      ------       ------       ------        ------
<S>                                                                 <C>           <C>          <C>            <C>
Balance December 31, 1994 ......................................         --   $       --      1,750,000      $   175

Distributions to affiliates (Note 9) ...........................         --           --           --            --

Issuance of Series A preferred stock
  net of $107,135 of offering costs ............................      328,540           33         --            --

Issuance of stock for services .................................         --           --         25,000            2

Issuance of common stock net of
  $967,249 of offering costs (Note 11) .........................         --           --        862,500           87

   Net income ..................................................         --           --           --            --
                                                                   ----------    ---------    ---------      -------
Balance December 31, 1995 ......................................      328,540           33    2,637,500          264

Issuance of common stock warrants
  for loan origination fee .....................................         --           --           --            --

   Net loss ....................................................         --           --           --            -- 
                                                                   ----------    ---------    ---------      -------
Balance December 31, 1996 ......................................      328,540 $         33    2,637,500   $      264
                                                                   ==========   ==========    =========      =======

<CAPTION>
                                                                   Additional
                                                                    Paid-In       Accumulated
                                                                    Capital         Deficit      Total
                                                                  -----------     -----------    -----
<S>                                                                 <C>           <C>         <C> 
Balance December 31, 1994 ...................................... $     89,825 $  (1,677,091) $(1,587,091)

Distributions to affiliates (Note 9) ...........................         --         (75,703)     (75,703)

Issuance of Series A preferred stock
  net of $107,135 of offering costs ............................    1,535,532         --       1,535,565

Issuance of stock for services .................................      149,998         --         150,000

Issuance of common stock net of
  $967,249 of offering costs (Note 11) .........................    4,207,764         --       4,207,851

   Net income ..................................................         --         579,160      579,160
                                                                   ----------     ---------    ---------
Balance December 31, 1995 ......................................    5,983,119    (1,173,634)   4,809,782

Issuance of common stock warrants
  for loan origination fee .....................................       25,000         --          25,000

   Net loss ....................................................         --     (10,154,677) (10,154,677)
                                                                   ----------    ----------   ---------- 
Balance December 31, 1996 ...................................... $  6,008,119  $(11,328,311)$ (5,319,895)
                                                                   ==========    ==========   ==========
</TABLE>
                 See notes to consolidated financial statements.

                                      F - 4

<PAGE>
<TABLE>
<CAPTION>
                 WESTERN FIDELITY FUNDING, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                                                                                             For the Year Ended
                                                                                                                December 31,
                                                                                                         --------------------------
                                                                                                            1995           1996
                                                                                                            ----           ----
<S>                                                                                                   <C>            <C>  
Cash flows from operating activities
   Net income (loss) ...............................................................................  $     579,160  $  (10,154,677)
                                                                                                        -----------    ------------
      Adjustments to reconcile net (loss) income to net cash provided (used) by
       operating activities
      Depreciation and amortization ................................................................        164,595         678,263
      Provision for credit losses ..................................................................        291,200       6,780,120
             Changes in operating assets and liabilities -
         Accrued interest receivable ...............................................................       (235,141)       (211,690)
                           Interest receivable on portfolio sales ..................................     (1,466,026)           --
         Residual interest in securitization .......................................................           --        (1,195,000)
         Vehicles held for sale ....................................................................       (742,105)     (2,127,170)
         Restricted cash ...........................................................................       (120,341)     (1,435,138)
         Prepaid expenses ..........................................................................       (336,988)       (977,714)
         Accounts payable ..........................................................................      2,761,289      (1,610,573)
         Accrued liabilities .......................................................................        247,576         168,796
                                                                                                       ------------    ------------
                                                                                                            564,059          69,894
                                                                                                       ------------    ------------
                                            Net cash provided (used) by operating activities .......      1,143,219     (10,084,783)
                                                                                                       ------------    ------------
Cash flows from investing activities
   Contracts originated or purchased ...............................................................    (26,480,714)    (26,946,535)
   Contracts repaid ................................................................................      2,233,791       4,211,596
   Contracts sold and securitized ..................................................................      9,577,911      22,544,029
   Purchases of fixed assets .......................................................................        (73,551)       (704,960)
                                                                                                       ------------    ------------
                                            Net cash (used) provided by investing activities .......    (14,742,563)       (895,870)
                                                                                                       ------------    ------------
Cash flows from financing activities
   Expenditures for loan acquisition fees ..........................................................       (326,154)     (1,068,490)
      Net change in line-of-credit .................................................................           --         7,670,757
      Proceeds from notes payable - insurance companies ............................................     10,181,020       1,023,222
      Payments on notes payable - insurance companies ..............................................     (1,240,473)     (3,925,336)
      Proceeds from note payable - related party ...................................................            165            --
      Proceeds from the issuance of master notes ...................................................      2,459,181            --
   Payments on master notes ........................................................................     (1,459,545)     (1,549,304)
                  Proceeds from notes payable - other ..............................................      1,477,034      10,483,274
                  Payments on notes payable - other ................................................     (1,117,179)     (1,772,946)
                  Proceeds from issuance of Series A preferred stock ...............................         35,000            --
      Proceeds from issuance of common stock .......................................................      4,207,851            --
      Offering costs related to issuance of Series A preferred stock ...............................       (107,135)           --
                  Distributions to affiliates ......................................................        (75,703)           --
                                                                                                       ------------    ------------
                                            Net cash provided by financing activities ..............     14,034,062      10,861,177
                                                                                                       ------------    ------------
Increase (decrease) in cash for the year ...........................................................        434,718        (119,476)
Beginning cash balance .............................................................................         46,120         480,838
                                                                                                       ------------    ------------
Ending cash balance ................................................................................   $    480,838    $    361,362
                                                                                                       ============    ============
</TABLE>
Supplemental disclosure of cashflow in formation:
     Cash paid for interest was  $1,381,800 and $3,499,792 for December 31, 1995
     and 1996, respectively.

Supplemental disclosure of noncash investing and financing activities:
     During the year ended December 31, 1995, the Company issued preferred stock
     in exchange for $1,607,700 of an interest in the Trusts, which is reflected
     as a reduction in the outstanding principal balance of the Master Notes.

     During the year ended  December 31, 1995,  the Company issued 25,000 shares
     of common stock in consideration for loan origination fees for $150,000.

     During the year ended  December 31, 1996,  the Company  issued common stock
     warrants valued at $25,000 as a loan origination fee.

                 See notes to consolidated financial statements.

                                      F - 5
<PAGE>
                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 1 - Organization and Summary of Significant Accounting Policies

The Company was incorporated  under the laws of Colorado in June 1990 to provide
alternative  financing  programs  to the  purchasers  of used cars.  The Company
provides  such  financing  by  acquiring  retail   installment  sales  contracts
("Contracts")  from auto dealers in the United  States.  The  Contracts are also
originated  through the sale of used cars at the used car retail sales  facility
operated by the Company in Denver, Colorado.  Contracts acquired are either held
in the Company's portfolio, sold to third parties or securitized.  The Contracts
are sold on  varying  terms to  various  financial  institutions  located in the
United States.  In 1994, the Company formed a wholly-owned  subsidiary,  O and S
Finance,  Inc., for the purpose of acquiring and selling contracts.  In December
1996, the Company formed a wholly-owned  subsidiary,  Western Fidelity  Finance,
Inc., a "bankruptcy remote entity" to facilitate securitization transactions.

Principles of Consolidation

The  accompanying  consolidated  financial  statements  include the  accounts of
Western  Fidelity  Funding,  Inc.  and its  wholly-owned  subsidiaries,  Western
Fidelity Finance,  Inc. and O and S Finance,  Inc. All intercompany accounts and
transactions have been eliminated.

Finance Receivables

Finance  receivables  consist of those Contracts  purchased from auto dealers or
from the retail sale of automobiles at the Company-owned retail auto store.

Broker Commissions

Broker commissions are commissions and  administrative  costs paid to securities
brokers who arrange financing through various trusts established by the Company.
These  commissions  are included in loan  origination  fees in the  accompanying
consolidated  financial  statements  and  are  amortized  to  expense  over  the
contractual life of the related loans.

Fair Value of Financial Instruments

The  carrying  amounts  of  financial   instruments   including  cash,   finance
receivables,  accounts payable,  notes payable and accrued expenses approximated
fair value as of December 31, 1996 because of the  relatively  short maturity of
these instruments.

Vehicles Held for Sale

Vehicles  held for sale consist of the  Company's  inventory of used cars at the
retail  auto store and  vehicles  held on  consignment  by  various  dealerships
located  throughout  the United  States.  Vehicles  acquired  through  wholesale
dealers  are  valued at the lower of  wholesale  cost or net  realizable  value.
Repossessed  vehicles are stated at the remaining finance  receivable balance on
date of repossession  for a four-month  period and after this four-month  period
are written down to the lower of wholesale cost or net realizable  value. To the
extent  vehicles are  determined  to be  impaired,  they are written down to net
realizable value immediately.

                                      F-6
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Furniture and Equipment

Furniture  and  equipment  are stated at cost.  Depreciation  is computed  using
accelerated  methods over the estimated  useful life of the assets  ranging from
five to seven years.

Revenue Recognition

The  Company  purchases  Contracts  from  vehicle  dealerships  at  a  discount,
generally 15 percent off face value. Interest income from finance receivables is
recognized using the interest (actuarial) method.  Accrual of interest income on
finance receivables is suspended when the loan becomes contractually  delinquent
for  thirty  days or  more.  The  accrual  is  resumed  when  the  loan  becomes
contractually  current,  and past-due  interest is recognized at that time.  Any
discounts recognized from the purchase of installment contracts are added to the
allowance for credit losses.

The  Company  recognizes  the  revenue on sale of vehicles at the point of sale.
Vehicle sales that are financed by the Company are  discounted at a rate from 10
to 15%.

Credit Losses

Provisions  for credit  losses are  charged to income in amounts  sufficient  to
maintain  the  allowance at a level  considered  adequate to cover the losses of
principal in the existing portfolio. The Company's charge-off policy is based on
a loan-by-loan  review for all Contracts in the Company's  portfolio,  which are
charged off when deemed uncollectible.

Use of Estimates

The  preparation  of  consolidated   financial  statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of contingent  assets and liabilities at the date of the consolidated
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

The Company's  business is to purchase and sell installment sales contracts.  In
connection  with the purchase and sale,  the Company is required to estimate the
amount of loans expected to result in  repossessions  and to estimate the amount
of loss that will be incurred  under each  repossession.  The Company  currently
provides allowances for these losses based on the historical  performance of the
Contracts which are tracked by the Company on a pool basis.  These losses relate
both to  Contracts  that are held by the Company to  maturity  along with losses
that could result on contracts sold to third parties. The actual losses incurred
could  differ  materially  from the amounts  that the Company has  estimated  in
preparing the historical consolidated financial statements.

                                      F-7

<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Loan Origination Fees

Fees  received  and  direct  costs  incurred  for the  origination  of loans are
deferred and  amortized  to interest  income over the  contractual  lives of the
loans using the interest method. Unamortized amounts are recognized in income at
the time that loans are sold or paid in full.

Master Notes

The Company has entered into master note  agreements  ("Master  Notes") with the
G.E.O. Income Trusts ("Trusts")  specifically to fund the Company's purchases of
contracts.

Concentration of Credit Risks

During the year ended December 31, 1995 and 1996, approximately 44% and 25%, and
52%  and  3%,  of  all  contracts  purchased  were  in  Texas  and  New  Jersey,
respectively.  However,  the primary  concentration  of credit  risk  relates to
lending to individuals who cannot obtain traditional bank financing. The Company
places its temporary cash  investments  with high quality  institutions,  and by
policy, limits the amount of credit exposure to any one institution. The Company
does,  however,  on occasion  exceed the FDIC  federally  insured  limits and at
December  31, 1995 and 1996,  exceeded the limit by  approximately  $506,000 and
$178,000, respectively.

Income Taxes

The Company  recognizes  deferred  tax  liabilities  and assets for the expected
future tax  consequences  of events that have been included in the  consolidated
financial  statements or tax returns.  Deferred tax  liabilities  and assets are
determined based on the difference between the consolidated financial statements
and tax basis of assets and liabilities  using enacted tax rates in effect.  The
measurement  of deferred tax assets is reduced,  if necessary,  by the amount of
any tax  benefits  that,  based on  available  evidence,  are not expected to be
realized (Note 10).

Net Income (Loss) Per Common Share

Net income  (loss)  per common  share has been  computed  based on the  weighted
average  number of common  shares  outstanding  during each year.  Common  stock
equivalents have been excluded from the weighted average number of common shares
outstanding as their effect would be immaterial or anti-dilutive.

Reclassifications

Certain prior year balances have been  reclassified in order to conform with the
current year presentation.

                                      F-8
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Accounting Standards Not Yet Adopted

In June 1996, the FASB issued  Statement No. 125,  "Accounting for Transfers and
Servicing of Financial Assets and  Extinguishments  of Liabilities" ("FAS 125").
FAS 125 provides consistent standards for distinguishing  transfers of financial
assets that are sales from transfers that are secured borrowings. Under FAS 125,
after a transfer of financial  assets,  an entity  recognizes  the financial and
servicing  assets it controls and the liabilities it has incurred,  derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when  extinguished.  FAS 125 prohibits early application and,  accordingly,  the
Company plans to adopt this standard for  transactions  occurring after December
31, 1996. Upon adoption,  transferred  assets and the related  nonrecourse  debt
will be removed from the balance sheet with the  resulting  gain or loss on sale
reflected in the consolidated statement of operations. Management of the Company
does not expect that adoption of SFAS No. 125 will have a material impact on the
Company's consolidated financial position or results of operations.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

The  Company  adopted  the  provisions  of  SFAS  No.  121,  Accounting  for the
Impairment of Long-Lived  Assets and for Long-Lived Assets to be Disposed of, on
January 1, 1996.  This  statement  requires that  long-lived  assets and certain
identifiable  intangibles be reviewed for impairment  whenever events or changes
in  circumstances  indicate  that the  carrying  amount  of an asset  may not be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceed the fair value of the assets.  Assets to be disposed
of are reported at the lower of the carrying  amount or fair value less costs to
sell.  Adoption  of  this  statement  did  not  have a  material  impact  on the
Company's  consolidated  financial  position,  results  of  operations  or
liquidity.


Note 2 - Continued Operations and Realization of Assets

The accompanying consolidated financial statements have been prepared on a going
concern basis which  contemplates  the  realization of assets and liquidation of
liabilities  in the  ordinary  course of  business.  The Company has  suffered a
significant  loss  from  operations  of  $10,154,677  in  1996  resulting  in an
accumulated deficit of $11,328,311 at December 31, 1996.

These  losses  have  caused  the  Company  to be in  default  or out of trust on
$26,021,077  of its  debt  obligations.  The  Company  is not  current  with its
preferred  stock  dividend  payments and is involved in exclusive  litigation as
described  in Note 14.  The  Company  has hired an  investment  banking  firm to
explore strategic business alternatives.  If the Company is unable to enter into
satisfactory arrangements with its creditors or obtain additional financing, the
Company may be unable to continue in existence.

                                      F-9

<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 2 - Continued Operations and Realization of Assets (continued)

The  accompanying   consolidated   financial   statements  do  not  include  any
adjustments  relating to the recoverability and classification of recorded asset
amounts or amounts and  classification  of  liabilities  that might be necessary
should the Company be unable to continue in existence.


Note 3 - Accounting Changes

Change in Accounting Method

Effective  October 1, 1996, the Company  adopted a new methodology for analyzing
its loan  losses.  This  accounting  method is  commonly  referred  to as static
pooling.  The static pooling reserve  methodology allows the Company to stratify
its finance receivable  portfolio into separate and identifiable  monthly pools.
The monthly pools,  along with the Company's estimate of future principal losses
and  recoveries,  are  analyzed  quarterly  to  determine  the  adequacy  of the
allowance  for credit  losses.  The  method  previously  used by the  Company to
analyze  the  allowance  for  credit  losses  was  based  on the  total  finance
receivables  portfolio.  In management's opinion, the static pool reserve method
provides a more sophisticated and comprehensive  analysis of the adequacy of the
allowance for credit losses and is preferable to the method  previously used. As
part of its adoption of the static pool reserve  method,  where  necessary,  the
Company  will  adjust  its pool  allowances  to a level  necessary  to cover all
anticipated future losses (i.e., life of loan) for each related pool of loans.

Under  static  pool  analysis,  unearned  discounts  are  used to  increase  the
allowance for credit losses and  represent  the  Company's  primary  reserve for
future losses on its portfolio.  To the extent that any monthly pool's  discount
reserves are insufficient to absorb future estimated losses,  net of recoveries,
adjusted for the impact of current  delinquencies,  collection efforts and other
economic  indicators  including  analysis of the Company's  historical data, the
Company will provide for such  deficiency  through a charge to the provision for
credit  losses.  To the extent that any discount  reserves are  determined to be
sufficient to absorb future estimated losses, net of recoveries,  the difference
will be accreted  into  interest  income on an  effective  yield method over the
estimated remaining life of the related monthly static pool.

As the portfolio method  previously used was calculated on a life of loan basis,
as is the  static  pool  method,  the  effect  of  adoption  was not  considered
material.


                                      F-10
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

Note 3 - Accounting Changes

Change in Accounting Estimate

The Company has operated its used car retail sales  facility for both retail and
repossessed vehicles since 1994.  Historically,  the Company has utilized retail
sales  prices in  calculating  the average  loss per  repossessed  vehicle  when
estimating the allowance for credit losses.  Subsequent to year end, the Company
closed its retail sales  facility  (Note 13).  Accordingly,  the  allowance  for
credit  losses  at  December  31,  1996 has  been  calculated  by pool  assuming
recoveries  on  repossessed  vehicles  will be based on  wholesale  prices which
increased   the   estimated   average  loss  per   repossession.   In  addition,
management's  estimate of the  portfolio  default rate  increased due to a
decline in the  performance of the  Company's  portfolio  during 1996. The
effect of these  changes in estimate is an increase in the  allowance for credit
losses  and a  charge  to  operations  in  the  current  year  of  approximately
$5,698,000.

Additionally, the closing of the retail sales facility resulted in an adjustment
to the carrying  value of the Company's  vehicle  inventory.  Historically,  the
vehicle  inventory  had been  valued at the lower of cost or market  assuming  a
retail  sales  price.   At  December  31,  1996,   an  inventory   writedown  of
approximately  $1,530,000  was  recorded to write down the  inventory to its net
realizable value based on wholesale prices.


Note 4 - Significant Fourth Quarter Adjustments

During  the  fourth  quarter  of  1996,  the  Company   recorded  the  following
adjustments which increased the net loss by $8,127,000:

     Increase in the allowance for credit losses (Note 3)       $ 4,960,000
     Inventory reserve to adjust inventory to net
      realizable value (Note 3)                                   1,530,000
     Uncollectible interest participation receivable
      (Note 5)                                                    1,637,000
                                                                 ----------
                                                                $ 8,127,000
                                                                 ==========

                                      F-11
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

Note 5 - Finance Receivables

Finance receivables consist of the following:
                                                            December 31,
                                                        --------------------
                                                        1995            1996
                                                        ----            ----

Finance receivables ............................    $ 23,466,954   $ 20,546,022
Accrued interest ...............................         283,991        495,681
Interest receivable on portfolio sales .........       1,692,011           --
Allowance for credit losses ....................      (4,123,733)    (6,100,000)
                                                    ------------   ------------

Finance Receivables - Net ......................    $ 21,319,223   $ 14,941,703
                                                    ============   ============

On December 31, 1995 and 1996,  the accrual of interest  income was suspended on
$2,472,095 and $5,248,298, respectively, of Contracts.

The contractual maturities on finance receivables were as follows:


         Year Ending December 31,
         ------------------------
                 1997                      $  4,951,676
                 1998                         4,381,409
                 1999                         4,593,502
                 2000                         4,006,688
                 2001                         2,612,747
                                             ----------
                                           $ 20,546,022
                                             ==========

It is the Company's  experience that a portion of the Contracts in the portfolio
is  charged  off  or  repaid  before  contractual   maturity  dates.  The  above
tabulation,  therefore,  is not to be  regarded  as a  forecast  of future  cash
collections.

At the time Contracts are originated or purchased,  the Company estimates future
losses of  principal  based on the type and terms of the  Contract,  the  credit
quality of the borrower and the underlying value of the vehicle  financed.  This
estimate  of loss is based on the  Company's  static  pool  analysis  (Note  3).
However, since the static pool analysis uses past history to predict the future,
changes in national  and  regional  economic  condition,  borrower mix and other
factors could result in actual losses differing from initially predicted losses.

                                      F-12

<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 5 - Finance Receivables (continued)

The  allowance  for credit  losses,  as presented  below,  has been  established
utilizing data obtained from the  Company's  static pool analysis and will
be  continually  reviewed and  adjusted in order to maintain the  allowance at a
level which, in the opinion of management,  provides  adequately for current and
future  losses that may  develop in the present  portfolio.  This  allowance  is
reported as a reduction to Finance Receivables.

                                                              December 31,
                                                           ------------------
                                                           1995          1996
                                                           ----          ----

Beginning balance ...................................  $ 1,488,076  $ 4,123,733
Provision for credit losses .........................      291,200    6,780,120
Contracts charged off ...............................     (411,304)  (4,742,213)
Change in unearned discounts and acquisition fees ...    2,755,761      (61,640)
                                                          ---------   ----------
Ending balance ......................................  $ 4,123,733  $ 6,100,000
                                                         =========    =========

Private Offering of Asset-Backed Certificates

In 1996, the Company's wholly-owned subsidiary,  Western Fidelity Finance, Inc.,
initiated a securitization program under which it sells finance receivables to a
trust  which uses the  finance  receivables  to create  asset-backed  securities
(certificates)  which are remitted to the Company in consideration for the sale.
The Company then sells the  certificates  to third party investors and retains a
subordinated  interest.  The certificates represent an undivided interest in the
trust  assets  which  consist of all of the  rights,  title and  interest in the
future cash flows underlying the finance receivables,  the related vehicles, and
all amounts on deposit in the capitalized interest and pre-funding accounts. The
Company  receives  cash  proceeds  from the sale of the  certificates  which are
collateralized by the finance receivables. In addition, the Company receives the
right to future cash flows (the  residual  interest in  securitization)  arising
from those receivables to the extent not required to make payments on the senior
certificates or to pay related servicing and administrative costs.

In December  1996,  the Company  completed a private  offering of $24,500,000 of
Class A, B and C  Pass-Through  Certificates  (the  Certificates)  with interest
ranging from 7.5% to 12%. The Company sold approximately  $17,200,000 of finance
receivables to the trust in consideration  for the  Certificates.  The remaining
finance  receivables of $7,300,000  were funded  subsequent to year end at which
time the related  proceeds were released.  The Company  recognized a gain on the
sale  of  the  initial  contracts  of  $1,863,000  which  is  reflected  in  the
accompanying 1996 consolidated statement of operations.

                                      F-13
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 5 - Finance Receivables (continued)

Private Offering of Asset-Backed Certificates (continued)

In  connection  with the  securitization,  the  Company is  required  to make an
initial cash deposit into two accounts held by the trustee (the reserve fund and
the capitalized  interest fund) and to assign a security interest in these funds
to the trust. The Company (through the trustee)  deposits  additional cash flows
into the reserve  fund to maintain  the fund at a  specified  percentage  of the
principal  balance of the finance  receivables.  All payments  received from the
underlying  finance  receivables are sent directly to the trustee where the cash
flow is  distributed  in the  priority as defined in the  Pooling and  Servicing
Agreement. Any remaining cash flows, after all required payments have been made,
are deposited  into the reserve  fund. To the extent there is available  cash in
excess of the required reserve fund amount, the remaining cash is distributed to
the  Company.  This excess cash of  $1,195,000,  net of an estimate  for default
losses and prepayments, is reflected as a residual interest in securitization in
the accompanying 1996 consolidated financial statements.

Sales to Third Parties

During 1995 and 1996, the Company sold $11,767,187 and $9,715,425, respectively,
contracts to several financial institutions. The purchase price of the contracts
is determined on a contract by contract basis. The Company  recognized a gain of
$2,512,463  and  $598,262 in 1995 and 1996,  respectively.  Pursuant to the 1995
sale,  the Company was to receive  interest  over the life of the Contracts at a
rate of 10.6% per annum.  Revenue was  recognized on the date of sale based upon
the present value of present and future payments to be received. The arrangement
required  the Company to fund a reserve  account of 5 % of the face value of the
Contracts sold for anticipated losses on repossessions. During 1996, the Company
determined  the  interest  participation  receivable  and related  reserve  were
uncollectible due to the performance and servicing of the underlying  contracts.
Accordingly,  a charge to operations of approximately $1,637,000 is reflected in
the 1996 consolidated statement of operations.


Note 6 - Restricted Cash

As required by the Master Note agreements and a note to a financial  institution
(Note 7), the Company  maintains an insurance policy to insure against potential
losses incurred on repossession. The surety requires the Company to deposit cash
into a restricted  account equal to seven percent of the face value of Contracts
funded by Master Note and financial  institution  proceeds.  The cash reserve is
maintained to reimburse the Company for losses incurred on Contracts in default.
The  Company's  surety  will  reimburse  the Company for losses in excess of the
amounts held in the cash reserve.  As of December 31, 1996, Contract losses have
been solely  funded from the cash  reserve.  At December 31, 1995 and 1996,  the
cash reserve had a balance of $862,754 and $2,308,397, respectively.

                                      F-14

<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 6 - Restricted Cash (continued)

Also  included in  restricted  cash is cash held by  financial  institutions  as
collateral  for credit  losses on  Contracts  purchased  from the  Company.  The
financial  institutions  withhold  four to five  percent  of the  face  value of
Contracts  sold. Any funds remaining in the account at maturity of the Contracts
will be  refunded  to the  Company.  At December  31,  1995,  the balance of the
reserves was $144,848 less allowances for credit losses of $138,467.  There were
no such reserves at December 31, 1996.

The Company's restricted cash balance also includes cash advanced to the Company
by the Trusts under the Master Note  agreement  (Note 7). Cash is advanced  from
the Trusts  specifically for the purchase of Contracts.  The Company is required
to reimburse  the Trust's cash  accounts for  principal  amounts  received  from
customers on Contracts originally purchased with the Trust funds.

At December 31, 1995 and 1996,  the balance of  restricted  cash relating to the
Trusts was $21,930 and  $17,806,  respectively.  As a result of the  significant
operating losses the Company has incurred to date, the principal  amounts of the
Contracts held as collateral for the borrowings from the Trusts under the Master
Note agreement is  approximately  $152,000 and $1,224,111 below the amounts owed
by the Company to the Trusts as of December 31, 1995 and 1996, respectively. The
Trusts do not have the right to accelerate  principal and interest  payments due
on the Master Notes.


Note 7 - Debt

Master Notes

During the years 1991 through 1995, the Company entered into the Master Notes to
fund the Company's  purchases of contracts.  The Master Notes are secured by the
pledge  of the  Company's  security  interest  in the  vehicles  underlying  the
Contracts,  the  restricted  cash  held in trust  (Note  6),  and the  insurance
maintained  by the  Company  (Note 6). The loan  proceeds  were  funded  through
private  offerings  by the Trusts in the form of two and four year  notes,  with
interest payable in monthly installments and principal due upon maturity.  As of
December 31, 1996 all of the two year notes had matured and only four year notes
remained  outstanding.  The stated  interest rates on the Master Notes vary from
eight to twelve  percent per annum.  At December  31,  1997,  the Company was in
default and has used  collateral to fund  operations  resulting in  insufficient
collateral on these loans.

In July and August 1995, the Company issued 321,540 shares of Series A preferred
stock  to  holders  of the  Trusts'  promissory  notes  in  exchange  for  their
respective  interests in the Trusts (Note 11). There are no  restrictions on the
Company's right to pay off the Master Notes by use of the purchased interests in
the Trusts.

                                      F-15

<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 7 - Debt (continued)

Master Notes (continued)

The  interest  in the Trusts is  reflected  as a  reduction  to the  outstanding
principal of the Master Notes as follows:

                                                        December 31,
                                                     -------------------
                                                     1995           1996
                                                     ----           ----

    Master Notes, unpaid principal balance ... $  5,765,693   $  4,021,389
    Less interest purchased in Trusts ........   (1,607,700)    (1,412,700)
                                                  ---------      --------- 
                                               $  4,157,993   $  2,608,689
                                                  =========      =========


Notes payable - other and related party consist of:
                                                              December 31,
                                                          -------------------
                                                          1995           1996
                                                          ----           ----

$10,000,000 revolving loan - finance company,  interest
is payable monthly at a floating rate equivalent to the
LIBOR plus 3.25% or a specified bank  alternative  rate
plus 1% (9.25% at December 31, 1996).  The loan matures
July  1997  and  is   collateralized   by  all  finance
receivables,  vehicles  held for sale and virtually all
other assets of the  Company.  The note is currently in
default and out of trust.*                              $    --      $ 7,670,757

Note payable - financial institution, interest at prime
plus 3.75% (12% at December 31, 1996).  The note is due
on  demand  and is  collateralized  by  the  underlying
contracts.  The note is currently in default and out of
trust.*                                                      --          483,274

Notes payable - insurance companies,  monthly principal
and interest  payments ranging from $12,399 to $50,251,
interest  ranging from 9.85% to 10.5%. The notes mature
between   April   1998   and   January   2000  and  are
collateralized  by the underlying  finance  receivables
and  the  related  assets.  The  note is  currently  in
default and out of trust.*                               10,769,160    7,029,886

Note  payable  -  insurance  company,  interest  at 12%
payable  quarterly  through  October 1998 at which time
quarterly principal and interest  installments  ranging
from  $704,621 to $975,360  commence.  The note matures
July 2001 and is  subordinate  to all other debt of the
Company.  The Company is currently out of trust on this
note.*                                                       --       10,000,000

                                      F-16

<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 7 - Debt (continued)

Master Notes (continued)
                                                              December 31,
                                                          -------------------
                                                          1995           1996
                                                          ----           ----

Notes  payable - financial  institution  - paid in full
during 1996.                                              1,772,946        --

Note payable - related  party,  interest at 15% payable
monthly;  principal  due  upon  demand.  Paid  in  full
subsequent to year end.                                      11,000       11,000

Notes payable - insurance  company,  interest at 9.85%.
Monthly  principal  and  interest  payments  range from
$12,601 to $12,851.  The notes  mature in February  and
March of 2000 and are  collateralized by the underlying
finance receivables and the related assets. The note is
currently in default and out of trust.*                      --          837,160
                                                         ----------   ----------
                                                        $12,553,106  $26,032,077
                                                         ==========   ==========

The future maturities of debt are as follows:

         Year Ending December 31,
         ------------------------
                1997                                    $12,660,713
                1998                                      4,802,015
                1999                                      4,856,383
                2000                                      3,479,971
                2001                                      2,841,684
                                                         ----------
                Total                                   $28,640,766
                                                         ==========

At  December  31,  1996,  the  Company  was in  violation  of various  financial
covenants  on several note  agreements.  The  outstanding  balance on these note
agreements at December 31, 1996 was $26,021,077.




                                      F-17
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 7 - Debt (continued)

Master Notes (continued)

* As a result of the  significant  operating  losses the Company has incurred to
date,  the  principal  amounts  of the  contracts  held  as  collateral  for the
borrowings on substantially  all debt agreements were below the amounts required
or were  out of  trust  as of  December  31,  1996  or  subsequent  to year  end
approximately as follows:

                                               Amount Out of Trust
                                               -------------------

Master notes                                       $  1,200,000
Notes payable - insurance companies                  10,500,000
Revolving loan - finance company                      1,300,000
                                                     ----------
Total                                              $ 13,000,000
                                                     ==========


Note 8 - Commitments

Under the Master Note funding  agreements  (Note 7), the Company is obligated to
pay a broker annual  commissions and quarterly Trust accounting fees on the four
year notes of 5 and 1 1/2 percent,  respectively.  The fees and  commissions are
paid annually until maturity.  Fees and commissions  paid during the years ended
December  31,  1995  and  1996  were   approximately   $319,000  and   $212,000,
respectively.

In 1992, the Company entered into an agreement with a company which provides for
the  payment of  finder's  fees and the  issuance  of a warrant  upon  obtaining
commitments of funding for the Company. The Company paid cash fees in connection
with funding  obtained from three  insurance  companies and Contracts  sold to a
financial institution. In October 1995, the Company terminated the agreement and
has agreed to pay  future  finder's  fees in an amount  equal to 2% of the sales
price of the Contracts sold with respect to the financial institution introduced
by the company. In addition, the Company issued 25,000 shares of common stock in
complete  substitution  for any  obligation of the Company to issue the warrants
under the  agreement.  Also, the Company agreed to pay a fee of 1/8 of 1% on all
financings  up to  $200,000,000  (except  for the sale of equity  securities  or
unsecured  debt) received by the Company  through  October 31, 1997. The maximum
obligation under this provision would be $250,000.

The Company leases its office  facility under two operating  leases.  The leases
require total monthly lease payments ranging from $4,840 to $7,899 through terms
ranging from October 1997 to August 1999.


                                      F-18
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 8 - Commitments (continued)

Future minimum lease payments under these leases are as follows:

         Year Ending December 31,
         ------------------------
                1997                        $ 87,518
                1998                          76,507
                1999                          19,359
                                             -------
                Total                       $183,384
                                             =======

The Company  entered into a lease on its used car sales facility in January 1997
requiring monthly payments of $1,100 through January 2001.


Note 9 - Related Party

The Company has advanced money to a company related by common ownership. For the
period ended  December 31, 1995 and 1996,  these  advances total $75,703 and $0,
respectively,   and  are  included  in  the   distributions   to  affiliates  in
stockholders' equity.

The  Company  purchased  airline  tickets of  approximately  $24,000 and $25,000
during the years ended December 31, 1995 and 1996,  respectively,  from a travel
agency  owned by the wife of the  President of the  Company.  The travel  agency
received customary industry commissions with respect to such ticket purchases by
the Company.

In June of 1995, the Company entered into a Management  Agreement with a company
owned  by  the  son of the  President  of the  Company  for  the  operation  and
management  of  the  Company's  used  car  retail  sales  facility.  Under  this
agreement, the Company pays a fee of $3,800 per month plus 20% of the net profit
of the facility as defined.  Management fees paid during the year ended December
31, 1995 and 1996 were approximately $151,000 and $283,000,  respectively. As an
additional  incentive  under the agreement,  the  President's  son was granted a
nonstatutory stock option entitling him to purchase up to 3,400 shares of common
stock during a five year period at $5.00 per share.  These options were canceled
during 1996.



                                      F-19
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 10 - Income Taxes

At  December  31,  1995  and  1996,  the  Company  had the  following  temporary
differences which resulted in a net deferred tax asset.

                                                               December 31,
                                                           -------------------
                                                           1995           1996
                                                           ----           ----

Net interest receivable on portfolio sales            $  (487,000)  $      --
Allowance for credit loss                                 583,000     2,074,000
Net operating loss carry forward                          331,000     1,783,000
Gain on securitized contracts                                --         (64,000)
                                                        ---------     ---------
                                                          427,000     3,793,000
Valuation allowance                                      (427,000)   (3,793,000)
                                                        ---------     ---------
                                                       $     --     $      --
                                                        =========     =========

At December  31,  1995 and 1996,  the Company  has  approximately  $828,000  and
$11,000,000,  respectively,  of net operating loss  carryforwards for income tax
reporting  purposes which expire in 2005 through 2011. The  availability  of the
Company's  net  operating  loss  carryforward  may be limited  due to changes in
control.


Note 11 - Stockholders' Equity

Stock Split

In June  1995,  the  stockholders  approved  a 1,750 for one stock  split of the
Company's common stock, a change in par value of the common stock from no par to
$.0001 per share and an increase in the authorized number of shares from 100,000
to 10,000,000.  All share and per share data have been adjusted to reflect these
changes.

Preferred Stock

In June 1995, the  stockholders  authorized the issuance of 2,000,000  shares of
preferred stock. The directors of the Company  designated 400,000 shares of this
preferred stock as Series A 10% Convertible Preferred Stock ("Series A Preferred
Stock").  During July and August 1995,  the Company issued 328,540 shares of the
Series A Preferred Stock. The remaining  preferred stock may be issued in one or
more series with rights and  preferences  as may be fixed and  determined by the
Board of Directors.


                                      F-20
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 11 - Stockholders' Equity (continued)

Sale of Stock in a Private Offering

During July and August 1995,  the Company  sold  328,540  shares of its Series A
Preferred Stock at $5.00 per share.  The Series A Preferred Stock is convertible
into common stock at a price equal to $7.50 and will automatically  convert into
Common Stock at such price on August 31, 1998.  The Series A Preferred  Stock is
redeemable at the Company's option in whole or in part, upon 90 days notice,  at
a redemption  price of $6.50 through  August 31, 1996,  $6.00 through August 31,
1997 and $5.50 through August 30, 1998,  plus unpaid  dividends,  if any. Unless
prohibited  by Colorado  law,  dividends  will be paid on the Series A Preferred
Stock  at a rate of $.50 per  share  per  year  and  will be paid  quarterly  in
arrears.  A preferred  stock  dividend of $54,757  and  $164,270  was accrued at
December 31, 1995 and 1996, respectively.

The  Series A  Preferred  Stock was sold to  holders  of G.E.O.  Income  Trusts'
promissory  notes in  exchange  for  their  interest  in the  Trusts  (Note  7).
Noteholders electing to exchange their interest for the Series A Preferred Stock
exchanged  at a rate of one share of Series A Preferred  Stock for each $5.00 of
principal of the notes held. Of the 328,540  shares of Series A Preferred  Stock
issued,  321,540 shares were issued in exchange for $1,607,700 of an interest in
the Trusts and 7,000 shares were issued for $35,000 in cash. The net proceeds of
$1,535,565  are net of $107,135  of offering  costs.  In  addition,  the Company
granted 32,854  warrants to purchase  common stock at an exercise price of $6.00
as commission for the sale.

Public Offering

In November 1995, the Company  completed a public  offering of 862,500 shares of
common stock at $6.00 per share.  The proceeds from the offering were $4,207,751
net of offering costs of $967,249. In connection with this offering, the Company
issued  warrants to the underwriter to purchase 75,000 shares of common stock at
$7.20 per share.

Stock Options

Effective  August 1, 1995,  the Company  adopted an Incentive  and  Nonstatutory
Stock  Option  Plan (the  "Plan").  Pursuant to this plan,  the Company  granted
150,000  options to  purchase  common  stock at an  exercise  price of $5.50 and
100,000  options  at an  exercise  price of $5.00.  During  1996,  this plan was
terminated and the related stock options were canceled.


                                      F-21
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 11 - Stockholders' Equity (continued)

Stock Options (continued)

Effective   December  30,  1996,  the  Company  adopted  another  Incentive  and
Nonstatutory  Stock Option Plan. The Plan covers 500,000 shares of common stock.
Options  granted under the Plan may be either  incentive or  nonstatutory  stock
options  and will be granted at an  exercise  price  determined  by the Board of
Directors. The exercise price of the incentive stock options cannot be less than
100-110% of the fair market value of the stock on the date of grant. The options
expire up to four years from the date of grant.

The Company  granted  276,664  options to purchase  common  stock at an exercise
price of $3.38 and 221,346 at an exercise price of $3.70 under this plan.

The following is a summary of options and warrants at December 31, 1996:

                                                                     Exercise
                                        Options     Warrants           Price
                                        -------     --------         --------

Outstanding, December 31, 1995          250,000     107,854      $  5.00 to 7.20
Granted                                 498,010     263,750      $  3.14 to 3.71
Canceled                               (250,000)      --         $          5.00
                                        -------     -------         ------------

Outstanding, December 31, 1996          498,010     371,604      $  3.14 to 7.20
                                        =======     =======         ============

The above options where issued pursuant to an incentive and  nonstatutory  stock
option plan adopted during 1996.

The above warrants were granted as a commission to the selling agent pursuant to
obtaining the subordinated  debt. Loan origination fees of $25,000 were recorded
as a result of granting the warrants.



                                      F-22
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 11 - Stockholders' Equity (continued)

Stock Options (continued)

The  Corporation  has adopted the  disclosure - only  provisions of Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation".  Accordingly,  no  compensation  cost has been recognized for the
stock option plans.  Had  compensation  cost for the Corporation 's stock option
plans  been  determined  based on the fair value at the grant date for awards in
1995 and 1996 consistent with the provisions of SFAS No. 123, the  Corporation's
net  earnings  and  earnings  per share would have been reduced to the pro forma
amounted indicated below:

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                         ---------------------
                                                                         1995             1996
                                                                         ----             ----

<S>                                                                 <C>            <C>             
  Net income (loss) applicable to common stockholders - as    
    reported                                                        $   579,160    $   (10,154,677)
  Net income (loss) applicable to common stockholders - pro
    forma
                                                                    $  (303,834)   $    (10,336,868)
Income (loss) per share - as reported                               $       .30    $          (3.81)
(Loss) income per share - pro forma                                 $      (.16)   $          (3.92)
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions  used for grants:  dividend yield of 0%; expected  volatility of 69%
discount rate of 10%; and expected lives of 4 years.


Note 12 - Major Customer

The Company purchased  approximately 18% of the total Contracts purchased during
the year ended December 31, 1995 from one dealer.  There were no major customers
during the year ended December 31, 1996.


Note 13 - Segment Information

The Company operates in two principal business segments:  used car financing and
used car sales.  Selected financial information is presented below for the years
ended December 31, 1995 and 1996.



                                      F-23
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 13 - Segment Information (continued)

Purchases  consist  of  purchases  of used  cars  and  the  costs  of  Contracts
purchased.  Direct cost salaries consist primarily of management fees, salaries,
and commissions.

1996                                                  Used Car       Vehicle
----                                                   Sales        Financing
                                                      --------      ---------
Revenues ........................................  $  2,576,096   $  7,358,664
                                                     ==========    ===========
Direct costs
   Purchases ....................................  $  1,669,365   $      --
                                                     ==========    ===========
   Salaries .....................................  $    943,600   $  1,698,730
                                                     ==========    ===========
   Interest expense .............................  $       --     $  2,750,446
                                                     ==========    ===========
   Loan acquisition costs .......................  $       --     $    901,554
                                                     ==========    ===========
   Advertising and other ........................  $    941,062   $       --
                                                     ==========    ===========

Identifiable assets .............................  $  3,254,335   $ 22,217,761
                                                     ==========    ===========

Depreciation ....................................  $     22,614   $    125,626
                                                     ==========    ===========

1996                                                  Used Car       Vehicle
----                                                   Sales        Financing
                                                      --------      ---------
Revenues ........................................  $  1,924,795   $  4,819,477
                                                     ==========    ===========
Direct costs
       Purchases ................................  $  1,065,777   $       --
                                                     ==========    ===========
       Salaries .................................  $    317,145   $  1,121,970
                                                     ==========    ===========
       Interest expense .........................  $       --     $  1,824,100
                                                     ==========    ===========
       Loan acquisition costs ...................  $       --     $    172,419
                                                     ==========    ===========
       Advertising and other ....................  $    204,801   $       --
                                                     ==========    ===========

Identifiable assets .............................  $    994,706   $ 24,119,177
                                                     ==========    ===========

Depreciation ....................................  $        825   $      7,425
                                                     ==========    ===========

Discontinued Segment

In March  1997,  the  Company  closed its used car  retail  sales  facility  and
associated  financing  operations.  The  Company is  currently  liquidating  the
remaining  inventory and is  negotiating a sublease  agreement for the remaining
lease term of the facility.


                                      F-24
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Note 14 - Subsequent Event

Subsequent   to  year  end,  the  Company   completed  the  second  phase  of  a
securitization   as  discussed  in  Note  5.  In  addition,   the  Company  sold
approximately $4,400,000 in contracts to a third party.

Due to significant  losses from  operations,  in April 1997, the Company reduced
its business  activities.  The Company has been unable to obtain  financing  and
accordingly  is no longer  purchasing new loans.  The current  activities of the
Company consist of servicing and collecting contracts in its portfolio.

In April 1997,  Durrett Motor Company,  Incorporated filed a lawsuit against the
Company for breach of contract in the District Court of Harris County, Texas. In
this  action,  the  Plaintiffs  allege  that the  Company  breached  a  purchase
agreement  with  Plaintiff  relating  to  the  sale  of  certain  motor  vehicle
installment  contracts.  The  Plaintiffs  are  seeking  damages in the amount of
$239,401  plus  costs,  fees and  interest.  A writ of  garnishment  on  monthly
payments of thirteen  Contracts  purchased  by the Company  from  Durrett  Motor
Company, Incorporated was issued by the court in this case in May 1997.

In May 1997, Pekin Life Insurance Company, Farmers Automobile Insurance Company,
Western Fraternal Life Association and Grinnell Mutual Reinsurance Company filed
a lawsuit  against  the  Company in the  United  States  District  Court for the
Northern District of Illinois, Eastern Division, for declaratory, injunctive and
other relief.  In this action,  the Plaintiffs allege that the Company defaulted
on 14  separate  loan  transactions  pursuant to which  Plaintiffs  cumulatively
loaned  the  Company  $12,500,000.  The  Plaintiffs  are  seeking a  declaratory
judgment  from the court  finding  that each  Plaintiff is entitled to immediate
delivery  of  collateral  pertaining  to each  loan,  a  preliminary  injunction
ordering  delivery  of the  collateral,  an  accounting  from the Company of all
current funds received under the notes and an inspection and  examination of the
books and records of the Company.



                                      F-25
<PAGE>

                     WESTERN FIDELITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

Note 14 - Subsequent Event (continued)

In May 1997,  Equity  Participation,  Inc.  filed a lawsuit in the United States
District Court for the District of Colorado against the Company,  Insight,  D&O,
Inc., Gene E. Osborn,  Leonard L. Skerjanc and John J. Scordo, II, alleging mail
fraud,  securities frauid,  violations of the Racketeer,  Influenced and Corrupt
Organizations Act and the Colorado Organized Crime Control Act. The lawsuit also
contains claims against Messrs.  Osborne,  Skerjanc and Scordo for violations of
their duty of fidelity to Insight  noteholders  and commercial  bribery.  In the
complaint,  Plaintiff alleges that Plaintiff agreed to raise capital for Insight
through the Trust in return for royalty payments from the sales of an automobile
security  device  ("Product"),  that  Insight and Messrs.  Osborn,  Skerjanc and
Scordo failed to maintain distribution of the Product due to misappropriation of
funds, that Insight and Messrs.  Osborn,  Skerjanc and Scordo made misstatements
about the quality of a  replacement  of the  Product,  that in  connection  with
various  offerings  Insight and Messrs  Osborn,  Skerjanc  and Scordo  failed to
disclose material facts as to the use of the proceeds therefrom, that the monies
were used for purposes other than represented and that the proceeds were used to
further the business of the Company and to personally  benefit  Messrs.  Osborn,
Skerjanc and Scordo. The lawsuit further claims that Messers.  Osborn,  Skerjanc
and Scordo violated their fiduciary duty to Plaintiff in the distribution of the
assets of D&O, Inc., a Colorado  corporation to which  Plaintiff  claims certain
assets of Insight were improperly transferred. The Plaintiff requests the remedy
of a constructive  trust be imposed on Mr. Osborn's interest in D&O, Inc. and on
the  business  of D&O,  Inc.  and an  unspecified  amount of actual,  treble and
exemplary damages, interest and attorneys' fees.






                                      F-26