UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-QSB


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT Of 1934
                  For the quarterly period ended June 30, 1997

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

          For the transition period from _____________ to _____________


                         Commission file number 0-17771 




                     FRANKLIN CREDIT MANAGEMENT CORPORATION
        (Exact name of small business issuer as specified in its charter)




Delaware                                    
(State or other jurisdiction of incorporation or organization) 
                                   
75-2243266
(I.R.S. Employer Identification No.) 




                               Six Harrison Street
                            New York, New York 10013
                                 (212) 925-8745
          (Address of principal executive offices, including zip code,
                   and telephone number, including area code)

              
         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months   
(or for such shorter period that the registrant was required to file such 
reports), and (2) has been subject to such filing requirements for the past
 90 days.    Yes X   No     


         Check whether the registrant filed all documents and reports required
 to be filed by Section 12, 13 or 15(d) of the Exchange Act after the 
 distribution of securities under a plan confirmed by a court.   Yes X   No     
   

         As of August 15, 1997, 1,102,077 shares of the issuer's Common Stock, 
 par value $.01 per share were outanding. 

 

<PAGE>
 
                     FRANKLIN CREDIT MANAGEMENT CORPORATION


                                   FORM 10-QSB

                                  JUNE 30, 1997


                                 C O N T E N T S


PART I.                    FINANCIAL INFORMATION                         Page 

Item 1.  Financial Statements 

    Consolidated Balance Sheets June 30, 1997 (unaudited)
    and December 31, 1996                                                 3 

    Consolidated Statements of Income (unaudited) for the three months   
    and six months ended June 30, 1997 and 1996                           4   

    Consolidated Statement of Cash Flows (unaudited) for the six months 
    ended June 30, 1997 and 1996                                          5 

    Consolidated Statements of Stockholders' Equity                       6 

    Notes to consolidated Financial Statements                         7-12 


Item 2.  Management's Discussion and Analysis of Financial Condition  
         and Results of Operations                                    13-21 



PART II.                            OTHER INFORMATION 

Item 1.  Legal Proceedings                                               21 

Item 2.  Changes in Securities                                           21 

Item 3.  Defaults Upon Senior Securities                                 21 

Item 4.  Submission of Matters to a Vote of Security Holders             21 

Item 5.  Other Information                                               22 

Item 6.  Exhibits and Reports on Form 8-K                                22 

SIGNATURES                                                               23 








<PAGE>
Item 1.  Financial Statements

FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
<S>                                             <C>                    <C>
                                             30-Jun-97              31-Dec-96
ASSETS                                       (unaudited)             (audited)
-------------------------------------------------------------------------------            -----------------
Cash                                        $  3,112,766           $  1,967,964
Restricted cash                                  966,103                828,845

Notes Receivable:
    Principal amount                         129,692,730            113,610,782
    Joint venture participations                (345,028)              (360,395)
    Purchase discount                        (21,242,608)           (18,160,403)
    Allowance for loan losses                (30,077,585)           (23,604,810)
                                             -----------            -----------
       Net notes receivable                   78,027,509             71,485,174

Accrued interest receivable                      984,036              1,132,370
Other real estate owned                        9,566,536              4,737,085
Other receivables                              5,230,479                421,392
Other assets                                   2,335,024                704,695
Building, furniture & fixtures, net              624,368                640,749
Deferred financing costs                       1,263,016              1,358,874
                                             -----------            -----------
                                            $102,109,837            $83,277,148
                                             ===========            ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------

Liabilities:
    Accounts payable and accrued
       expenses                             $  2,414,682          $   1,874,267
    Lines of credit                              564,721                583,916
    Notes payable                             90,424,931             73,538,865
    Subordinated debentures                      991,875              1,025,000
    Notes payable, affiliates and 
       stockholders                              216,159                373,218
    Deferred income taxes                      2,862,928              1,778,862
                                              ----------            -----------
          Total liabilities                   97,475,297             79,174,128

Commitments and contingencies

Stockholder's Equity:
    Common Stock, $.01 par value,
      10,000,000 authorized shares,
      issued and outstanding 1997 and 1996:
        1,102,077                                 11,022                 11,022
    Additional paid-in capital                 6,534,113              6,534,113
    Accumulated deficit                       (1,910,596)            (2,442,115)
                                             -----------            -----------
      Total stockholders' equity               4,634,539              4,103,020
      Total liabilities and                  -----------            -----------
          stockholders' equity              $102,109,837            $83,277,148
                                             ===========            ===========
</TABLE>

See Notes to Consolidated Financial Statements.

                                        Page 3
<PAGE>
Item 1.  Financial Statements

FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Period ended June 30, 1997 and 1996
<S>                              <C>       <C> 
                               Three Months Ended          Six Months Ended
                             30-Jun-97   30-Jun-96      30-Jun-97    30-Jun-96
                            (unaudited) (unaudited)    (unaudited)  (unaudited)
--------------------------------------------------------------------------------
Revenue:
  Interest income            $1,885,284  $1,368,371     $3,160,548  $3,177,050
  Purchase discount earned    1,511,606   1,800,958      3,094,831   3,089,586
  Gain on sale of
     loan portolfios            973,337     977,519        973,337     977,519
  Gain on sale of
     other real estate owned    649,172      21,824        683,439      36,563
  Other                          53,990      72,445        122,386     169,142
                             ----------  ----------     ----------  ----------
                              5,073,388   4,241,117      8,034,540   7,449,860
                             ----------  ----------     ----------  ----------
Operating expenses:
    Interest Expense          2,168,449   1,896,131      4,123,804   3,787,251
     Collection, general 
     and administrative       1,185,654     940,875      2,180,530   1,815,265
    Provision for loan losses     7,841     233,465        103,853     440,191
    Banking service fees            -       (19,803)        31,395     196,514
    Amortization of deferred
      financing costs           254,070     237,711        309,329     336,639
    Depreciation                 15,672      17,598         31,344      33,394
                             ----------  ----------     ----------  ----------
                              3,631,687   3,305,977      6,780,256   6,609,254
                             ----------  ----------     ----------  ----------
     Operating income (loss)  1,441,701     935,140      1,254,284     840,606
                             ----------  ----------     ----------  ----------
    Provision for 
    income taxes               (722,765)   (120,358)      (722,765)   (120,358)          -       (120,358)
                             ----------  ----------     ----------  ----------
       Net income (loss)     $  718,936  $  814,782     $  531,519  $  720,248
                             ==========  ==========     ==========  ==========


Earnings per common share:

    Net income (loss)        $    0.62   $   0.71       $    0.46   $   0.63
                             ----------  ----------     ----------  ----------
Weighted average number 
  of shares outstanding       1,164,706   1,140,696      1,164,760   1,140,696
                             ==========  ==========     ==========  ==========
</TABLE>

See Notes to Consolidated Financial Statements.

                                   Page 4
<PAGE>

Item 1.  Financial Statements

FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Six Months ended June 30, 1997 and 1996
<S>                                                   <C>              <C>
                                                   30-Jun-97       30-Jun-96
                                                  (unaudited)     (unaudited)
--------------------------------------------------------------------------------
Cash Flows From Operating Activities
  Net income (loss)                              $    531,519     $   720,248
  Adjustments to reconcile net loss to net
    cash used in operating activities:
    Depreciation, depletion, amortization              340,673        370,033
    Purchase discount earned                        (3,094,831)    (3,126,149)
    (Gain)Loss on sale of assets                      (973,337)
    Provision for loan losses                          103,853        440,191
    Deferred tax provision (benefit)                                   52,171
    Changes in assets and liabilities:
      (Increase) decrease in:
         Accrued interest receivable                   194,027         (6,716)
         Accounts receivable                            28,386        (17,923)
         Inventory repossessions                    (2,689,979)    (1,825,334)
         Other assets                                 (725,824)       (97,085)
      Increase (decrease) in:
         Accounts payable and accrued expenses         353,162        691,977
         Due to affiliates                             (82,227)       126,993
         Income tax payable                            722,765         19,600
                                                   ------------    -----------
           Net cash used in operating activities    (5,291,811)    (2,651,994)

Cash Flows From Investing Activities
  Purchase of property and equipment                  (272,357)         25,565
  Purchase of notes receivable                     (17,820,766)     (2,869,874)
  Principal collections on notes receivable         14,913,235      16,590,634
  Foreclosures on Real Estate                       (2,041,230)
  Joint venture participation                          (18,629)       (55,728)
  Acquisition fees paid                                (33,063)       (61,091)
  (Increase) in restricted cash                       (137,258)       (66,058)
                                                  ------------    -----------
          Net cash used in investing activities     (5,410,068)    13,563,448
Cash Flows From Financing Activities
  Payments on debenture notes payable                  (33,125)      (117,500)
  Capital contributions                                   -           428,516
  Proceeds from lines of credit                        388,608        652,441
  Payments on lines of credit                         (407,803)      (916,357)
  Proceeds from long-term debt                      23,361,039       2,850,902
  Principal payments of long-term debt             (11,462,039)    (13,998,576)
                                                  ------------     -----------
       Net cash provided by financing activities    11,846,680     (11,100,574)
                                                  ------------     -----------
          Net increase (decrease) in cash            1,144,801        (189,120)

Cash:
   Beginning                                         1,967,965       1,335,800
                                                  ------------     -----------
   Ending                                          $ 3,112,765     $ 1,146,680
                                                  ============     ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                   Page 5

<PAGE>
Item 1. Financial Statements

FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<S>                       <C>       <C>       <C>         <C>         <C>
                           Common Stock    Additional   Retained
                        ------------------   Paid-In    Earnings
                        Shares     Amount    Capital    (Deficit)     Total
-------------------------------------------------------------------------------
Balance, 
   December 31, 1995   5,503,896  $55,040  $6,470,952  $(3,271,268) $3,254,724
  Conversion of 
     warrants             10,225      102      20,348         -         20,450

  One-for-five reverse 
     stock split      (4,411,297) (44,113)     44,113         -           -
  
  Purchase of fractional
    shares in connection
      with reverse 
       stock split         (747)       (7)     (1,300)        -         (1,307)
 
  Net income                                               829,153     829,153
                      ---------------------------------------------------------
Balance, 
   December 31, 1996   1,102,077   11,022   6,534,113   (2,442,115)  4,103,020

  Net loss                                                 531,519     531,519
                      ---------------------------------------------------------
Balance, 
   June 30, 1997       1,102,077  $11,022  $6,534,113  $(1,910,596) $4,634,539
                      =========================================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       Page 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                          

Note 1. Nature of Business and Significant Accounting Policies 

Significant Accounting Policies 

The  accounting  policies  followed by the Company are set forth in Note 1 to
the  Company's  financial  statements included in its Annual Report on 
Form 10-KSB for the fiscal year ended December 31, 1996. 

Nature of business 

Franklin Credit  Management  Corporation  (the  "Company"),  incorporated  under
the laws of the State of Delaware, acquires  non-performing,  non-conforming  
and sub-performing  notes receivable,  promissory notes, and real estate from  
financial  institutions,  mortgage  and finance  companies  and the  
Federal  Deposit  Insurance  Corporation ("FDIC").  The Company  services and 
collects such notes  receivable  through  enforcement of terms of the original 
note, modification of original note terms, and, if necessary, liquidation of 
the underlying collateral. 

In January,  1997 a new wholly owned  subsidiary,  Liberty  Lending  Corp. 
("Liberty")  was formed to originate or purchase, through wholesale  agreements 
with correspondents,  sub-prime  residential mortgage loans to individuals 
whose borrowing needs are generally not being served by traditional  financial  
institutions.  Liberty is currently licensed as a mortgage banker in the states 
of Connecticut,  Massachusetts,  and Florida. Additionally Liberty has received
approval from the US Housing and Urban  Development  ("HUD")  Administration to
originate Federal Housing Administration  ("FHA") Title II loans.  Liberty's  
application for the New York State mortgage  banking license is currently 
pending approval with the New York State Banking Commissioner. 

A summary of the Company's significant accounting policies follow: 

Basis of financial statement presentation 

The financial  statements  have been prepared in accordance  with  generally  
accepted  accounting  principles  and general  practices  similar to those of a
consumer  finance  company.  In  preparing  the  financial  statements, 
management  is  required  to make  estimates  and  assumptions  that  affect  
the  reported  amounts  of assets and liabilities  as of the date of the balance
sheet and revenue and expenses  for the period.  Actual  results  could differ 
from those estimates and the differences could be significant. 

Basis of consolidation 

The  consolidated  financial  statements  include  the  accounts  of  the  
Company  and  wholly-owned  subsidiaries controlled  by the  Company.  By terms
outlined  in the  various  agreements  that are in effect,  the  Company is 
specifically  afforded full power and authority on behalf of its  subsidiaries 
to manage,  control,  administer and operate the business and affairs of the 
subsidiaries.  All significant  intercompany accounts and transactions have 
been eliminated in consolidation. 

Statement of Cash Flows 

For purposes of reporting  cash flows,  the Company  includes all cash accounts
(excluding  restricted  cash) and money market  accounts  held at financial  
institutions.  The Company  maintains  amounts due from banks which,  at times, 
may exceed federally insured limits. The Company has not experienced any losses 
from such concentrations. 

<PAGE>
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 
__                                         

Notes Receivable and Income Recognition 

The Company's notes  receivable  portfolio  consists  primarily of secured  
consumer and real estate mortgage loans purchased from  financial institutions,
mortgage and finance  companies and the FDIC.  Such notes  receivable are 
generally  non-performing  or  under-performing  at the time of purchase and 
accordingly are usually purchased at a substantial discount from the principal 
balance remaining. 

Notes receivable are stated at the amount of unpaid  principal,  reduced by the 
purchase  discount and an allowance for loan losses.  The Company has the 
ability to hold its notes receivable until maturity,  payoff,  liquidation of 
collateral or sale. 

On January 1, 1995,  the Company  adopted  Statement of Financial  Accounting  
Standards  No. 114,  "Accounting  by Creditors for  Impairment of a Loan," as 
amended by Statement No. 118,  "Accounting  by Creditors for Impairment of a 
Loan - Income  Recognition and  Disclosures."  The method utilized by the 
Company to measure  impairment of notes receivable  prior to the adoption of 
Statement  No. 114 was  essentially  equivalent  to the method  prescribed  by 
Statement  No. 114. The effect of adopting  Statement  114 was not significant 
to the  operations  of the Company based on the  composition  of the notes  
receivable in the company's  portfolio.  Impaired notes are measured based 
on the present  value of expected  future cash flows  discounted  at the note's
effective  interest  rate or, as a practical  expedient,  at the observable 
market price of the note receivable or the fair value of the collateral if 
the note is secured.  A note  receivable  is impaired when it is probable the 
Company will be unable to collect all contractual   principal  and  interest   
payments  due  in  accordance  with  the  terms  of  the  note  agreement. 
Approximately  17% of the Company's  note  receivable  portfolio  consists of 
smaller  balance,  homogeneous  notes receivable which are collectively  
evaluated for impairment and approximately 83% consists of larger balance notes
receivable secured by real estate which are individually evaluated for 
impairment. 

In general,  interest on the notes  receivable is calculated  based on 
contractual  interest rates applied to daily balances of the principal amount 
outstanding using the simple-interest method. 

Accrual of interest on notes  receivable,  including  impaired notes  
receivable,  is discontinued  when management believes,  after  considering  
economic  and  business  conditions  and  collection  efforts,  that the  
borrower's financial  condition is such that collection of interest is doubtful.
When interest accrual is  discontinued,  all unpaid  accrued  interest is  
reversed.  Subsequent  recognition  of income  occurs  only to the extent  
payment is received  subject to  management's assessment of the  collectibility
of the remaining  interest and principal.  A non-accrual note is restored to 
accrual status when it is no longer  delinquent and  collectibility of interest 
and principal is no longer in doubt.  Past due interest is recognized at that 
time. 

Loan  purchase  discount  is  amortized  to income  using the  interest  method 
over the period to  maturity.  The interest  method  recognizes  income by 
applying  the  effective  yield on the net  investment  in the loans to the 
projected  cash flows of the loans.  Discounts  are  amortized  if the  
projected  payments  are  probable  and the collection and the timing of such  
collections is reasonably  estimable. The projection of cash flows for purposes 
of amortizing  purchase loan discount is a material  estimate  which could 
change  significantly  in the near term. Changes in the projected payments are 
accounted for as a change in estimate and the periodic amortization is  
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                          

prospectively  adjusted over the remaining  life of the loans.  Should  
projected  payments not exceed the carrying value of the loan, the periodic  
amortization  is suspended and either the loan is written down or an allowance 
for uncollectability is recognized. 

Allowance for loan losses 

The  allowance  for loan  losses,  a material  estimate  which could  change  
significantly  in the  near-term,  is initially  established by an allocation 
of the notes  purchase  discount  based on  management's  assessment of the 
portion of purchase  discount that represents  uncollectible  principal.  
Subsequently,  increases to the allowance are made through a provision for loan
losses  charged to expense and the  allowance is  maintained at a level that 
management considers adequate to absorb potential losses in the Company's 
portfolio of notes receivable. 

Management's  judgment in  determining  the adequacy of the  allowance is based
on the  evaluation  of  individual notes  receivable  within the  Company's  
portfolio,  the known and inherent risk  characteristics  and size of the 
portfolio,  the assessment of current  economic and real estate market  
conditions,  estimates of the current value of underlying  collateral,  
past loan loss  experience  and other relevant  factors.  Notes  receivable,  
including impaired notes  receivable,  are charged  against the allowance for 
loan losses when  management  believes that the collectibility  of principal is 
unlikely based on a  note-by-note  review.  Any subsequent  recoveries are 
credited to the allowance for loan losses when  received.  In connection  with 
the  determination  of the allowance for loan losses, management obtains 
independent appraisals for significant properties, when considered necessary. 

The Company's real estate notes receivable are  collateralized by real estate 
located  throughout the United States with a concentration in the Northeast and 
California.  Accordingly,  the collateral value of a substantial portion of the
Company's  real estate notes  receivable  and real estate  acquired  through  
foreclosure  is susceptible to changes in market conditions. 

Management  believes that the allowance for loan losses is adequate.  While  
management uses available  information to recognize  losses on notes  
receivable,  future additions to the allowance or write-downs may be necessary 
based on changes in economic conditions. 

Other real estate owned 

Other real estate owned  ("OREO")  consists of properties  acquired  through,  
or in lieu of,  foreclosure or other proceedings or portfolio  acquisitions,  
and is initially  recorded at fair market value at the date of foreclosure 
which  establishes a new cost basis.  After  foreclosure,  the  properties are 
held for sale and are carried at the lower of cost or fair market value less  
estimated  costs of disposal.  Any  write-down to fair market value,  less 
cost to sell, at the time of acquisition is charged to the allowance for loan 
losses.  Subsequent  write-downs  are charged to operations  based upon  
management's  continuing  assessment of the fair market value of the underlying
collateral.  Property is  evaluated  regularly  to ensure that the  recorded  
amount is  supported  by current fair market  values and  valuation allowances
are recorded as  necessary to reduce the carrying  amount to fair market value  
less  estimated  cost to  dispose.  Revenue  and  expenses  from the operation
of OREO and  changes in the valuation allowance are included in operations.  
Costs relating to the development and improvement of the  
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                           

property are  capitalized,  subject to the limit of fair market value of the  
collateral,  while costs  relating to holding the property are expensed.  Gains 
or losses are included in operations upon disposal. 

Building, property and equipment 

Building,  property and equipment are recorded at cost net of accumulated  
depreciation.  Depreciation  is computed using the  straight-line  method  over 
the  estimated  useful  lives of the assets  which range from 3 to 40 years. 
Gains and losses on  dispositions  are  recognized  upon  realization.  
Maintenance  and  repairs  are  expensed as incurred. 

Deferred financing costs 

Debt financing  costs,  which include loan  origination  fees incurred by the 
Company in connection  with obtaining financing, are deferred and are amortized 
based on the principal reduction of the related loan. 

Mortgage servicing rights 

The Company  adopted  Statement of Financial  Accounting  Standards  No. 122,  
"Accounting  for Mortgage  Servicing Rights," on January 1, 1996.  
Statement  No. 122  requires  an entity  which  acquires  mortgage  servicing  
rights through either  purchase or origination of mortgage  loans and  
subsequent  sale or  securitization  with servicing rights  retained,  to 
allocate the total cost of the mortgage  loans,  proportionately,  to the 
mortgage  servicing rights and the loans  based on the  relative  fair  value.  
The  servicing  rights  capitalized  are  amortized  in proportion to and over 
the period of estimated net servicing income,  including  prepayment  
assumptions based upon the  characteristics  of  the  underlying  loans.  
Capitalized  servicing  rights  are  periodically  assessed  for impairment 
based on the fair value of the rights with any impairment recognized through a 
valuation allowance. 

Pension plan 

The Company has a defined  contribution  retirement  plan (the "Plan") covering
all  full-time  employees who have completed  one year of  service.  
Contributions  to the Plan are made in the form of  payroll  reductions  based 
on employees' pretax wages.  Currently, the Company does not offer a matching 
provision for the Plan. 

Income taxes 

The Company  recognizes  income taxes under an asset and liability method.  
Under this method,  deferred tax assets are recognized for deductible temporary
differences  and operating loss or tax credit carry forwards and deferred tax  
liabilities  are recognized for taxable  temporary  differences.  Temporary  
differences  are the  differences between the financial statement carrying 
amounts of existing assets and liabilities and their  respective  bases.  
Deferred tax assets and  liabilities  are measured using enacted tax rates 
expected to apply to taxable  income in the years in which  those  temporary  
differences  are  expected  to be  recovered  or  settled. Deferred tax assets 
are reduced by a valuation  allowance when  management  determines  that it is 
more likely than not  that  some  portion  or all of the  deferred  tax  assets
will not be  realized.  Deferred  tax  assets  and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment. 

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                                                             

Earnings per common share 

Primary  earnings per share  amounts are computed by dividing net income by the 
weighted  average  number of shares actually  outstanding  plus the shares that 
would be  outstanding  assuming the exercise of dilutive  stock options and 
warrants,  which are considered  common stock  equivalents.  The number of 
shares that would be issued from the exercise of stock  options and  warrants  
has been  reduced by the number of shares that could have been  purchased from 
the  proceeds  at the  average  market  price of the  Company's  stock.  
Earnings  per  common  share has been retroactively restated for the effects of 
the 1996 one-for-five reverse stock split.  

Fair value of financial instruments 

Statement of Financial  Accounting  Standards  No. 107,  "Disclosures  About 
Fair Value of Financial  Instruments," requires  disclosure  of fair value  
information  about  financial  instruments,  whether or not  recognized in the 
balance  sheet,  for which it is  practicable to estimate that value.  In cases
where quoted market prices are not available,  fair  values  are  based  on  
estimates  using  present  value  or other  valuation  techniques.  Those 
techniques  are  significantly  affected by the  assumptions  used,  including  
the discount  rate and estimates of future cash flows.  In that regard,  the 
derived fair value  estimates  cannot be  substantiated  by  comparison to 
independent  markets  and,  in many  cases,  could not be  realized in  
immediate  settlement  of the  instruments. Statement No. 107 excludes certain
financial  instruments and all  nonfinancial  assets and liabilities  from its 
disclosure  requirements.  Accordingly, the aggregate fair value amounts do not
represent the underlying  value of the Company. 

The  following  methods and  assumptions  were used by the Company in  
estimating  the fair value of its  financial instruments: 

      Cash,  restricted cash,  accrued interest  receivable,  other receivables 
      and accrued interest  payable:  The carrying values reported in the 
      balance sheet are a reasonable estimate of fair value. 

      Notes  receivable:  Fair value of the net note  receivable  portfolio is 
      estimated by discounting the future cash flows using the interest method.
      The carrying amounts of the notes receivable approximate fair value. 

      Short-term  borrowings:  The  carrying  amounts  of the  line  of credit
      and  other  short-term  borrowings approximate their fair value. 

      Long-term  debt:  Fair  value  of  the  Company's  long-term  debt  
      (including  notes  payable,  subordinated debentures  and notes payable,
      affiliate) is estimated  using  discounted  cash flow analysis  based on 
      the Company's  current incremental  borrowing  rates for similar types of 
      borrowing  arrangements.  The carrying amounts reported in the balance 
      sheet approximate their fair value. 



<PAGE>




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                                                      

Recent accounting pronouncements 

The Financial  Accounting  Standards Board has issued Statement No. 125, 
"Accounting for Transfers and Servicing of Financial  Assets and  Extinguishment
of  Liabilities,"  effective for transfers and servicing of financial assets 
and extinguishment of liabilities  occurring after December 31, 1996. This 
Statement  provides financial  reporting standards for the derecognition and 
recognition of financial  assets,  including the distinction  between transfers 
of financial  assets  which  should be recorded as sales and those which should
be recorded as secured  borrowings. Certain  provisions  of Statement No. 125 
are  effective  beginning  January 1, 1997,  while other  provisions  are 
effective  January 1, 1998.  The Company has adopted  Statement  No. 125 for
transfers  and servicing of financial assets and extinguishment of liabilities 
during the year ended December 31, 1997. 

The Financial  Accounting  Standards Board issued Statement of Financial  
Accounting  Standards No. 128,  "Earnings per Share" in February,  1997. This 
pronouncement  establishes  standards for computing and presenting earnings per 
share,  and is effective for the Company's  1997  year-end  financial 
statements.  The  Company's  management  has determined  that this standard will
have no impact on the Company's  computation or  presentation of net income per 
common share.                     

<PAGE>
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations. 

General 

         Forward-Looking  Statements.  When used in this report,  press releases
and elsewhere by management of the Company  from time to time,  the words  
"believes",  "anticipates",  and "expects"  and  similar  expressions  are 
intended to identify  forward-looking  statements  that  involve  certain  risks
and  uncertainties.  Additionally, certain statements contained in this 
discussion may be deemed  forward-looking  statements that involve a number of
risks and  uncertainties.  Among the  factors  that  could  cause  actual 
results  to  differ  materially  are the following:  unanticipated  changes in
the U.S.  economy,  business  conditions  and interest rates and the level of 
growth in the finance and housing  markets,  the  availability  for  purchases 
of additional  loans,  the status of relations  between the Company and its 
primary  sources for loan  purchases,  the status of  relations  between the 
Company  and its  primary  Senior  Debt lender and other  risks  detailed  from
time to time in the  Company's  SEC reports.  Readers are cautioned not to place
undue reliance on these  forward-looking  statements  which speak only as of the
date thereof.  The Company  undertakes  no  obligation  to publicly  release the
results on any events or circumstances after the date hereof or to reflect the 
occurrence of unanticipated events. 

         Loan and OREO Acquisitions.  The Company purchased nine portfolios of 
notes receivable,  with an aggregate face value of $35,365,660  and a purchase
price of $17,503,609 or 49.5% of aggregate face value,  and one portfolio of 
OREO with a purchase  price of $3,911,840 during the six months ended June 30, 
1997, as compared with  purchases of three portfolios  of notes  receivable 
with an aggregate  face value of $8,887,949 for an aggregate  purchase price of
$5,576,135 or 62.7% of aggregate face value, and no portfolios of OREO,  during
the six months ended June 30, 1996. The Company believes that this 441% 
increase in OREO and notes  receivable  acquisitions  during the six months 
ended June 30, 1997 as compared to the six months ended June 30, 1996  reflects 
the more  competitive bids submitted by the Company as a result of the reduction
in its cost of funds.  See"-Cost of Funds."  Acquisitions  of were funded 
through term debt facilities  from a financial  institution  (the "Senior  
Debt") of  $21,415,449 and $5,576,135,  during the six month periods ended June
30, 1997 and 1996,  respectively.  Total Senior Debt funding capacity  was 
approximately $100 million at June 30, 1997, of which approximately $90 million
had been drawn down as of such date.  As of June 30, 1997 approximately 
$13 million of Senior  Debt had been syndicated by the Senior Debt lender to 
other  participating  banks. The Senior Debt lender has verbally informed the 
Company that it will not deem such syndicated  amounts as outstanding for 
purposes of determining  availability under the Company's agreement with such 
lender.  As a result,  under the current senior debt agreement FCMC has 
approximately $23 million available at the prime rate to purchase additional 
loan portfolios. 

         The Company  believes  these  acquisitions  will  increase the level of
operating income during future periods.  During the initial period  following  
acquisitions, the Company incurs the carrying costs of the related Senior Debt 
and administrative costs of new portfolios.  Payment streams are only generated 
once the loans are incorporated  into the  Company's  computerized  loan  
tracking  system  and  contact  is made  with the  borrower. Non-performing 
loans  generate  payment  streams once such loans are  restructured or 
collection  litigation  is settled or successfully concluded. 

         In the ordinary course of business,  the Company acquires  properties  
either from portfolio  acquisitions or via  foreclosures.  Such  properties are 
classified as OREO and are evaluated  regularly to ensure that recorded amounts 
are supported by current fair market values. 

<PAGE>

         Management  intends to continue to expand the  Company's  earning  
asset base through the  acquisition  of additional  portfolios  including  
performing and non-performing real estate secured loans.  The Company believes
that its  current  infrastructure  is adequate to service  additional  loans  
without  any  material  increases  in expenses.  There can be no assurance the 
Company will be able to acquire any additional  loans or that it may do so on 
favorable  terms.  While  management  believes that the  acquisition  of  
additional  loan  portfolios  would be beneficial,  management does not believe 
that current  operations  would be materially  impacted if additional loan 
portfolios were not acquired during 1997. 

         Cost of Funds.  The  Company's  cost of funds on Senior  Debt  during 
the six months  ended June 30,  1997 decreased as compared  with previous  
periods.  As of June 30, 1997,  the Company had Senior Debt of  approximately 
$90 million. The Senior Debt accrues interest at a variable rate based upon the
prime rate.  

         The weighted  average  interest  rate on borrowed funds for the Senior
Debt  decreased  by  approximately .49% to  approximately to 10.07% for the six
months ended June 30, 1997 from 10.56% for the six months ended June 30 1996.  
Management  believes that any future  decreases in the prime rate will  
positively impact the net income of the Company while increases may be expected
to negatively impact such net income. 

         In March,  1997,  the Company  renegotiated  its  interest  rates with 
the Senior  Debt  lender  effective February 28, 1997.  Senior Debt  incurred to
finance portfolio acquisitions  after  December 31, 1996,  will bear interest
at the prime rate.  Additionally,  in March 1997 the Senior Debt lender agreed 
to a .375% reduction in the interest rate on all Senior Debt outstanding to the 
prime rate plus 1.75% from the prime rate plus 2.125%. 

         During the six months  ended June 30, 1997 and 1996 the Company  
incurred  additional  financing  costs in the form of service fees and loan  
commitment  fees.  The service  fees were  calculated  as a percentage of gross
collections on four specific  portfolios  while loan  commitment  fees are 
points based upon  origination of Senior Debt.  During  March  1997 the Company
negotiated  the  prospective  elimination  of such  fees.  Under  this new 
arrangement  the  Company  has  ceased  paying  service  fees on  Senior  Debt  
and  will  incur a 1% exit fee upon completing  repayment of the Senior Debt  
outstanding as of December 31, 1996, or  approximately  $700,000.  If the funds
collected from the notes  receivable  underlying  such Senior Debt are  
insufficient  to satisfy the related Senior Debt and exit fee, any shortfall up 
to the amount of the exit fee will be forgiven. 

Inflation.  The impact of  inflation  on the  Company's  operations during both
the six months ended June 30, 1997 and 1996 was immaterial. 

Subsequent  Events.  The Company  purchased a portfolio of $3.7 million  
principal  amount of notes receivable from Preferred  Credit  Corporation  
("PCC") for $1.8  million.  Although the Company  conducted  its own review of 
each loan file, it has discovered  since the closing of such purchase that 
certain  information had been removed from or falsified in certain of such 
files.  The Company is currently  evaluating  the extent and  responsibility  
for such fraud and  identifying  and  quantifying  whether  and the extent to 
which any losses are  expected  to be incurred resulting  from such fraud.  
The Company  currently  believes  that these  events will not have a material  
adverse effect on its financial condition. 
<PAGE>

Results of Operations 

Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996 

         Total revenue,  comprised of interest income,  purchase discount 
earned, gain on sale of portfolios,  gain of sale of other real estate  owned 
and other  revenue,  increased by $832,271 or 20% to  $5,073,388  for the three 
months ended June 30, 1997, from $4,241,117 for the three months ended 
June 30, 1996.  
   
         The Company  recognizes  interest  income on notes  included in its  
portfolio  based upon three  factors: interest on performing notes,  interest 
received with settlement  payments on non-performing  notes and the balance of  
settlements  in excess of the carried  principal  balance.  Revenues from 
interest  income on notes  receivable increased by $516,913 or 38%, to 
$1,885,284  for the three months ended 1997 from  $1,368,371  for the three 
months ended 1996. This increase  resulted  primarily from an increases in the 
weighted  average  portfolio  interest rate of the notes receivable included in
the portfolio,  in the number performing loans, and in settlement  payments on 
non-performing  notes,  all of which were only partially  offset by the 
reduction in performing  assets sold in the second  quarter of 1996.  The  
majority  of the loans  purchased  by the  Company  bear  interest  at a fixed 
rate; consequently, there is little change in interest income due to changes in 
market interest rate conditions.   

         Purchase  discount  earned  decreased  by $289,352 or 16%, to  
$1,511,606  for the three months ended 1997 from  $1,800,958  for three months
ended 1996.  This decrease reflected the aging of the portfolio and the sale of
performing assets in the second half of 1996.   

         Gain on sale of  portfolios  decreased by $4,182,  or .4%, to $973,337 
for the three months ended June 30, 1997 from $977,519 for the three months 
ended June 30, 1996.  This decrease  resulted  primarily from a decrease in the 
size of the portfolio  sold which was partially  offset by an increase in the 
sale price.  Gain on sale of OREO increased  by $627,348 to  $649,172  for the 
three  months  ended June 30, 1997 from  $21,824 for the three  months ended 
June 30, 1996.  This  increase  resulted  primarily  from an increase in the 
number of OREO  properties  held during the respective periods. 

          Total revenue as a percentage  of notes  receivable  included in the  
Company's  portfolio as of the last day of the  respective  quarters,  net of 
allowance  for loan losses,  decreased to 5.1% for the three months ended 
June 30, 1997 from 5.5% for the three  months  ended June 30,  1996.  This  
decrease  resulted  primarily  from the increase  of loan  portfolio  
acquisitions,  which  acquisitions  only begin to  produce  cash flow  following
the Company's  incorporation of a major portion of the underlying loans into its
collection  system.  See "General-Loan Acquisitions." 

         Total operating  expenses  increased by $325,710 or 10%, to $3,631,687 
for the three months ended June 30, 1997 from  $3,305,977  for the three months
ended June 30,  1996.  Total  operating  expenses  includes  interest expense,  
collection,  general and administrative costs,  provisions for loan losses, 
service fees, amortization of loan commitment fees and depreciation expense. 
<PAGE>

         Interest  expense  increased  by $272,318 or 14%, to  $2,168,449  for 
the three months ended June 30, 1997 from  $1,896,131  for the three months 
ended June 30, 1996.  This  resulted  from an increase in the average  total 
debt  outstanding  of $17.3  million,  or 25%, to $87.8 million for the three 
months June 30, 1997 ended from $70.5 for the three months ended June 30, 1996,
which increase was only partially  offset by a reduction of .49% in the weighed
average  interest  rate of the  Company's  total  outstanding  debt.  Total  
debt  includes  Senior  Debt, debentures,  lines of credit and loans from 
affiliates.  The increase in total debt and interest expense  reflected 
increased borrowings to purchase portfolios of notes receivable and OREO. 

         Collection,  general and  administrative  expenses  increased  by 
$244,779 or 26%, to  $1,185,654  for the three months ended June 30, 1997 from  
$940,875 for the three months ended June 30, 1996.  Collection,  general and 
administrative  expenses include  personnel  expenses,  OREO related  expenses,
litigation  expenses and all other overhead  expenses.  Personnel  expenses  
increased  by $51,060 or 19%, to $325,892 for three months ended June 30, 1997 
from $274,832 for three months ended June 30, 1996, reflecting principally the 
staffing of Liberty Lending .  

         OREO related  expenses  increased by $86,895 or 240%, to $123,045 for 
the three months ended June 30, 1997 from $36,160 for the three months ended 
June 30, 1996.  This increase  resulted from the increased  carrying  costs 
associated  with the  increase  in OREO  properties.  Properties  held as OREO 
as of June 30,  1997,  increased  by $4,829,451 or 102%, to  $9,566,536  from  
$4,737,085  as of December 31, 1996.  This increase  reflected  increased 
foreclosure  activity  resulting  from  the  growth  in size of the  Company's  
portfolio  and the  Company's  OREO acquisitions.   

         Litigation  expenses  decreased  by $80,797 or 24%, to $255,315  for 
the three  months ended June 30, 1997 from $336,112 for the three months ended 
June, 30 1996.  This decrease  reflected  fewer assets  entering the legal 
recovery  process, which reduces the costs  incurred by the Company to initiate
new  proceedings  which  represent the majority of the legal expenses typically 
incurred in bringing the loans to resolution.   

         Direct  collection  expenses  relating to credit reports and  
repossession  fees,  increased by $21,315 or 24%, to $111,645 for three months
ended June 30, 1997 from  $90,330 for three  months  ended June 30, 1996.  This 
increase  reflected  the increase in the loan  portfolio  for the three months 
ended June 30, 1997 as compared with the three months ended June 30, 1996.  
Additionally,  costs  incurred  related to obtaining  current title searches 
and credit  reports for the  portfolio  sale of second  mortgages  during the 
three months ended June 30, 1997 were not present during the three months ended 
June 30, 1996. 

         Provisions  for loan losses  decreased  by $225,624 or 97%, to $7,841 
for three months ended June 30, 1997 from  $233,465 for three months ended 
June 30, 1996.  Provisions  for loan losses,  for the three months ended 
June 30, 1997 and three months ended June 30, 1996,  expressed  as a percentage
of gross notes  receivable,  as of the last day of the respective period,  was 
approximately  0.01 % and 0.2 %, respectively.  These decreases are believe 
to reflect the greater  accuracy of its estimates of future  performance of 
newly acquired notes  receivable as its level of experience with such notes 
increases.   

<PAGE>

         There were no service fees  expensed in the three months ended 
June 30, 1997 as compared  with a refund of $19,803 of service fees for the 
three  months  ended June 30,  1996.  This  increase  resulted  principally  
from a reduction in service fees  negotiated  with the Company's  Senior Debt 
lender in June 1996, and the  elimination of service fees negotiated with the 
Company's Senior Debt lender effective February 28, 1997. 

         Operating  income  increased by $506,561 or 54%, to a gain of  
$1,444,701  for the three months ended June 30, 1997 from an  operating  profit 
of $935,140  for the three months ended June 30, 1996 for the reasons set forth 
above. 

         Provisions  for income taxes  increased  by $602,407,  or 600% to 
$722,765 for the three months ended June 30, 1997 from  $120,358 for the three 
months ended June 30, 1996.  This  increase was primary due to  exhaustion of 
net  operating  loss carry  forwards,  an  increase  in taxable  income,  and  
increases  in the net  deferred  tax liabilities. 

         Net income  decreased  by $95,846 or 11%,  to a profit of  $718,836 in
the three  months  ended 1997 from income of $814,782 for the three months 
ended 1996, for the reasons described above.  

Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 

         Total  revenue  increased by $584,680 or 8% to  $8,034,540 for the six
months ended June 30, 1997, from $7,449,860 for the six months ended 
June 30, 1996.  

         Revenues from interest  income on notes  receivable  decreased by 
$16,502 or 1%, to $3,160,548 for the six months  ended  June 30,  1997 from  
$3,177,050  for the six months  ended June 30,  1996.  This  decrease  resulted 
primarily  from the  increased  age of loans in the  Company's  portfolios,  
which  results in a larger  portion of payments  on such loans  being credited
to  principal  rather  than  interest,  and the bulk sale in June 1996 of 
$6,311,404  in face amount of  performing  loans,  which  loans,  had they  
continued  to perform,  could have been expected  to  produce  approximately  
$320,000  of  interest  income  during the six  months  ended June 30,  1997. 
Purchase  discount  earned  decreased by $5,245 or .2%, to  $3,089,586  
for the six months ended June 30, 1997 from $3,126,149 for the six months ended 
June 30, 1996.  The decrease  reflected the aging of the portfolio and the sale 
of performing assets in the second quarter of 1996. 

         Gain on sale of  portfolios  decreased  by $4,182, or .4%, to $973,337
for the six months ended June 30, 1997 from $977,519 for the six months ended 
June 30, 1996.  This  decrease  resulted  primarily from a decrease in the size
of the portfolio  sold which was only partially  offset by an increase in the 
sale price.  Gain on sale of OREO  increased  by  $646,876 to $683,439  for the 
six months  ended June 30, 1997 from  $36,563 for the six months ended 
June 30, 1996.  This increase  resulted  primarily from a more  aggressive  
marketing of the OREO  properties and an increased pool of such properties 
available and prepared for sale. 

         Total revenue as a percentage of notes receivable  included in the 
Company's portfolio as of the last day of the six months ended June 30, 1997 
and June 30, 1996,  net of allowance  for loan losses,  increased to 8.1% for 
the six months ended June 30, 1997 as compared with 6.7% for the six ended 
June 30, 1996.  This  increase  resulted primarily from the improve performance 
of the Company's portfolio. 
<PAGE>

         Total  operating  expenses  increased  by $171,002 or 3%, to  
$6,780,256  in the six months ended June 30, 1997 from $6,609,254 in the six 
months ended June 30, 1996.  

         Interest  expense  increased by $336,553 or 8.9%, to $4,123,804 in the 
six months ended June 30, 1997 from $3,787,251  for six months ended 
June 30, 1996.  This increase  resulted from an increase in the average total 
debt outstanding  of $17.6  million,  or 25% to $85.7  million for the six 
months ended June 30, 1997 from $68.1 for the six months  ended June 30, 1996,  
which was only  partially  offset by a reduction  of .49% in the weighed  
average interest rate of the Company's total outstanding debt. 

         Collection, general and administrative expenses increased by $365,265 
or 20%, to $2,180,530 for the six months ended June 30, 1997 from $1,815,265 for
the six months ended June 30, 1996.  Personnel expenses increased  by $88,920 
or 16%, to $653,369 for the six months ended June 30, 1997 from $564,449 for the
six months ended June  30, 1996. This increase reflected the staffing of Liberty
Lending and salary increases granted to existing personnel.  

         OREO related expenses increased by $60,258 or 52%, to $175,501 for the
six months ended June 30, 1997 from $115,243 for the six months ended 
June 30, 1996.  This increase reflected increased foreclosure activity resulting
from the growth in size of the Company's portfolio and OREO acquisitions. 

         Litigation expenses increased by $48,332 or 9%, to $579,609 for the six
months ended June 30, 1997 from $531,277 for the six months ended June 30, 1996.
This increase reflected both an increase in quantity of notes receivable 
purchased by the Company and a decreased loan-to-value ratio of notes receivable
purchased by the Company. The Company believes that the latter decrease gave 
rise to a more assertive legal defense by borrowers attempting to preserve their
collateral, thereby increasing the Company's legal expense.  

         Direct collection expenses relating to credit reports and repossession
fees, decreased by $31,933 or  17%, to $157,202 for the six months ended 
June 30, 1997 from $189,135 for the six months ended June 30, 1996.This decrease
reflected economies of scale resulting from the growth in size and improved 
performance of the Company's portfolio, which was only partially offset by the 
increased costs associated with the sale of the second mortgage portfolio. 

         Provisions  for loan losses decreased  by $336,338 or 76%, to $103,853
for the six months ended June 30, 1997 from  $440,191 for the six months ended 
June 30, 1996.  Provisions  for loan losses during the six months June 30, 1997
as compared with the six months ended June 30, 1996  expressed as a percentage  
of gross notes  receivable as of the last day of the respective period,  
was approximately  0.07 % and 0.40 %,  respectively.  These decreases are  
believe to reflect the greater  accuracy  of its  estimates  of future  
performance  of newly  acquired  notes receivable as its level of experience 
with such notes increases. 
   
         Service  fees  decreased  by  $165,119  or 84%,  to $31,395  for the 
six months  ended June 30,  1997 from $196,514  for the six  months  ended 
June 30,  1996.  This  decrease  resulted  from a  reduction  in service  fees 
negotiated  with the Company's  Senior Debt lender in June 1996,  and the  
elimination  of service fees  negotiated with the Company's Senior Debt lender 
effective February 28, 1997. 

         Operating  income  increased by $413,678 or 49%, to $1,254,284 for the 
six months ended June 30, 1997 from income of $840,606 for the six months ended 
June 30, 1996.  
<PAGE>

         Net income  decreased  by $188,729 or 26%,  to a gain of $531,519  for 
the six months  ended June 30, 1997 from net income of $720,248 for the six 
months ended June 30, 1996, for the reasons described above.  


Liquidity and Capital Resources 

          General.  During  the six  months  ended  June 30,  1997,  the  
Company  purchased  $35,365,660  of notes receivable  for an  aggregate  
purchase  price  of  $17,503,609  or  49.5%  of face  value.  Additionally  
107 OREO properties  were  purchased for  $3,911,840,  compared with  purchases 
of  $8,887,949  of notes  receivable  for an aggregate cost of $5,576,135,  
or 62.7% of face value and no OREO  properties  during the six months ended 
June 30, 1996. The Company  believes that this increase  reflected  attractive  
market  opportunities,  the reduction in the Company's cost of funds,  
redirection to private negotiated purchases from independent financial  
institutions from the FDIC/RTC  competitive bid auctions,  the  re-organization
of the Company's  senior  management  during the six months ended June 30, 1996 
and the increased  name  recognition  of the Company  achieved as a result of 
its hiring of a public relations firm in the fourth quarter of 1996.  

         During the six months ended June 30, 1997, the Company  renegotiated  
its credit  arrangements  with its senior  lenders  thereby  reducing its cost 
of funds and increasing its price competitiveness. See "- General - Cost of 
Funds".  All of the loans  acquired by the  Company  during 1996 were  acquired
after the second  quarter. The Company  believes  that the  redirection  of its 
marketing  efforts and the reduction in its cost of funds has enhanced its 
competitiveness. 

         The  Company's  portfolio of notes  receivable at June 30, 1997 had a 
face value of  approximately  $129.7 million and net of joint  venture  
participations,  purchase  discount  and allowance  for loan losses and had net 
notes receivable of approximately  $99.6 million.  The Company's portfolio of 
notes receivable at June 30, 1996 had a face value of approximately  
$98.9 million and included net notes receivable of  approximately  $56 million.
The Company has the ability to hold its notes receivable  until maturity,  
payoff or liquidation of collateral or sale, however,  the Company's  strategy 
is to restructure its notes to performing status, then arrange an economically 
beneficial sale of these assets. 

         During the six months  ended June 30,  1997,  the  Company  used cash 
in the amount of  $5,288,105  in its operating  activities  primarily for 
interest expense,  ordinary  litigation  expense incidental to its collections 
and for the  foreclosure  and  improvement  of OREO and  overhead.  The Company 
used  $20,323,303  in its investing activities,  primarily for the purchase of 
notes  receivable,  which uses were only  partially  offset by principal 
collections  of  $10,083,227  upon  its  notes  receivable,  resulting  in a net
use of  $10,240,076  in  investing activities.  Cash used in operating  and 
investing  activities  was funded by  $16,676,668  of net cash provided by 
financing  activities,  primarily from a net increase in Senior Debt of 
$16,729,008. The above activities resulted in a net increase in cash during the
six months ended June 30, 1997 of $1,148,507. 

         In the ordinary course of its business,  the Company  accelerates and 
forecloses upon real estate securing non-performing  notes receivable  included 
in its portfolio.  As a result of such  foreclosures and the purchase of OREO  
portfolios, at the end of the six months ended June 30, 1997 and the six months
ended June 30,  1996,  the Company held OREO having a net realizable  value of 
$6,325,978 and  $5,723,019,  respectively.  OREO is recorded on the  financial  
statements of the Company at the lower of cost or fair market value.  The 
Company  generally  holds OREO as rental  property or sells such OREO in the 
ordinary  course of business  when it believes  such sales to be economically 
beneficial.   


<PAGE>

         On June 30,  1997 and 1996,  the  Company  held no  automobile  
inventory.  Management  believes  that any additional  automobile  inventory  
acquired  in the  ordinary  course  of  business  from the  Company's remaining 
automobile  loans will be sold.  The  Company  has ceased to  purchase  notes  
receivable  secured by  automobiles. Approximately $562,000 or 0.5 % of the 
Company's gross loan portfolio at June 30, 1997 was secured by automobiles. 

         Management  believes that the Company's  existing cash balances,  
credit lines,  and anticipated cash flow from  operations  will provide  
sufficient  working  capital  resources for its  anticipated  short-term  
operating needs.  The Company has negotiated  with its Senior Debt lender a 
modification  of the terms of its funding of cash flows for operation,  which 
may improve cash flows. See "Cash Flow from Financing  Activities".  The  
modifications permit the Company to retain  operating cash flows in connection 
with budgeted  expenditures to operate the Company after the current principal,
interest and escrow  obligations  are met. Funds  remaining  after such  
obligations have  been met are used  first to fund the  Company's  budgeted  
operating  cash  flows,  and then to fund  certain reserve agreements, with any 
remaining funds to be applied toward the prepayment of Senior Debt.  

         In order to expand  its  capacity  to fund  Liberty  and to support  
increases  in its  borrowing  for the purchase of  portfolios  of notes  
receivable,  the  Company, on June 2, 1997 entered into a letter of intent (the
"Letter of Intent") for a best efforts  private  offering by the Company of a 
minimum of $4.0 million and a maximum of $6.3 million of the Company's  equity  
securities to accredited  investors.  There can be no assurance  that the 
offering will be successful and that any of the offered  securities  will be 
sold, and if sold, that such sale will be on terms  favorable  to the Company.  
In the event that the  offering is  consummated,  the  securities  offered 
thereby will not have been  registered  with or approved or disapproved  by the 
Securities and Exchange  Commission or any state securities  commission or will
the Securities and Exchange  Commission or any state  commission  have passed  
upon  the  accuracy  or  adequacy  of  any  documentation   under  which  such  
securities  are  sold.  Any representation to the contrary will be a criminal 
offense. 

         In the event that such offering is not  consummated, the Company will
consider  other  alternatives  for financing its  medium-term  growth.  There 
can be no assurance that such alternative sources of financing will be 
available, and if available, that such availability will be on terms favorable 
to the Company. 

Cash Flow From Operating and Investing Activities 

         Substantially  all of the assets of the Company are  invested in its  
portfolio of notes  receivable.  The Company's  primary  source  of  cash flow
for operating and investing activities is collections on notes receivable.
See  "General".  At June 30, 1997, the Company had cash, cash equivalents and 
marketable  securities ofapproximately  $3.1  million.  Management  believes  
that  sufficient  cash  flow  from the  collection  of notes receivable will be 
available to repay the Company's secured  obligations and that sufficient  
additional cash flows will exist,  through  collections  of notes  receivable,  
the bulk sale of performing  loan  portfolios,  continued modifications  to the 
secured debt credit  agreements or  additional  borrowing, to repay the current
liabilities arising from operations and to repay the long term indebtedness of 
the Company.  


<PAGE>

         From time to time, the Company seeks merger and  acquisition  
opportunities  of companies in the specialty financing  industry.  
On May 9, 1997, the Company through its wholly owned subsidiary Liberty Lending
Corporation ("Liberty"), entered  into a letter of intent (the "Letter of 
Intent")  to  acquire  the  assets of K Mortgage Corporation  
("K"),  an originator  of certain  classes of Federal  Housing  Administration  
mortgages  ("Qualified Products").  The Company  believes that this transaction
will enable  Liberty,  subject to receipt of appropriate licenses and other  
contingencies,  to integrate K's existing network of mortgage brokers,  Realtors
and  potential  home  buyers as well as its  remaining  infrastructure,  thereby
accelerating  Liberty's  entry  into the  mortgage  loan  origination  industry.
Pursuant  to the Letter of Intent,  Liberty  will  acquire  the right to certain
trademarks associated with K's business, enter into an employment agreement with
a two year term and a one year  renewal  term with one  principal  of K and into
consulting  agreements with five year terms with the three additional principals
of K. In exchange,  Liberty will pay to such  principals  an aggregate of 50% of
its Gross Profits (as defined in the Letter of Intent) on all Qualified Products
as defined in the Letter of Intent  brought to the  Company by such  principals,
payable quarterly for five years, assume certain scheduled liabilities of K, not
to exceed  $350,000,  which  amount  shall be credited  against the Gross Profit
payments  due to  such  principals,  and  pay to the  principal  retained  as an
employee a salary of $104,000 per annum plus benefits.

   The Company is currently completing its due diligence and expects to complete
this  transaction by during the third quarter of 1997.  While,  the Company does
not have a commitment  to purchase  any other  companies,  management  is in the
process of reviewing certain  opportunities.  Depending upon  circumstances this
may not cause the Company to incur additional capital expenditures,  outside the
acquisitions of additional notes  receivable.  Although the Company from time to
time engages in  discussions  and  negotiations  with  respect to  acquisitions,
except as discussed  herein,  it currently has no agreements with respect to any
material acquisition.

Cash Flow From Financing Activities 

     Senior Debt. As of June 30, 1997, the Company and its wholly owned 
subsidiaries owed an aggregate amount of approximately $90 million of Senior 
Debt.

     The Senior Debt is collateralized by first liens on the respective loan
portfolios  for the purchase of which the debt was incurred and is guaranteed by
the Company.  The monthly payments on the Senior Debt have been, and the Company
intends for such  payments to  continue to be, met by the  collections  from the
respective  loan  portfolios.  The loan  agreements for the Senior Debt call for
minimum  interest and principal  payments each month; a fixed monthly  allowance
for operating expenses and accelerated payments based upon the collection of the
notes  receivable  securing the debt during the preceding month. The Senior Debt
accrues  interest at variable  rates  ranging  from prime rate to 1.75% over the
prime rate. See "General - Cost of Funds." The  accelerated  payment  provisions
are generally of two types:  the first requires that all collections  from notes
receivable,  other than a fixed monthly allowance for servicing  operations,  be
applied to reduce the Senior Debt;  the second  requires a further  amount to be
applied  toward  additional   principal  reduction  from  available  cash  after
scheduled  principal  and interest  payments  have been made. As a result of the
accelerated payment  provisions,  the Company is repaying the amounts due on the
Senior Debt at a rate faster than the minimum  scheduled  payments.  The Company
has negotiated with its Senior Debt lender to eliminate service fees, reduce the
interest rates and increase the portion of  collections  retained by the Company
for operations after payment of its contractual  principal,  interest and escrow
payments, rather than applied to payment of its Senior Debt. Management believes
this may reduce  periods  of  irregular  cash  flows,  however,  there can be no
assurance  that the Company will not encounter  periods of cash flow  shortages.
See "- General - Cost of Funds".
<PAGE>

   Certain of the Senior Debt credit agreements required  establishment of
restricted  cash accounts,  funded by an initial deposit at the loan closing and
additional  deposits  based upon monthly  collections  up to a specified  dollar
limit. The restricted cash is maintained in a interest bearing account, with its
Senior Debt lender.  Restricted cash may be accessed by the lender only upon the
Company's  failure to meet the minimum monthly  payment due if collections  from
notes  receivable  securing the loan are insufficient to satisfy the installment
due. Historically, the Company has not called upon these reserves. The aggregate
balance of  restricted  cash in such  accounts was $966,103 on June 30, 1997 and
$828,845 on December 31, 1996.

   Lines of Credit. The Company has a line of credit with the Senior Debt lender
permitting it to borrow a maximum of approximately $1,500,000 at a rate equal to
the bank's  prime rate plus two percent per annum.  Principal  repayment  of the
lines are due six months  from the date of each cash  advance  and  interest  is
payable monthly.  The total amounts  outstanding under the lines of credit as of
June 30, 1997 and 1996,  were $564,721 and  $1,060,213,  respectively.  Advances
made under the line of credit  were used to satisfy  senior lien  positions  and
fund  property  repair costs in  connection  with  foreclosures  of certain real
estate loans financed by the Company.  Management  believes the ultimate sale of
these  properties  will  satisfy  the  related  outstanding  lines of credit and
accrued  interest,  as well as surpass  the  collectible  value of the  original
secured  notes  receivable.  Management  has an agreement in principal  with its
Senior  Debt  lender  to  increase  this  credit  facility  to cover  additional
properties  foreclosed  upon by the Company which the Company may be required to
hold as rental property to maximize its return. Historically the Senior Debt.

Harrison First Corporation 12% Debentures. In connection with the acquisition of
a loan  portfolio  during 1995,  the Company  offered to  investors  $800,000 of
subordinated  debentures.  As of  each of June  30,  1997  and  June  30,  1996,
$555,000, of these debentures were outstanding.  The Harrison 1st 12% Debentures
bear  interest at the rate of 12% per annum  payable in quarterly  installments.
The  principal  is  to be  repaid  over  three  years  in  ten  equal  quarterly
installments of $22,200 commencing September 30, 1997 with the remaining balloon
payment of $333,000 due June 30,  2000.  The  Harrison  1st 12%  Debentures  are
secured by a lien on the Company's  interest in certain notes receivable and are
subordinated to the Senior Debt encumbering the loan portfolio.

  12% Debentures. In connection with the acquisition of a loan portfolio during
1994, the Company offered to investors $750,000 of subordinated  debentures.  As
of June 30, 1997 and June 30, 1996,  $484,687  and  $587,500,  respectively,  of
these debentures were outstanding.  The 12% Debentures bear interest at the rate
of 12% per annum  payable in  quarterly  installments.  The  principal  is to be
repaid over four years in sixteen equal  installments  of $44,062 which payments
commenced on March 31,  1996.  The 12%  Debentures  are secured by a lien on the
Company's  interest in certain  notes  receivable  and are  subordinated  to the
Senior Debt encumbering the loan portfolio.

<PAGE>

Item 1.  Legal Proceedings 
                  None 

Item 2.  Changes in Securities 
                  None 

Item 3.  Defaults Upon Senior Securities 
                  None 

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

   On June 11, 1997 at the Company's annual  meeting the  shareholders  voted to
reelect the  following  persons as  Directors to the Company  expiring  upon the
election and  qualification  of their  successors  at the annual  meeting of the
Company in the year 2000 and to ratify the  appointment  of  McGladrey & Pullen,
LLP as the Company's independent public auditors for fiscal year ending December
31, 1997.




<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. 

August 15, 1997                                FRANKLIN CREDIT MANAGEMENT 
                                                   CORPORATION 


                                             By:    THOMAS J. AXON 
                                                    Thomas J. Axon 
                                          President and Chief Executive Officer


     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. 

Signature                 Title                                  Date 

THOMAS J. AXON        President, Chief Executive Officer     August 15, 1997  
Thomas J. Axon        and Director 
                      (Principal executive officer)  


FRANK B. EVANS, Jr.   Vice President, Treasurer,             August 15, 1997
Frank B. Evans, Jr.   Chief Financial Officer and Director 
                      Secretary (Principal financial and accounting officer)



JOSEPH CAIAZZO        Vice President, Chief Operating        August 15, 1997
Joseph Caiazzo        Officer and Director                                 



                                       Page 21
<PAGE>
Exhibit 11 
<TABLE>
<CAPTION>
Computation of earnings per share second quarter 1996. 
<S>          <C>              <C>           <C>        <C>            <C>
                                                                  Restated for 
                                                                    effect of  
                         No. Of Shares      Weight                 stock split  
12/31/95 Common Stock      5,503,896 
         O/S warrants        137,674 
                           5,641,470          33%   1,860,532        372,106 

3/31/96  Common stock      5,503,896 
         O/S warrants        127,349 
         warrants exercised   10,225 
                           5,641,470          33%   1,860,466        372,093 

6/30/96  Common stock      5,503,896 
         O/S warrants        127,349 
         warrants exercised  (17,216)
         Stock options       209,500 
                           5,823,529          34%   1,982,483        396,497 


        Weighted average number of shares           5,703,481       1,140,696


Earnings per Common share: 
     Net income            $ 720,248                  $0.13            $0.63 

</TABLE>
                                   Page 22

<PAGE>
Exhibit 11 
<TABLE>
<CAPTION>
Computation of earnings per share second Quarter 1997. 
<S>          <C>                 <C>            <C>        <C>        <C> 
                                                                  Restated for 
                                                                    effect of  
                            No. Of Shares      Weight              stock split  
12/31/96 Common stock         5,503,896 
         O/S warrants 
        (Extended for 1 year)   110,133 
         Stock options          209,500 
                              5,823,529          33%   1,941,176     388,235 

3/31/97  Common stock         5,503,896 
         O/S warrants                  
        (Extended for 1 year)   110,133 
         Stock options          209,500 
                              5,823,529          33%   1,941,176     388,235 

6/30/97  Common stock         5,503,896 
         O/S warrants                  
        (Extended for 1 year)   110,133 
         Stock options          209,500 
                              5,823,529           33%   1,941,176    388,235

            Weighted average number of shares           5,823,529   1,164,706 


Earnings per Common share: 
         Net Income             $531,519                     $0.09      $0.46 

</TABLE>
                                   Page 23