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

                               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 November 18, 1997, 5,516,527 shares of the issuer's Common Stock,
par value $.01 per share were outstanding.


<PAGE>

                     FRANKLIN CREDIT MANAGEMENT CORPORATION

                                   FORM 10-QSB

                               September 30, 1997

                                 C O N T E N T S
                                 ---------------

PART I.                    FINANCIAL INFORMATION                         Page
                                                                         ----
Item 1.  Financial Statements

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

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

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

    Consolidated Statements of Stockholders' Equity                        6

    Notes to consolidated Financial Statements                          7-11


Item 2.  Management's Discussion and Analysis of Financial Condition
             and Results of Operations                                 12-22



PART II.                            OTHER INFORMATION

Item 1.  Legal Proceedings                                               23

Item 2.  Changes in Securities                                           23

Item 3.  Defaults Upon Senior Securities                                 23

Item 4.  Submission of Matters to a Vote of Security Holders             23

Item 5.  Other Information                                               23

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

SIGNATURES                                                               25


                                     Page 2

<PAGE>

ITEM 1.  FINANCIAL STATEMENTS

              FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
<TABLE>
<CAPTION>
                                                                           30-SEP-97      31-DEC-96
                                                                         (UNAUDITED)      (AUDITED)
                                                                         ============    ============
<S>                                                                     <C>              <C>      
Cash                                                                      3,352,808       1,967,964
Restricted cash                                                           1,238,541         828,845

Notes receivable:
     Principal amount                                                   117,657,061     113,610,782
     Joint venture participations                                          (362,914)       (360,395)
     Purchase discount                                                  (16,940,164)    (18,160,403)
     Allowance for loan losses                                          (30,185,751)    (23,604,810)
                                                                       ------------    ------------
         NET NOTES RECEIVABLE                                            70,168,231      71,485,174

Accrued Interest receivable                                                 914,332       1,132,370
Other real estate owned                                                  11,197,788       4,737,085
Other receivables                                                           (20,574)        421,392
Other assets                                                                247,760         704,695
Building, furniture & fixtures, net                                         697,886         640,749
Deferred financing costs                                                  1,023,154       1,358,874
                                                                       ------------    ------------
         TOTAL ASSETS                                                    88,819,925      83,277,148
                                                                       ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
     Accounts payable and accrued expenses                                2,126,224       1,874,267
     Lines of credit                                                        559,618         583,916
     Notes payable                                                       78,667,587      73,538,865
     Escrow                                                                 557,741
     Subordinated debentures                                                929,362       1,025,000
     Notes payable, affiliates and stockholders                             125,630         373,218
     Deferred income taxes                                                1,135,116       1,778,862
                                                                       ------------    ------------
         TOTAL LIABILITIES                                               84,101,278      79,174,128

Commitments and Contingencies                                                     0


STOCKHOLDER'S EQUITY:
     Common Stock,  $.01 par value, 10,000,000 authorized 
       shares; issued and outstanding 1997 and 1996:
         5,516,527                                                           55,167          11,022
     Additional paid-in capital                                           6,489,969       6,534,113
     Accumulated deficit                                                 (1,826,489)     (2,442,115)
                                                                       ------------    ------------
         Total stockholders' equity                                       4,718,647       4,103,020
                                                                       ------------    ------------

         Total liabilities and stockholders' equity                      88,819,925      83,277,148
                                                                       ============    ============
</TABLE>

                See accompanying notes to financial statements.


                                     Page 3

<PAGE>

ITEM 1.  FINANCIAL STATEMENTS

              FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
                        CONSOLIDATED STATEMENTS OF INCOME
                    PERIOD ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                NINE MONTHS ENDED
                                                           30-SEP-97        30-SEP-96        30-SEP-97          30-SEP-96
                                                          (UNAUDITED)      (UNAUDITED)      (UNAUDITED)        (UNAUDITED)
                                                        =============================    ================================
REVENUE:
<S>                                                      <C>              <C>              <C>                <C>       
       Interest Income                                   $1,505,860       $1,475,203       $4,666,408         $4,652,253
       Purchase discount earned                           2,198,879        1,696,808        5,293,710          4,786,394
       Gain on sale of portfolios                           404,119                0        1,377,454            977,519
       Gain on sale of other real estate owned               76,443                0          759,882             36,563
       Other                                                115,634           69,210          238,020            218,352
                                                        =============================    ================================
                                                          4,300,936        3,241,221       12,335,475         10,671,081
                                                        =============================    ================================
OPERATING EXPENSES:
       Interest expense                                   2,085,835        1,943,095        6,209,639          5,730,346
       Collection, general and administrative             1,565,531        1,000,300        3,746,062          2,815,565
       Provision for loan losses                            (16,938)         138,727           86,915            578,918
       Banking service fees (reductions)                         (0)          96,439           31,395            292,953
       Amortization of deferred financing costs             126,007          108,902          435,337            445,541
       Depreciation                                          15,922           16,035           47,266             49,429

                                                        =============================    ================================
                                                          3,776,357        3,303,498       10,556,614          9,912,752
                                                        =============================    ================================

                          OPERATING INCOME (LOSS )          524,579          (62,277)       1,778,861            758,329
                                                        =============================    ================================

       Special Charge                                    (1,500,000)               0       (1,500,000)                 0
       Settlement Income                                    295,000           55,500          295,000             75,500

       Income (loss) before benefit (provision)            (680,421)          (6,777)         573,861            833,829
                                                        =============================    ================================

       Benefit (provision) for income taxes                 764,530          (41,364)          41,765           (161,722)
                                                        =============================    ================================

                          NET INCOME (LOSS)                  84,109          (48,141)         615,626            672,107
                                                        =============================    ================================

Earnings per common share:


                                                        =============================    ================================
       Net income (loss)                                       0.01           (0.01)            0.11               0.12
                                                        =============================    ================================

Weighted average number of shares outstanding             5,823,529        5,733,969        5,823,529          5,733,969
                                                        =============================    ================================
</TABLE>

                See accompanying notes to financial statements.


                                     Page 4

<PAGE>

ITEM 1.  FINANCIAL STATEMENTS

              FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
              FISCAL NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                (UNAUDITED)           (UNAUDITED)
                                                                                  09/30/97              09/30/96
===================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                              <C>                   <C>         
     Net income (loss)                                                           $   615,626           $   672,107
     Adjustments to reconcile net income to net
         cash used in operating activities:
         Special Charge                                                            1,500,000
         Depreciation, depletion, amortization and valuation provisions              483,193               494,970
         Purchase discount earned                                                 (5,293,711)           (4,822,957)
         (Gain) Loss on sale of assets                                            (1,402,685)                    0
         Provision for loan losses                                                    86,915               578,918
         Deferred tax provision (benefit)                                           (359,892)              161,722
         Changes in assets and liabilities:                                               
          (Increase) decrease in:                                                         
              Accrued interest receivable                                            222,165                16,572
              Accounts receivable                                                   (220,610)               29,632
              Inventory-repossessions                                             (4,002,990)           (1,420,094)
              Other assets                                                           293,714                45,869
          Increase (decrease) in:                                                          
              Accounts payable and accrued expenses                                1,400,295               832,517
              Due to affiliates                                                       16,400                   851
              Income tax payable                                                     294,127
                                                                             ----------------      ----------------
                Net cash used in operating activities                             (6,367,453)           (3,409,892)

CASH FLOWS FROM INVESTING ACTIVITIES
     Distributions                                                                         0                     0
     Additional capital contributed                                                        0                     0
     Acquisition and loan fees                                                      (289,277)
     Purchase of property and equipment                                                    0                19,886
     Principal collections on notes receivable                                    13,272,488            21,219,046
     Acquisition of notes receivable                                             (19,986,365)          (10,362,046)
     Proceeds from sale of notes                                                   7,428,649
     Foreclosures on real estate                                                   2,127,308
     Joint venture participation                                                       6,486              (116,945)
     Advances to subsidiaries                                                        877,431
     Acquisition of furniture & equipment                                           (104,403)             (191,254)
     (Increase) in restricted cash                                                  (306,169)             (142,595)
                                                                             ----------------      ----------------
                Net cash used in investing activities                              3,026,148            10,426,092

CASH FLOWS FROM FINANCING ACTIVITIES
     Payments on debenture notes payable                                             (73,438)             (176,250)
     Capital contributions                                                                 0                     0
     Proceeds from lines of credit                                                   533,458               474,711
     Payments on lines of credit                                                    (395,606)           (1,049,920)
     Proceeds from long-term debt                                                 22,803,560            10,336,175
     Principal payments of long-term debt                                        (18,141,826)          (16,553,967)
                                                                             ----------------      ----------------
                Net cash provided by financing activities                          4,726,148            (6,969,251)
                                                                             ----------------      ----------------
                Net increase (decrease) in cash                                    1,384,843                46,949

CASH:
     Beginning                                                                     1,967,965             1,335,800
                                                                             ----------------      ----------------
     Ending                                                                       $3,352,808            $1,382,748
                                                                             ================      ================

                See accompanying notes to financial statements.
</TABLE>


                                     Page 5

<PAGE>

ITEM 1. FINANCIAL STATEMENTS

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

                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                                                                    
                                                         Common Stock               Additional       Retained 
                                                  =========================          Paid-In         Earnings 
                                                    Shares         Amount            Capital        (Deficit)          Total
==================================================================================================================================
<S>                                                 <C>            <C>             <C>               <C>               <C>       
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
                                                                                   
     Four-for-one stock Dividend                    4,414,450       44,144.50         (44,145)
                                                                                   
     Net Income                                                                                          615,626          615,626
                                                                                   
                                                  ================================================================================
Balance, September 30, 1997                         5,516,527     $ 55,167         $6,489,969        $(1,826,489)      $4,718,646
                                                  ================================================================================
</TABLE>

                See accompanying notes to financial statements.


                                     Page 6

<PAGE>

                                     PART I

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,  New York, New Jersey,  Washington DC, Maryland,
Pennsylvania 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  as a
licensed  mortgage banker in the state of Virginia is currently pending approval
with the Virginia 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 balances due from banks which, 


                                     Page 7

<PAGE>


at times, may exceed federally  insured limits.  The Company has not experienced
any losses from such concentrations.

         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 stated  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 that 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 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.


                                     Page 8

<PAGE>

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 less estimated costs of disposal 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.  If the OREO is  acquired  through a
portfolio  purchase,  the asset is carried at the lower of acquisition cost plus
any  capital  improvements  or the 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 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.


                                     Page 9

<PAGE>

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.

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 a  one-for-five  reverse stock
split  consummated  in 1996 and 


                                    Page 10

<PAGE>

a  four-for-one  stock  dividend  (as a result of which  stockholders  held five
shares for each previously held share.) consummated in September of 1997.

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.

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 11

<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 nine months ended  September 30,
1997, as compared with purchases of five portfolios of notes receivable, with an
aggregate  face  value  of  $17,771,004  for  an  aggregate  purchase  price  of
$10,360,46 or 58.2% of aggregate face value,  and no portfolios of OREO,  during
the nine months ended  September 30, 1996.  The Company  believes that this 121%
increase in total  acquisitions  reflects the more competitive bids submitted by
the  Company as a result of the  reduction  in its cost of funds.  See"-Cost  of
Funds." The Company did not acquire any  portfolios of notes  receivable  during
the three months ended  September 30, 1997 as compared with the purchases of two
portfolios of notes receivable with an aggregate face value of $8,883,055 for an
aggregate  purchase  price of $4,760,040 or 53.6% of aggregate face value during
the three  months  ended  September  30, 1996.  The Company  believes  that this
decrease reflected the availability of fewer portfolio  offerings for bid during
the three  months  ended  September  30, 1997 as compared  with the three months
ended  September  30,  1996.  The  Company  acquired  two  portfolios  of  notes
receivable with an aggregate face value of $4,798,131 for aggregate  purchase of
$2,753,886 or 57.4% of aggregate  face value  subsequent to the close of quarter
ended September 30, 1997. Based upon this acquisition and its historical  fourth
quarter experience, the Company believes that acquisition activity will increase
during the fourth quarter of 1997.

         In May 1997, the Company purchased a portfolio of $3.7 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 come to
believe  since the  closing of the  acquisition  that  certain  information  was
intentionally  omitted or removed from such files or kept in another  repository
of files which were not made available to the Company and that PCC intentionally
and  materially  misrepresented  the status and quality of the notes  receivable
included  in the  portfolio.  Although,  its  estimate  will be  refined  as the
purchased portfolio is seasoned,  the Company currently believes that as much as
approximately 90% of the principal amount of the portfolio may be uncollectable,
due to debtor  bankruptcies  or senior  credit  foreclosures  of the  underlying
collateral.  The Company has recorded, on its Consolidated Statement of Income a
Special Charge reflecting its current estimate of the  uncollectable  portion of
the purchase price of such portfolio.

         The Company has  initiated a suit and is seeking  recision of the asset
purchase  agreement or damages  incurred in connection  with the  purchase.  See
"Part II Item 1.  Legal  Proceedings."  The  Company's  litigation  


                                    Page 12

<PAGE>

counsel has advised the Company that it believes  the Company has a  substantial
probability of prevailing in such suit.

         During the nine months ended  September 30, 1997 and 1996  acquisitions
were  funded  through a term debt  facility  from a financial  institution  (the
"Senior Debt") of $21,415,449  and  $10,366,175,  respectively.  The Senior Debt
facility  provided for maximum  availability  of  approximately  $100 million at
September 30, 1997, of which approximately $78 million had been drawn down as of
such date. The Senior Debt lender has verbally informed the Company that it will
not deem  approximately  $11  million of Senior Debt that it had  syndicated  to
other  banks  as of  such  date  as  outstanding  for  purposes  of  determining
availability  under the Senior  Debt  Facility.  As a result,  the  Company  has
approximately $33 million available to purchase  additional  portfolios of notes
receivable.

         The Company  believes its  continuing  acquisitions  will  increase the
level of operating  income during future  periods.  However,  during the initial
period  following  acquisitions,  the Company  incurs the carrying  costs of the
related Senior Debt and the administrative  costs related to the new portfolios,
while 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.

         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 and OREO  portfolios.  The  Company
believes that its current infrastructure is adequate to service additional notes
receivable  in its core  business  without any  material  increases in expenses.
There can be no  assurance  the Company  will be able to acquire any  additional
notes  receivable  or that it may do so on  favorable  terms.  While  management
believes that the acquisition of additional portfolios of notes receivable 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.  Senior Debt accrues  interest at a variable  rate based
upon the prime rate. The weighted average interest rate on borrowed funds, which
include  interest,  amortization of origination fees, and service fees on Senior
Debt,  decreased by  approximately  .85% to  approximately to 8.85% for the nine
months ended September 30, 1997 from 9.70% for the nine months ended  September,
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.

         The Company's  decreased cost of funds reflects a reduction in interest
rates and fees negotiated with the Senior Debt lender in March 1997. Pursuant to
such  reduction,  effective  February 28, 1997,  Senior Debt incurred to finance
portfolio  acquisitions after December 31, 1996 bears interest at the prime rate
and Senior  Debt  incurred  prior to such date bears  interest at the prime rate
plus 1.75% rather the prime rate plus 2.125%.

         During the nine  months  ended  September  30, 1996 and the first three
months of 1997 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 and payment
of a 1% exit fee upon completing  repayment of the Senior Debt outstanding as of


                                    Page 13

<PAGE>

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.

         The Company's  portfolio  included Senior Debt of  approximately  $78.6
million as of September  30, 1997  compared to $73.5 million as of September 30,
1996.

         INFLATION.  The impact of inflation  on the  Company's  operations  was
immaterial  during both the nine months  ended  September  30, 1997 and the nine
months ended September 30, 1996.


RESULTS OF OPERATIONS

THREE MONTHS ENDED  SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED  SEPTEMBER
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 $1,059,715 or 33% to $4,300,936 for the three months ended
September 30, 1997,  from  $3,241,221  for the three months ended  September 30,
1996.

         The Company recognizes as interest income on notes receivable  included
in its portfolio 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 $30,657 or 2%, to $1,505,860  for the three months ended  September
30, 1997 from  $1,475,203  for the three months ended  September 30, 1996.  This
increase resulted  primarily from  restructuring  and  rehabilitation of certain
non-performing and sub-performing notes receivable and the acquisitions of notes
receivable  since the third quarter of 1996, which were only partially offset by
the sale of certain  performing notes receivable sold since the third quarter of
1996.  The majority of the loans  purchased  by the Company  bear  interest at a
fixed  rate;  consequently,  changes in market  interest  rates to not  directly
materially  affect interest  income. A bulk sale of notes receivable with a face
principal  amount of $2,744,262  was  consummated on the last day of the quarter
ended September 30, 1997 and,  therefore,  did not impact interest income during
the three months ended September 30, 1997.

         Purchase  discount  earned  increased by $502,071 or 30%, to $2,198,879
for the three months ended  September 30, 1997 from  $2,198,879 for three months
ended September 30, 1996. This increase  reflected the acquisition of additional
of notes  receivable  since the last quarter of 1996,  which was only  partially
offset by the aging of the portfolio and sales of  performing  notes  receivable
during the second and third quarters of 1997.

         Gain on sale of  portfolios  increased by $404,119 for the three months
ended  September 30, 1997 from $0 for the three months ended September 30, 1996.
This increase resulted from the increased frequency of notes receivable sales as
the Company continues to pursue its policy of restructuring  non-performing loan
to  performing   status,   seasoning  them  and  selling  them  at  economically
advantageous prices.

         Gain on sale of OREO  increased  by $76,443  to  $76,443  for the three
months ended September 30, 1997 from $0 for the three months ended September 30,
1996. This increase resulted from the Company's more aggressive marketing of its
OREO  properties  and the larger  inventory of OREO available for sale resulting
form increased foreclosure activity and OREO portfolio acquisition.


                                    Page 14

<PAGE>

         Total revenue as a percentage of net notes  receivable  included in the
Company's  portfolio  as of the  last  day of the  respective  quarters,  net of
allowance  for loan  losses,  was 5.9% for the three  months ended June 30, 1997
from 5.4% for the three months ended June 30, 1996. This increase  reflected the
increase in revenue generating  activities,  described above, which outpaced the
growth in total net notes receivable for such time periods.

         Total  operating  expenses  increased by $472,859 or 14%, to $3,776,357
for the three  months ended  September  30, 1997 from  $3,303,498  for the three
months ended September 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.

         Interest  expense  increased by $142,740 or 7.3%, to $2,085,835 for the
three months ended September 30, 1997 from $1,943,095 for the three months ended
September  30,  1996.  This  increase  reflected  increased  average  total debt
outstanding  of $9.4  million,  or 14.2%,  to $76 million  for the three  months
September  30, 1997,  as compared  with $66.6 million for the three months ended
September  30,  1996,  which was only  partially  offset by a  reduction  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.

         Amortization  of loan  origination  fees  increased  by $17,105 for the
three months ended  September  30, 1997 or 16% to $126,007 from $108,902 for the
three months ended  September 30, 1996.  This  increase  reflected the increased
principal  collection  from the  Company's  borrowers  in the three months ended
September 30, 1997.

         Service fee  expenses  decreased  by $96,439 for the three months ended
September  30, 1997 to $0 from 96,439 for the three months ended  September  30,
1996. This reflects the  renegotiation of the Company's Senior Debt obligations.
See "- General - Cost of Funds".

         Collection,  general and administrative  expenses increased by $543,845
or 57%,  to  $1,565,531  for the three  months  ended  September  30,  1997 from
$1,000,300 for the three months ended  September 30, 1996.  Collection,  general
and administrative  expenses include personnel expenses,  OREO related expenses,
litigation expenses and all other overhead expenses.

         Personnel  expenses increased by $161,583 or 59%, to $434,436 for three
months ended  September 30, 1997 from $272,853 for three months ended  September
30, 1996. This increase reflected the staffing of Liberty Lending, an upgrade in
staffing  for existing  positions  and the  commensurate  increase in salary for
those positions.

         OREO  expenses  increased  by $83,386 or 94%, to $171,990 for the three
months  ended  September  30,  1997  from  $88,604  for the three  months  ended
September 30, 1996.  This increase  resulted from the increased  carrying  costs
associated with the increase in OREO  properties.  Properties held as OREO as of
September  30, 1997,  increased  by  $6,460,703  or 136%,  to  $11,197,788  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  increased  by $97,759 or 31%, to $414,951 for the
three months ended  September  30, 1997 from $317,192 for the three months ended
September 30, 1996. This increase  reflected both an increase in the 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 


                                    Page 15

<PAGE>

assertive  legal defense by borrowers  attempting to preserve their  collateral,
thereby increasing the Company's legal expense.

         Direct collection expenses decreased by $3,126 or 9% to $31,452 for the
three  months ended  September  30, 1997 from $34,578 for the three months ended
September  30,  1996.  This  decrease  reflected  a  decrease  in the  number of
performing  notes receivable as a result of bulk sales as well as more efficient
collection  methods  which lead to improved  payment  patterns of the  Company's
borrowers.

         Provisions for loan losses decreased by $155,665 or 112%, to a negative
$16,938 for three months ended September 30, 1997 from $138,727 for three months
ended September 30, 1996. Provisions for loan losses, for the three months ended
September  30, 1997 and three months ended  September  30, 1996,  expressed as a
percentage of net notes receivable as of the last day of the respective periods,
was approximately -0.02% and 0.23%, respectively.  A negative provision for loan
loss  typically  represents an improved  performance  or settlements on seasoned
loans, which have had their loss provision established and fixed.

         Operating income increased by $589,856 to $524,579 for the three months
ended  September 30, 1997 from an operating loss of $62,277 for the three months
ended September 30, 1996 for the reasons set forth above.

         Settlement  income  increased  by $239,500  to  $295,000  for the three
months ended September 30, 1997 from $55,500 for the three months  September 30,
1996.  This increase  reflects an  improvement  the  performance of a receivable
arising  in  connection  with  certain  claims of the  Company  against  certain
principals of its corporate predecessor.

         In  connection  with  what the  Company  believes  is its  having  been
defrauded in its purchase  during May,  1997 of a portfolio of notes  receivable
from Preferred Credit  Corporation,  the Company has taken a $1.5 million charge
to income during the three months ended  September 30, 1997 in order to create a
reserve for what it has discovered to be the impaired  value of such  portfolio.
See "General- Pending Litigation." The portfolio was purchased for approximately
$1.8 million and the Company  currently  expects  approximately  $300,000 of the
notes  receivable in the portfolio to be  collectible.  The Company is currently
vigorously  pursuing  legal  remedies  from  PCC and  has  been  advised  by its
litigation  counsel that it has a substantial  probability of prevailing in such
suit. See "Part II. Item 1. Legal Proceedings."

         Provisions for income taxes decreased by $805,894 to a benefit $764,530
for the three  months ended  September  30, 1997 from a provision of $41,364 for
the three months ended  September  30, 1996.  This  decrease  resulted  from the
Company's  overestimation of its tax liabilities  during the first six months of
1997, as a result its  overly-conservative  assumption  that its available  loss
carry  forwards  would be exhausted  in its 1996 tax return,  which was filed on
September 15, 1997.

         Net income,  exclusive of the special  charge and tax benefits  arising
from such event,  increased  by $901,750 to $853,609 in the three  months  ended
September  30, 1997 from a loss of $48,141 for the three months ended  September
30,  1996.  Net income,  increased  by $132,250 to $84,109 for the three  months
ended  September  30,  1997 from a loss of $48,141  for the three  months  ended
September 30,1996.

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996

         Total revenue  increased by $1,664,394  or 16% to  $12,335,475  for the
nine months ended September 30, 1997, from $10,671,081 for the nine months ended
September 30, 1996.


                                    Page 16

<PAGE>

         Revenues from interest income on notes receivable  increased by $14,155
or .2%,  to  $4,666,408  for the nine  months  ended  September  30,  1997  from
$4,652,253 for the nine months ended September 30, 1996. This increase  resulted
primarily from  restructuring and  rehabilitation of certain  non-performing and
sub-performing  notes  receivable and the acquisitions of notes receivable since
the  third  quarter  of 1996  which  were only  partially  offset by the sale of
certain performing notes receivable sold since the third quarter of 1996. A bulk
sale  of  notes  receivable  with a face  principal  amount  of  $2,744,262  was
consummated  on the  last day of the  quarter  ended  September  30,  1997  and,
therefore, did not impact interest income during the nine months ended September
30, 1997.

         Purchase  discount  earned  increased by $507,316 or 11%, to $5,293,710
for the nine months ended September 30, 1997 from $4,786,394 for the nine months
ended September 30, 1996. This increase  reflected the acquisition of additional
notes receivable since the last quarter of 1996, which was only partially offset
by the aging of the portfolio and sales of performing  notes  receivable  during
the second and third quarters of 1997.

         Gain on sale of portfolios increased by $399,935, or 41%, to $1,377,454
for the nine months ended  September  30, 1997 from $977,519 for the nine months
ended September 30, 1996. This increase resulted from the increased frequency of
loan  sales as the  Company  continues  to pursue  its  policy of  restructuring
non-performing  loan to performing  status,  seasoning  them and selling them at
economically advantageous prices.

         Gain on sale of OREO  increased  by $723,319  to $759,882  for the nine
months ended September 30, 1997 from $36,563 for the nine months ended 30, 1996.
This increase resulted from the Company's more aggressive  marketing of its OREO
properties  and the larger  inventory of OREO  available for sale resulting form
increased foreclosure activity and OREO portfolio acquisition.

         Total revenue as a percentage of net notes  receivable  included in the
Company's  portfolio as of the last day of the nine months ended  September  30,
1997 increased to 17.0% for the nine months ended  September 30, 1997 from 17.8%
for the nine ended September 30, 1996. This decrease resulted primarily from the
increase  in net notes  receivable,  which  outpaced  the  increase  in  revenue
generating activities for such periods.

         Total operating expenses increased by $643,862 or 6%, to $10,556,614 in
the nine months  ended  September  30, 1997 from  $9,912,752  in the nine months
ended September 30, 1996.

         Interest  expense  increased by $479,293 or 8.4%,  to $6,209,639 in the
nine months  ended  September  30, 1997 from  $5,730,346  for nine months  ended
September 30, 1996.  This  increase  reflected  increased  average total debt of
outstanding  of $9.4 million,  or 14.8% to $76 million for the nine months ended
September  30, 1997 as  compared  with $66.6  million for the nine months  ended
September  30,  1996,  which was only  partially  offset by a  reduction  in the
weighed average interest rate of the Company's total outstanding debt.

         Service  fees  decreased  by  $261,558  or 89%, to $31,395 for the nine
months  ended  September  30,  1997  from  $292,953  for the nine  months  ended
September  30, 1996.  This  decrease  resulted  from a reduction in service fees
negotiated  with the  Company's  Senior  Debt lender in  September  1996 and the
elimination  of service fees  negotiated  with the Company's  Senior Debt lender
effective February 28, 1997 See "General - Cost of Funds."

         Amortization of loan  origination  fees decreased  $10,204 for the nine
months ended  September  30, 1997 or 2% to $435,337  from  $445,541 for the nine
months ended September 30, 1996.  Amortization of loan  origination fees related
to bulk notes  receivable  sales gain on sale of notes  receivable  rather  than
included in amortization of loan origination fees.


                                    Page 17

<PAGE>

         Collection,  general and administrative  expenses increased by $930,497
or 33%,  to  $3,746,062  for the nine  months  ended  September  30,  1997  from
$2,815,565 for the nine months ended September 30, 1996.

         Personnel  expenses increased by $250,503 or 30%, to $1,087,805 for the
nine months  ended  September  30, 1997 from  $837,302 for the nine months ended
September 30, 1996. This increase reflected the staffing of Liberty Lending,  an
upgrade in staffing  for existing  positions  and the  commensurate  increase in
salary for those positions.

         OREO  expenses  increased  by $143,644 or 60%, to $347,491 for the nine
months  ended  September  30,  1997  from  $203,847  for the nine  months  ended
September 30, 1996.  This increase  resulted from the increased  carrying  costs
associated with the increase in OREO  properties.  Properties held as OREO as of
September  30, 1997,  increased  by  $6,460,703  or 136%,  to  $11,197,788  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  increased by $146,091 or 17%, to $994,560 for the
nine months  ended  September  30, 1997 from  $848,469 for the nine months ended
September 30, 1996. This increase  reflected both an increase in the 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 $35,059  or 16%,  to  $188,654  for the nine  months  ended
September 30, 1997 from  $223,713 for the nine months ended  September 30, 1996.
This decrease  reflected a decrease in the number performing notes receivable as
a result of bulk sales as well as more efficient  collection  methods which lead
to improved payment patterns of the Company's borrowers.

         Operating income increased by $1,020,532 or 135%, to $1,778,861 for the
nine months ended September 30, 1997 from income of $833,829 for the nine months
ended September 30, 1996.

         Settlement income increased by $219,500 to $295,000 for the nine months
ended  September  30, 1997 from $75,500 for the nine months  September 30, 1996.
This increase reflects an improvement the performance of a receivable arising in
connection with certain claims of the Company against certain  principals of its
corporate predecessor.

         In  connection  with  what the  Company  believes  is its  having  been
defrauded in its purchase  during May,  1997 of a portfolio of notes  receivable
from Preferred Credit  Corporation,  the Company has taken a $1.5 million charge
to income during the three months ended  September 30, 1997 in order to create a
reserve for what it has discovered to be the impaired  value of such  portfolio.
See "General- Pending Litigation." The portfolio was purchased for approximately
$1.8 million and the Company  currently  expects  approximately  $300,000 of the
notes  receivable in the portfolio to be  collectible.  The Company is currently
vigorously  pursuing  legal  remedies  from  PCC and  has  been  advised  by its
litigation  counsel that it has a substantial  probability of prevailing in such
suit. See "Part II. Item 1. Legal Proceedings."

         The  Provision  for income taxes  decreased by $203,487 to a benefit of
$41,765 for the nine months ended  September 30, 1997 from $161,722 for the nine
months ended  September  30, 1996.  This increase  resulted from higher  taxable
income.


                                    Page 18

<PAGE>

         Net income,  exclusive of the special  charge and tax benefits  arising
from such event,  increased by $713,019 to $1,385,126  for the nine months ended
1997 from  $672,107 for the three months  ended 1996.  Net income,  decreased by
$56,481 to $615,626 for the three months ended September 30, 1997 from a loss of
$672,107 for the three months ended September 30,1996.

LIQUIDITY AND CAPITAL RESOURCES

         GENERAL.  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 nine months ended September 30, 1997, as compared
with purchases of five  portfolios of notes  receivable,  with an aggregate face
value of $17,771,004 for an aggregate  purchase price of $10,336,175 or 58.2% of
aggregate  face value,  and no portfolios of OREO,  during the nine months ended
September 30, 1996. The Company believes that its increased  purchases reflected
attractive market  opportunities,  the reduction in the Company's cost of funds,
redirection of portfolio  acquisition  efforts to private  negotiated  purchases
from  independent  financial  institutions  from the  FDIC/RTC  competitive  bid
auctions, 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  nine  months  ended   September  30,  1997,   the  Company
renegotiated its credit arrangements with its Senior Lender thereby reducing its
cost of funds and increasing its price competitiveness. See "- General - Cost of
Funds".  The Company believes that the redirection of its marketing  efforts and
the reduction in its cost of funds have enhanced its competitiveness.

         The Company's portfolio of notes receivable at September 30, 1997 had a
face  value  of  approximately  $117.9  million  and net of  purchase  discount,
allowance for loan losses,  and joint venture  participation  included net notes
receivable of  approximately  $72.4  million.  The Company's  portfolio of notes
receivable  at  September  30,  1996 had a face  value of  approximately  $103.7
million and included net notes  receivable of approximately  $59.8 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 nine months ended  September 30, 1997, the Company used cash
in the amount of $6,367,453 in its operating  activities  primarily for interest
expense,  ordinary  litigation  expense incidental to its collection efforts and
for the foreclosure and improvement of OREO and overhead.  The Company generated
$23,012,513  from  its  investment  activities,  primarily  from  the  principal
collection  of $13.3  million,  sale of  performing  notes  receivable  for $7.4
million and the sale of OREO for $2.1 million,  which were only partially offset
by uses of $20,606,206  primarily from the  acquisitions of notes receivable for
$19.9  million,  resulting in net sources of cash from  investing  activities of
$3,026,148.  The Company  generated  $23,337,018  from its financing  activities
primarily from Senior Debt of $22.8 million which was only  partially  offset by
uses of  $18,618,870  primarily  from the  principal  repayment of $18.1 million
resulting  in  source of  $4,726,148.  The above  activities  resulted  in a net
increase of cash for the nine months ended September 30, 1997 of $1,384,843.

         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 direct purchase of OREO
portfolios,  at September 30, 1997 and September 30, 1996, the Company held OREO
having a net value of $11,197,788 and $6,239,973, respectively. OREO is recorded
on the  financial  statements of the 



                                    Page 19

<PAGE>

Company  at the  lower of cost or fair  market  value  less  estimated  costs of
disposal. 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.  The Company has implemented a strategy of capitalizing
on the OREO processing  capabilities  developed in its notes receivable business
by purchasing  portfolios of OREO when it believes that they may be purchased at
a  discount  to the value of the  properties  when  purchased  individually  and
processing  such OREO as it would an OREO  acquired  upon  foreclosure  of notes
receivable.

         On  September  30,  1997  and  1996,  the  Company  held no  automobile
inventory.  The approximate  face amount of notes receivable  collateralized  by
automobiles was $251,563,  or .20% of total notes receivable,  with an estimated
collectable  balance of  $146,154,  or .15% of total  collectable  balances,  at
September 30, 1997. The Company has ceased to purchase notes receivable  secured
by automobiles.  Management  believes that any additional  automobile  inventory
acquired  in the  ordinary  course  of  business  from the  Company's  remaining
automobile loans will be sold.

         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. In the first
quarter  of  1997  the  Company   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. During October, 1997, the Company negotiated with
its Senior Debt lender an  adjustment  to the  amortization  of its  outstanding
Senior Debt to take into account the fact that as a result of the interaction of
the required  payment  provisions of the Senior Debt and the  Company's  sale or
collection of certain notes  receivable had resulted in the Company repaying the
Senior  Debt far more  quickly  than  provided  for  under the  minimum  payment
provisions.  The expected impact of the adjusted  amortization will be to reduce
the  required  minimum  principal  payments  under the Senior  Debt.  Management
estimates  that the impact of such  reduction for October 1997 will be to reduce
the required minimum monthly payment by approximately 24%.

         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.


                                    Page 20

<PAGE>

CASH FLOW FROM OPERATING AND INVESTING ACTIVITIES

         Substantially  all of the assets of the  Company  are  invested  in its
portfolio of notes  receivable  and OREO.  The Company's  primary source of cash
flow for operating and investing  activities is collections on notes  receivable
and the sale of OREO.  See  "General".  At September  30, 1997,  the Company had
cash, cash equivalents and marketable  securities of approximately $4.6 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.

         From  time  to  time,   the  Company   seeks  merger  and   acquisition
opportunities of companies in the specialty financing industry.  For example, in
May,  1997,  the Company  through its wholly owned  subsidiary  Liberty  Lending
Corporation  ("Liberty"),  entered  into a letter  of  intent  (the  "Letter  of
Intent")  to  acquire  certain  assets  and  retain a  principal  of K  Mortgage
Corporation ("K"), an originator  specializing in Federal Housing Administration
mortgages under the FHA/203K program. Although this acquisition may not be fully
consummated due to the resignation of K's principal,  Liberty  continues to seek
to enter the market for 203K and other mortgage products. In addition to seeking
candidates for merger and  acquisitions in specialty  finance areas, the Company
engaged an  executive  search  firm to assist it in  identifying  and  retaining
experienced  personnel  to add such  specialty  products to  Liberty's  mortgage
product line.  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 September 30, 1997, the Company and its wholly owned
subsidiaries  owed an aggregate  amount of  approximately  $78 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,  bulk sales of performing notes receivable and sales
of OREO. 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. During October,  1997, the Company
negotiated with its Senior Debt lender an adjustment to the  amortization of its
outstanding  Senior  Debt to take into  account the fact that as a result of the
interaction  of the  required  payment  provisions  of the  Senior  Debt and the
Company's  sale or collection of certain  notes  receivable  had resulted in the
Company  repaying the Senior Debt far more  quickly than  provided for under the
minimum payment  provisions.  The expected  impact of the adjusted  amortization
will be to reduce the required minimum principal payments under the Senior Debt.
Management  estimates that the impact of such reduction for October 1997 will be
to reduce the required minimum monthly payment by approximately  24%. The Senior
Debt  accrues  interest at variable  rates  ranging from the 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.

         The first quarter of 1996 the Company  negotiated  with its Senior Debt
lender the  elimination of service fees,  reduce the interest rates and increase
the portion of collections  retained by the Company for operations after 


                                    Page 21

<PAGE>

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".

         Certain of the Senior Debt loan 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 an interest  bearing  account,  with
the Senior Debt lender.  Restricted cash may be accessed by the lender only upon
the Company's  failure to meet the minimum  monthly  payments due if collections
from  notes  receivable  securing  the  loan are  insufficient  to  satisfy  the
installment due.  Historically,  these reserves have not been called on for this
purpose.  The  aggregate  balance of  restricted  cash on December  31, 1997 was
$1,238,541, which included $262,450 in escrow balances held by Liberty on behalf
of  borrowers  or other  lenders,  the balance  compares to  restricted  cash on
September 30, 1996 of $828,845.

         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 is 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  September  30, 1997 and  December 31,  1996,  were  $559,618  and  $583,916,
respectively. Advances made under the line of credit were used to satisfy senior
lien  positions  and fund  property  capital  improvements  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.

         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  of which  $555,000  were  issued.  As at
September 30, 1997 $532,800 of these debentures were outstanding and at December
31, 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 September 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 its portfolio of
notes receivable.

         12% DEBENTURES.  In connection with the acquisition of a loan portfolio
during  1994,  the  Company  offered  to  investors   $750,000  of  subordinated
debentures of which $705,000 were issued.  As of September 30, 1997 and December
31,  1996,  $440,625  and  $396,562,  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 22

<PAGE>

                                     PART II

ITEM 1.  LEGAL PROCEEDINGS

         On August 19, 1997 the Company filed suit in the United States District
Court  for  the  Southern   District  of  New  York  against   Preferred  Credit
Corporation,  and Todd Rodriguez and Lori Cartwright, each of whom is alleged to
be or have been a director or employee  of PCC.  In its  complaint,  the Company
alleges common law fraud and negligent misrepresentation,  unjust enrichment and
breach of contract,  in connection with a purchase by it of a portfolio of notes
receivable from PCC in May, 1997. See "Part I Pending  Litigation."  The Company
is  seeking  recision  of  its  purchase  or  compensatory,   consequential  and
incidental damages, as well as all of its costs, fees and interest.  The Company
is currently seeking pretrial discovery.

         The Company has been advised by its litigation counsel that it believes
that the Company has a  substantial  probability  of  prevailing  and intends to
vigorously pursuing a recovery.

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. The vote  tabulation  does not reflect the effects of a stock dividend
consummated after the date of such meeting.

        DIRECTOR              FOR      AGAINST    NOT VOTING        TOTAL
----------------------      -------    -------    ----------      ---------
Thomas J. Axon              970,088      158       133,213        1,103,459
Frank B. Evans, Jr.         970,088      158       133,213        1,103,459
Steven W. Lefkowitz         970,088      158       133,213        1,103,459
                                               
                                             
INDEPENDENT PUBLIC AUDITORS    FOR     AGAINST  ABSTAIN  NOT VOTING     TOTAL
---------------------------   -------  -------  -------  ----------   ---------
McGladrey & Pullen, LLP       969,948    100      198     133,213     1,103,459

ITEM 5.  OTHER INFORMATION
                  None


                                    Page 23
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)                                         EXHIBIT TABLE
                  EXHIBIT
                  NO.                       DESCRIPTION
                  3(a)        Restated Certificate of Incorporation.  Previously
                              filed with, and  incorporated by reference to, the
                              Company's  10-KSB,  filed with the  Commission  on
                              December 31, 1994.

                    (b)       Bylaws of the Company.  Previously filed with, and
                              incorporated herein by reference to, the Company's
                              Registration  Statement on Form S-4, No. 33-81948,
                              filed with the Commission on November 24, 1994.

                  4(a)        15% Convertible Subordinate Debentures. Previously
                              filed with, and  incorporated  herein by reference
                              to, the Company's  Registration  Statement on Form
                              S-4, No.  33-81948,  filed with the  Commission on
                              November 24, 1994.

                    (b)       Warrants  associated  with principal  repayment of
                              the  15%  Convertible   Subordinated   Debentures.
                              Previously filed with, and incorporated  herein by
                              reference to, the Company's Registration Statement
                              on  Form  S-4,  No.   33-81948,   filed  with  the
                              Commission on November 24, 1994.

(b)      Reports on Form 8-K.       None



                                    Page 24
<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.

November 18, 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.

<TABLE>
<CAPTION>
SIGNATURE                            TITLE                               DATE

<S>                          <C>                                     <C>
 THOMAS J. AXON              President, Chief Executive Officer      November 18, 1997
--------------------         and Director                            -----------------
 Thomas J. Axon              (Principal executive officer)
                             


 FRANK B. EVANS, Jr.         Vice President, Treasurer,              November 18, 1997
--------------------         Chief Financial Officer and Director    ------------------
 Frank B. Evans, Jr.         Secretary (Principal financial and 
                             accounting officer)
                                                                                  
                             


 JOSEPH CAIAZZO              Vice President, Chief Operating         November 18, 1997
---------------------        Officer and Director                    -----------------
 Joseph Caiazzo              
</TABLE>


                                    Page 25

<PAGE>

EXHIBIT 11

COMPUTATION OF EARNINGS PER SHARE THIRD QUARTER 1996

<TABLE>
<CAPTION>
                                                       NO. OF SHARES              WEIGHT
                                                       -------------              ------
<S>                                                       <C>                      <C>           <C>      
        12/31/95          Common stock                    5,503,896
                          O/S warrants                      137,674
                                                      --------------
                                                          5,641,570                25%           1,388,015

        03/31/96          Common stock                    5,503,896
                          O/S warrants                      127,349
                          Warrants exercised                 10,225
                                                      --------------
                                                          5,641,470                25%           1,387,965

        06/30/96          Common stock                    5,503,896
                          O/S warrants                      127,349
                          Warrants exercised                (17,216)
                          Stock options                     209,500
                                                      --------------
                                                          5,823,529                25%           1,478,995
                                                      ==============

                                                      ==============

        06/30/96          Common stock                    5,503,896
                          O/S warrants                      127,349
                          Warrants exercised                (17,216)
                          Stock options                     209,500
                                                      --------------
                                                          5,823,529                25%           1,478,995
                                                                                            ---------------
                                                      ==============
                                                         22,930,098
                                                      ==============

                          WEIGHTED AVERAGE NUMBER OF SHARES                                      5,733,969

Earnings per Common share:
                          Net Income                   $      672,107                            $    0.12


FOOTNOTE:                 THIS IS A REFLECTION OF THE STOCK SPLIT AND
                          THE 4 FOR 1 STOCK DIVIDEND.


                                    Page 26
<PAGE>

COMPUTATION OF EARNINGS PER SHARE 3RD QUARTER 1997


                                                      NO. OF SHARES              WEIGHT
                                                      -------------              ------
        12/31/96          Common stock                    5,503,896
                          O/S warrants
                          (extended for 1 year)             110,133
                          Stock options                     209,500
                                                        ------------
                                                          5,823,529                25%           1,455,882

        03/31/97          Common stock                    5,503,896
                          O/S warrants                      110,133
                          (extended for 1 year)
                          Stock options                     209,500
                                                        ------------
                                                          5,823,529                25%           1,455,882

        06/30/97          Common stock                    5,503,896
                          O/S warrants                      110,133
                          (extended for 1 year)
                          Stock options                     209,500
                                                        ------------
                                                          5,823,529                25%           1,455,882

        09/30/97          Common stock                    5,503,896
                          O/S warrants                      110,133
                          (extended for 1 year)
                          Stock options                     209,500
                                                        ------------
                                                          5,823,529                25%           1,455,882
                                                                                             --------------
                                                        ============
                                                         23,294,116
                                                        ============

                          WEIGHTED AVERAGE NUMBER OF SHARES                                      5,823,529

Earnings per Common share:
                          Net Income                    $    615,626                         $        0.11

</TABLE>

FOOTNOTE:                 THIS IS A REFLECTION OF THE STOCK SPLIT AND
                          THE 4 FOR 1 STOCK DIVIDEND.



                                    Page 27