NATIONAL AFFILIATED CORP
10QSB, 1998-02-09
LIFE INSURANCE
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         UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549
                           Form 10-QSB
(Mark one)
 X  QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended               September 30, 1997               .

      TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from                                 to            
Commission file number                0-13538              

                 NATIONAL AFFILIATED CORPORATION

(Exact Name of small business issuer as specified in its charter)

                   Louisiana                        72-0947819                
    (State or other jurisdiction of(I.R.S. Employer Identification
     incorporation or organization)Number)

7228 England Drive, Suite 24, P.O. Box 12190, Alexandria, LA 71315

             (Address of principal executive offices)

                          (318) 473-4355

        (Insurer's telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last 
report)

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

               APPLICABLE ONLY TO ISSUERS INVOLVED
                 IN BANKRUPTCY PROCEEDINGS DURING
                    THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be 
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution 
of securities under a plan confirmed by a court. Yes     No    

              APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.

Registrant had 10,105,934 Voting Common Shares outstanding on 
September 30, 1997.

                  PART I - FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 
<TABLE>
<S>                                          <C>          <C>
                                                 1997        1996
ASSETS:
Cash                                            $175,179    $195,835
Invested assets:                                          
   Fixed maturities available-for-sale at mar  1,772,121   1,227,902
   Equity securities available-for-sale at ma    445,780      80,938
   Mortgage loans                              1,661,988   1,425,000
   Collateral loans                              202,500     881,822
   Other long-term investments at equity          97,268     127,775
   Other long-term investments at market          39,000           0
   Certificates of deposit, time deposits and    805,361      24,673
   Restricted assets at market                 1,033,568   1,032,000
Accrued investment income                        127,051      62,313
Finance notes receivable - net                     2,545       7,117
Policy loans                                     106,829     107,830
Reinsurance receivable                           737,533     679,623
Other amounts receivable:                     
   Premiums due and uncollected                   75,714      25,458
   Agents' balances (net of allowance for unc             
     account of $150,000 in 1997 and 1996)       187,087     138,133
   Other                                         669,560   2,139,330
Property - net                                   132,870     136,839
Deferred policy acquisition costs                758,261     966,545
Investment in Life One, Inc                    3,788,911           0
Other assets                                   1,108,677      21,482
TOTAL                                        $13,927,803  $9,280,615
                                              
LIABILITIES AND STOCKHOLDERS' EQUITY:         
Policy benefit reserves                        3,366,970  $3,650,190
Policy claims                                    471,985     961,697
Unearned premiums                                 24,371      24,642
Dividends left on deposit                        245,279     304,697
Advance premium deposits                         119,941     168,141
Other policyholders' funds                        17,831      11,452
Accounts payable and accruals                    186,351     301,464
Debentures                                     3,798,000           0
   Total liabilities                           8,230,728   5,422,283
Commitments and contingent liabilities
Stockholders' equity:
   Voting common shares, no par; 14,000,000 s             
    authorized; 10,105,934 and 8,740,915 shar 10,461,891   9,275,003
   Additional paid-in capital                    154,500     154,500
   Net unrealized investment gains (losses)     (112,784)   (508,846)
   Accumulated deficit                        (4,806,532) (5,062,325)
   Total stockholders' equity                  5,697,075   3,858,332
TOTAL                                        $13,927,803  $9,280,615
</TABLE>
See notes to consolidated financial statements.
 

NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<S>                              <C>       <C>        <C>     <C>

                                       Three Months          Nine Months
                                   1997      1996      1997      1996
REVENUES:
Insurance premiums               $471,564  $425,160 1,687,244 1,428,715
Net investment income             103,214    64,034   273,510   378,880
Other income                      185,076    13,310   886,332    45,145
   Total revenues                 759,854   502,504 2,847,086 1,852,740

EXPENSES:
Increase (decrease) in policy be  (45,069)   (4,075) (360,372)  (44,404)
Claims and other benefits         217,639   243,935 1,110,439   939,458
Policyholder dividends              2,375     2,927     7,927    10,606
Commission expense                 52,164    68,110   175,126   222,879
Depreciation and amortization      19,930    51,008    41,469    65,898
Interest expense                   17,599    10,519    51,058    40,711
Salaries, wages and taxes         113,621   190,464   326,946   558,590
Operating expense                 248,041   732,943   682,565 1,424,785
Restructuring expense             252,527         0   347,851         0
Amortization of deferred acquisi   51,120    83,772   208,284   321,469
   Total expenses                 929,947 1,379,603 2,591,293 3,539,992

GAIN (LOSS) BEFORE INCOME TAXES  (170,093) (877,099)  255,793 (1,687,252)

PROVISION FOR INCOME TAXES              0         0         0         0

NET GAIN (LOSS)                 ($170,093)($877,099) $255,793 ($1,687,252)

GAIN (LOSS) PER COMMON SHARE       ($0.02)   ($0.24)    $0.03    ($0.48)
        (primary and fully diluted)

WEIGHTED AVERAGE COMMON 
     SHARES OUTSTANDING         9,528,034 3,635,586 9,021,066 3,531,521
</TABLE>
                                                     

See notes to consolidated financial statements.

NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<S>                                             <C>      <C>
                                                 1997        1996
Cash flows from operating activities:
Net gain (loss)                                 $255,793 ($1,687,252)
Non-cash and non-operating items:
   Loss (gain) on sale of invested assets         12,861    (244,332)
   Depreciation and amortization                   3,969      65,898
Change in assets and liabilities:
   Deferred policy acquisition costs             208,284     321,469
   Policy benefit reserves and unearned premi   (283,491)    (83,550)
   Policy claims                                (489,712)   (217,332)
   Equity write-down of other long-term inves     30,507      12,441
   Accounts payable and accruals                (115,113) (1,435,086)
   Due from reinsurance companies                (57,910)     80,032
   Other                                         265,905     608,514
Net cash provided from (used in) operating ac   (168,907) (2,579,198)
Cash flows from investing activities:
Acquisitions of:
   Invested assets
      Fixed maturities available-for-sale     (1,319,923) (1,420,120)
      Equity securities available-for-sale      (262,500)   (250,000)
      Mortgage loans                            (236,988) (1,045,715)
      Collateral loans                          (362,500)   (881,822)
      Other long-term investments                (39,000)          0
      Certificates of deposit, time deposits,   (780,688)          0
   Finance notes receivable                            0     (10,000)
   Property                                            0     (10,991)
Proceeds from:
   Invested assets
      Fixed maturities available-for-sale        804,399   3,340,308
      Equity securities avaiable-for-sale        250,596           0
      Collateral loans                         1,041,822           0
      Other long-term investments                      0      29,000
      Certificates of deposit and time deposi          0     141,480
   Finance notes receivable                        4,572       1,041
Policy loans                                       1,001     (15,670)
Agent's balances - net                           (48,954)      2,020
Net cash (used in) provided from investing ac   (948,163)   (120,469)
Cash flows from financing activities:
Withdrawals of dividends and advance premiums    (99,563)    (94,884)
Sale of preferred and common stock             1,186,888   2,634,840
Sale of convertible debentures                 3,798,000           0
Investment in Life One, Inc.                  (3,788,911)          0
Net cash provided from financing activities    1,096,414   2,539,956
Net decrease in cash                             (20,656)   (159,711)
Cash at beginning of year                        195,835     306,686
Cash at end of period                           $175,179    $146,975

Supplemental cash flows disclosures:
Interest paid                                    $32,770     $24,085
Income taxes paid                                     $0          $0
</TABLE>
See notes to consolidated financial statements.


NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997  

NOTE 1 - REPRESENTATION BY MANAGEMENT


The unaudited consolidated financial statements included herein reflect all
normal, recurring adjustments which are necessary to a fair presentation of
the consolidated financial position, results of operations and cash flows for
the interim periods presented.

The results of operations for the nine month period ended September 30,
1997, are not necessarily indicative of the results to be expected for the
entire year of 1997.


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF
          OPERATION

Management's discussion and analysis reviews the consolidated financial
condition of National Affiliated Corporation ("NAC" or "the Company") at
September 30, 1997 and December 31, 1996, the consolidated  results of
operations for the periods ended September 30, 1997 and 1996, and, where 
appropriate, factors that may affect future financial performance.  This
discussion should be read in conjunction with the  accompanying 
consolidated  financial  statements, notes thereto and selected financial
data.

The Company and its controlling stockholder, The Southern Group, Inc.
("TSG"), have formed a corporate joint venture - Life One, Inc. ("Life
One"), which was incorporated in Delaware on June 24, 1997.  T. Brent
Chapel , and Michael Dugan own or have a beneficial interest in the
majority of TSG stock.  The Company has contributed the proceeds of a
$3,788,911 convertible debenture offering netting $2,778,423  for 75% of
the authorized and outstanding common shares (750 shares) of Life One,
Inc.  TSG contributed 100,000 shares of common stock, which is 100% of
the issued and outstanding shares of Southern Mortgage, Inc., a
commercial mortgage company located in San Juan Capistrano, California, 
and 200,000 shares of common stock, which is 100% of the issued and
outstanding shares (1,000,000 shares are authorized) of Maryland Southern
Life Insurance Company, a Maryland domiciled life insurance company
("MSLIC") located in Towson, Maryland. The contribution of MSLIC to
Life One is subject to the approval of the Maryland Insurance
Commissioner.  TSG received 250 common shares or 25% of the issued
and outstanding stock of Life One, Inc. for its contributions.

The Company has settled all of the Alabama lawsuits and, as is discussed
under Legal Proceedings, has reached an agreement to settle the FLA-100
policyholder class action lawsuit, which was the last material lawsuit.  See
ITEM 1. Legal Proceedings.

Previously, the Company, through its wholly-owned subsidiary, National
Affiliated Investors Life Insurance Company ("NAIL"), issued life and
accident and health insurance policies to customers in targeted niche
markets in urban and rural areas.  Beginning in 1997, the Company
changed its focus to reduce its operating and marketing costs and to begin
steps to acquire other life insurance companies. 

Financial Condition

The Company's assets at September 30, 1997, totaled $13,927,803 as
compared to $9,280,615 on December 31, 1996. Liabilities totaled
$8,230,728 and $5,422,283 on September 30, 1997 and December 31,
1996, respectively. Stockholders' equity increased to $5,697,075 at
September 30, 1997, from $3,858,332 at December 31, 1996. Equity
securities increased by $364,842 due to common stocks included in the
recapture of the life insurance block. Effective December 31, 1995, NAIL
and Maryland Southern Life Insurance Company (MSLIC) entered into a
coinsurance agreement whereby MSLIC assumed 80% of all the life
insurance business retained by NAIL. This agreement was terminated
December 31, 1996 and the ceded business was recaptured by NAIL. This
is a nonrecurring transaction. Insurance companies use coinsurance and
reinsurance to increase their statutory capital. This practice is more
common in small insurance companies. The practice provides additional
statutory capital immediately, but also has a negative impact on profits in
the long run. The securities were sold in the second quarter of 1996 for a
profit. Other amounts receivable decreased by $1,653,395 primarily as a
result of the reversal of the coinsurance transaction in February 1997.
Policy benefit reserves decreased by $283,220 due to a decrease in the
number and amount of policies. The reserves also decreased due to the
reduction in cash outflows, which is a component of reserves if the
company is losing money. The reduction in cash outflows resulted from the
cost reduction program. 

Through September of 1997, the Company's earnings per share were $.03
on net income of $255,793, as compared to a loss per share in the same
period of 1996 of $.48 on a loss of  $1,687,252.  Premium revenues
exceeded the first nine months of 1996 by $258,529, or 18%, due to
recapture of the 80% coinsurance from MSLIC in the first quarter of 1997.
Other income increased $841,187 due to restructuring of the New Mexico
Health program. Policy claims and other benefits increased by $170,981, or
18%. This was due to large health claims which occurred in the first four
months of the year. Salaries were reduced by 42% and other operating
expenses were reduced by $742,220, or 52%. These improvements were
due to outsourcing of operations and cost reduction programs implemented
by new management.

Results of Operations

1997 Compared to 1996

The Company had a net profit for the first nine months of 1997 of
$255,793 compared to a loss of $1,687,252 for the nine months ended
September 30, 1996.  The earnings per common share were $.03 through
September of 1997 compared to a loss of $.48 for the same period 1996. 
Total revenues through September of 1997 increased to $2,847,086 from
$1,852,740 in 1996.  Premium revenues increased to $1,687,244 in the first
nine months of 1997 from $1,428,715 in 1996.
<TABLE>
          <S>                       <C>                <C>
                                     Nine months ended September 30,
                                         1997              1996  
          Life premium               $ 605,098          $ 769,385
          Life reinsurance premiums    (16,452)          (493,092)
          A & H premiums             1,273,016          1,292,747
          A & H reinsurance premiums  (174,418)          (140,325)
          
          Total premium revenues    $1,687,244         $1,428,715
</TABLE>
          
     
Although total premiums increased, life premiums declined as a result of
continuing lapses of FLA-100 policies.  The Company ceased paying
significant dividends on these policies in 1992 when the Board of Directors
determined the projected dividend to be excessive.  This action has caused
the lapse rate of these policies to increase. 

The increase in the accident and health (A&H) premium is the result of
adding additional members to the New Mexico group business.  The
Company has received a 33% rate increase, which is effective October 1,
1997. Additional savings of 6% were also obtained through benefit
reductions.  

Net investment income decreased to $273,510 as of September 30, 1997 as
compared to $378,880 at September 30, 1996. This decrease was due to
capital gains realized from the sale of assets in connection with a
coinsurance transaction in the first quarter of 1996.

The Company's claims and other benefits increased to $1,110,439 for the
first nine months of 1997 from $939,458 for the same period of 1996.  The
increase is the result of the claims incurred on the New Mexico policies
described above. These claims were due to seven extraordinary cases
including several leukemia cases and several premature births. Reinsurance
covered a portion of the costs. Only one case of this magnitude occurred in
the six years previous to this period. This unusual number of claims is not
expected to occur again in future periods. The composition of benefits and
claims for the nine months ending September 30 are as follows:
<TABLE>
          <S>                         <C>                 <C>
                                       Nine months ended September 30,
                                            1997              1996  
                    
          Life benefits                 $ 245,584          $ 50,383
          A & H benefits                  864,855           889,075
                  
          Total benefits              $ 1,110,439         $ 939,458
</TABLE>
          
     

Commission expense decreased to $175,126 for the first nine months of 
1997 from $222,879 for the first nine months of 1996, primarily as a result
of decreased sales of life policies.  The composition of commission expense
was as follows:
<TABLE>
          <S>                      <C>             <C>
          
                                 Nine months ended September 30,
                                      1997            1996  
          
          Life commissions          $ 39,513       $ 112,290
          A & H commission           135,613         889,075
          
          Total                    $ 175,126       $ 222,879
          
</TABLE>
     

Salaries and operating expenses decreased to $1,009,511 through
September of 1997 from $1,983,375 in 1996. The Company expects
additional decreases in salaries and other operating expenses during the
remainder of 1997. The Company has moved its offices and decreased its
rent, utility and maintenance costs. The Company has downsized its staff
by 76% and out-source its computer and policy administrative services. 
These changes are expected to result in a further decrease in these expenses
in 1997.  Management is continuing to evaluate operations to further
reduce operating costs. 

The Company has experienced excessive costs in the third quarter related
to the settlement of the FLA-100 policyholder class action lawsuit. These
costs include actuarial reviews and litigation attorneys costs. 

Conseco Capital Management (CCM), an asset management company with
$29 billion of assets under management, manages the assets of the
Company. Based on CCM's historical record of investing assets, the
Company expects to see an improvement in its investment income.

Amortization of deferred policy acquisition costs decreased to $208,284
for the first nine months of 1997 as compared to $321,469 for the first nine
months of 1996.  The lapse of FLA-100 policies is still causing a decrease
in deferred acquisition costs.  The decrease in deferred acquisition costs is
allocated between life and health as follows:
<TABLE>
          <S>                     <C>                  <C>
                                  Nine months ended September 30,
                                      1997               1996  
          Life                     $139,152            $ 198,702
          A & H                      69,132              122,767
               
          Total                   $ 208,284            $ 321,469
</TABLE>
          
Liquidity and Capital Resources

The liquidity requirements for the Company's operations generally arise
from the insurance operations of NAIL and the administrative activities of
NAC, and include payment of claims  to policyholders, payment of
commissions and other costs of acquiring new policies, payment of
operating costs, and payment of cash values upon termination of policies. 
These demands have generally been met by NAIL with funds generated by
its operations, from its reserves and liquid assets, and from capital
contributions by NAC.  NAC has funded its operations primarily through
management fees charged to its subsidiaries, including NAIL.  NAIL is
prohibited by Louisiana law from paying dividends to NAC other than from
statutory profits.

Statutory losses in the previous six years by NAIL have had a substantial
negative impact on the amount of its surplus.  Due to the decline in surplus
and continual operating losses, NAIL was notified during 1996 that its
licenses were suspended in the states of Alabama, Tennessee and
Wyoming.  With the stock purchase by The Southern Group, the Company
contributed $2,766,913 to NAIL's surplus at December 31, 1996. The
latest liquidity test published by A.M. Best Insurance Reports rates NAIL's
Current Liquidity as 123%. The usual range stated by Best for this test is
95% to 120%. NAIL's Quick Liquidity, which measures the portion of
liabilities covered by cash and quickly convertible investments, is 56.8%
while the usual range is 10% to 20%. 

Acquisition of Life Insurance Companies

The Company's business plans will focus on growth through the acquisition
and consolidation  of other small and medium-sized insurance companies. 
The Company plans  to acquire undervalued life insurance companies in the
$2 million to $50 million equity range.  This acquisition strategy will
require acquisition candidates, evaluation, acquisition finance, and
regulatory approvals. The company has implemented this program and the
status is as follows:

     Maryland Southern Life Insurance Company has been funded,
     regulatory approval anticipated at the conclusion of the tri-annual
     audit by the Maryland Insurance Commission.  Southern Mortgage,
     Inc. has been funded and will be consolidated in the fourth quarter
     of 1997.

The Company continues to seek additional candidates, evaluate potential
targets and negotiate with companies and funding sources.

The Company has a strategic alliance with CCM to provide assistance in
the evaluation of the assets of target life insurance companies during the
due diligence phase. CCM also manages the assets of the insurance
company if the acquisition is completed. 


            PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS
          
From time to time, the Company and National Affiliated Investors Life
(NAIL), NAC's life insurance subsidiary, are involved in lawsuits related to
their operations. In most cases, such lawsuits involve claims under
insurance policies of NAIL or other contracts of the Company. 

The Company has reached an agreement to settle Classert et. al. v. NAIL
et. al., with the plaintiffs' attorneys. The settlement must be approved by
the 14,000 individual FLA-100 policyholders and the 18th Judicial District
Court.
          
The Company and NAIL have other outstanding lawsuits as well as other
claims that arise in the ordinary course of business. Even though the
Company and NAIL may be contesting the validity or extent of its liability
in response to such lawsuits, the Company has established reserves in its
consolidated financial statements that approximate its estimated potential
liability.

ITEM 2.   CHANGES IN SECURITIES
          
Former employees acquired 99,500 shares of common stock of the
Company upon the exercise of options at $0.50 per share in July, 1997.
Also in July, 74,546 shares were issued to investor relation firms as
payment for fees.  All shares were issued pursuant to a registration
statement filed by the Company on Form S-8.  

On May 21, 1997, NAC completed the sale of $1,500,000 of convertible
debentures which was previously reported by the Company in its Annual
Report on Form 10-K for the fiscal year ended December 31, 1996. The
debentures were sold to purchasers who were not United States persons in
transactions occurring outside of the United States. All of the purchasers
were institutional investors. The offering was completed with the assistance
of European American Securities, Inc., a NASDAQ licensed broker-dealer
domiciled in London, who was paid a commission of $150,000 in
connection with the placement. The offering is intended to be exempt from
registration pursuant to Regulation S promulgated under the Securities Act
of 1933, as amended.  In the third quarter an agreement to buy back
approximately $900,000 of debentures was made when the Company stock
price was below $0.80. Subsequent announcements caused the price to go
above $2.00 and the debenture holders requested permission to convert at
20% below the higher price. All the debentures have been redeemed.
Overall, 1,422,580 shares of common stock were issued to these debenture
holders as a result of conversions from this issue.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None during the period ended September 30, 1997.  Under the terms of the
convertible debentures issued by the Company during 1997, the Company
is in default in certain affirmative covenants with regard to the maintenance
of sufficient authorized shares required for conversion of such debentures
into shares of common stock.  The face amount of convertible debentures
as of February 6, 1998 is $4,378,241.  The default occurred due to an
unexpected decline in the market value of the Company's common stock
and the resulting requirement that additional shares be made available for
possible future conversions by debenture holders.

The Company is in the process of requesting waivers of this default by the
debenture holders.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF
          SECURITY HOLDERS
          None

ITEM 5.   OTHER INFORMATION
          
On October 21, 1997, the Company agreed to exchange with TSG, three
mortgages with a face value of $475,000 each and a collateralized note for
$440,911. For these assets TSG agreed to transfer the remaining 25% of
Life One, Inc. thus giving the Company 100% of Life One, Inc. The
acquisition by the Company of the remaining shares of Life One includes
the acquisition of all of the shares of Maryland Southern Life Insurance
Company and is accordingly subject to the approval of the Maryland
Insurance Commissioner.  TSG also agreed to guarantee up to $10 million
of convertible debt and pay up $300,000 of the settlement to the plaintiffs'
attorneys in the Classert class action case.

The Department of Justice has begun seizing control of Conestoga Life
Assurance Company. This action has caused NAC to cease its attempts to
secure a reinstatement of the note purchase agreement between its
controlling stockholder, The Southern Group, and the Pennsylvania
Insurance Commissioner, for Conestoga. The seizure proceedings arise out
of the federal criminal conviction in December 1997 of Allan Stewart, the
indirect beneficial owner of Conestoga. In the criminal trial certain of Mr.
Stewart's assets, including his interest in Conestoga, were found by the
jury to be subject to forfeiture proceedings in the United States Federal
Court.

NAC has received a return of $1,800,000 of its initial payments for the
note and is seeking return of the remaining $650,000. At the time that
NAC was notified of the Department of Justice's decision to seize
Conestoga, NAC was attempting to secure financing for the remaining
installment due on the note purchase agreement and to reinstate the note
purchase agreement. NAC has submitted a letter of intent to the United
States Marshal to purchase 100% of the common shares of Conestoga and
is requesting transfer of the remaining $650,000 to the U.S. Marshal as a
deposit. NAC has no existing agreements with the United States
government or the Pennsylvania Insurance Commissioner for the purchase
of any of the shares of Conestoga. No assurance can be provided that NAC
will be able to secure financing for this acquisition on terms acceptable to
NAC. 

     On January 30, 1998, the Board of Directors removed Ira
L. Gottshall as Director, President and CEO of the Company and of
various directorships and officer positions in its subsidiaries.

     During the third quarter, NAC participated in offerings to offshore
investors, non-U.S. Persons, for their investment in a series of convertible
debentures.  Such offerings to offshore investors were made pursuant to
Regulation S promulgated under the Securities Act of 1933, as amended
("Regulation S").  The offered convertible debentures, except for those
debentures in (2) and (3) below, are guaranteed by The Southern Group,
Inc., the majority shareholder of NAC.  The following information is
provided with respect to such convertible debentures:
<TABLE>
<C>         <C>            <C>                  <C>             <C>
Debenture       Gross    Offering Price       Broker's Fee         Net

(1)         $1,788,000     $1,490,000           $178,000        $1,311,200
(2)           $360,000       $300,000            $36,000          $264,000
(3)         $1,199,904     $1,000,000           $120,660          $880,000
</TABLE>

      (1)(a)On September 15, 1997, September 18, 1997, and
September 22, 1997, NAC sold convertible debentures entitled 12% Series
A Subordinated Convertible Redeemable Debenture due August 31, 1998,
in the face amount of $1,788,000 ("Debenture," see Item 6).

      (b)The Debenture was sold to non-U.S. Persons as the term is
defined pursuant to Rule 902 of Regulation S. 

      (c)The total offering price was $1,490,000, a 16.67% discount
from the face value of the Debenture.  The broker, Vengua Capital Markets
("Vengua"), a placement agent in Lemington Spa, Great Britain, was paid a
broker's fee of 12% or $178,800.  NAC received cash in an amount equal
to the offering price net of the broker's fee or $1,311,200.

      (d)The Debenture was sold pursuant to Regulation S.

      (e)The holder of the Debenture, commencing 45 days after the
closing of the offering, has the option to convert all or any amount over
$10,000 of the face amount to the Debenture to common stock, $0.001 par
value, of the NAC ("Common Stock") at a conversion price equal to the
lower of (i) 75% of the average of the closing bid prices of the Common
Stock for the five business days immediately preceding the date of receipt
by NAC of a notice of conversion or (ii) 80% of the closing bid price of the
Common Stock for the business day immediately preceding the closing date
as reported by the National Association of Securities Dealers Electronic
Bulletin Board ("Conversion Shares").  If the number of resultant
Conversion Shares would as a matter of law or pursuant to a regulatory
authority require the Company to seek shareholder approval of such
issuance, NAC shall take the necessary steps to obtain such approval.  If
such approval is not obtained within 45 days, NAC shall be required to
redeem the Debenture.  To effectuate the conversion, the holder shall be
required to execute investment representations and documents reasonably
required to comply with Regulation S.  If it fails to deliver the Conversion
Shares to holder within ten days of the conversion, NAC has agreed to pay
liquidated damages to the holder in the amount of $500 per day late,
starting after the initial ten days, for up to ten additional days late and
$5,000 plus an additional $1,000 for every day late after the additional ten
days late.  NAC can redeem the Debenture within 45 days of issuance by
paying 100% of the face value or after 90 days from issuance by paying
120% of face value. 

      (2)(a)On September 19, 1997, NAC sold one convertible
debenture entitled 12% Convertible Debenture due September 18, 1998, in
the face amount of $360,000 ("Debenture," see Item 6).

      (b)The Debenture was sold to a non-U.S. Person as the term is
defined pursuant to Rule 902 of Regulation S.

      (c)The total offering price was $300,000, a 16.67% discount
from the face value of the Debenture.  The broker, Vengua, a placement
agent in Lemington Spa, Great Britain, was paid a broker's fee of 12% or
$36,000.  NAC received cash in an amount equal to the offering price net
of the broker's fee or $264,000.

      (d)The Debenture was sold pursuant to Regulation S.

      (e)The holder of the Debenture, commencing on or after
October 29, 1997, has the option to convert all or any amount, in
increments of $50,000, of the face amount to the Debenture to Common
Stock at a conversion price equal to (i) 80% of the five days average lower
bid price prior to the date of execution of the Debenture or (ii) the lower of
(x) 75% of the average of the closing bid prices of the Common Stock for
the five business days immediately preceding the date of receipt by NAC of
a notice of conversion or (x) 75% of the lower bid price of the Common
Stock for the day immediately prior to conversion as reported by the
National Association of Securities Dealers Electronic Bulletin Board.  To
effectuate the conversion, the holder shall be required to execute
investment representations and documents reasonably required to comply
with Regulation S.  If it fails to deliver the Common Stock within five days
of the conversion, NAC will pay to the holder a monthly penalty of an
additional three percent discount to the stated value of Common Stock
upon conversion.  NAC can redeem the Debenture at any time within 90
days of the issuance by paying 120% of face value.

      (3)(a)On September 23, 1997, NAC sold convertible debentures
entitled 12% Senior Convertible Redeemable Debenture due September 25,
1998, in the face amount of $1,199,904 ("Debenture," see Item 6).

      (b)The Debenture was sold to non-U.S. Persons as the term is
defined pursuant to Rule 902 of Regulation S.

      (c)The total offering price was $1,000,000, a 16.66% discount
from the face value of the Debenture.  The broker, Vengua, a placement
agent in Lemington Spa, Great Britain, was paid a broker's fee of 12% or
$120,000.  NAC received cash in an amount equal to the offering price net
of the broker's fee or $880,000.

      (d)The Debenture was sold pursuant to Regulation S.

      (e)The holder of the Debenture, at any time commencing 45
days after the issue date of the Debenture, has the option to convert all or
any amount, in increments of $50,000, of the face amount to the Debenture
to Common Stock at a conversion price equal to (i) $.80 or (ii) 75% of the
closing bid price of the Common Stock on the last day that the Common
Stock trades immediately preceding the date of receipt by NAC of a notice
of conversion by the holder as such closing price is quoted by the National
Association of Securities Dealers Electronic Bulletin Board ("Conversion
Shares").  If the number of resultant Conversion Shares would as a matter
of law or pursuant to a regulatory authority require the Company to seek
shareholder approval of such issuance, NAC shall take the necessary steps
to obtain such approval.  If such approval is not obtained within 30 days,
NAC shall be required to redeem the Debenture.  If the Conversion Shares
are not delivered to the holder within three days of the conversion, NAC
will pay a cash penalty equal to .5% of the face amount of the Debenture. 
To effectuate the conversion, the holder shall be required to execute
investment representations and documents reasonably required to comply
with Regulation S.  NAC can redeem the Debenture at any time within 45
days of the issuance by paying 110% of face value.

     Vengua presently disputes NAC's rescinding of a conditional
arrangement whereby Vengua would have received additional warrants to
purchase common stock of NAC in exchange for providing additional
financing for NAC.  NAC rescinded the conditional arrangement after
Vengua failed to perform the conditions of the arrangement.

     As of January 26, 1998, the following conversions have occurred
with respect to the convertible debentures:
<TABLE>
<C>         <C>         <C>             <C>              <C>         <C>
Debenture      Gross    Amount      Number of Shares    Amount Left  Shares in
                       Converted                                       Escrow
(1)         $1,788,000  $1,738,000      1,786,108         $50,000            0
(2)           $360,000    $360,000        362,920               0            0
(3)         $1,199,904     $50,000         62,500        $410,544    1,346,514*

</TABLE>
_________
*    These shares represent two share certificates.  NAC issued a
     replacement share certificate for 833,334 shares and did not receive
     a certificate representing the shares being replaced.  The remaining
     513,180 shares are presently being disputed by NAC as superseded
     by the replacement shares.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

EXHIBIT 4.01
          12% Series A Subordinated Convertible Redeemable
          Debenture due August 31, 1998

EXHIBIT 4.02
          12% Convertible Debenture due September 18, 1998

EXHIBIT 4.03
          12% Senior Convertible Redeemable Debenture due
          September 25, 1998

EXHIBIT 11
     NATIONAL AFFILIATED CORPORATION AND SUBSIDIARIES

     STATEMENT OF COMPUTATION OF PER SHARE EARNINGS

          The weighted average number of shares outstanding for the
          nine months ended September 30, 1997 was computed as
          follows:

        Shares outstanding, beginning of period      8,740,915

        Shares issued, first quarter, 1997              24,500

        Shares issued, second quarter, 1997             21,000

        Shares issued, third quarter, 1997           1,319,519

        Shares outstanding, end of period           10,105,934

     Shares outstanding,
     January   8,740,915
     February  8,760,915
     March     8,765,415
     April     8,765,415
     May       8,786,415
     June      8,786,415
     July      9,046,682
     August    9,431,486
     September 10,105,934
               81,189,592 / 9 = 9,021,066

     July      9,046,682
     August    9,431,486
     September 10,105,934
                         28,584,102 / 3 = 9,528,034

     
SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of
     1934, the Registrant has duly caused this report to be signed on its
     behalf by the undersigned thereunto duly authorized.

     NATIONAL AFFILIATED CORPORATION
     (Registrant)




    Date February 6, 1998             By:    /s/  T. Brent Chapel, CPA
                                          T. Brent Chapel,CPA
                                   Chief Financial Officer
                                   (Duly authorized officer and principal
                                   accounting officer of the Registrant)

                                      Exhibit 4.01

DEBENTURE

     THE SECURITIES REPRESENTED HEREBY HAVE
     NOT BEEN REGISTERED UNDER THE UNITED
     STATES SECURITIES ACT OF 1933, AS AMENDED
     (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD
     IN THE UNITED STATES (AS DEFINED IN
     REGULATION S UNDER THE ACT) OR TO, OR FOR
     THE ACCOUNT OR BENEFIT OF U.S. PERSONS (AS
     DEFINED IN REGULATION S UNDER THE ACT)
     EXCEPT PURSUANT TO REGISTRATION UNDER
     THE ACT OR AN EXEMPTION FROM THE
     REGISTRATION REQUIREMENTS OF THE ACT AND
     APPLICABLE STATE SECURITIES LAWS.

No.                                    US $_______


         NATIONAL AFFILIATED CORPORATION
                        
12% SERIES A SUBORDINATED CONVERTIBLE REDEEMABLE 
         DEBENTURE  DUE AUGUST 31, 1998
                        
     THIS DEBENTURE is one of a duly authorized issue of Debentures
of National Affiliated Corporation, a corporation duly organized and existing
under the laws of Louisiana (the "Company") designated as its 12% Series A
Subordinated Convertible Redeemable Debentures Due August 31, 1998, in
an aggregate principal face amount not exceeding Two Million Four Hundred
Thousand Dollars (U.S. $2,400,000) which Debentures are being purchased
at 83.33% of the face amount of such Debentures.

     FOR VALUE RECEIVED, the Company promises to pay to
_____________ _______________, the registered holder hereof and its
successors and assigns (the "Holder"), the principal face sum of
_________________________________ (US $_______) on August 31, 1998
(the "Maturity Date"), and to pay interest on the principal sum outstanding,
at the rate of 12% per annum due and payable quarterly commencing
_______________, 1997 pursuant to paragraph 4(b) herein and pursuant to
the terms and conditions of the Subscription Agreement between the
Company and ____________________________ of even date herewith (the
"Subscription Agreement").  Accrual of interest shall commence on the date
hereof and shall continue until payment in full of the outstanding principal sum
has been made or duly provided for.  The interest so payable will be paid to
the person in whose name this Debenture (or one or more predecessor
Debentures) is registered on the records of the Company regarding
registration and transfers of the Debentures (the "Debenture Register");
provided, however, that the Company's obligation to a transferee of this
Debenture arises only if such transfer, sale or other disposition is made in
accordance with the terms and conditions of the Subscription Agreement. 
The principal of, and interest (with the exception of the prepaid interest set
forth in Section 4(b) herein) on, this Debenture are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address last appearing
on the Debenture Register of the Company as designated in writing delivered
to the Company (with a copy to the Transfer Agent) by the Holder hereof
from time to time.  The Company will pay the outstanding principal due upon
this Debenture before or on the Maturity Date, less any amounts required by
law to be deducted or withheld, to the Holder of this Debenture no later than 
the tenth (10th) day prior to the Maturity Date by check or on the Maturity
Date by wire transfer and addressed to such Holder at the last address
appearing on the Debenture Register.  The forwarding of such check or wire
transfer shall constitute a payment of outstanding principal hereunder and shall
satisfy and discharge the liability for principal on this Debenture to the 
extent of the sum represented by such check or wire transfer plus any amounts so
deducted.  Interest shall be payable in Common Stock (as defined below)
pursuant to paragraph 4(b) herein.

     This Debenture is subject to the following additional provisions:

     
  1. The Debentures are issuable in denominations of Ten Thousand
Dollars (US$10,000) and integral multiples thereof.  The Debentures are
exchangeable for an equal aggregate principal amount of Debentures of
different authorized denominations, as requested by the Holders surrendering
the same but not less than U.S. $10,000.  No service charge will be made for
such registration or transfer or exchange, except that transferee shall pay any
tax or other governmental charges payable in connection therewith.

      2. The Company shall be entitled to withhold from all payments
of principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax or
other applicable laws at the time of such payments.

      3. This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged in the U.S. only in compliance with the Securities Act of 1933, as
amended (the "Act") and applicable state securities laws.  Prior to due
presentment for transfer of this Debenture, the Company and any agent of the
Company may treat the person in whose name this Debenture is duly
registered on the Company's Debenture Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other purposes,
whether or not this Debenture be overdue, and neither the Company nor any
such agent shall be affected or bound by notice to the contrary.  Any holder
of this Debenture, electing to exercise the right of conversion set forth in
Section 4(a) hereof, in addition to the requirements set forth in Section 4(a),
and any prospective transferee of this Debenture, is also required to give the
Company (i) written confirmation that it is not a U.S. Person and the
Debenture is not being converted on behalf of a U.S. Person ("Notice of
Conversion") or (ii) an opinion of U.S. counsel to the effect that the
Debenture and shares of common stock issuable upon conversion or transfer
thereof have been registered under the 1933 Act or are exempt from such
registration.  In the event a Notice of Conversion or opinion of counsel is not
provided the Holder hereof will not be entitled to exercise the right to convert
or transfer the Debentures.

       4. (a) The Holder of this Debenture is entitled, at its option,
at any time commencing 45 days after closing of the Offering hereof to
convert all or any amount over $10,000 of the principal face amount of this
Debenture then outstanding into shares of common stock, $0.001 par value
per share, of the Company (the "Common Stock"), at a conversion price for
each share of Common Stock equal to the lower of (a) 75% of the average of
the closing bid prices of the Common Stock for the five (5) business days
immediately preceding the date of receipt by the Company of notice of
conversion or (b) 80% of the closing bid price of the Common Stock for the
business day immediately preceding the closing date ("Conversion Shares")
as reported by the National Association of Securities Dealers ("NASDAQ")
(the "Conversion Price").  If the number of resultant Conversion Shares
would as a matter of law or pursuant to regulatory authority require the
Company to seek shareholder approval of such issuance, the Company shall,
as soon as practicable, take the necessary steps to seek such approval.  If such
approval is not received within 45 days then Company shall be required to
redeem the Debenture pursuant to paragraph 4(c) herein.  Such conversion
shall be effectuated by surrendering the Debentures to be converted (with a
copy, by facsimile or courier, to the Company) to the Company with the form
of conversion notice attached hereto as Exhibit I, executed by the Holder of
this Debenture evidencing such Holder's intention to convert this Debenture
or a specified portion (as above provided) hereof, and accompanied by proper
assignment hereof in blank.  Accrued but unpaid interest shall be subject to
conversion.  No fractional shares or scrip representing fractions of shares will
be issued on conversion, but the number of shares issuable shall be rounded
to the nearest whole share.  The transferee or issuee shall execute such
investment representations or other documents as are respectively required by
counsel in order to ascertain the available registration exemption.  The date
on which notice of conversion is given shall be deemed to be the date on
which the Holder has delivered this Debenture, with the assignment and
conversion notice duly executed, to the Company or, if earlier, the date set
forth in such notice of conversion if the Debenture is received by the
Company within five (5) business days thereafter.  The transferee or issuee
shall execute such investment representations or other documents as are
reasonably required by counsel in order to ascertain the available registration
exemption.

      (b)Interest at the rate of 12% per annum shall be payable
in advance, quarterly commencing                        , 1997.  However, at
Closing, the Company shall prepay the first 3 months interest by issuing in
Common Stock of the Company as follows: Based on the average closing bid
prices of the Common Stock for the last 5 consecutive trading days prior to
Closing ("Market Price") the Company shall issue to the Holder shares of
Common Stock in an amount equal to the total monthly interest accrued and
due divided by 80% of the Market Price (the "Interest Shares"). Common
Stock issued pursuant hereto shall be issued pursuant to Regulation S or other
applicable exemption to federal and state securities laws in accordance with
the terms of the Subscription Agreement.  Thereafter, commencing 91 days
after Closing the Company shall pay interest on a quarterly basis in advance
in cash (or Common Stock, based on the above formula, at the Company's
option).

      (c)At any time within 45 days of issuance of the
Debenture the Company shall have the option to redeem the Debenture in full
by paying to the Holder the face amount of the Debenture.  In addition, at any
time on of after 90 days the Company shall have the option to pay to the
Holder 120% of the principal face amount of the Debenture, in full, to the
extent conversion has not occurred pursuant to paragraph 4(a) herein, or
prepay upon maturity if the Debenture is not converted, the Company shall
give the Holder 5 days written notice and the Holder shall have the option to
convert the Debenture or any part thereof into shares of Common Stock at a
conversion price equal to 75% of the average of the closing bid price of the
Common Stock for the 5 consecutive trading days prior to the date of such
conversion or accept the cash repayment.  Any shares issued pursuant to the
options shall be issued pursuant to Regulation S or a Registration Statement. 

      5. No provision of this Debenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of, and interest on, this Debenture at the time, place, and rate, and
in the coin currency, herein prescribed.

      6. The Company hereby expressly waives demand and
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of dishonor, notice of acceleration or intent to accelerate, bringing of
suit and diligence in taking any action to collect amounts called for hereunder
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereon, regardless of and without any notice, diligence, act or
omission as or with respect to the collection of any amount called for
hereunder.

      7.  The Company agrees to pay all costs and expenses, including
reasonable attorneys' fees, which may be incurred by the Holder in collecting
any amount due under this Debenture.

      8.If one or more of the following described "Events of Default"
shall occur (and shall not be caused by misrepresentation or omission by
Holder in Holders Subscription Agreement) and continue for 30 days unless
a different period is otherwise stated below:

     (a)  The Company shall default in the payment of principal
          or interest on this Debenture; or

     (b)  Any of the representations or warranties made by the
          Company herein, in the Subscription Agreement, or in
          any certificate or financial or other written statements
          heretofore or hereafter furnished by or on behalf of the
          Company in connection with the execution and
          delivery of this Debenture or the Subscription
          Agreement shall be false or misleading in any material
          respect at the time made; or

     (c)  The Company shall fail to perform or observe, in any
          material respect, any other covenant, term, provision,
          condition, agreement or obligation of the Company
          under this Debenture [and such failure shall continue
          uncured for a period of thirty (30) days after notice
          from the Holder of such failure]; or

     (d)  The Company shall (1) become insolvent; (2) admit in
          writing its liability to pay its debts generally as they
          mature; (3) make an assignment for the benefit of
          creditors or commence proceedings for its dissolution;
          or (4) apply for or consent to the appointment of a
          trustee, liquidator or receiver for its or for a
          substantial part of its property or business; or

     (e)       A trustee, liquidator or receiver shall be appointed for
               the Company or for a substantial part of its property
               or business without its consent and shall not be
               discharged within thirty (60) days after such
               appointment; or

     (f)  Any governmental agency or any court of competent
          jurisdiction at the instance of any governmental agency
          shall assume custody or control of the whole or any
          substantial portion of the properties or assets of the
          Company and shall not be dismissed within thirty (30)
          days thereafter; or 

     (g)  Any money judgment, writ or warrant of attachment,
          or similar process, in excess of One Million
          ($1,000,000) Dollars in the aggregate shall be entered
          or filed against the Company or any of its properties or
          other assets and shall remain unpaid, unvacated,
          unbonded or unstayed for a period of fifteen (15) days
          or in any event later than five (5) days prior to the date
          of any proposed sale thereunder; or

     (h)  Bankruptcy, reorganization, insolvency or liquidation
          proceedings or other proceedings for relief under any
          bankruptcy law or any law for the relief of debtors
          shall be instituted by or against the Company and, if
          instituted against the Company, shall not be dismissed
          within thirty (60) days after such instruction of the
          Company shall by any action or answer approve of,
          consent to, or acquiesce in any such proceedings or
          admit the material allegations of, or default in
          answering a petition filed in any such proceeding; or

     (i)  The Company shall have its Common Stock delisted
          from the over-the-counter market.

     (j)  The Company shall fail to issue the Common Stock
          within seven (7) business days pursuant to paragraph
          4 herein and as permitted by then current SEC
          guidelines for this type of offering without a restrictive
          legend.

     (k)  The Company shall fail within 3 business days from the
          date of closing to perfect a secured interest for the
          debenture in its asset by the filing of a UCC-1
          Statement and all other necessary documents.

Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which
waiver shall not be deemed to be a waiver of any subsequent default) at the
option of the Holder and in the Holder's sole discretion, the Holder may
consider this Debenture immediately due and payable, without presentment,
demand, protest or (further) notice of any kind (other than notice of
acceleration), all of which are hereby expressly waived, anything herein or in
any note or other instruments contained to the contrary notwithstanding, and
the Holder may immediately, and without expiration of any period of grace,
enforce any and all of the Holder's rights and remedies provided herein or any
other rights or remedies afforded by law.

       9.(a)This Debenture represents a secured obligation of the
Company guaranteed by The Southern Group, Inc. pursuant to paragraph 9(b)
herein.  However, no recourse shall be had for the payment of the principal of,
or the interest on, this Debenture, or for any claim based hereon, or otherwise
in respect hereof, against any incorporator, officer or director, as such, past,
present or future, of the Company whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment or penalty or
otherwise, all such liability being, by the acceptance hereof and as part of the
consideration for the issue hereof, expressly waived and released.

      (b)The Southern Group, Inc. shall contemporaneously
with the issuance of this Debenture enter into a guarantee in the form attached
hereto.  All Holders of the Debentures shall have equal priority regardless of
the time of their purchase.  The Southern Group, Inc. shall take all steps
necessary to execute appropriate guarantee documents and shall provide the
Holder with an opinion of counsel or other evidence that such guarantee is
enforceable in accordance with its terms.

      10.The Holder of this Debenture, by acceptance hereof, agrees
that this Debenture is being acquired for investment and that such Holder will
not offer, sell or otherwise dispose of this Debenture or the Shares of
Common Stock issuable upon exercise thereof except under circumstances
which will not result in a violation of the Act or any applicable state Blue Sky
law or similar laws relating to the sale of securities.

      11.In case any provision of this Debenture is held by a court of
competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Debenture will not in any
way be affected or impaired thereby.

      12.This Debenture and the agreements referred to in this
Debenture constitute the full and entire understanding and agreement between
the Company and the Holder with respect to the subject hereof.  Neither this
Debenture nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the Company and the
Holder.

      13.This Debenture shall be governed by and construed in
accordance with the laws of New York.  Holder hereby waives trial by jury
and consents to exclusive jurisdiction and venue in the State of New York.

      14.Any controversy or claim relating to this Agreement
("Arbitrable Dispute") shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (the
"AAA") as such rules may be modified herein or as otherwise agreed by the
parties in controversy.  The forum for arbitration shall be New York, New
York.  Broker agrees to submit to the jurisdiction of the New York Courts for
purposes of confirming any award.
     
      15.As set forth herein, the Company shall use all reasonable
efforts to issue and deliver, within seven (7) business days after the Holder 
has fulfilled all conditions and submitted all necessary documents duly executed
and in proper form required for conversion (the "Deadline"), to the Holder or
any part receiving a Debenture by transfer from the Holder (together, a
"Holder"), at the address of the Holder on the books of the Company, a
certificate or certificates for the number of Shares of Common Stock to which
the Holder shall be entitled.  It is understood by both parties that such
certificates must  comply with the then enacted SEC regulations governing
this transaction.  The Company understands that a delay in the issuance of the
Shares of Common Stock beyond the Deadline could result in economic loss
to the Holder.  As compensation to the Holder for such loss, the Company
agrees to pay as liquidated damages to the Holder for late issuance of Shares
(not resulting from causes out of Company's control)  upon conversion in
accordance with the following schedule (where "No. Business Days Late" is
defined as the number of business days beyond ten (10) business days from the
date of receipt by the Company and the transfer agent of a Notice of
Conversion of all necessary documentation duly executed and in proper form
required for conversion, including the original Debenture to be converted, all
in accordance with the Debenture, Subscription Agreement and the
requirements of the transfer agent):
<TABLE>
           <C>                                  <C>
                                       Liquidated Damages per
        No. Business Days Late            $100,000 of Debenture

           1                                      $500
           2                                    $1,000
           3                                    $1,500
           4                                    $2,000
           5                                    $2,500
           6                                    $3,000
           7                                    $3,500
           8                                    $4,000
           9                                    $4,500
           10                                   $5,000
           10                                   $5,000 + $1,000 each
                                                Business Day Late beyond 10 days
</TABLE>
     The Company shall pay the Holder any liquidated damages incurred
under this Section by check upon the earlier to occur of (i) issuance of the
Shares to the Holder or (ii) each monthly anniversary of the receipt of the
Company of such Holder's Notice of Conversion.

     The Company shall at all times reserve and have available all Common
Stock necessary to meet conversion of the Debentures by all Holders of the
entire amount of Debentures then outstanding.  If, at any time Holder submits
a Notice of Conversion and the Company does not have sufficient authorized
but unissued shares of Common Stock available to effect, in full, a conversion
of the Debentures (a "Conversion Default", the date of such default being
referred to herein as the "Conversion Default Date"), the Company shall issue
to the Holder all of the shares of Common Stock which are available, and the
Notice of Conversion as to any Debentures requested to be converted but not
converted (the "Unconverted Debentures"), upon Holder's sole option, may
be deemed null and void.  The Company shall provide notice of such
Conversion Default ("Notice of Conversion Default") to all existing Holders
of outstanding Debentures, by facsimile, within one (1) business day of such
default (with the original delivered by overnight or two day courier), and the
Holder shall give notice to the Company by facsimile within five business days
of receipt of the original Notice of Conversion Default (with the original
delivered by overnight or two day courier) of its election to either nullify or
confirm the Notice of Conversion.

     The Company agrees to pay to all Holders of outstanding
Debentures, as liquidated damages, payments for a Conversion Default
("Conversion Default Payments") in the amount of (N/365) x (.24) x the initial
issuance price of the outstanding and/or tendered but not converted
Debentures held by each Holder where N = the number of days from the
Conversion Default Date to the date (the "Authorization Date") that the
Company authorizes a sufficient number of shares of Common Stock to effect
conversion of all remaining Debentures.  The Company shall send notice
("Authorization Notice") to each Holder of outstanding Debentures that
additional shares of Common Stock have been authorized, the Authorization
Date and the amount of Holder's accrued Conversion Default Payments.  The
accrued Conversion Default shall be paid in cash or shall be convertible into
Common Stock at the Conversion Rate, at the Holder's option, payable as
follows:  (i) in the event Holder elects to take such payment in cash, cash
payments shall be made to such Holder of outstanding Debentures by the fifth
day of the following calendar month, or (ii) in the event Holder elects to take
such payment in stock, the Holder may convert such payment amount into
Common Stock at the conversion rate set forth in Section 4(a) at anytime
after the 5th day of the calendar month following the month in which the
Authorization Notice was received, until the maturity date.


     IN WITNESS WHEREOF, the Company has caused this instrument
to be duly executed by an officer thereunto duly authorized.


Dated:                                                  

                                    NATIONAL AFFILIATED CORPORATION


                                    By:                                         
                                    Title:    
                                                                        



                                    Guaranteed By:

                                    THE SOUTHERN GROUP, INC.


                                    By:                                         
                                    Title:    
                                                                        

                    EXHIBIT I
                        
              NOTICE OF CONVERSION
                        
(To be Executed by the Registered Holder in order to Convert the
                   Debenture)



     The undersigned hereby irrevocably elects to convert
$______________ of the above Debenture No. ___ into Shares of
Common Stock of National Affiliated Corporation (the "Company")
according to the conditions set forth in such Debenture, as of the date
written below.

     The undersigned represents that it is not a U.S. Person as defined in
Regulation S promulgated under the Securities Act of 1933, as amended,
and is not converting the Debenture on behalf of any U.S. Person and the
representations contained in the Subscription Agreement are true and
correct.  If Shares are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with
respect thereto.

Date of Conversion*                                                         
                                 

Applicable Conversion Price                                                    
                                 

Signature                                                                    
                                 
     [Print Name of Holder and Title of Signer]

Address:                                                                    
                                 

                                                                            
                                  








                                                                          
Medallion Signature Guaranty



* This original Debenture and Notice of Conversion must be received by the 
Company by the fifth business date following the Date of Conversion.


                    PATH:                         

                                      Exhibit 4.02

  THESE SECURITIES HAVE NOT BEEN REGISTERED WITH
     THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OR
     ANY STATE BECAUSE THEY ARE BELIEVED TO BE
    EXEMPT FROM REGISTRATION UNDER REGULATIONS
   PROMULGATED UNDER THE SECURITIES ACT OF 1933,
 AS AMENDED (THE "ACT") THE SECURITIES MAY NOT BE
RESOLD
 OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT
     PURSUANT TO REGISTRATION OR AN EXEMPTION
THEREFROM.

No.  ______                             US$_______

          NATIONAL AFFILIATED CORPORATION

 12% CONVERTIBLE DEBENTURE DUE SEPTEMBER 18, 1998

     THIS DEBENTURE is one of a duly authorized issue of Debentures
of NATIONAL AFFILIATED CORPORATION, a corporation duly
organized and existing under the laws of the State of Louisiana (the
"Company"), designated as its 12% CONVERTIBLE DEBENTURE  due
September 18, 1998 in an aggregate principal amount not exceeding Three
Hundred Sixty Thousand ($360,000) US Dollars which Debentures are being
purchased at (83.34%) percent of the face amount of such Debentures.

     FOR VALUE RECEIVED, the Company promises to pay to the
order of ________________________, the registered holder hereof (the
"Holder"), the principal sum of ____________________________
($_______) US Dollars on September 18, 1998 (the "Maturity Date") and to
pay interest on the principal sum outstanding from time to time monthly in
advance at the rate of 12% per annum, computed on the basis of the actual
number od days elapsed in a 365 day year.  First quarter interest shall be
payable upon closing in stock calculated at the five day average lower bid
price prior to conversion.  Accrual of interest shall commence on the date
hereof until payment in full of the principal sum has been made or duly
provided for.  All accrued and unpaid interest shall bear interest at the same
rate from and after the due date of the interest payment until so paid.  The
interest so payable, less any amounts required by law to be deducted or
withheld, will be paid on the Maturity Date or, if earlier, on each conversion
Date, to the person in whose name this Debenture (or one or more
predecessor Debentures) is registered on the records of the Company
regarding registration and transfers of the Debentures (the "Debenture
Register') on the Conversion Date or tenth day prior to the Maturity Date, as
the case may be, in accordance with the terms and conditions of the
Regulation S Subscription Agreement executed by the original Holder in
connection with the purchase of this Debenture (the "Subscription
Agreement").  The principal of, and interest on, this Debenture are, at holder's
option, payable in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public and private debts
or paid in shares of common stock valued at 80% of the five days average
lower bid price prior to the date of the execution of this agreement or 75% of
the five day average lower bid price prior to conversion or 75% of the lower
bid price the day prior to conversion, whichever is lower.  Notice of
conversion shall be given to the Issuer in writing by facsimile at any time 41
days after the date of close.  The forwarding of the Company's check shall,
subject to collection, constitute a payment of interest and principal hereunder
and shall satisfy and discharge the liability for principal and interest on this
Debenture to the extent of the sum represented by such check.

     This Debenture is subject to the following additional provisions:

      1.Debentures are issuable in denominations of Fifty Thousand
($50,000.00) US Dollars and integral multiples thereof.  The Debentures are
exchangeable for an equal aggregate principal amount of Debentures of
different authorized denominations, as requested by the Holders surrendering
the same.  No service charge will be made for such registration or transfer or
exchange.

      2.The Company shall be entitled to withhold from all payments
of principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws
or other applicable laws at the time of such payments.

      3.This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged only in compliance with the Securities Act of 1933, as amended
(the "Act').  Prior to due presentment for transfer of this Debenture, the
Company and any agent of the Company may treat the person in whose name
this Debenture is duly registered on the Debenture Register as the owner
hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Debenture be overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.

       4.a)The Holder of this Debenture shall, at any time during
the period commencing on and after October 29, 1997 convert up to One
Hundred Percent (100%) of the principal face amount of this Debenture then
outstanding (in increments of not less than Fifty Thousand Dollars) into shares
of common stock, no par value, (the "Common Stock") of the Company,
without restrictive legend and free trading on the books of the issuer, at a
conversion price for each share of Common Stock equal to 80% of the five
days average lower bid price prior to the date of the execution of this
agreement or 75% of the five day average lower bid price prior to conversion
or 75% of the lower bid price the day prior to conversion, whichever is lower. 
Notice of conversion shall be given to the issuer in writing at any time 41 days
after the date of close.  Such conversion shall be effectuated by surrendering
the Debentures to be converted to the Company with the form of conversion
notice attached hereto as Exhibit A, executed by the Holder of the Debenture
evidencing such Holder's intention to convert this Debenture or a specified
portion (as above provided) hereof.  The amount interest as of the Conversion
Date shall be subject to reconciliation, at holder's option, in shares of
Common Stock at the Market Price at a conversion price for each share of
Common Stock equal to 80% of the five days average lower bid price prior
to the date of the execution of this agreement or 75% of the five day average
lower bid price prior to conversion or 75% of the lower bid price the day prior
to conversion, whichever is lower, whichever is lower as reported by NASD
trading symbol ("NAAC").  No fraction of shares of the Common Stock or
script representing fractions of shares will be issued on conversion, but the
number of shares of the Common Stock issuable shall be rounded to the
nearest whole share.  The date on which notice of conversion is given shall be
deemed to be the date on which the Holder has delivered this Debenture, with
the conversion notice duly executed, to the Company, or if earlier the date set
forth in such notice of conversion if the Debenture is received by the
Company within three business days thereafter.  Such date is referred to
herein as the "Conversion Date".  Facsimile delivery of the conversion notice
shall be accepted by the Company.  Certificates representing Common Stock
upon conversion will be delivered to the Holder within five (5) business days
from the date the notice of conversion is delivered to the Company.

      (b)At any time within ninety (90) days the Company shall have the
option to pay to the Holder 120% of the principal amount of the Debenture,
in full, to the extent conversion has not occurred pursuant to paragraph 4(a)
herein, or pay upon maturity if the Debenture is not converted, the Company
shall give the Holder 5 days written notice and the Holder shall have the
option to convert the Debenture or any part thereof into shares of Common
Stock at a conversion price equal to 80% of the average of the closing bid
price of the Common Stock for the 5 consecutive trading days prior to the
date of such conversion or accept the cash repayment.  Any shares issued
pursuant to the options shall be issued pursuant to Regulation S or a
Registration Statement.

      5.Any of the following shall constitute an "Event of Default":

     a.   The Company shall default in payment of principal or
          interest on this Debenture as and when the same shall
          be due and payable and such default shall continue for
          five (5) business days after the due date thereof; or

     b.   Any of the representations or warranties made by the
          Company herein, in the Subscription Agreement, or in
          any certificate or financial or other written statements
          heretofore or hereafter furnished by or on behalf of the
          Company in connection with the execution and
          delivery of this Debenture or the Subscription
          Agreement shall be false or misleading in any material
          respect at the time made; or

     c.   The Company shall fail to perform or observe, in any
          material respect, any other covenant, term, provision,
          condition, agreement or obligation of the Company
          under this Debenture or the Subscription Agreement
          and such failure shall continue uncured for a period of
          five (5) business days after the first date on which such
          failure arises it being understood that in the case of
          defaults which cannot reasonably be cured within a 3-
          day period no grace period shall be necessary as a
          precondition to the failure to perform such covenant
          constituting an Event of Default; or

     d.   The Company shall (1) make an assignment for the
          benefit of creditors or commence proceedings for its
          dissolution; or (2) apply for or consent to the
          appointment of a trustee, liquidator or receiver for its
          or for a substantial part of its property or business; or

     e.   A trustee, liquidator or receiver shall be appointed for
          the Company or for a substantial part of its property
          or business without its consent and shall not be
          discharged within sixty (60) days after such
          appointment; or

     f.   Bankruptcy, reorganization, insolvency or liquidation
          proceedings or other proceedings for relief under any
          bankruptcy law or any law for the relief of debtors
          shall be instituted by or against the Company and, if
          instituted against the Company, shall not be dismissed
          within sixty (60) days after such institution or the
          Company shall by any action or answer approve of,
          consent to, or acquiesce in any such proceeding or
          admit the material allegations of, or default in
          answering a petition filed in any such proceeding; or

     g.   The Company shall have its Common Stock delisted
          from the NASD or suspended from trading thereon,
          and shall not have its Common Stock relisted or have
          such suspension lifted, as the case may be, within
          seven (7) days; or

     h.   The Company shall default on the payment of any
          material indebtedness for borrowed money beyond any
          applicable grade period; or

     i.   Any judgment, levy or attachment shall be rendered
          against the Company or any of its assets or properties
          in an amount in excess of Ten Thousand ($10,000)
          USD and such judgment, levy or attachment shall not
          be dismissed, stayed, bonded or discharged within
          thirty (30) days of the date of carry thereof; or

     j.   The Company shall be party to any merger or
          consolidation or shall dispose of all substantially all of
          its assets in one or more transactions or shall redeem
          more than a minimal amount of its outstanding share
          of capital stock.

Upon the occurrence of any Event of Default or at any time thereafter, and in
each and every such case, unless such Event of Default shall have been waived
in writing by the Holder (which waiver shall not be deemed to be a waiver of
any subsequent Event of Default) at the option of the Holder and in the
Holder's sole discretion, the Holder may, upon written notice to the Company,
consider this Debenture immediately due and payable in an amount equal to
the product of (x) the number of shares of Common Stock into which this
Debenture is then convertible and (y) the low bid price of the Common Stock
as reported on the NASD trading symbol ("NAAC") on the date notice of the
occurrence of such Event of Default is given to the Company, without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived, anything herein or in any note or other instruments
contained to the contrary notwithstanding, and the Holder may immediately,
and without expiration of any period of grace, enforce any and all of the
Holders' rights or remedies afforded by law.

      6.No provision of this Debenture shall alter or impair the
obligation of the Company, which is absolute and unconditioned, to pay the
principal of, and interest on, this Debenture at the time, place, and rate, and
in the coin or currency, herein prescribed.  This Debenture and all other
Debentures now or hereafter issued of similar terms are direct obligations of
the Company.  This Debenture ranks equally with all other Debentures now
or hereafter issued under the terms set forth herein.

      7.In the event that the Issuer fails to convert to Common Stock
within five (5) days of receipt of the properly executed Notice of Conversion
as provided for in Exhibit A, or is late in delivery of the Common Stock, the
Issuer shall be deemed to be in default and shall pay to Holder a monthly
penalty of three (3%) percent discount of the stated value of the shares.  Such
penalty shall be calculated upon conversion by Holder to equate to a further
discount of three (3% percent per month.

      8.No recourse shall be had for the payment of the principal of,
or interest on this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.

      9.This Debenture shall be governed by and construed in
accordance with the laws of the State of New York without regard to the
choice of law provisions thereof and the parties hereto submit to the
jurisdiction of New York for purposes of this Debenture.

      10.Upon receipt of the Notice of Conversion, the Issuer shall
immediately forward, by overnight courier, to the transfer agent such
Conversion Notice together with a letter authorizing the transfer agent to
accept an opinion by legal counsel in connection with the issuance of the
shares.

      11.The Company hereby agrees that except for the transactions
as set out in the Subscription Agreement signed between the parties that it will
not enter into any additional Regulation S transaction with any other party for
a period of Ninety (90) Days after the conclusion of the last tranche provided
for in the Subscription Agreement previously mentioned.

      12.The ___________ agrees that upon receipt of a Notice of
Conversion from the Purchaser, it shall forward to the transfer agent, by
overnight courier, such Conversion Notice together with a letter authorizing
the transfer agent to accept a legal opinion letter in connection with the
issuance of the shares.

      13.Failure by the __________ to comply with the terms and
provisions herein, as well as a failure to convert upon receipt of a Notice of
Conversion from the Purchaser shall be deemed a default herein and
___________ shall bear any and all costs, including attorney fees, to the
Purchaser incurred in seeking enforcement of the provisions and conversion
contemplated herein.

     IN WITNESS WHEREOF, the Company has caused this instrument
to be duly executed by __ officer ___________ duly authorized.

     NATIONAL AFFILIATED CORP.

     By:                                          

   Dated:  



                                      Exhibit 4.03

                     DEBENTURE

     THE SECURITIES REPRESENTED HEREBY HAVE NOT
     BEEN REGISTERED UNDER THE UNITED STATES
     SECURITIES ACT OF 1933, AS AMENDED (THE "ACT")
     AND MAY NOT BE OFFERED OR SOLD IN THE
     UNITED STATES (AS DEFINED IN REGULATIONS
     UNDER THE ACT) OR TO, OR FOR THE ACCOUNT OR
     BENEFIT OF, U.S. PERSONS(AS DEFINED IN
     REGULATIONS UNDER THE ACT) EXCEPT
     PURSUANT TO REGISTRATION UNDER THE ACT OR
     AN EXEMPTION FROM THE REGISTRATION
     REQUIREMENTS OF THE ACT AND APPLICABLE
     STATE SECURITIES LAWS

No.1                                 US $_________

          NATIONAL AFFILIATED CORPORATION

         12% SENIOR CONVERTIBLE REDEEMABLE
         DEBENTURE DUE SEPTEMBER 25,1998.

     THIS DEBENTURE is one of a duly authorized issue of Debentures
of National Affiliated Corporation, a corporation duly organized and existing
under the laws of the State of Louisiana (the "Company") designated as its
12% Senior Convertible Redeemable Debentures due September 25, 1998,
having an aggregate principal face amount of
_________________________(US$_______) which Debentures are being
purchased at 83.34% of the face amount of such Debentures.

     FOR VALUE RECEIVED, the Company promises to pay to
________________, the registered holder hereof and its successors and
assigns (the "Holder"), the principal face sum of _______________________
(US$_________) on September 25, 1998 (the "Maturity Date"), and to pay
interest on the principal sum outstanding, at the rate of 12% per annum due
and payable monthly in advance commencing September 25, 1997 pursuant
to paragraph 4(b) herein.  Accrual of interest shall commence on the date
hereof and shall continue until payment in full of the outstanding principal sum
has been made or duly provided for.  The interest so payable will be paid to
the person in whose name this Debenture is registered on the records of the
Company regarding registration and transfer of the Debentures (the
"Debenture Register").  The principal of, and interest on, this Debenture are
payable in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts, at the
address last appearing on the Debenture Register of the Company as
designated in writing by the Holder hereof from time to time.  The Company
will pay the outstanding principal due upon this Debenture before or on the
Maturity Date, less any amounts required by law to be deducted or withheld,
to the Holder of this Debenture no later than the tenth (10th) day prior to the
Maturity Date by check or on the Maturity Date by wire transfer and
addressed to such Holder at the last address appearing on the Debenture
Register.  The forwarding of such check or wire transfer shall constitute a
payment of outstanding principal hereunder and shall satisfy and discharge the
liability for principal on this Debenture to the extent of the sum represented
by such check or wire transfer plus any amounts so deducted.  Interest shall
be payable at the election of the Company in the same manner as principal or
in Common Stock (as defined below) pursuant to paragraph 4(b) herein.

     This Debenture is subject to the following additional provisions:

      1.The Debentures are exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holders surrendering the same but not less than US$50,000. 
No service charge will be made for such registration or transfer or exchange,
except that transferee shall pay any tax or other governmental charges payable
in connection therewith.

      2.The Company shall be entitled to withhold from all payments
of principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax or
other applicable laws at the time of such payments.

      3.This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged in the U.S. only in compliance with the Securities Act of 1933, as
amended (the "Act") and applicable state securities laws.  Prior to due
presentment for transfer of this Debenture, the Company and any agent of the
Company may treat the person in whose name this Debenture is duly
registered on the Company's Debenture Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other purposes,
whether or not this Debenture be overdue, and neither the Company nor any
such agent shall be affected or bound by notice to the contrary.  Any holder
of this Debenture, electing to exercise the right of conversion set forth in
Section 4(a) hereof, in addition to the requirements set forth in Section 4(a),
and any prospective transferee of this Debenture, is also required to give the
Company (i) written confirmation that it is not a U.S. Person, the Debenture
is not being converted on behalf of a U.S. Person ("Notice of Conversion")
and the other representations set forth in Section 2(a) of the Subscription
Agreement, or (ii) get other certifications as shall be necessary in connection
with an exempt transfer.  In the event a Notice of Conversion or opinion of
counsel is not provided the Holder hereof will not be entitled to exercise the
right to convert or transfer the Debentures.

       4.(a)The Holder of this Debenture is entitled, at its option,
at any time commencing 45 days after the issue date of this Debenture, to
convert all or any amount over $50,000 of the principal face amount of this
Debenture then outstanding into shares of common stock ("Conversion
Shares"), no par value, of the Company (the "Common Stock"), at a
conversion price for each share of Common Stock equal to the lower of (y)
US$0.80 or (z) 75% of the closing bid price of the Common Stock on the last
date the Common Stock trades immediately preceding the date of receipt by
the Company of notice of conversion from the Holder ("Conversion Date"),
as reported by the National Association of Securities Dealers Electronic
Bulletin Board ("NASDAQ") or other securities market upon which the
Common Stock is then trading (the "Conversion Price").  The Company shall
at all times maintain a number of conversion Shares equal to 100% of the
number of shares of Common Stock necessary to allow the Holder to fully
convert this Debenture.  If the number of resultant Conversion Shares would
as a matter of law or pursuant to regulatory authority require the Company
to seek shareholder approval of such issuance, the Company shall, as soon as
practicable, take the necessary steps to seek such approval.  If such approval
is not received within 30 days after such approval becomes necessary, then the
Company shall be required to redeem the Debenture pursuant to the terms and
conditions of Paragraph 10 hereof.  Such conversion shall be effectuated by
surrendering the Debentures to be converted (with a copy, by facsimile or
courier, to the Company) to the Escrow Agent, identified in the Subscription
Agreement with the form of conversion notice attached hereto as Exhibit I
(the "Notice of Conversion"), executed by the Holder of this Debenture
evidencing such Holder's intention to convert this Debenture or a specified
portion (as above provided) hereof, and accompanied by proper assignment
hereof in blank.  If Conversion Shares shall not have been delivered to the
Holder within three (3) days of the Conversion Date, the Company shall pay
a penalty in cash in an amount equal to .5% of the face amount of this
Debenture calculated daily until the Conversion Shares are so delivered. 
Accrued but unpaid interest shall be subject to conversion.  No fractional
shares or scrip representing fractions of shares will be issued on conversion,
but the number of shares issuable shall be rounded to the nearest whole share. 
The date on which notice of conversion is given shall be deemed to be the
date on which the Holder has delivered this Debenture, with the assignment
and conversion notice duly executed, to the Escrow Agent identified in the
Subscription Agreement or, if earlier, the date set forth in such Notice of
Conversion, delivered in person or by facsimile, if the Debenture is received
by the Escrow Agent within three (3) business days thereafter.  The
transferee, assignee or issuee shall execute such investment representations or
other documents as are reasonably required by counsel in order to ascertain
the available registration exemption.

      (b)Interest at the rate of 12% per annum shall be payable
in advance, monthly commencing September 25, 1997 and on the 25th of each
month thereafter (unless such day is not a business day, then on the next
business day) and on the Maturity Date, accelerated or otherwise.  At the
election of the Company, interest may be paid in the same manner as principal
of the Debenture or in common stock of the Company; provided, however,
that, on the Closing Date the Company shall pay the first 3 months interest by
issuing Common Stock of the Company as follows:  based on the lesser of (x)
$0.80 per share or (y) 75% of the closing bid price of the Common Stock on
the trading day immediately preceding the Closing Date, the Company shall
issue to the Holder shares of Common Stock in an amount equal to the total
monthly interest accrued and due (the "Interest Shares").  Common Stock
issued pursuant hereto shall be issued pursuant to Regulation S in accordance
with the terms of the Subscription Agreement.  Thereafter, commencing 91
days after Closing, the Company shall pay interest on a monthly basis in cash
(or Common Stock, based on the above formula at the Company's option).

      5.No provision of this Debenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and interest on this Debenture at the time, place, and rate, and in
the manner, herein prescribed.

      6.The Company hereby expressly waives demand and
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of dishonor, notice of acceleration or intent to accelerate, bringing of
suit and diligence in taking any action to collect amounts called for hereunder
and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereof regardless of and without any notice, diligence, act or
omission as or with respect to the collection of any amount called for
hereunder.

      7.The Company agrees to pay all costs and expenses, including
reasonable attorneys' fees, which may be incurred by the Holder in collecting
any amount due under this Debenture.

      8.If one or more of the following described "Events of Default",
shall occur and continue for seven (7) days or such other period indicated
below:

      (a)The Company shall default in the payment of principal
or interest on this Debenture;

      (b)Any of the representations or warranties made by the
Company herein, in the Subscription Agreement, dated as the date hereof,
between the Company and Holder (the "Subscription Agreement"), or in any
certificate or financial or other written statements heretofore or hereafter
furnished by or on behalf of the Company in connection with the execution
and delivery of this Debenture or the Subscription Agreement shall be false or
misleading in any material respect at the time made;

      (c)The Company shall fail to perform or observe, in any
material respect, any other covenant, term, provision, condition, agreement
or obligation of the Company under this Debenture (and such failure shall
continue uncured for a period of seven (7) days after notice from the Holder
of such failure);

      (d)The Company shall (1) become insolvent; (2) admit in
writing its inability to pay its debts generally as they mature; (3) make an
assignment for the benefit of creditors or commence proceedings for its
dissolution; or (4) apply for or consent to the appointment of a trustee,
liquidator or receiver for its or for a substantial part of its property or
business;

      (e)A trustee, liquidator or receiver shall be appointed for
the Company or for a substantial part of its property or business without its
consent and shall not be discharged within thirty (30) days after such
appointment;

      (f)Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency shall assume custody
or control of the whole or any substantial portion of the properties or assets
of the Company and shall not be dismissed within thirty (30) days thereafter;

      (g)Any money judgment, writ or warrant of attachment,
or similar process, in excess of Four Hundred Thousand ($400,000) Dollars
in the aggregate shall be entered or filed against the Company or any of its
properties or other assets and shall remain unpaid, unvacated, unbonded or
unstayed for a period of thirty (30) days;

      (h)(i) Bankruptcy, reorganization, insolvency or
liquidation proceedings or other proceedings for relief under any bankruptcy
law or any law for the relief of debtors shall be instituted by or against the
Company and, if instituted against the Company, shall not be dismissed within
thirty (30) days after such institutions or (ii) the Company shall by any action
or answer approve of, consent to, or acquiesce in any such proceedings or
admit the material allegations of, or default in answering a petition filed in 
any such proceeding; or

      (i)The Company shall have its Common Stock delisted
from the NASDAQ Electronic Bulletin Board;

      (j)The Company shall fail to deliver a legal opinion of
counsel to the Company as required under Section 4(k) of the Subscription
Agreement.

then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which
waiver shall not be deemed to be waiver of any subsequent default) at the
option of the Holder and in the Holder's sole discretion, the Holder may
consider this Debenture immediately due and payable, without presentment,
demand, protest or (further) notice of any kind (other than notice of
acceleration), all of which are hereby expressly waived, anything herein or in
any notice or other instruments contained to the contrary notwithstanding, and
the Holder may immediately, and without expiration of any period of grace,
enforce any and all of the Holder's rights and remedies provided herein or any
other rights or remedies afforded by law.

     In the event the Company becomes aware of any Event of Default, the
Company, after it becomes aware thereof, will give written notice thereof to
Holder.

      9.This Debenture represents an unsecured obligation of the
Company.  No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.

      10.Within forty-five (45) days after the Closing Date, the
Company may elect to redeem all or part of this Debenture upon payment of
one hundred and ten percent (110%) of the principal amount of the Debenture
being redeemed together with interest accrued thereon to the date for
redemption ("Redemption Price").  If and only if the Company does not have
available the number of authorized shares of Common Stock necessary to fully
satisfy the Holders conversion option hereunder, then the Holder may elect to
require the Company, and the Company shall be so required, to redeem all or
part of this Debenture upon payment of one hundred and twenty percent
(120%) of the principal amount of the Debenture being redeemed together
with the interest accrued thereon to the date of redemption ("Second
Redemption Price").  The Company shall effect a redemption by written notice
to the Holder and the Redemption Price/Second Redemption Price will be
payable by the Company to the Holder not later than the fifth business day
after such notice is sent.  The Company may not send notice of redemption on
any principal amount of the Debenture for which the Company has received
a notice of conversion from the Holder.

      11.The Holder of this Debenture, by acceptance hereof, agrees
that this Debenture is being acquired for investment and that such Holder will
not offer, sell or otherwise dispose of this Debenture or the shares of
Common Stock issuable upon exercise thereof except under circumstances
which will not result in a violation of the Act or any applicable state Blue Sky
law or similar laws relating to the sale of securities.

      12.Holder may assign, transfer, sell or grant any of its rights or
obligations hereunder to any person without the consent of the Company;
provided, however, that the Company's obligation to a transferee of this
Debenture arises only if such assignment, transfer, sale or grant or other
dispositions is made in accordance with the terms and conditions of the
Subscription Agreement.

      13.In case any provision of this Debenture is held by a court of
competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Debenture will not in any
way be affected or impaired thereby.

      14.This Debenture, the Subscription Agreement and the Escrow
Agreement, dated as of the date hereof by and among the Company, the
Holder and The Bank of New York, as escrow agent and the agreements
referred to in this Debenture constitute the full and entire understanding and
agreement between the Company and the Holder with respect to the subject
thereof.  Neither this Debenture nor any term hereof may be amended,
waived, discharged or terminated other than by a written instrument signed by
the Company and the Holder.

      15.The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension
law or any usury law or other law that would prohibit or forgive the Company
from paying all or any portion of the principal of, premium, if any, or interest
on the Debenture as contemplated herein, wherever enacted, now or at any
time hereafter in force, or that may affect the covenants or the performance
of this Indenture; and (to the extent that it may lawfully do so) the Company
hereby expressly waives all benefit or advantage of any such law and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to Holder, but will suffer and permit the execution of every
such power as though no such law had been enacted.

      16.This Debenture shall be governed by and construed in
accordance with the laws of New York.  Holder hereby waives trial by jury
and consents to exclusive jurisdiction and venue in the State of New York.

      17.All disputes or controversies arising under, out of, in
connection with or in relation to, this Agreement which cannot be resolved
between the parties shall be dealt with as set forth in Section 11 of the
Subscription Agreement.

     IN WITNESS WHEREOF, the Company has caused this instrument
to be duly executed by an officer hereunto duly authorized.

Dated:  September _____, 1997

                                      NATIONAL AFFILIATED CORPORATION


                                      By:                                    
                                      Title:

                            EXHIBIT I

               NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert the
Debenture)


     The undersigned hereby irrevocable elects to convert
$__________________ of the above Debenture No. _____ into shares of
Common Stock of National Affiliated Corporation (the "Company")
according to the conditions set forth in such Debenture, as of the date written
below.

     The undersigned represents that it is not a U.S. Person as defined in
Regulation S promulgated under the Securities Act of 1933, as amended, and
is not converting the Debenture on behalf of any U.S. Person and the
representations contained in the Subscription Agreement are true.  If Shares
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto.

Date of Conversion                                

Applicable Conversion Price                       

Signature                                         
    [Print Name of Holder and Title of Signer]

Address                                           

                                                  



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<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-END>                               SEP-30-1997
<DEBT-HELD-FOR-SALE>                         1,772,121
<DEBT-CARRYING-VALUE>                                0
<DEBT-MARKET-VALUE>                                  0
<EQUITIES>                                     445,780
<MORTGAGE>                                   1,661,988
<REAL-ESTATE>                                        0
<TOTAL-INVEST>                               6,057,586
<CASH>                                         175,179
<RECOVER-REINSURE>                             160,309
<DEFERRED-ACQUISITION>                         758,261
<TOTAL-ASSETS>                              13,927,803
<POLICY-LOSSES>                              3,101,422
<UNEARNED-PREMIUMS>                             24,371
<POLICY-OTHER>                                       0
<POLICY-HOLDER-FUNDS>                          383,051
<NOTES-PAYABLE>                              3,798,000
                                0
                                          0
<COMMON>                                    10,461,891
<OTHER-SE>                                 (4,764,816)
<TOTAL-LIABILITY-AND-EQUITY>                13,927,803
                                   1,687,244
<INVESTMENT-INCOME>                            273,510
<INVESTMENT-GAINS>                            (12,861)
<OTHER-INCOME>                                 886,332
<BENEFITS>                                     757,994
<UNDERWRITING-AMORTIZATION>                    208,284
<UNDERWRITING-OTHER>                         1,625,015
<INCOME-PRETAX>                                255,793
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            255,793
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   255,793
<EPS-PRIMARY>                                      .03
<EPS-DILUTED>                                        0
<RESERVE-OPEN>                                 961,697
<PROVISION-CURRENT>                                  0
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