SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB-A

Commission File Number 0-11663

Chancellor Corporation
(Name of Small Business Issuer in its Charter)

Issuer's Telephone Number, Including Area Code (617) 368-2700

Securities registered under Section 12(g) of the Exchange Act:

(Title of Class)

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

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

Issuer's revenues for the year ended December 31, 1998 were approximately $10,708,000.

As of April 13, 1999, 43,226,395 shares of Common Stock, $.01 par value per share and 5,000,000 shares of Series AA Convertible Preferred Stock, $.01 par value per share (with a liquidation preference of $.50 per share or $2,5000,000) were outstanding. Aggregate market value of the voting stock held by non-affiliates of the registrant as of April 13, 1999 was approximately $9,332,000. Aggregate market value of the total voting stock of the registrant as of April 13,1999 was approximately $28,367,000.

Proxy Statement for the Annual Meeting of Stockholders to be held at 2:00 p.m. on June 25, 1999 at the offices of Bingham Dana, LLP, 150 Federal Street, Boston, MA 02109 - Part III

This Annual Report on Form 10-KSB-A contains certain "Forward-Looking" statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management as well as assumptions used in this report, the words "anticipate", "believe", "estimate", "expect", and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or the Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introduction and acceptance, technology changes and changes in industry conditions. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

ITEM 1.     DESCRIPTION OF BUSINESS

Chancellor Corporation ("Chancellor" or the "Company") was incorporated in Massachusetts in January 1977. It is principally engaged in (1) buying, selling, leasing and remarketing new and used transportation equipment, (2) managing equipment on and off-lease, and (3) arranging equipment-related financing through its principal subsidiary, Chancellor Fleet Corporation ("Fleet"), which was incorporated in Massachusetts in January 1980.

Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the Company, entered into a Management Agreement, dated August 1, 1998, as amended August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and The Management Agreement provided CAM with effective control of Tomahawk's operations as of August 1, 1998. Subsequently, CAM acquired all of the outstanding capital stock of Tomahawk from the two (2) sole shareholders (the "Selling Shareholders") pursuant to a Stock Purchase Agreement (the "Agreement") dated January 29, 1999.

In addition to having effective control of Tomahawk as of August 1998, the Company had also contractually committed to significant liabilities in excess of $11,194,000. The Company completed additional due diligence through the remainder of the year and effected a formal closing in January 1999. The Company had initially filed its 1998 10-KSB on April 14, 1999, whereby the Company included Tomahawk in its consolidated financial statements. Upon additional review and discussions with the Securities and Exchange Commission, the Company has filed this amended 10-KSB-A to reflect the financial statements without Tomahawk as of August 1998, and recorded the transaction as of January, 1999. In an effort to reflect the transaction on a pro forma basis as initially recorded, please see footnote 18 to the financial statements.

The Company originates lease transactions directly with equipment users and in most cases sells those leases to investors. The Company also manages most of the leases it sells to investors and, when the original leases expire or terminate, remarket the equipment for the benefit of the investors and the Company. The Company originates leases involving primarily transportation equipment, but also other equipment including material handling equipment and construction equipment. Investors who purchase equipment subject to a lease may receive the tax and most of the economic benefits associated with the lease transaction. In certain cases, the Company has retained leases for its own account. The Company also arranges non-recourse financing for some of the leases which it sells and for most leases which it has retained for its own account. Typically, when the Company originates leases, the investors or buyers of those leases are not known. Therefore, the Company at the time of entering into the lease transaction is "underwriting" the lease. At the expiration or early termination of the original lease, the Company typically sells or releases the equipment on behalf of the investor.

During the period 1989 through 1997, the Company incurred cumulative losses in excess of $56 million. The Company recorded a loss of $1,802,000 during fiscal 1997. The continued decline from 1989 through 1996 led the Company to the development and implementation of a restructuring and transition plan. This plan was developed and implemented under the direction of Vestex Capital Corporation, the Company's majority shareholder. The continued, but decreasing, loss in 1997 was due primarily to the lack of sufficient cash flow to add new leases to the Company's own lease portfolio and continued costs that occurred in the first half of 1997 in connection with the Company's restructuring efforts. For the year ended December 31, 1998, the Company recorded a profit of $524,000, the first year of profitability since 1988. The Company's return to profitability in 1998 reflects the culmination of new management's efforts and strategies to maximize remarketing of off lease equipment and fully implement its strategy to expand its operations to retail used transportation equipment. The Company continues to develop and attempts to implement innovative financing and fleet management programs in the transportation equipment finance industry to further the Company's continued growth.

Chancellor Asset Management Inc. ("CAM"), a wholly owned subsidiary of the Company, entered into a Management Agreement, dated August 1, 1998, as amended August 17, 1998, with M.R.B. Inc., a Georgia corporation d/b/a Tomahawk Truck Sales; Tomahawk Truck & Trailer Sales, Inc., a Florida corporation; Tomahawk Truck & Trailer Sales of Virginia, Inc., a Virginia corporation; and The Management Agreement provided CAM with effective control of Tomahawk's operations as of August 1, 1998. Subsequently, CAM acquired all of the outstanding capital stock of Tomahawk from the two (2) sole shareholders (the "Selling Shareholders") pursuant to a Stock Purchase Agreement (the "Agreement") dated January 29, 1999.

Tomahawk is engaged in a similar line of business as CAM. Tomahawk retails and wholesales used transportation equipment, primarily tractors and trailers. Tomahawk operates five (5) retail centers in Conley, Georgia; Richmond, Virginia; Pompano Beach, Florida; Orlando, Florida; and Kansas City, Missouri. Tomahawk also operates its wholesale division from the Conley, Georgia facility. Tomahawk will operate as a wholly owned subsidiary of the Company, coordinating many operations with the Company to achieve operating efficiencies and synergies.

The purchase price paid by CAM consisted of 4,500,000 shares of Common Stock of Chancellor (valued at $.65 per share) and future cash consideration pursuant to an earn-out (the "Earn-Out") as provided for in the Agreement. The Earn-Out provides that each of the Selling Shareholders will be paid an amount equal to seven and one-half percent (7.5%) of the Adjusted Pre-Tax Earnings of Tomahawk. Investment funding the Earn-Out, which is paid on a quarterly basis, begins in the fiscal year ended December 31, 1999 and ends in the fiscal year ended December 31, 2004. In connection with this Agreement, CAM loaned the Selling Shareholders a total of $500,000 pursuant to certain promissory notes payable that are payable in full on January 29, 2004. Additionally, Vestex Capital Corporation, the largest shareholder of the Company, is to receive up to $3,250,000 plus expenses, not to exceed $50,000, payable over the next six years for services rendered in finding, negotiating and arranging financing on the transaction. The final fee is based principally upon the financial impact and profitability that Tomahawk adds to the Company's operating results.

The Agreement also: i) nominates one of the Selling Shareholders as a director of Chancellor's Board of Directors; ii) elects both of the Selling Shareholders as directors of CAM's Board of Directors; iii) provides for Employment Agreements for the Selling Shareholders over a period of five years with base salaries of $200,000 per annum; iv) prohibits the Selling Shareholders from competing against CAM or Tomahawk, or soliciting former employees and customers of Tomahawk; v) provides for Tomahawk to lease from the Selling Shareholders the Conley, Georgia facility at fair market value rents of approximately $8,500 per month; and vi) provides CAM an option to purchase from the Selling Shareholders the Conley, Georgia facility for an amount not to exceed $950,000.

This transaction was recorded in accordance with the purchase method of accounting as of January 29, 1999. As a result of the effect on the transaction of the Management Agreement, the designated date of this transaction for accounting purposes was initially August 1, 1998 but has been revised effective January, 1999. In connection with this transaction, CAM assumed liabilities of approximately $11,200,000 and incurred acquisition costs of approximately $155,000. The excess of the purchase price over net assets of approximately $2,600,000 has been recorded in intangibles and allocated between a covenant not to compete, customer database files and goodwill in 1999 and will be amortized in the beginning of February, 1999 over periods of five to twenty years.

In August 1997, the Company committed to make a $1 million equity investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund composed of $40 million from equity participants including the Company, and $80 million in debt financing provided by the Overseas Private Investment Corporation ("OPIC"), an independent U.S. government agency. The purpose of the fund is to make direct investments in emerging companies throughout Africa. As of December 31, 1998, the Company had funded approximately $350,000 and is obligated to provide additional funding in the approximate amount of $650,000. The Company has additionally invested approximately $1,340,000 into one of NAOF's investee companies. The Company continues to negotiate further strategic opportunities with this investee company.

The Company undertook a review of its trust portfolio, including consultation with legal counsel and industry consultants, and determined that it had not been recovering costs associated with administering the trusts. Management's initial review determined that approximately $22,000,000 of costs for periods prior to 1997 had not been recovered from the trusts. The Company has recorded approximately $1,498,000 and $994,000 of cost recoveries in the years ended December 31, 1998 and 1997, respectively. For periods prior to 1997, $1,868,000 was recovered. Management makes no representations concerning the Company's ability to recover any further costs for periods prior to 1997. Further recoveries for periods prior to 1997 and thereafter are contingent upon the current status of the specific trusts and the Company's level of recovery efforts. Consequently, the Company will record any further recoveries as income in the period in which collection is assured.

The ability of the Company to profitably operate its lease origination business unit in the future will depend largely on the amount of new capital available to the Company and the cost of that capital. In addition, the success of the Company's remarketing and retailing of used transportation equipment will result, in part, from its ability to locate sources of quality used transportation equipment and expansion of its distribution channel through siting of potential new retail facilities. The Company continues to explore possible sources of new capital including, for example, obtaining new or additional recourse debt, obtaining new equity capital, securitizing lease transactions, obtaining equity capital from private investors, purchases of equipment leases originated by the Company and/or entering into strategic alliances/joint ventures with other leasing or financial services companies and the sale of ancillary business units and/or assets as considered appropriate. The Company also utilizes an expansive database of over 75,000 sources and customers of used transportation equipment. This effort is on going and includes a fully staffed telemarketing group to continually upgrade and add new sources and users of transportation equipment. Additionally, the Company's management has established a retail facility expansion program through the investigation of potential new sites that can be developed internally as well as acquisition candidates. The Company intends on investing any new capital that it obtains in leases for its own portfolios (if practical), expansion of its remarketing and retail/wholesale operations, and other business operations.

The majority of the Company's leases are noncancelable "net" leases which contain provisions under which the customer must make all lease payments regardless of any defects in the equipment and which require the customer to insure the equipment against casualty loss, and pay all related property, sales and other taxes. Some of the leases written by the Company provide for early termination options. Generally, these options may be exercised at specified times upon receipt by the Company of an amount at least equal to the discounted present value of remaining rent payments. The Company intends to collect all termination payments. Other leases allow the lessee at certain times to require the Company to attempt to sell or sublease the equipment for the lessee, with the Company sharing in any losses or gains should a decrease or increase in revenue streams occur as a result.

Leases are generally originated for private third party purchasers of equipment. The Company's lease origination marketing strategy is transaction driven. With each lease origination opportunity, the Company evaluates both the prospective lessee and the equipment to be leased. With respect to each potential lessee, the Company evaluates the lessee's credit worthiness. With respect to the equipment, the Company evaluates the remarketing potential.

The Company currently concentrates on leasing transportation equipment, such as tractors, trailers and trucks. The Company also leases construction equipment, aircraft, material handling equipment and other equipment. The Company's business plan calls for diversification of the equipment available to be financed. This diversification will provide for the financing of low-obsolescence, hard-asset equipment with predictable and dependable residual values, including but not limited to, plastics, printing, construction and general manufacturing equipment. Further, the Company will seek to syndicate transactions not meeting these criteria or the Company's credit risk profile.

The Company leases equipment to lessees in diverse industries throughout the United States. Although the Company's direct solicitation efforts involving leases of new equipment have shifted from Fortune 100 companies to include smaller business entities, most of the Company's lessees of new equipment are still of substantial creditworthiness, with minimum net worth in excess of $25 million.

During 1998, the Company continued its lease originating activities, including brokering of several new lease transactions. The Company also transacted several significant buyouts of portfolios held by certain trust investors. During 1998, 31% (based on original equipment cost) of the new lease transactions originated by the Company were with the one largest lessee (Wal-Mart). In addition, approximately 40% and 31% (based on original equipment cost) of equipment sold to investors in 1998 were purchased by the two largest investors. During 1997, 92% (based on original equipment cost) of the new lease transactions originated by the Company were with the one largest lessee. In addition, approximately 55% and 37% (based on original equipment cost) of equipment sold to investors in 1997 were purchased by the two largest investors.

The Company acquired $5.5 million of equipment under 40 leases during 1998. The Company acquired $214,000 of equipment under 4 leases during 1997. Additionally, the Company acquired 10 existing leases in connection with the prepayment of the intercreditor loan in 1997.

In 1998, the Company disposed of $6.8 million of portfolio equipment (measured by its original cost) on operating leases and disposed of $139,000 on direct finance leases, reducing the total equipment (net of depreciation, pay-down and write-downs) on operating leases and direct finance leases to $702,000 and $359,000, respectively. In 1997, the Company disposed of $4.0 million of the Company's portfolio equipment (measured by its original cost) on operating leases and disposed of $590,000 on direct finance leases, reducing the total equipment (net of depreciation, pay-down and write-downs) on operating leases and direct finance leases to $232,000 and $521,000, respectively. In 1997, the Company, as a result of a commitment from the previous management and board, sold $1,300,000 (based on original cost) of equipment under one lease from the portfolio prior to lease expiration.

The remarketing of equipment plays a vital role in the operations of the Company. The Company's remarketing efforts are directed through Chancellor Asset Management, Inc. ("CAM"), the Company's wholly owned subsidiary.

In connection with the sale of lease transactions to investors, the Company typically is entitled to share in a portion of the residual value realized upon remarketing. Successful remarketing of the equipment is essential not only to the realization of the Company's interest in the residual value but also for the Company to recover its original investment in the equipment in its portfolios and to recognize a return on that investment.

The Company continues to dedicate substantial resources towards the development and improvement of its remarketing capabilities, which is a significant profit center for the Company. The Company's strategy is to exploit its remarketing expertise by providing fee-based remarketing services to fleet equipment owners and lessees and also to create a dealer capability under which the Company would buy and re-sell fleet equipment. The Company continually explores the potential for financing relationships enabling the remarketing group to enter into transactions to purchase used transportation equipment which can be quickly and profitably remarketed.

The Company has found that its ability to remarket equipment is affected by a number of factors. The original equipment specifications, current market conditions, technological changes, and condition of the equipment upon its return all influence the price for which the equipment can be sold or re-leased. Delays in remarketing caused by various market conditions reduce the profitability of remarketing.

Remarketing efforts are pursued on a direct retail sale, wholesale or lease basis. The Company's fleet equipment remarketing experience has shown that generally the greatest residual value is realized by initially re-leasing equipment, rather than immediately selling it. Therefore, the Company has concentrated its remarketing efforts on re-leasing, although re-leasing involves more risks than selling because lessees of used equipment are generally smaller, less creditworthy enterprises than the Company's initial lessees. The Company sells fleet equipment through its retail sales center located in Elizabeth, New Jersey. Additionally, the Company uses indirect retail sales centers in California, Georgia, Illinois and Texas.

As previously mentioned, CAM acquired Tomahawk for purposes of enhancing its remarketing of used transportation equipment. The acquisition of Tomahawk provides the Company with five additional retail centers in Conley, Georgia; Pompano Beach and Orlando, Florida; Richmond, Virginia; and Kansas City, Missouri, in addition to its previously existing location in Elizabeth, New Jersey. Tomahawk also provides additional wholesale opportunities from its Conley, Georgia headquarters. The Company will derive significant revenues from the retail and wholesale of used transportation equipment through CAM's Tomahawk business unit. In addition, the Company's ability to utilize retail pricing to establish residual values on lease transactions will provide the Company with a competitive advantage in its retail centers throughout the domestic marketplace. CAM maintains an extensive database of used equipment sources and customers and continually updates this information through a fully staffed telemarketing group.

The Company sold certain lease transactions to private investors through the sale of interests in grantor trusts. In the grantor trust structure, the equipment is acquired directly by the trust and the related lease is transferred to the trust. The Company or one of its subsidiaries usually acts as trustee and in that capacity holds title to the equipment and performs specified administrative functions for which it is entitled to receive reimbursement for costs incurred. The Company typically sells equipment directly to an investor. The Company receives fees upon these sales. In addition, the Company often shares with the investor in the residual value derived from the remarketing of equipment at lease expiration or early termination. The Company sold approximately $3 million of equipment to private investors during 1997. There were no sales of equipment using grantor trusts in 1998. Although the Company will continue its efforts to syndicate lease transactions, it does not envision the use of grantor trusts in future transactions.

The principal methods by which the Company competes are its ability to underwrite the lease transactions which it originates; its knowledge of the equipment used by its lessees; the training and experience of its personnel; the relationships and reputation it has established with lessees, equipment suppliers and financial institutions; its ability to adapt to changing regulations and tax laws; and its experience in successfully remarketing the equipment at lease termination. Additionally, the Company's ability to provide in-house retail distribution channels provides advantages in establishing pricing for lease origination transactions and improving overall fleet management and total holding costs for the customer.

The equipment leasing business, on a global basis, is a highly competitive, fragmented marketplace with thousands of competitors. The Company has identified emerging markets such as Russia, the Commonwealth of Independent States, the Republic of South Africa, the Kingdom of Swaziland, and other sub-Saharan countries. These emerging markets hold significant opportunity to provide financial services, such as leasing, that the Company will continue to explore as resources and opportunities permit. The Company is aggressively pursuing the transacting of lease deals and negotiation of strategic alliances in these markets. Chancellor's competitors include (1) large diversified financial services companies, (2) other leasing companies and (3) vendor financing programs. Many of these organizations have greater financial resources than the Company and, therefore, may be able to obtain funds or equipment on more favorable terms than those available to the Company. Additionally, the Company competes against other financing alternatives available to lessees for the purchase of equipment.

The Company's strategy is to increase profitability, increase market share, and create growth opportunities by expanding its core business through servicing middle market clients, expanding its used transportation equipment retail and wholesale distribution channel, expanding into new transportation and equipment markets and seeking strategic financial partnerships and joint ventures domestically and internationally.

Historically, the Company focused its efforts on Fortune 100 companies. The Company implemented a plan to broaden the focus of its transportation equipment and remarketing expertise by expanding the number of customers within its target market. The Company will broaden its scope of lease origination activities to include middle market clients with a variety of transportation equipment requirements. The strategic decision to target middle market origination activities is expected to result in higher gross margins while utilizing the Company's twenty years of historical equipment residual performance. The Company will leverage off of its expertise allowing entry into emerging international markets seeking these basic financial services in their economic development. The Company enjoys a reputation as one of the premier transportation equipment remarketers in the industry. The Company believes there is a significant opportunity to offer lease and rental companies, finance companies, utilities, municipalities, and transportation companies an outlet for their used equipment other than the traditional low-end auction channels. The Company further believes the acquisition of Tomahawk will enhance the distribution of this equipment at lease expiration.

The Company also perceives significant opportunities for its services in international markets. Additionally, the Company can benefit from higher margins in less competitive international markets. In 1997, the Company completed certain lease transactions in the Russian Federation and the Commonwealth of Independent States ("Russia and the CIS"). In addition, the Company has made investments with certain parties that both invest in and operate companies in the Republic of South Africa ("RSA"), the Kingdom of Swaziland and other sub-Saharan countries. The Company continues to evaluate the potential for providing additional financial services in the RSA as a result of the strategic alliances established.

Since the change in management and Board control on December 3, 1996 the Company closely scrutinizes transactions to maximize profitability. As a result of the restructuring, which was completed in 1997, and a move towards concentrating on profit centers, the Company has established a strong foundation upon which future profitable business expansion can be achieved. As an outgrowth of the Company's core transportation leasing business, several acquisitions are being evaluated that provide for vertical and horizontal integration into businesses that utilize similar back office operations.

In 1997, the Company instituted an aggressive mergers and acquisition strategy, seeking candidates providing vertical and horizontal opportunities within the areas of commercial, consumer and real estate finance. The expansion of the Company's core business through the acquisition of and merger with complementary businesses within financial services will be an ongoing strategic focus. The implementation of this strategy involves members of senior management and outside professionals reporting to a Mergers and Acquisitions subcommittee of the Board of Directors. This group is constantly evaluating a variety of domestic and international leasing companies and related opportunities, for potential alliances and/or business combinations.

The Company has commenced efforts to assess and where required, remediate, issues associated with Year 2000 ("Y2K") issues. Generally defined, Y2K issues arise from computer programs which use only two digits to refer to the year and which may experience problems when the two digits become "00" in the year 2000. In addition, imbedded hardware microprocessors may contain time and two-digit year fields in executing their functions. Much literature has been devoted to the possible effects such programs may experience in the Year 2000, although significant uncertainty exists as to the scope and effect the Y2K issues will have on industry and the Company.

The Company has recognized the need to address the Y2K issue in a comprehensive and systematic manner and has taken steps to assess the possible Y2K impact on the Company. Although the Company has not completed a 100% assessment of all its information technology ("IT") and non-IT systems for Y2K issues, the Company has completed its assessment of all mission-critical systems. All mission-critical systems and most of the major applications and hardware have been assessed to determine the Y2K impact and a plan is in place for timely resolution of potential issues.

In 1998, the Company developed a strategic plan to identify the IT systems needed to accomplish the Company's overall growth plans. As part of this process, Y2K issues were considered and addressed by the Company's senior management and MIS personnel. Although this plan was intended to modernize the IT systems, compliance with Y2K requirements were incorporated.

The cost of bringing the Company in full compliance should not result in a material increase in the recent levels of capital spending or any material one-time expenses. The Company has spent approximately $152,000 in modernizing its IT system, including compliance with Y2K requirements. The Company anticipates spending of approximately $300,000 during fiscal 1999 to complete the modernization of its IT system.

The failure of either the Company, its vendors or clients to correct the systems affected by Y2K issues could result in a disruption or interruption of business operations. The Company uses computer programs and systems in a vast array of its operations to collect, assimilate and analyze data. Failure of such programs and systems could affect the Company's ability to track assets under lease and properly bill. Although the Company does not believe that any of the foregoing worst-case scenarios will occur, there can be no assurance that unexpected Y2K problems of the Company's and its vendors' and customer's operations will not have a material adverse effect on the Company.

While it is difficult to classify our state of readiness, we believe that our internal plans should have the Company ready for the year 2000 to avoid any material Y2K issues. We have completed the assessment, testing systems and developing contingency plans. Management is in constant communication with its IT personnel and has made and will continue to make reports to the Company's Board of Directors.

In 1998 the Company made several improvements to its Internet presence (http://www.chancellorcorp.com) as part of the Company's strategy to further incorporate technology into its marketing and customer service initiatives. The Company's goal for 1999 is to create a simple, well-designed and useful Internet destination by redesigning the site and expanding content to improve its usefulness as a business resource for customers and an informational tool for investors.

During second quarter of 1999, the Company plans to launch a comprehensive upgrade to its Internet site designed to be more user friendly. The new Chancellor site will showcase the Company's truck and trailer inventory available through its New Jersey retail location, provide online and downloadable lease applications for fleet managers, and improve the quality and quantity of corporate and financial information tailored for the investment community.

Through implementation of a strategy allowing for penetration of middle market, as well as Fortune 100 customers, the Company will broaden its target market to a less competitive and price sensitive arena. The Company will focus its energies domestically and internationally on the multi-billion dollar leasing marketplace. The ability of the Company to originate and remarket equipment in underdeveloped and inefficient markets translates into higher potential rates of return. Additionally, the willingness of the Company's strategic financial partners to augment the Company's deal underwriting capabilities provides financial strength to execute transactions.

The used transportation equipment market also presents one of the most fragmented markets available. Dominated by local dealers and manufacturer remarketers, the used transportation equipment market presents Chancellor an opportunity for consolidation in this industry. The Company's management believes that a significant opportunity exists to offer lease and rental companies, finance companies, utilities, municipalities, and transportation companies a retail outlet for their used equipment as opposed to the current wholesale and auction outlets currently used.

The Company also views its efforts to be a global originator/remarketer of transportation and non-transportation equipment as an element to its corporate growth strategy over the next 5 to 7 years. The additional international revenue streams, where margins are significantly higher than the domestic market, will help facilitate the Company's goal of increasing profitability. Exposure on these transactions will be mitigated through the use of credit enhancement, letters of credit and other similar instruments. The Company's management is committed to a strategy providing for international diversification within emerging global markets.

Additionally, the Company has made significant progress in establishing a presence in the Republic of South Africa ("RSA") as a premier financial services company in this region. The Company's efforts as a key contributor in the economic development of the RSA are demonstrated indirectly through an investment in the New Africa Opportunity Fund, LP ("NAOF.)

As a result of its strength in the management of assets, the Company has a unique opportunity to originate and/or remarket long-lived assets in the international marketplace. As continued emphasis is placed on projects to rebuild and improve infrastructure, the need for capital equipment in these international markets is expected to grow.

The Company's fully integrated sales and marketing departments are headquartered in Boston, Massachusetts, with a satellite office located in New York City, New York. The Company maintains retail used transportation equipment centers in Conley, Georgia; Pompano Beach, Florida; Orlando, Florida; Richmond, Virginia; Kansas City, Missouri; and Elizabeth, New Jersey. A direct sales staff and telemarketing program supports a national network of sales representatives.

Because of tax and investment considerations, investors frequently defer their decisions to purchase lease transactions until after the first half of the calendar year.

As of April 13, 1999, the Company employed approximately 90 persons on a full time basis.

ITEM 2.     DESCRIPTION OF PROPERTY

The Company leases an office facility in Boston, Massachusetts. This facility houses the Company's administrative, financing and marketing operations. The Boston, Massachusetts lease is for a non-cancelable period of five years, with three and a half years remaining in the term, and with a base rent, as of December 31, 1998, of approximately $11,000 per month. The Boston, Massachusetts facility adequately provides for present and future needs, as currently planned.

The Company also leases a retail center in Elizabeth, New Jersey. This location is utilized for the storage, display, and selling of used transportation equipment. This facility is leased under a non-cancelable arrangement with the remaining term of one year. The monthly rent of this facility as of December 31, 1998 is approximately $4,500.

ITEM 3.     LEGAL PROCEEDINGS

As of 12/1/99, all material litigation involving the Company has been settled and grievances have been resolved. The Company is involved in routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition or operations of the Company.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

The Company's Common Stock has traded on the NASDAQ OTC Electronic Bulletin Board under the symbol "CHLR" since August 21, 1996 and under the symbol "CHCR" between January 28, 1994 and August 21, 1996 on the basis of actual trading prices. The Company's Common Stock had traded from June 30, 1992 to January 28, 1994 on the Small Cap Market of the Automated Quotation System of NASDAQ on the basis of actual trading prices.

The following table sets forth the high and low sales prices of the Company's Common Stock for the periods indicated, according to published sources.

The analysis below is reflective of the Company, and does not give rise to further analysis of the Management Agreement with Tomahawk.

Revenues. Total revenues for the year ended December 31, 1998 was $10,708,000 as compared to $4,433,000 for the prior year, an increase of $6,275,000 or 141.6%. For the year ended December 31, 1998, transportation equipment sales were $6,165,000 as compared to no sales for the corresponding prior year. This significant revenue stream is attributable in part to a major purchase and sale of equipment from the buy-out of a portfolio resulting in approximately $5,647,000 of revenues recorded. The Company will also utilize the competitive advantage provided by its access to retail pricing for residual values to aid in the ability to improve competitiveness within the Company's lease origination business unit. For the year ended December 31, 1998, rental income increased by $72,000 or 8.3% as compared to the prior year. The increase in rental income is attributable primarily to the addition of certain equipment acquired in connection with the purchase of several portfolios. For the year ended December 31, 1998, lease underwriting income decreased by $219,000 or 74.7% as compared to the prior year. Lease underwriting income decreased due to a higher concentration of broker related activity that results in a lower overall revenue stream. The Company does, however, continue its lease origination rebuilding process through the addition of key senior management and sales personnel, and development of strategic alliances to provide future growth in this area. For the year ended December 31, 1998, direct finance lease income decreased by $162,000 or 59.6%, as compared to the prior year. The decrease in direct finance lease income is attributable primarily to the lack of additions to its portfolio of direct finance leases in 1998 as compared to the addition of 10 leases in 1997. For the year ended December 31, 1998, gains from portfolio remarketing increased by $573,000 or 71.5% as compared to the prior year. The increase in gains from portfolio remarketing is attributable to the increase in sales of portfolio assets during the year ended December 31, 1998 as compared to the prior year. For the year ended December 31, 1998, fees from remarketing activities decreased slightly by $81,000 or 5.4% as compared to the prior year. This decrease is attributable, in part, to management's efforts to increase the level of activity in the sales of used transportation equipment. For the year ended December 31, 1998, other income decreased by $224,000 or 33.7% as compared to the corresponding prior year period. The decrease is attributable in part to the inclusion of certain consulting fees earned in 1997 that were not recurring in 1998.

Costs and Expenses. Total costs and expenses for the year ended December 31, 1998 was $10,184,000 as compared to $7,152,000 for the prior year, an increase of $3,032,000 or 42.4%. The increase is primarily a result of the costs associated with sales of transportation equipment. The cost of transportation equipment sales was $5,647,000 for the year ended December 31, 1998 and resulted in an overall gross margin of 8.4%. Selling, general and administrative expenses for the year ended December 31, 1998 was $3,949,000 as compared to $6,412,000 for the corresponding prior year, a decrease of $2,463,000 or 38.4%. For the year ended December 31, 1998, selling, general and administrative expenses included recovered reimbursable administration costs of $1,498,000 as compared to $405,000 for the corresponding prior year. Before netting out the reimbursable administration costs selling, general and administrative costs decreased to $5,447,000 for the year ended December 31, 1998 as compared to $6,817,000 for the corresponding prior year, a decrease of $1,370,000 or 20.1%. The decrease in selling, general and administrative expenses reflects the success of management's cost containment and stabilization efforts that were finalized in 1997. Management believes it has successfully implemented its cost containment and stabilization strategy. These cost improvements have resulted in a stabilization of the corporate infrastructure and provide a firm foundation for the new management team to implement the growth phase of its business plan.

Interest expense for the year ended December 31, 1998 was $111,000 as compared to $281,000 for the prior year, a decrease of $170,000 or 60.5%.

Depreciation and amortization expense for the year ended December 31, 1998 was $477,000 as compared to $459,000 for the prior year, an increase of $18,000 or 3.9%.

Extraordinary Item - Gain on Debt Forgiveness. The Company recorded a gain on debt forgiveness for the year ended December 31, 1997 of $930,000. In April 1997, the Company repaid in advance of their respective terms an inter-creditor loan and secured inventory loan. The aggregate amount of this debt on the repayment date was $1,906,000, of which approximately $976,000 was paid in cash and the balance of $930,000 was forgiven. In addition, the Company paid approximately $22,000 in legal and bank fees to complete this transaction.

Net Income. Net income for the year ended December 31, 1998 was $524,000 as compared to a net loss of $1,802,000 for the prior year, an increase of $2,326,000 or 129.1%. The increase in net income is primarily attributable to the significant increase in revenues, primarily from the retail and wholesale of used transportation equipment, the buy-out of leases from portfolios, and continued improvements in the containment of costs. Basic net income per share for the year ended December 31, 1998 was $0.02 per share as compared to a ($0.12) net loss per share for the prior year, an increase of $0.14 per share. The increase is due primarily to the marked increase in overall net income resulting from significant revenue growth .

The Company recognized a net increase in cash and cash equivalents for the year ended December 31, 1998 of $515,000. Operating activities used cash of $2,283,000 during the year ended December 31, 1998. Investing activities provided cash of $946,000 during the year ended December 31, 1998. Financing activities provided cash of $1,852,000 during the year ended December 31, 1998 and is primarily a result of increases in stock issuance. Cash and cash equivalents amounted to $612,000 at December 31, 1998 as compared to $97,000 at December 31, 1997, an increase of $515,000 or 530.9%.

The Company is provided management and consulting services by VMI, Corporation ("VMI") an affiliate of the Company's majority stockholder, pursuant to a consulting agreement approved by the shareholders at the 1995 Annual Meeting of the Stockholders, as amended in July 1998. VMI provides specified services including, but not limited to, general business consulting, the development and implementation of the Company's 1997 transition and turnaround strategies, development of domestic and international business opportunities and growth strategies, identification and development of strategic alliances, and support of merger and acquisition activity. Vestex Capital Corporation ("VCC"), an additional affiliate of the Company, provided specified services including debt and equity raising efforts, and other financing activity. VCC is paid fees related to debt and equity transactions up to 3.0% and 7.5%, respectively, of the amount of financing raised in addition to related expenses. VMI provides services to the Company on operational and other matters for which it is compensated at levels negotiated with the Company.

During 1998, VCC investigated numerous strategic alliances and merger and acquisition opportunities on behalf of the Company. In connection with this activity, VCC was instrumental in the negotiation and consummation of the Lease Servicing Agreement entered into on November 1, 1998 among Chancellor Leasing Services, Riviera Finance - East Bay and United Capital and Finance LLC. VCC continues to negotiate and manage the Company's financing, acquisition and investment efforts in the Republic of South Africa and other international opportunities. VCC was instrumental in the development and implementation of the strategy to buy-out and acquire investment grade transportation equipment portfolios. As a result of this strategy, the Company acquired portfolios valued at an original equipment cost of approximately $22,000,000. The acquisition of these portfolios was further facilitated by VCC assisting in arranging approximately $8,000,000 of financing to effect the portfolio buy-out. VCC was also instrumental in recruiting and attracting key employees to the Company. Additionally, VCC provided these key employees warrants to purchase Chancellor common stock, beneficially owned by VCC and valued at approximately $1,752,300. VCC's activities provided sources of funding to the Company of approximately $6,500,000, and $300,000 for fees for services and reimbursable expenses, respectively, converted into debt and equity instruments of the Company. This included the purchase of 1,946,146 shares of the Company's common stock at a price of $.69 per share. Additionally, VCC infused approximately $755,000 of cash and paid expenses of approximately $670,000 on behalf of the Company during 1998. As a result, in part, of VCC's activities and services provided, the Company's net worth increased to $2,362,000 at December 31, 1998 from $227,000 as of December 31, 1997 and from an approximate $2,550,000 negative net worth as of December 31, 1996.

The Company undertook a review of its trust portfolio, including consultation with legal counsel and industry consultants, and determined that it had not been recovering costs associated with administering the trusts. Management's review determined that approximately $22,000,000 of costs for periods prior to 1997 had not been recovered from the trusts. The Company has recorded approximately $1,498,000 and $994,000 of cost recoveries in the years ended December 31, 1998 and 1997, respectively. For periods prior to 1997, $1,868,000 was recovered. Management makes no representations concerning the Company's ability to recover any further costs for periods prior to 1997 or thereafter. Further recoveries for periods prior to 1997 are contingent upon the current status of the specific trusts and the Company's level of recovery efforts. Consequently, the Company will record any further recoveries as income in the period in which collection is assured.

The Company's ability to underwrite equipment lease transactions is largely dependent upon the availability of short-term warehouse lines of credit. Management is engaged in continuing dialogue with several inventory lenders which appear to be interested in providing the Company with warehouse financing. If the Company experiences delays in putting warehouse facilities in place, the Company transacts deals by coterminous negotiation of lease transactions with customers and financing with institutions upon which it obtains a fee as the intermediary of up to 3% of the amount of financing.

The remarketing, retailing and wholesaling of equipment has played and will continue to play a vital role in the Company's operating activities. In connection with the sale of lease transactions to investors, the Company typically is entitled to share in a portion of the residual value realized upon remarketing. Successful remarketing of the equipment is essential to the realization of the Company's interest in the residual value of its managed portfolio. It is also essential to the Company's ability to recover its original investment in the equipment in its own portfolios and to recognize a return on that investment. The Company has found that its ability to remarket equipment is affected by a number of factors. The original equipment specifications, current market conditions, technological changes, and condition of the equipment upon its return all influence the price for which the equipment can be sold or re-leased. Delays in remarketing caused by various market conditions reduce the profitability of the remarketing.

The Company anticipates it will continue to dedicate substantial resources toward the further development and improvement of its remarketing and retailing capabilities and believes that this business unit will continue to be a profit center for the Company. The Company's strategy is to further exploit its remarketing expertise by continuing to develop its ability to sell remarketing services to other lessors, fleet owners, and lessees and also to create a dealer capability under which the Company would buy and resell fleet equipment. The Company will also expand its used transportation equipment retail and wholesale capabilities through addition of retail centers through internal growth and acquisitions. This improved capability will be used as a competitive advantage that will enable the Company to provide a "total holding cost" concept when competing for new lease origination deals. The Company's retail and wholesale business unit will both provide an improved outlet for other lessors, financial institutions, and fleet owners to dispose of used transportation equipment and a source of quality used transportation equipment for fleet owners and owner-operator. The Company will also aggressively promote its Internet capabilities to further promote its business activities and as an e-commerce tool.

In August 1997, the Company committed to make a $1 million equity investment in the New Africa Opportunity Fund, LP ("NAOF"). NAOF is a $120 million investment fund composed of $40 million from equity participants including the Company, and $80 million in debt financing provided by the Overseas Private Investment Corporation ("OPIC"), an independent U.S. government agency. The purpose of the fund is to make direct investments in emerging companies throughout Africa. As of December 31, 1998, the Company had funded approximately $350,000 and is obligated to provide additional funding in the approximate amount of $650,000. The Company has additionally invested approximately $1,340,000 into one of NAOF's investee companies. The Company continues to negotiate further strategic opportunities with this investee company.

The Company's renewal or replacement of recently expired lines, its expected access to the public and private securities markets, both debt and equity, anticipated new lines of credit (both short-term and long-term and recourse and non-recourse), anticipated long-term financing of individual significant lease transactions, and its estimated cash flows from operations are anticipated to provide adequate capital to fund the Company's operations for the next twelve months. Although no assurances can be given, the Company expects to be able to renew or timely replace expired lines of credit, to continue to have access to the public and private securities markets, both debt and equity, and to be able to enter into new lines of credit and individual financing transactions.

As previously discussed, although the Company did not have a formal closing with Tomahawk until January 1999, the Company was contractually liable at December 31, 1998 for approximately $11,200,000 of liabilities. The purchase was effected January, 1999 (see footnote 18 for details).

The Company's future quarterly operating results and the market price of its stock may fluctuate. In the event the Company's revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of the Company's stock. Any such adverse impact could be greater if any such shortfall occurs near the same time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing companies or major customers or vendors of the Company.

The Company's quarterly results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, as a result of sales by the Company of equipment it leases to its customers. Such sales of equipment, which are an ordinary but not predictable part of the Company's business, will have the effect of increasing revenues, and, to the extent sales proceeds exceeds net book value, net income, during the quarter in which the sale occurs. Furthermore, any such sale may result in the reduction of revenue, and net income, otherwise expected in subsequent quarters, as the Company will not receive lease revenue from the sold equipment in those quarters.

Given the possibility of such fluctuations, the Company believes that comparisons of the results of its operations to immediately succeeding quarters are not necessarily meaningful and that such results for one quarter should not be relied upon as an indication of future performance.

The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 prescribes standards for reporting comprehensive income and its components. The implementation of this SFAS has no material effect on the Company's consolidated financial statements.

SFAS No. 131, "Disclosures About Segments of An Enterprise and Related Information", requires disclosures of certain information about the Company's operating segments on a basis consistent with the way in which the Company is managed and operated. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or the financial position of the Company but did affect the disclosure of segment information.

All schedules have been omitted because they are inapplicable or the required information is included in the notes to the consolidated financial statements.

On February 25, 1999, our Audit Committee and Board of Directors approved the dismissal of our independent accountants, Reznick Fedder & Silverman, P.C. ("Reznick Fedder"). We provided Reznick Fedder with the reasons for the dismissal in a letter on March 4, 1999. The reasons include, but are not limited to: (i) disagreements on fees billed by Reznick Fedder for services in the prior year, including, but not limited to, due diligence and business advisory services in connection with merger and acquisition activity, and estimated fees in connection with the proposed 1998 audit engagement, (ii) a lack of commitment by Reznick Fedder to ensure timely completion of the 1998 audit and timely filing of the 1998 Annual Report on Form 10-KSB, (iii) dissatisfaction as to the timeliness of Reznick Fedder's provision of business advisory reports and recommendations in general and Management Reports pursuant to the requirements of Statements on Auditing Standards No. 61 in particular, and (iv) personality conflicts between Reznick Fedder's audit team and management, including disagreements concerning the quality of staffing provided previously.

During the years ended December 31, 1997 and 1996: (i) there were no disagreements with Reznick Fedder on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Reznick Fedder, would have caused Reznick Fedder to make a reference to the subject matter of the disagreements in connection with its reports in the financial statements for such years and (ii) there were no "reportable events" as described in Items 304 of Regulation S-K. Reznick Fedder's report of independent accountants on the Company's consolidated financial statements for the years ended December 31, 1997 and 1996 each contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

During the interim period from December 31, 1997 through February 25, 1999 (the date of Reznick Fedder's dismissal as the Company's independent accountants), Reznick Fedder alleged, solely in their opinion, (i) one potential disagreement as to a matter relating to accounting principles, and (ii) one suggested "reportable event".

By letter dated March 15, 1999, Reznick Fedder has indicated that, based on the limited information provided to them as of February 6, 1999, it did not appear that the purchase of Atlanta based MRB, Inc. and affiliates d/b/a Tomahawk Truck & Trailer Sales, Inc. ("MRB") should be reflected as of August 1, 1998, as stated in our Current Report on Form 8-K filed on February 12, 1999. Reznick Fedder based its preliminary determination on the August 1, 1998 Management Agreement, the January 29, 1999 Stock Purchase Agreement, and the January 29, 1999 Loan Agreement, each with MRB, as indicated in Reznick Fedder's letter to us dated March 8 (incorporated by reference from Exhibit 99 to the Company's Form 8-K/A filed with the Securities and Exchange Commission on March 22, 1999).

Reznick Fedder also incorrectly stated in that letter that their preliminary determination was based in part on the First Amendment to the Management Agreement dated August 17, 1998, when in fact, Reznick Fedder did not review that First Amendment until after we filed our Current Report on Form 8-K on February 12, 1999 reporting the completion of our acquisition of MRB. Despite their dismissal as our independent accountants, Reznick Fedder also requested in that letter that the Company provide any additional information that they should consider in connection with their opinion regarding the appropriateness of the accounting disclosures made in the Company's Form 8-K filed on February 12, 1999. Reznick Fedder did not request further information as to this issue prior to their dismissal.

We engaged the Atlanta based firm of Metcalf Rice Fricke & Davis ("Metcalf Rice") on January 25, 1999 to perform the 1998, 1997, and 1996 audits of MRB, a significant subsidiary. We further engaged the firm of Metcalf Rice, based on the merits of their performance of services in connection with the MRB audits, to serve as our independent accountants in February, 1999. We then asked Metcalf Rice to review this potential issue, alleged by Reznick Fedder as referenced in their letter dated March 15, 1999, using all available information, including materials not previously requested by Reznick Fedder, and provide us with their determination as to the proper accounting treatment of our acquisition of MRB under generally accepted accounting principles. On March 29, 1999, Metcalf Rice issued a letter pursuant to Statements of Auditing Standards No. 50 "Independent Accountants Report on Appropriate Application of Generally Accepted Accounting Principles," which addressed the reporting period under generally accepted accounting principles that the Company complied with in preparing its December 31, 1998 financial statements.

As to the second paragraph of Reznick Fedder's letter, they were only provided with a preliminary unaudited, unconsolidated, and unadjusted trial balance for fiscal 1998. In addition, Reznick Fedder was not engaged as our independent accountants for the purpose of certifying the consolidated financial statements of Chancellor Corporation as of December 31, 1998 and for the year then ended, and were therefore not engaged to perform planning for this audit.

Reznick Fedder was not asked by us to determine whether adjustments were required to recorded assets and liabilities which could materially impact the fairness or reliability of financial statements for the year ended December 31, 1998. Adjustments, as necessary, were made based on recommendations of Metcalf Rice during the course of their audit fieldwork.

The information required by Item 401 and 405 of Regulation S-B with respect to directors and executive officers of the registrant will be set forth in the Proxy Statement for the Annual Meeting of Stockholders to be held on June 25, 1999 and to be filed with the Securities and Exchange Commission in April 1999, and is incorporated herein by this reference.

ITEM 10.     EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-B with respect to executive compensation will be set forth in he Proxy Statement for the Annual Meeting of Stockholders to be held on June 25, 1999 and to be filed with the Securities and Exchange Commission in April 1999, and is incorporated herein by this reference.

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 403 of Regulation S-B with respect to security ownership of certain beneficial owners and management will be set forth in the Proxy Statement for the Annual Meeting of Stockholders to be held on June 25, 1999 and to be filed with the Securities and Exchange Commission in April 1999, and is incorporated herein by this reference.

ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 404 of Regulation S-B with respect to certain relationships and related transactions will be set forth in the Proxy Statement for the Annual Meeting of Stockholders to be held on June 25, 1999 and to be filed with the Securities and Exchange Commission in April 1999, and is incorporated herein by this reference.

ITEM 14.     EXHIBITS AND REPORTS ON FORM 8-K

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors

of Chancellor Corporation

We have audited the accompanying consolidated balance sheet of Chancellor Corporation and subsidiaries as of December 31, 1998 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Chancellor Corporation and subsidiaries for the year ended December 31, 1997 were audited by other auditors whose report dated March 27, 1998 expressed an unqualified opinion on those statements.

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

As discussed further in notes 1 and 18, the Company has restated the 1998 consolidated financial statements to reflect the results of a change in the date of acquisition of the Company's MRB, Inc. subsidiary to January 29, 1999.

In our opinion, the 1998 consolidated financial statements, as restated, referred to above present fairly, in all material respects, the financial position of Chancellor Corporation and subsidiaries as of December 31, 1998, and the results of operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.

/s/ Metcalf Rice Fricke & Davis

Atlanta, Georgia

April 13, 1999, except for Notes 7, 10, 14, 15, 16 and 18

which are as of December 30, 1999.

INDEPENDENT AUDITOR'S REPORT

To the Stockholders and Board of Directors of

Chancellor Corporation

We have audited the accompanying consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, and the results of operations and cash flows of Chancellor Corporation and its subsidiaries for the year ended December 31, 1997, in conformity with generally accepted accounting principles.

/s/ Reznick Fedder & Silverman

Boston, Massachusetts

March 18, 1998

The accompanying notes are an integral part
of these consolidated financial statements.

(In Thousands, Except Per Share Data)

Chancellor Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands)

The accompanying notes are an integral part
of these consolidated financial statements.

The accompanying notes are an integral
part of these consolidated financial statements.

Chancellor Corporation and Subsidiaries (the "Company") are engaged in (1) buying, selling, leasing and remarketing new and used equipment, primarily transportation, material handling and construction equipment, (2) managing equipment on and off-lease, and (3) arranging equipment-related financing. The Company's primary market has historically been the United States. During 1998, the Company expanded its market presence to include minor activities in international markets such as Russia and the Republic of South Africa.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, transactions and profits and losses have been eliminated in consolidation.

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These assumptions could change based on future experience and, accordingly, actual results may differ from these estimates.

Transportation equipment sales - Revenue on transportation equipment sales is recognized in the period in which the sale is completed and title is transferred. Deposits on transportation equipment, that may be required under certain financing contracts, are shown as deposits on sales and included in accrued expenses.

Lease underwriting income - Lease underwriting fees arise from the sale of equipment leasing transactions and include cash underwriting margins and residual value fees. The excess of the sales price of equipment to an investor (including the assumption of any nonrecourse indebtedness) over its cost to the Company represents lease-underwriting fees. The Company typically arranges for the lease of equipment to a lessee and, in some cases for borrowings to finance the purchase of the equipment, assigning lease rentals to secure such borrowings on a nonrecourse basis. If the Company elects to sell the transaction (as opposed to retaining the transaction for its own portfolio), the equipment, subject to the lease and the borrowing (if any), is then sold to investors. Consideration for the sale of the leased equipment to investors is normally in the form of a cash investment.

Residual value fees arise from the sale of lease transactions to investors. These fees represent the Company's present value share of the future residual value of the leased equipment that the Company expects to realize upon successful remarketing of the equipment. The Company accounts for these transactions by booking the income during the period in which it is recognized.

Direct finance lease income - Lease contracts which qualify as direct finance leases are accounted for by recording on the balance sheet minimum lease payments receivable and estimated residual values on leased equipment less unearned lease income and credit allowances. Revenues from direct finance leases are recognized as income over the term of the lease, on the basis that produces a constant rate of return.

Operating leases (Rental Income) - Lease contracts, which qualify as operating leases, are accounted for by recording the leased equipment as an asset, at cost. The equipment is then depreciated on a straight-line basis over two to fifteen years to its estimated residual value. Equipment is further depreciated below its initial residual value upon release to its estimated revised residual value at lease expiration. Any changes in depreciable lives affect the associated expense on a prospective basis. Rental income from operating leases is recognized using a straight-line method over the initial term of the lease.

The Company is entitled to reimbursement of expenses incurred in the remarketing of certain equipment as outlined in various remarketing agreements. Pursuant to the terms of the trust agreements, the Company is permitted to charge the trusts for costs associated with administrating the trust. The reimbursement of these costs is recorded as a reduction of general and administrative expenses.

The Company reviews recorded residual values on an annual basis. Write downs in estimated residual values, due to declines in equipment value or the financial creditworthiness of individual customers and major industries into which the Company leases equipment, are recorded when considered other than temporary. The residual valuation is based on independent valuation of the equipment held under trust lease and its internal valuation assessments. The Company also reviews current market analyses and trends of the industry for comparative valuations.

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.

The Company maintains its cash balances in several banks. The Federal Deposit Insurance Corporation insures up to $100,000 of the balances held by each bank. The Company also has arrangements whereby the funds in excess of specified cash balances are invested in overnight repurchase agreements and such overnight investments are collateralized by high-grade corporate debt securities. As of December 31, 1998, the uninsured portion of the cash balances held at one bank was approximately $573,000, of which $532,000 was invested in overnight repurchase agreements.

All inventories are valued at the lower of cost or market. The cost of transportation equipment, including reconditioning parts and other direct costs, is determined using the specific identification method.

Furniture and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, typically 3 to 7 years. Leasehold improvements are amortized over the lease term.

Intangibles primarily consist of goodwill, which is amortized over an estimated life of ten years using the straight-line method.

Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," requires an asset and liability approach for financial accounting and reporting for income taxes. In addition, future tax benefits, such as net operating loss tax carry forwards, are recognized to the extent realization of such benefits is more likely than not.

The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which allows the Company to account for stock-based awards (including stock options) to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No, 25, "Accounting for Stock Issued to Employees".

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur from potential common stock such as stock issuable pursuant to the exercise of stock options outstanding and conversion of debt.

Basic net loss per share amounts are computed based on the weighted average number of common shares and diluted net loss per share amounts are based on common and common equivalent shares, when dilutive. Diluted net loss per share for 1997 is the same as basic net loss per share since common stock equivalent shares from convertible preferred stock and from stock options and warrants were antidilutive.

Cash paid for income taxes during 1998 and 1997 was $13,000 and $13,000, respectively. Interest paid during 1998 and 1997 was $63,000 and $340,000, respectively.

The Company accounts for its equity investment of less than 20% ownership in an investee on the cost basis.

The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 prescribes standards for reporting comprehensive income and its components. The implementation of this SFAS has no material effect on the Company's consolidated financial statements.

SFAS No. 131, "Disclosures About Segments of An Enterprise and Related Information", requires disclosures of certain information about the Company's operating segments on a basis consistent with the way in which the Company is managed and operated. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or the financial position of the Company but did affect the disclosure of segment information.

The Company has commenced efforts to assess and, where required, remediate issues associated with Year 2000 ("Y2K") issues. Generally defined, Y2K issues arise from computer programs which use only two digits to refer to the year and which may experience problems when the two digits become "00" in the year 2000. In addition, imbedded hardware microprocessors may contain time and two-digit year fields in executing their functions. Much literature has been devoted to the possible effects such programs may experience in the Year 2000, although significant uncertainty exists as to the scope and effect the Y2K issues will have on industry and the Company.

The Company has recognized the need to address the Y2K issue in a comprehensive and systematic manner and has taken steps to assess the possible Y2K impact on the Company. Although the Company has not completed a 100% assessment of all its information technology ("IT") and non-IT systems for Y2K issues, the Company has completed its assessment of all mission-critical systems. All mission-critical systems and most of the major applications and hardware have been assessed to determine the Y2K impact and a plan is in place for timely resolution of potential issues.

In 1998, the Company developed a strategic plan to identify the IT systems needed to accomplish the Company's overall growth plans. As part of this process, Y2K issues were considered and addressed by the Company's senior management and MIS personnel. Although this plan was intended to modernize the IT systems, compliance with Y2K requirements were incorporated.

The cost of bringing the Company in full compliance should not result in a material increase in the recent levels of capital spending or any material one-time expenses. The Company has spent approximately $152,000 in modernizing its IT system, including compliance with Y2K requirements. The Company anticipates spending of approximately $300,000 during fiscal 1999 to complete the modernization of its IT system.

The failure of either the Company, its vendors or clients to correct the systems affected by Y2K issues could result in a disruption or interruption of business operations. The Company uses computer programs and systems in a vast array of its operations to collect, assimilate and analyze data. Failure of such programs and systems could affect the Company's ability to track assets under lease and properly bill. Although the Company does not believe that any of the foregoing worst-case scenarios will occur, there can be no assurance that unexpected Y2K problems of the Company and its vendors' and customer's operations will not have a material adverse effect on the Company.

While it is difficult to classify our state of readiness, we believe that our internal plans should have the Company ready for the year 2000 to avoid any material Y2K issues. Assessment and testing are complete and we have developed contingency plans. Management is in constant communication with its IT personnel and has made and will continue to make reports to the Company's Board of Directors.

The fair value of the Company's assets and liabilities that constitute financial instruments as defined in SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", approximate their recorded amounts.

The Company is exposed to risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; material disasters; and product liability. The Company carries commercial insurance for risks of loss.

The Company uses the US dollar as its functional currency. Foreign currency assets are recoverable in US dollars, including equipment lease payments. However, the Company has recorded an allowance equal to the net book value for lease receivables from a party in Russia. The effect of any foreign currency fluctuations is not considered material in these financial statements.

In accordance with guidelines of the Securities and Exchange Commission, the Company has restated its 1998 financial statements to reflect the acquisition of MRB, Inc. and related companies "Tomahawk" on January 29, 1999 and to properly record expenses and accrued liabilities related to the issuance of stock purchase warrants by the Company's majority shareholder and certain other deferred costs or expenses paid by VCC or VMI on behalf of the Company during 1998. The effects of the above is as follows:

2.     Receivables

Receivables consists of the following as of December 31, 1998 (in thousands):

Receivables from trusts include amounts due the Company for cash outlays associated with the remarketing of equipment of $72,000. These amounts will be collected upon successful remarketing of such equipment. Additionally, receivables from trusts include amounts due for costs incurred by the Company for administration of the trusts in accordance with the trust agreements of $1,764,000. Collection of costs of administration is not certain due to numerous factors and is, therefore, included net of the estimated reserve.

Accrued rents represent amounts due from portfolio leases, net of an allowance of $88,000.

3.     Residual Values, Net

The Company's lease underwriting income includes consideration in the residual value sharing arrangements received from originating and selling lease transactions to investors. The Company, upon remarketing of the equipment at termination or expiration of the related leases, will realize this type of consideration (residual values). The Company's share of expected future residual values is recorded as income at their discounted present value at the time the underlying leases are sold to investors. Any increases in the Company's expected residual sharing are recorded as gains upon realization. Write-down in estimated residual value due to declines in equipment value or the financial creditworthiness of individual customers and major industries into which the Company leases equipment, are recorded when considered other than temporary. The Company evaluates residual values based upon independent assessments by industry professionals, in addition to already established internal criteria.

The activity in the residual value accounts for the years ended December 31, 1998 and 1997 is as follows (in thousands):

Residual value estimate reductions represent reductions in expected future residual values on certain equipment, the residuals that were substantially all recorded prior to 1997. Such reductions resulted from an extensive review and valuation of all assets owned, leased and managed by the Company. For the years ended December 31, 1998 and 1997, the Company realized income of approximately $1,407,000 and $1,488,000, respectively, relating to the remarketing of equipment for which no residuals were recorded or realized amounts exceeded the booked residual.

Aggregate residual value fees expected to be realized as of December 31, 1998 are as follows (in thousands):

4.     Net Investment in Direct Finance Leases and Equipment on Operating Lease:

Net investment in direct finance leases consisted of the following as of December 31, 1998 (in thousands):

The cost of equipment on operating lease by category of equipment consists of the following as of December 31, 1998 (in thousands):

The aggregate amounts of minimum lease payments to be received from noncancelable direct finance and operating leases are as follows (in thousands):

Accounts payable and accrued expenses consists of the following as of December 31, 1998 (in thousands):

6.     Early Extinguishment of Intercreditor Loan

In April 1997, the Company executed and delivered (1) the Loan Reduction and Purchase and Assignment Agreement dated April 1997 among the Company, its corporate affiliates, a bank, as agent (the "Agent") for the Company's principal recourse lenders, and VCC, the Company's majority shareholder; (2) release in favor of the principal recourse lenders to be given by VCC and Brian M. Adley, Chairman of the Board of Directors of the Company and President of VCC, individually; (3) release in favor of the principal recourse lenders to be given by the Company, its corporate affiliates and/or subsidiaries, in favor of VCC. Coterminous with this transaction, both the intercreditor loan and secured inventory loan were repaid in advance of their respective terms. The aggregate amount of this debt on the repayment date was approximately $1,906,000, of which approximately $976,000 was paid in cash and the balance of $930,000 was forgiven. In addition, the Company paid approximately $22,000 in legal and bank fees to complete this transaction

7.     Non-Recourse and Recourse Debt

Non-recourse indebtedness consists of notes payable to banks and financial institutions arising from assignments of the Company's rights, (most notably the right to receive rental payments) as lessor, at interest rates ranging from 7.8% to 13.6%. Amounts due under nonrecourse notes are obligations of the Company, which are secured only by the leased equipment, and assignments of lease receivables, with no recourse to any other assets of the Company. The Company is at risk, however, for the amount of residual value booked on equipment for its own portfolio in the event of a lessee default.

Aggregate future maturities of non-recourse debt as of December 31, 1998 are as follows (in thousands):

Recourse debt consists of the following as of December 31, 1998 (in thousands):

Aggregate future maturities of recourse debt as of December 31, 1998 are as follows (in thousands):

The provision (benefit) for income taxes consists of the following (in thousands):

A reconciliation of the rate used for the provision (benefit) for income taxes is as follows:

The Company files consolidated federal income tax returns with all of its subsidiaries. As of December 31, 1998, the Company has net operating loss carry forwards of approximately $21,771,000 available for federal tax purposes, which expire in the years 2001 through 2012. In addition, at December 31, 1998, the Company has investment tax credit carry forwards for federal income tax purposes available to offset future taxes of approximately $1,855,000 expiring in the years 1999 through 2002 and minimum tax credit carry forwards for federal income tax purposes available to offset future taxes of approximately $135,000 which do not expire. For federal tax purposes, utilization of net operating losses and tax credit carry forwards will be limited in future years as a result of a greater than 50% change in ownership which occurred in July 1995.

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carry forwards.

The tax effects of significant items comprising the Company's net deferred tax liability as of December 31, 1998 are as follows (in thousands):

All deferred tax liabilities and deferred tax assets (except tax credit carry forwards) are tax effected at the enacted rates for state and federal taxes. The valuation allowance relates primarily to net operating loss carry forwards and tax credit carry forwards that may not be realized. The valuation allowance decreased by $940,000 in 1998. For the year ended December 31, 1997 the valuation allowance decreased by $1,050,000.

The deferred tax asset is available to offset taxable income in excess of book income generated from the lease portfolio and residual values, which are the principal components of the total deferred tax liabilities of $189,000 as of December 31, 1998. The deferred tax asset, net of the deferred tax liability, has been fully reserved as of December 31, 1998.

9.     Stockholders Equity

The Preferred Stock issued by the Company carries certain preferences and rights as discussed below. Each share of Preferred Stock is entitled to the number of votes equal to the number of whole shares of Common Stock into which the share of the Preferred Stock held are then convertible. The holders of the Preferred Stock shall be entitled to receive cash dividends only to the extent and in the same amounts as dividends are declared and paid with respect to Common Stock as if the Preferred Stock has been converted to Common Stock in accordance with the provisions related to conversion. Preferences specific to each series are as follows:

10.     Stock Option Plans and Stock Purchase Plan

The Company has three stock option plans: a 1994 Stock Option Plan, a 1994 Directors' Stock Option Plan and a 1997 Stock Option Plan.

The Company's stock option plans provide for incentive and nonqualified stock options to purchase up to an aggregate of 7,207,000 shares of the Company's Common Stock which may be granted to key contributors of the Company, including officers, directors, employees and consultants. The options are generally granted at the fair market value of the Company's Common Stock at the date of the grant, vest over a five-year period, are exercisable upon vesting and expire five years from the date of grant.

Information with respect to the stock option plans is as follows:

Additional information regarding options outstanding as of December 31, 1998 is as follows:

Pro forma information. The Company has elected to follow APB Opinion No. 25; "Accounting for Stock Issued to Employees," in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equal or exceeds the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Company's financial statements. SFAS No. 123 requires the disclosure of pro forma net income (loss) and earnings per share as if the Company had adopted the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock options to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly differs from the calculated values.

The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 48 months following vesting; stock volatility 200% in 1998 and 1997; risk free interest rate, 8%, in 1998 and in 1997 and no dividends during the expected term. The forfeitures of the options are recognized as they occur. If the computed fair values of the 1997 and 1998 awards had been expensed over the vesting period of the awards, the pro forma net income in 1998 would have been $547,000 or $0.01 per share and the pro forma net loss in 1997 would have been $1,850,000 or $0.12 per share.

The Company's 1994 Employee Stock Purchase Plan authorizes the offering to employees of up to 250,000 shares of Common Stock in six semiannual offerings at a price of 85% of the Common Stock's bid price and in an amount determined by a formula based on each employee's estimated annual compensation. The Company's stockholders authorized this plan in January 1995. No shares of Common Stock have been offered pursuant to the plan to date.

The Company has reserved 250,000 shares of Common Stock for all amounts that may be offered to employees under this plan.

During 1998, the Company's majority shareholder allocated 3,300,000 shares of the Company's common stock to employees of the Company under various stock purchase warrant agreements.

Information with respect to these stock warrants is as follows:

Additional information regarding options outstanding as of December 31, 1998 is as follows: