FIRST ALLIANCE CORP /KY/, 10-K, 1999-03-31

FIRST ALLIANCE CORP /KY/
10-K, 1999-03-31
LIFE INSURANCE

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United States Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] Annual Report Pursuant to Section 14 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31,
1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transition Period From
to .

Commission file number : 33-67312

FIRST ALLIANCE CORPORATION
(exact name of registrant as specified in its charter)

Kentucky 61-1242009
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)

2285 Executive Drive, Suite 308
Lexington, KY 40505 606-299-7656
(Address of principal executive offices) (Telephone number)

Securities registered pursuant to Section 12(b) of the Act:
Title and Class
NONE

Securities registered pursuant to section 12(g) of the Act:
Title and Class
NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods 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[ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this form [X]

Applicable only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.

Common Stock, No Par Value - 5,620,690 shares as of March 1, 1999

Documents Incorporated by Reference

PART IV Certain Exhibits to the Company's prior filing of Form
10-K for 1995 and the Registration Statement on Form
S-1, Amendment Number 4, File Number 33-67312,
which was declared effective on March 4, 1994.

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<PAGE>2

PART I

Item 1. Business

First Alliance Corporation (the "Company") was organized on February
16, 1993 for the purpose of forming, owning and managing life insurance
companies. The Company registered with the Securities and Exchange
Commission and the Kentucky Department of Financial Institutions a
$12,500,000 public stock offering.

On October 28, 1995, the Company completed the public stock offering.
The company raised total capital of $13,750,000 which includes a 10%
over-sale of $1,250,000 contemplated in the public filing. Six million
dollars of the proceeds of the stock sale were used to capitalize the life
insurance subsidiary. Three million dollars of the proceeds might be used
to capitalize the venture capital company based on a schedule as
determined by the Company's Board of Directors. During 1997 and 1996,
$316,000 of the proceeds were used in the initial capitalization of the
Company's wholly-owned venture capital subsidiary, First Kentucky
Capital Corporation ("FKCC"). The remainder of the proceeds will
provide resources for additional capital for the life insurance subsidiary or
capital for the possible acquisition of life insurance or insurance related
company(s). At April 28, 1996, six months after completion of the
offering, substantially all of the preferred shares were converted to
common shares.

First Alliance Corporation

The primary revenue source for the Company is provided by its wholly
owned life insurance subsidiary, First Alliance Insurance Company
("FAIC"). FAIC has contracted with the Company to provide
administrative and data processing services for insurance operations.
Investment income provides additional income to the Company.

The Company has contracted with First American Capital Corporation
("FACC") of Topeka, Kansas to provide underwriting and accounting
services for FACC and its subsidiary, First Life America Corporation
("FLAC"). Under the terms of the management agreement, FACC pays
fees based on a percentage of delivered premiums of FLAC. The
percentages are five and one half percent (5.5%) for first year premiums;
four percent (4%) of second year premiums; three percent (3%) of third
year premiums; two percent (2%) of fourth year premiums and one
percent (1%) for years six through ten for ten year policies and one-half
percent (.5%) in years six through twenty for twenty year policies.
Pursuant to the agreement, FACC incurred $816 of management fees
during 1998. The Company will own approximately 9.9% of the FACC's
outstanding common shares after conversion of preferred stock to
common stock.

First Alliance Insurance Company

On May 17, 1995, FAIC received a Certificate of Authority from the
Kentucky Department of Insurance ("KDI"). On November 1, 1995
insurance operations commenced. Under gernerally accepted accounting
principles, FAIC has over $7,450,000 of capital and surplus and is wholly
owned by the Company. FAIC has contracted with the Company to
provide administrative and data processing services. As discussed in the
following paragraph, the only expenses to be directly incurred by FAIC
are direct agency expenses including commissions.

Administration

Effective November 1, 1995, the Company entered into a service
agreement with FAIC to provide personnel, facilities, and services to
FAIC. FAIC has no employees. The services to be performed pursuant
to the service agreement are underwriting, claim processing, accounting,
processing and servicing of policies, and other services necessary to carry
on FAIC's business. The agreement is in effect until either party provides
ninety days written notice of termination. Under the agreement, FAIC
pays monthly fees based on life and annuity premiums recorded by FAIC.
The percentages are twenty-five percent of first year premiums; twenty
percent of second year premiums; fifteen percent of third year premiums;
ten percent of fourth year premiums and five percent of premiums in years
five and thereafter. FAIC will retain direct agency expenses such as agent
training and licensing, agency meeting expenses, and other directly related
expenditures. Pursuant to the terms of the agreement, FAIC had incurred
expenses totaling $595,146, $432,648 and $359,662 during 1998, 1997
and 1996, respectively.

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On behalf of FAIC, the Company has retained the services of Bruce and
Bruce Company, consulting actuaries of Lake Bluff, Illinois. Bruce and
Bruce assisted in developing the products that the Company is marketing.

Products of FAIC

The primary insurance product being marketed by FAIC is a modified
payment whole life insurance policy with a flexible premium deferred
annuity rider. A modified payment whole life insurance policy requires
premium payments to be made for a certain number of years after which
the policyholder is entitled to full policy benefits. Typical premium
paying periods for modified payment whole life insurance polices are ten,
fifteen and twenty years. FAIC's product, marketed as the "Alliance
2000", combines both a ten and twenty payment period based on the issue
age of the insured. Issue ages from 0 to 20 and 51 through 80 are ten pay
polices and issue ages from age 21 to 50 are twenty pay policies.
Premium payments are split between the life and annuity based on
percentages established in the product design. First year premiums
payments are allocated 100% to life insurance and renewal payments are
split 50% to life and 50% to annuity. The product is being sold in
premium units with the ability to purchase either fractional or multiple
units. At the end of the required premium paying period, the policyholder
may continue to make full premium payments into the annuity rider to
provide for greater annuity accumulations.

The initial product was designed to provide predetermined life insurance
benefits based on the age of the insured. The base coverage decreases
each year until an ultimate benefit amount is attained. The annuity rider
does not contain any fees or load. Surrender charges in the annuity are
based on a regressive scale which starts at 10% in the first year and
decreases by 1% each year until after the tenth policy year there are no
surrender charges.

This product is the result of a modification of FAIC's initial insurance
product which was introduced in November of 1995. The initial insurance
product was a twenty pay ordinary life policy with a flexible premium
deferred annuity rider. For issue ages 0 to 50, there was an annual income
protection benefit rider (decreasing term rider).

FAIC also offers credit life and disability insurance products (see "Credit
Life Fronting Agreement" below) as well as a ten year term life insurance
policy and a single premium deferred annuity product.

Product Marketing and Sales

FAIC uses the same face to face marketing techniques for its life insurance
products as the Company did for its public stock offering. The marketing
plan is designed in its entirety around the Company's stockholder base,
which provides an excellent referral system for product sales.

FAIC also markets credit life and disability insurance products to banks
throughout the state of Kentucky. Marketing of these products is
accomplished through an agreement with the Kentucky Bankers
Association (the "KBA"). A representative of the KBA promotes FAIC's
credit insurance products through banks who are members of the KBA.
Marketing of these products commenced in December of 1998.

FAIC is licensed to market its products in the states of Indiana, Kansas,
Ohio and Kentucky. Marketing in Indiana began in late 1998. Marketing
in the Kansas and Ohio may not begin until a substantial policyholder base
is established in Kentucky and Indiana.

Credit Life Agreement

On November 1, 1998, FAIC entered into an credit life agreement with
North Central Life Insurance Company of St. Paul, Minnesota ("North
Central"). Under the terms of the agreement, FAIC receives 2 1/2% (two
and a half percent) of all credit life insurance premiums written by banks
in the state of Kentucky who offer FAIC's credit insurance products.
Additionally, FAIC entered into an administration agreement with North
Central through which North Central provides all policy administration.
At December 31, 1998, FAIC had received $295 of ceding commissions
pursuant to the agreement. All credit insurance products are also 100%
reinsured through North Central. FAIC remains primarily liable if North
Central is unable to meet its obligations under the terms of the reinsurance
agreement. North Central is rated A- Excellent by A.M. Best Company.

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<PAGE>4

<TABLE>
The following table provides certain information about FAIC's life
insurance operations for the year ended December 31, 1998.
<CAPTION>

1998
Number Amount of
of Insurance
Polices (thousands)
<S> <C> <C>
Beginning of year 1,366 $ 98,685

Issued during year 1,175 34,706

Deaths - -

Lapse and surrender (207) (13,815)

In-force end of year 2,334 $ 119,576

</TABLE>

Reinsurance

Consistent with the general practice of the life insurance industry, FAIC
reinsures a portion of the coverage provided by the life insurance products
it offers. The maximum amount of risk that FAIC retains on its ordinary
life products is $50,000 on any one insured. The remaining coverage is
reinsured with Business Men's Assurance Company of America of Kansas
City, Missouri. Additional reinsurance is provided for the 10-year term
product through Optimum RE of Dallas, Texas. The retention limit on the
10-year term is $50,000. FAIC reinsures all of the credit life and
disability it writes through North Central Life Insurance Company of St.
Paul, Minnesota. At December 31, 1998, FAIC has reinsured
$66,850,000 of life insurance coverage, including $30,540,000 in
accidental death benefits and $286,978 of credit life and disability.

Investments

Investment activities are an integral part of the operations of FAIC. The
Kentucky Insurance Code restricts the investments of insurance companies
by the type of investment, the amount that an insurance company may
invest in any one type of investment, and the amount that an insurance
company may invest in the securities of any one issuer. The restrictions
of the Kentucky Insurance Code are not expected to have a material effect
on the investment return of FAIC. The Company is not subject to the
same investment restrictions as FAIC. Credit risk is limited by
emphasizing investment grade securities and by diversifying the
investment portfolio among government and corporate bonds.

The Company has an agreement with Alpha Advisors, Inc. of Chicago,
Illinois, a registered investment advisor, to assist FAIC in managing its
investment portfolio. Alpha Advisors is an investment firm that caters to
the unique needs of life insurance companies. Alpha Advisors also
provides investment services for the Company. Fees are based on a
percentage of invested assets.

The Company has taken a very conservative investment approach in which
the investments consist of government and high grade corporate issues.
In doing so, investment yields are lower than could be obtained with
investments which have a higher degree of risk.

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Competition

The life insurance industry is extremely competitive. There are a large
number of insurance companies which are substantially larger, have
greater financial resources, offer more diversified product lines and have
larger selling organizations than FAIC. Competition also is encountered
from the expanding number of banks and other financial intermediaries
that offer competing products. FAIC must also compete with other
insurers to attract and retain qualified agents to market FAIC's products.

Governmental Regulation

FAIC is subject to regulation and supervision by the KDI. The insurance
laws of Kentucky give the KDI broad regulatory authority, including
powers to: (i) grant and revoke licenses to transact business; (ii) regulate
and supervise trade practices and market conduct; (iii) establish guaranty
associations; (iv) license agents; (v) approve policy forms; (vi) approve
premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; and (x) regulate the type and amount of
permitted investments.

Kentucky has enacted legislation which regulates insurance holding
company systems, including acquisitions, extraordinary dividends, the
terms of affiliate transactions, and other related matters. Currently, the
Company and FAIC have registered as a holding company system
pursuant to the laws of the state of Kentucky.

First Kentucky Capital Corporation

The Company funded its wholly owned venture capital subsidiary with
$316,000 during 1996 and 1997. FKCC provides capital for Kentucky
based business for both start-up companies and expansion of existing
business. During 1996 and 1997, FKCC made three venture capital
investments.

On April 12, 1996, FKCC purchased a 51% interest in Medical
Acceptance Corporation ("MAC") for $50,000. MAC purchases
receivables from medical providers at a discount. On December 31, 1997,
FKCC entered into an agreement to sell its interest in MAC for $8,000 in
cash and notes receivable totaling $147,049. The notes receivable
included draws of $105,049 on a $250,000 line of credit FKCC provided
to MAC as well as capital provided for operations since its purchase in
1996. Due to the uncertainty of collectibility of the notes, FKCC
established a $74,698 valuation allowance during 1997. During 1998,
MAC had paid $38,341 of the notes receivable. FKCC included $55,241
and $6,182 of operating losses of MAC in its operations during 1997 and
1996, respectively.

Other investments made during 1996 in LGP, Inc. and Cybertyme, Inc
were written-off during 1997 due to unfavorable operating results. These
write-offs totaled $97,184 at December 31, 1997 and will not affect future
operating results. In addition, during 1997 a $31,000 line of credit
agreement from LGP, Inc. was determined to be uncollectible and was
written off.

The Board of Directors of FKCC elected to place a moratorium on any
new investments made by FKCC until certain criteria can be established
for these investments. Management is exploring all opportunities
available to ensure the profitability of FKCC, one of which may include
management of the venture capital fund by a firm which specializes in
venture capital investing or investing in a larger well managed venture
capital fund.

Year 2000 Concerns

A growing concern is the ability of computer systems to accurately process
date calculations in the year 2000 and beyond. The problem arises from
the initial design of date values which only recognize a two digit year
value. As a result, a computer may interpret a date entered for the year
2000 as the year 1900. Any computer system that performs date
comparisons and calculations is exposed to such a problem. These
systems are typically referred to as information technology systems
("ITS") or computer based systems. Another concern is microchips which
may also be encoded with a two digit date value. These microchips are
typically found in such office equipment as facsimile machines and
telephone systems. These systems are referred to as non-information
technology systems ("NITS").

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The Company's primary exposure to any business interruption would be
the result of an ITS failure. The life insurance industry relies heavily on
date sensitive calculations in daily operations. The inability to process
transactions could be detrimental to the Company's ability to continue
operations. The Company out-sources its primary computer processing
system through Navisys, Inc. of Saint Louis, Missouri. Navisys has
assured the Company that its hardware and software systems have been
modified to eliminate any potential year 2000 problems. Testing is
scheduled to be completed by mid year 1999. Evaluation of internal
hardware and software is being performed. However, management does
not believe that a failure of these internal systems would cause an
interruption of business. Additionally, a NITS failure would not
substantially disrupt operations.

The costs to address year 2000 issues have been and will continue to be
relatively insignificant for the Company. All of the major costs related to
the insurance processing system have been borne by Navisys. Internally,
year 2000 issues may require the replacement of such items as personal
computers and facsimile machines, however these are not expected to
cause any significant financial impact.

The ultimate risk of the year 2000 issue is the Company's inability
continue as a going concern in the event of major computer system failure.
The impact could alter, not only the Company's ability to transact
business, but also global financial systems. Even though the Company is
confident that these issues will not cause significant internal problems, a
danger exists regarding the lack of preparedness of consumers and other
institutions, including federal and state government.

The Company is in the process of developing contingency plans to address
any system failure related to the year 2000. These plans are expected to
be completed during the fall of 1999.

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Financial Information Relating to Industry Segments

<TABLE>

Financial information related to specific segments of the Company's
business are presented below. All sales of life insurance by FAIC are to
unaffiliated customers.
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Premiums earned, net of reinsurance:
Life and annuity insurance operations $ 2,294,440 $ 1,221,400 $ 901,584

Revenues:
Life and annuity insurance operations $ 2,814,106 $ 1,652,201 $ 1,287,769
Venture capital operations 4,101 (152,919) (21,790)
Corporate operations 167,002 155,769 228,153
----------- ----------- -----------
Total $ 2,985,209 $ 1,655,051 $ 1,494,132
=========== =========== ===========
Income (loss) before income taxes:
Life and annuity insurance operations $ 935,549 $ 455,550 $ 446,563
Venture capital operations 4,085 (154,015) (115,728)
Corporate operations (540,135) (858,309) (519,041)
----------- ----------- -----------
Total $ 399,499 $ (556,774) $ (188,206)
=========== =========== ===========

Assets:
Life and annuity insurance operations $11,850,273 $ 9,259,930 $ 7,736,441
Venture capital operations 50,343 46,258 109,455
Corporate operations 3,332,409 3,992,176 4,685,176
----------- ----------- -----------
Total $15,233,025 $13,298,364 $12,531,072
=========== =========== ===========

</TABLE>

Employees

As of December 31, 1998, the Company had twelve full time employees.

Item 2. Properties

The Company leases approximately 6,100 square feet located at 2285
Executive Drive, Lexington, Kentucky. At December 31, 1998, the
Company leased approximately 5,400 square feet pursuant to a lease
agreement which would expire on March 31, 1999. In February of 1999,
the Company extended the 5,400 square foot lease agreement until January
31, 2001. Additionally, in February of 1999 the Company entered into a
lease agreement for an additional 700 square feet at the same location.
The lease on this additional space expires on January 31, 2001. Annual
rent expense for the year ended December 31, 1998 totaled $77,633.

Item 3. Legal Proceedings

The Company received a civil summons on October 6, 1997 related to an
automobile accident in October 1996 which involved an officer of the
Company, who was driving the automobile. The summons was served by
the Circuit Court in Fayette County, Kentucky and lists Katherine
Stockton, Individually, and as Administratrix of the Estate of Frank
Novak, and as next friend of Bradley Novak and Angela Novak, as the
Plaintiffs. The legal action alleges that the officer was acting in the course
and scope of employment with the Company at the time of the accident.
The outcome of this matter is not predictable with assurance. Although
any actual liability is not determinable as of December 31, 1998, the
Company believes that any liability resulting from this matter, after taking
into consideration insurance coverages, should not have a material adverse
effect on the Company's financial position.

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

Not Applicable

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

(a.) Market Information

Trading of the Company's common stock is limited and sporadic and an
established public market does not exist.

(b.) Holders

As of March 1, 1999, there are approximately 5,300 shareholders of the
Company's outstanding common stock.

(c.) Dividends

The Company has not paid any cash dividends since inception (February
16, 1993). Additionally, dividends are not anticipated in the foreseeable
future.

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Item 6. Selected Financial Data

<TABLE>
The following table provides selected consolidated operating results for
the Company for the years ended December 31, 1998, 1997 and 1996 and
selected balance sheet information at December 31, 1998, 1997 and 1996.

1998 1997 1996

Operating Data:
<S> <C> <C> <C>
Premium income, net $ 2,294,440 $ 1,221,400 $ 901,584

Net investment income 595,612 504,831 585,244

Benefits and expenses 2,585,710 2,211,825 1,682,338

Federal income taxes 265,102 123,995 111,653

Net income/(loss) 134,397 (680,769) (299,859)

Net income/(loss) per common
share-basic and diluted 0.02 (0.12) (0.05)

Cash dividend declared per
common share - - -

Balance Sheet Data:
<S> <C> <C> <C>
Total assets 15,233,025 13,298,364 12,531,072

Life policy reserves 1,493,766 761,808 379,920

Annuity contract liabilities 1,763,029 1,112,551 504,323

Total liabilities 4,406,299 2,732,006 1,556,636

</TABLE>

Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations

The Company makes forward-looking statements from time to time and
desires to take advantage of the "safe harbor" which is afforded such
statements under the Private Securities Litigation Reform Act of 1995
when they are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those in the forward-looking statements.

The statements contained in the following "Management's Discussion and
Analysis of Financial Condition and Results of Operations," statements
contained in future filings with the Securities and Exchange Commission
and publicly disseminated press releases, and statements which may be
made from time to time in the future by management of the Company in
presentations to shareholders, prospective investors, and others interested
in the business and financial affairs of the Company, which are not
historical facts, are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. Any projections of financial
performances or statements concerning expectations as to future
developments should not be construed in any manner as a guarantee that
such results or developments will, in fact, occur. There can be no
assurance that any forward-looking statement will be realized or that
actual results will not be significantly different from that set forth in such
forward-looking statement. In addition to the risks and uncertainties of
ordinary business operations, the forward-looking statements of the
Company referred to above are also subject to risks and uncertainties.

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<PAGE>10

The Company operates in a highly competitive business environment, and
its operations could be negatively affected by matters discussed under the
caption, "Competition," on page 5 of this Form 10-K.

The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto beginning on page
F-1.

Results of Operations

Comparisons between periods related to the results of operations are for
the years ended December 31 of the year specified. Net income during
1998 increased $815,166 over 1997 results based on the following income
and expense transactions.

The primary source of revenue for the Company is life insurance premium
income. First Alliance Insurance Company ("FAIC") began writing life
insurance and annuities in November of 1995. Typical with most life
insurance policies, a premium payment is required each year in order for
the policyholder to receive the benefits set forth in the policy. Premium
payments are classified as first year and renewal. Renewal premiums are
any premium payment that is made after the first year the policy is in
force. Therefore, the more years a company writes life insurance, the
larger the renewal premium base and a larger revenue stream. During
1998, premium income totaled $2,383,680. In 1997, premium income
totaled $1,279,679. This increase of $1,104,001 can be attributed to the
growth in the renewal premium base plus an increase in first year
premium sales. Of the $2,383,680 of premium income in 1998,
$1,375,270 represents first year premium and $1,008,410 represents
renewal premiums. Premium income in 1997 was comprised of
$700,920 of first year premium and $578,759 of renewal premiums.
Total premium income for 1997 increased $335,667 over 1996 primarily
due to a larger renewal premium base and first year premium sales.

Life insurance companies typically reinsure a portion of the death benefit
on individual lives. Reinsurance is a method of transferring risk to
another life insurance company to guard against an adverse effect on
capital. In return for assuming this risk, a premium is charged by the
reinsurance company. FAIC has a reinsurance agreement for its primary
product with Businessmen's Assurance Company of Kansas City,
Missouri. Under the terms of the agreement, FAIC is not required to
make first year premium payments. However, Generally Accepted
Accounting Principles require the amount of premium not paid in the first
year be recorded as a liability and amortized over the duration of the
associated policies. Reinsurance premiums totaled $89,240, $58,279 and
$42,427 for 1998, 1997 and 1996 respectively. These reinsurance
premiums are a direct reduction of premium income.

During 1998, net investment income increased $90,781 over 1997 results.
This increase is primarily due to a larger investment base from FAIC's
operations and investment earnings on cash made available from the
redemption of the U.S. Star preferred stock investment. The U.S. Star
investment contained a provision which allowed the Company to redeem
its entire preferred stock investment for the full purchase price at the end
of an eighteen month period which ended September 30, 1998. During
this period, the Company did not receive any interest income on the
investment. Accordingly, 1997 results reflect the loss of interest on
$1,000,000. The decrease in investment income in 1997 compared to
1996 can also be attributed to the interest loss on the U.S. Star investment.
Investment income in 1996 totaled $585,244.

Realized investment gains during 1998 totaled $6,529. During 1997,
realized investment losses included a write-off of a $31,000 credit line
balance of LGP, Inc., a valuation allowance of $75,000 on notes
receivable offset by a $8,000 gain on the sale of Medical Acceptance
Corporation. During 1998, realized investment gains included $6,529 of
investment gains on the sale of bonds. In 1996, realized investment losses
totaled $4,368 which were related to the loss on sale of bond investments.

Other income totaled $88,628 in 1998 which represents a $48,873
increase over 1997 results of $39,755. The Company provides accounting
support to Mid-American Alliance Corporation and First American
Capital Corporation during their public stock offerings. Fees related to
these accounting services increased $1,000 per month ($12,000 annually)
during 1998.

<PAGE>
<PAGE>11

Life insurance policy reserves totaled $731,958 in 1998 and $381,888 in
1997. Life insurance reserves are established to provide for the payment
of policyholder benefits. Factors such as premiums, interest, mortality
and life expectancy are considered in the calculation of reserve factors
developed by an actuary. Typically, these factors increase as a policy
reaches another anniversary creating a larger reserve. During 1998,
reserves were recorded on the new insurance sales and reserves on
existing policies increased. This accounted for the increase of $350,070
in 1998 as compared to 1997. During 1996, life insurance reserves
totaled $354,648.

Commissions paid to life insurance agents totaled $933,100, $473,231
and $528,056 in 1998, 1997 and 1996, respectively. Commissions are
paid to agents on both first year and renewal premium payments. First
year commission percentages are significantly greater than renewal
commission percentages. Accordingly, as new premiums are written and
existing policies renew, commission expense increases. In August of
1997, the initial product offered by FAIC was revised and the basis used
to calculate first year commissions was increased. During 1998, the
revised product was sold for the entire year and first year premium sales
increased which would account for the $459,869 increase in commission
expense in 1998 over 1997.

During 1998, FAIC did not incur any death claims. In 1997, death claims
totaled $24,848. Annuity premiums received are recorded as liabilities
rather than income pursuant to Statement of Financial Accounting
Standard 97 "Accounting and Reporting by Insurance enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from
the Sale of Investments". Interest is paid on these annuity premium
accumulations. As policies renew, the annuity fund balance increases
which also increases the base on which interest is earned by the
policyholder. The growth in the annuity fund balance accounts for the
increase in interest expense between years. Interest expenses totaled
$117,265 in 1998, $58,642 in 1997 and $17,250 in 1996.

Certain costs related to the acquisition of life insurance policies are
capitalized and amortized over the premium paying period of the policies.
These costs, which are referred to as deferred policy acquisition costs,
include first year commissions and first year management fees based on
new premiums written. During 1998, $1,197,813 of these expenses were
capitalized and will be amortized over remaining premium paying period
of the associated policies. In 1997 and 1996, $708,185 and $489,628 of
these costs were capitalized. Amortization of deferred policy acquisition
costs totaled $426,476, $339,562 and $161,163 for 1998, 1997 and 1996,
respectively.

Selling, administrative and general insurance expenses increased
$108,239 in a comparison of 1998 to 1997. These expenses relate to the
administration and issuance of life insurance policies. This increase can
be attributed to a larger sales volume and increased processing costs.
Selling , administrative and general insurance expenses totaled $333,750,
$225,511 and $215,652 in 1998, 1997 and 1996, respectively. Salaries,
wages and employee benefits totaled $801,332 in 1998 and increased
$121,139 over 1997 results. This increase is due to additional personnel,
increased costs of employee benefits and incentive payments to officers.

During 1997, the Company granted stock options. Compensation expense
was recorded based on the difference between the exercise price of the
options and the fair market value of the stock on the date of grant. This
compensation expense totaled $159,743 in 1997. There were no options
granted during 1998 and accordingly, no compensation cost related to
stock options is recorded.

Professional fees decreased $148,818 during 1998 compared to 1997.
During 1997, the Company incurred significant actuarial and consulting
fees related to the re-design of the initial product. Professional fees
include accounting fees, actuarial fees, consulting fees and legal fees.
Professional fees totaled $86,931 in 1998, $235,749 in 1997 and
$119,472 in 1996.

Income tax expense for 1998 totaled $265,102. Federal income taxes are
calculated based on the earnings of FAIC. Certain items included in
income reported for financial statements are not included in taxable
income for the current year and recorded as deferred income taxes. Of the
$265,102, deferred income taxes totaled $210,430 and taxes currently
payable totaled $54,671. In 1997 total income tax expense was $123,995
of which $109,142 was deferred.

<PAGE>
<PAGE>12

Consolidated Financial Condition

Changes in the consolidated balance sheet of 1998 compared to 1997
reflect the operations of the Company and capital transactions discussed
below.

Total assets in 1998 increased by $1,934,661 from 1997 to $15,233,025.
At December 31, 1998 and 1997, invested assets totaled $6,362,765 and
$10,393,617, respectively. This decrease of $4,030,852 is the result of
maturing investments held in cash and cash provided from insurance
operations. Additionally, the investment in preferred stock was redeemed
and held in cash equivalents at December 31, 1998. Cash and cash
equivalents totaled $6,587,264 at December 31, 1998 which consisted
primarily of U.S. Treasury Bills and money market mutual funds.

Deferred policy acquisition costs increased $773,935 net of amortization
of $426,476 during 1998. Policy acquisition expenses related to new
insurance sales totaled $1,200,411 and were capitalized during 1998.
Advances to agents increased $34,425 during 1998 due to money
provided to agents for living expenses and advances on new business
submitted.

Liabilities increased $1,674,292 during 1998 to $4,406,299. Annuity
premiums received by insurance companies are classified as liabilities.
At December 31, 1998 these annuity premiums, along with interest
credited to policyholder balances, totaled $1,763,029. Renewal annuity
premiums plus interest accounted for the $650,478 increase over 1997.
Life policy reserves increased $731,958 during 1998 to $1,493,766. Life
policy reserves were established on new business and additional reserves
were recorded on existing policies which renewed. Deposits on pending
policy applications increased from $92,215 in 1997 to $216,565 in 1998.
These deposits are monies submitted with life insurance applications
which are in the process of being issued. In the event these policies are
issued, this money becomes premium income, otherwise it is refunded to
the policyholder. The increase of $124,350 in 1998 represents increased
sales volume. Policyholder premium deposits are funds placed on deposit
with the Company to accumulate interest to pay future policy premiums.
Interest credited to the fund along with additional deposits accounted for
the $60,391 increase during 1998.

Deferred federal income taxes are based on timing differences between
FAIC's financial statement taxable income and taxable income computed
based on Internal Revenue Service requirements. Due to increased
earnings of FAIC, the deferred federal income taxes liability increased
$253,226 to $458,932 for 1998.

Liquidity

FAIC's insurance operations generally receive adequate cash flows from
premium collections and investment income to meet their obligations.
Insurance policy liabilities are primarily long term and generally are paid
from future cash flows. Most of the Company's invested assets are in
bonds which are readily marketable. Although there is no present need
or intent to dispose of such investments, the Company could liquidate
portions of their investments if such a need arose.

Year 2000 Considerations

<PAGE>
<PAGE>13

The Company is in the process of developing contingency plans to address
any system failure related to the year 2000. These plans are expected to
be completed during the fall of 1999.

Item 8. Financial Statements and Supplementary Data

The financial statements listed in Item 14(a) (1) and (2) are included in
this report beginning on page 19.

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure

NONE

<PAGE>
<PAGE>14

PART III

Item 10. Directors and Executive Officers

<TABLE>

Name Age Position Term
<S> <C> <C> <C>
Chris J. Haas 53 Chairman/Secretary 1 Year
Treasurer/
Director

Scott J. Engebritson 41 Vice Chairman of 1 Year
the Board/Director

Michael N. Fink 43 President/Director 1 Year

Daniel D. Briscoe 55 Director 1 Year

Jimmy Dan Conner 45 Director 1 Year

Denzel E. ("Denny") Crum 61 Director 1 Year

James M. Everett 53 Director 1 Year

Charles Hamilton 72 Director 1 Year

Ronda S. Paul 55 Director 1 Year

</TABLE>

The executive officers serve at the direction of the Board of Directors and
are appointed at the annual meeting of the Board. Directors are elected
annually by the shareholders. On September 30, 1998, Ballard Cassady,
Jr. resigned from the Company and its subsidiaries' Boards of Directors.
He resigned due to a potential conflict of interest between his position with
the Kentucky Bankers Association and his role as a Board Member of the
Company. The Company's subsidiary, First Alliance Insurance Company
markets credit life insurance products through banks who are members of
the Kentucky Bankers Association. The following is a brief description
of the previous business background of each of the executive officers and
directors.

CHRIS J. HAAS: Mr. Haas serves as Chairman of the Board of Directors,
Secretary and Treasurer. Mr. Haas also serves as Secretary, Treasurer and
Director of First American Capital Corporation and First Life America
Corporation, both of Topeka, Kansas and Secretary, Treasurer and
Director of Mid-American Alliance Corporation and Mid American
Century Life Insurance Company, both of Jefferson City, Missouri. Mr.
Haas has twenty years of experience in the insurance industry primarily in
the areas of financial and operations administration. He served as Chief
Financial Officer of Life of Indiana Corp. from June 1979 to June 1987.
He then served as Chairman of the Board and President of ROI
Corporation from June 1987 to June 1989. Mr. Haas became associated
with United Trust, Inc., an Illinois insurance holding company, in March
of 1990 as the company's Chief Financial Officer. He also served as
Executive Vice-President of Ohio-based United Income, Inc. and Chief
Financial Officer of United Security Assurance Company from March
1990 to March of 1993. Mr. Haas is a Certified Public Accountant
(Inactive) and a Fellow of Life Management Institute (FLMI). He served
as an Audit Manager at Arthur Young & Company in Indianapolis,
Indiana from October 1976 to June 1979. B.S. in accounting from Ball
State University.

SCOTT J. ENGEBRITSON: Mr. Engebritson serves as Vice-Chairman of
the Board of Directors. Mr. Engebritson is also Chairman of Mid-American
Alliance Corporation and Mid American Century Life Insurance
Company, both of Jefferson City, Missouri. Mr. Engebritson has twenty-one
years of experience in the insurance industry. From 1978 to 1984, he
was associated with Liberty American Corporation and Liberty American
Assurance Corporation as Regional Director of Sales and Director of
Customer Services. In December of 1984, Mr. Engebritson became
affiliated with United Trust, Inc., an Illinois insurance holding company,
where he served as Regional Director of Sales, Agency Director and
Assistant to the President. In December of 1987, Mr. Engebritson assisted
in the organization of United Income, Inc., an Ohio insurance holding
company, where he served as President and a Director of United Income,
Inc. and United Security Assurance Company, United Income's insurance
subsidiary, through February of 1993. He has been listed in Who's Who
in Life Insurance since 1988.

<PAGE>
<PAGE>15

MICHAEL N. FINK: Mr. Fink serves as President of the Company and a
Director. Mr. Fink also serves as Chairman of First American Capital
Corporation and First Life America Corporation, both of Topeka, Kansas.
Mr. Fink has eighteen years of experience in the insurance industry,
primarily in sales management. From 1981 to 1984, Mr. Fink was an
agent, District Director, and Regional Director with Liberty American
Assurance Company in Lincoln, Nebraska. In 1984, Mr. Fink transferred
to an affiliated company, Future Security Life, in Austin, Texas, where he
served as Regional Director and Agency Director until 1988. In March of
1988, Mr. Fink became affiliated with United Income, Inc. and United
Security Assurance Company as Agency Director and Assistant to the
President. He ended his affiliation with these companies in June of 1993.

DANIEL D. BRISCOE: Director. Political consultant and attorney.
Former Kentucky Commissioner of Insurance (1981-1984). Past
Chairman of the Kentucky State Democratic Party. Since 1989, has
served on the Kentucky State Fair Board. Six-year member of the
University of Louisville Board of Directors (1981-1987). BA in History
and Political Science from Centre College. JD from the University of
Louisville.

JIMMY DAN CONNER: Director. President of Old Colony Insurance
Service, Inc., an independent insurance agency. Involved in Crusade for
Children and Boy Scouts of America. Sales Manager of Allied Foods,
Atlanta, Georgia 1982-1983 and Torbitt & Castleman Co. in Buckner,
Kentucky 1977-1982. Professional basketball player with the Kentucky
Colonels of the American Basketball Association 1976-1977. Captain of
the University of Kentucky basketball team, All American Honorable
Mention and Academic All American in 1975. Kentucky Mr. Basketball
1971. Business Administration major at the University of Kentucky.

DENZEL E. ("DENNY") CRUM: Director. Head basketball coach at the
University of Louisville since 1971. On the Board of Directors of the
National Association of Basketball Coaches (NABC). The Sporting News
1986 "Coach of the Year." The Lexington Herald Leader's 1990
"Sportsman of the Decade." 1994 Naismith Basketball Hall of Fame
Inductee. Numerous other Kentucky and national coaching awards. BA
in Physical Education from UCLA where he played basketball for John
Wooden.

JAMES M. EVERETT: Director. Director, Kentucky Council Area
Development Districts. Member of Governor's Earthquake Hazards and
Safety Technical Advisory Panel (GEHSTAP) since 1983. On the Board
of Directors of Kentuckians for Better Transportation (KBT). Member of
the Governor's Local Issues Conference Planning Committee. Fulton
County Judge-Executive 1982-1992. B.S. in Vocational Agriculture and
M.S. in Horticulture from Murray State University.

CHARLES HAMILTON: Director. Owns and operates numerous
interests in real estate, agri-business and agriculture. Director of Bullitt
County Farm Bureau for last 24 years. Vice President and Director of
Bullitt County Bank. Former Kentucky Commissioner of Agriculture and
past Chairman of the Governor's Task Force on Agriculture. Past member
of the Kentucky State Fair Board. Recipient of the 1992 Distinguished
Services Award from the Kentucky Association of Conservation Districts.
1980 and 1991 recipient of the Kentucky Pork Producers Association
Outstanding Service Award. B.S. in Agriculture from the University of
Kentucky.

RONDA S. PAUL: Ms. Paul serves as General Counsel and Director for
the Company. Attorney. Director of the Kentucky Division of Securities
from 1982 through 1991. Attorney for the Kentucky Department of
Banking and Securities 1980-1981. On the faculty of the College of
Business and Economics at the University of Kentucky 1971-1978. PhD
in finance and accounting from Purdue University and JD from the
University of Kentucky.

<PAGE>
<PAGE>16

Item 11. Executive Compensation

<TABLE>

The following table sets forth amounts earned by executive officers as
compensation over the past three years:

Annual Compensation
Name and Incentive Other Annual
Principal Position Year Salary ($) Compensation($) Compensation($)(1)
<S> <C> <C> <C> <C>
Chris J. Haas 1998 78,888 62,121 7,200
Chairman/Secretary 1997 77,250 32,481 7,200
Treasurer/Director 1996 75,563 33,652 7,200

Scott J. Engebritson 1998 78,888 62,121 7,200
Vice-Chairman/Director 1997 77,250 32,481 7,200
1996 75,563 33,652 7,200

Michael N. Fink 1998 78,888 75,512 7,200
President/Director 1997 77,250 39,453 7,200
1996 75,563 41,580 7,200

(1) Amounts paid for auto allowance.

</FN>
</TABLE>

Compensation of Directors

Each Director of the Company, excluding Messrs. Haas, Engebritson and
Fink, receives a $1,000 annual retainer. Additionally, each Director is
paid $750 per meeting attended for the Company and its subsidiaries.
During 1998, there were five Board of Directors meetings of the
Company.

Executive Employment Agreements

On October 23, 1995, the Company entered into Executive Employment
Agreements with Messrs. Haas, Engebritson and Fink. The employment
agreements are for a term of four years beginning November 1, 1995.
Annual compensation under the agreement for each Executive is $75,000
adjusted annually for the increase in the Consumer Price Index Labor
Component. Incentive compensation is based on percentages of first year
life and renewal insurance premium of the FAIC "Alliance 2000" product.
Also included in the agreement is an annual auto allowance of $7,200.
Additionally, the Company provides term life insurance coverage in the
amount of $500,000 and disability coverage for each Executive.

<PAGE>
<PAGE>17

Item 12. Security Ownership of Certain Beneficial Owners and
Management

The following table sets forth information as of March 1, 1999, regarding
ownership of Common Stock of the Company by management and the
only persons known by the Company to own beneficially more than 5%
thereof:

Name and Address of Amount and Nature of Percent of
Title and Class Benficial Owner Beneficial Owner Class

<S> <C> <C> <C>
Common Stock Chris J. Haas 400,000 (2)(3) 7.17
1188 Sheffield Court
Lexington, KY 40509

Common Stock Scott J. Engebritson 427,500 (1) 7.66 4500 Sussex
4500 Sussex
Columbia, MO 65203

Common Stock Michael N. Fink 500,000 (3) 8.96
1121 Chetford Drive
Lexington, KY 40509

(1) These shares are held in trust for two children and a nephew of
Mr. Engebritson, who is the trustee.

<F2>

(2) Mr. Haas has two adult children who each own 50,000 shares.
Mr. Haas disclaims any beneficial ownership of such shares.

<F3>

(3) These shares are owned jointly with spouse.

</FN>
</TABLE>

Item 13. Certain Relationships and Related Transactions

<PAGE>
<PAGE>18

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K

(a) 1 and 2 Financial Statements and Schedules

The consolidated financial statements and financial statement
schedules of First Alliance Corporation presented in this
report are listed in the index on Page F-1.

3 Exhibits

3(i) Articles of Incorporation, as amended (1)

3(ii) By-laws, as amended (1)

4 Instruments defining the rights of security holders,
including indentures (1)

10 Material Contracts

(a) Lease (1)
(b) Sub-lease (2)
(c) Advisory Board Contract (1)
(d) Service agreement between First Alliance
Insurance Company and First Alliance Corporation. (2)
(e) Management Employment Agreements (2)
(f) Lease agreement dated February 26, 1999
(g) Management agreement between First Alliance Corporation and
First American Capital Corporation

11 Statement re computation of per share earnings (3)

27 Financial Data Schedule

(b) Reports on Form 8-K

Form 8-K filed on November 17, 1998 indicated the appointment
of Kerber, Eck and Braeckel, LLP as the Company's independent
accountants for fiscal year ending December 31, 1998.

(1) Filed as an Exhibit to the Registrant's Registration Statement on
Form S-1, Amendment Number 4, File Number 33-67312, which
was declared effective on March 4, 1994, and incorporated
herein by reference.

(2) Filed as an Exhibit to the Registrant's 1995 Form 10-K, File
Number 33-67312, and incorporated herein by reference.

(3) Note 2 in Notes to Consolidated Financial Statements included
in this Report beginning on Page F-8

<PAGE>
<PAGE>19

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

By /s/Chris J. Haas Date 3/26/99

Chris J. Haas, Chairman/Secretary
Treasurer/ Director

By /s/Thomas I. Evans Date 3/26/99

Thomas I. Evans, Vice-President/
Assistant Secretary

<PAGE>
<PAGE>20

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

By /s/Scott J. Engebritson Date 3/26/99

Scott J. Engebritson, Vice-Chairman/Director

By /s/Chris J. Haas Date 3/26/99

Chris J. Haas, Chairman/Secretary/
Treasurer/Director

By /s/Michael N. Fink Date 3/26/99

Michael N. Fink, President/Director

By /s/ Daniel D. Briscoe Date 3/26/99

Daniel D. Briscoe, Director

By /s/ Jimmy Dan Conner Date 3/26/99

Jimmy Dan Conner, Director

By Date 3/26/99

Denzel E. Crum, Director

By /s/ James M. Everett Date 3/26/99

James M. Everett, Director

By /s/ Charles Hamilton Date 3/26/99

Charles Hamilton, Director

By /s/ Ronda S. Paul Date 3/26/99

Ronda S. Paul, Director

<PAGE>
<PAGE>F-1

FIRST ALLIANCE CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

Page
Consolidated Financial Statements Numbers

Report of Independent Auditors . . . . . . . . . . . . . . . . . F-2

Report of Independent Auditors . . . . . . . . . . . . . . . . . F-3

Consolidated Balance Sheets as of December 31, 1998 and 1997. . . F-4

Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . F-6

Consolidated Statement of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996 . . . . . . . . F-7

Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . F-8

Notes to Consolidated Financial Statements. . . . . . . . . . . . F-9

Consolidated Financial Statement Schedules

Schedule I Summary of Investments. . . . . . . . . . . . . F-22

Schedule II Condensed Financial Information of Registrant . F-23

Schedule III Supplementary Insurance Information . . . . . . F-26

Schedule IV Reinsurance . . . . . . . . . . . . . . . . . . F-28

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been omitted.

<PAGE>
<PAGE>F-2

Independent Auditors' Report

Board of Directors and Shareholders
First Alliance Corporation

We have audited the accompanying consolidated balance sheet of First Alliance
Corporation (a Kentucky corporation) and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations, changes in shareholders'
equity, 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.

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.

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

We have also audited Schedule I, II, III and IV as of December 31, 1998, of
First Alliance Corporation and subsidiaries and Schedules II, III and IV for
the year then ended. In our opinion, these schedules present fairly, in all
material respects, the information required to be set forth therein.

/s/KERBER, ECK & BRAECKEL LLP

Springfield, Illinois
February 18, 1999

<PAGE>
<PAGE>F-3

Report of Independent Auditors

The Shareholders and Board of Directors
First Alliance Corporation

We have audited the accompanying consolidated balance sheet of First Alliance
Corporation and subsidiaries as of December 31, 1997 and related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. Our audit also
included the financial statement schedules as of and for the years ended
December 31, 1997 and 1996. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of First Alliance Corporation and subsidiaries at December 31, 1997,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the 1997 and
1996 financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.

/s/ Ernst & Young LLP

Louisville, Kentucky
March 24, 1998

<PAGE>
<PAGE>F-4

<TABLE>
FIRST ALLIANCE CORPORATION

CONSOLIDATED BALANCE SHEETS
<CAPTION>

December 31,
1998 1997
<S> <C> <C>
Assets
Investments:
Available-for-sale fixed maturities,
at fair value (amortized cost, $5,973,453
and $9,016,891 in 1998 and 1997, respectively) $ 6,121,129 $ 9,038,694

Preferred stock at cost - 1,000,000
Common stock at cost 20,000 20,000
Notes receivable (net of $149,698 valuation
allowance in 1998 and 1997) 221,636 334,923

Total investments 6,362,765 10,393,617

Cash and cash equivalents 6,587,264 1,335,455
Investments in related parties 125,000 125,000
Receivables from related parties 20,496 21,286
Accrued investment income 107,416 151,813
Deferred policy acquisition costs 1,848,419 1,074,485
Prepaid expenses 23,427 20,662
Office furniture and equipment, less accumulated
depreciation of $69,808 and $53,533 in 1998
and 1997, respectively 43,684 32,026
Advances to agents 57,676 23,251
Premiums due 47,130 27,951
Other assets 9,748 92,818

Total assets $ 15,233,025 $ 13,298,364

See notes to consolidated financial statements.

</TABLE>
<PAGE>
<PAGE>F-5

<TABLE>
FIRST ALLIANCE CORPORATION

CONSOLIDATED BALANCE SHEETS (continued)
<CAPTION>

December 31,
1998 1997
<S> <C> <C>
Liabilities and Shareholders' Equity

Policy and contract liabilities:

Annuity contract liabilities $ 1,763,029 $ 1,112,551
Life policy reserves (net of reinsurance
ceded reserves of $88,534 and $60,616
in 1998 and 1997, respectively) 1,493,766 761,808
Deposits on pending policy applications 216,565 92,215
Unearned revenue 102,993 136,299
Policyholder premium deposits 177,528 117,137
Reinsurance premiums payable 65,183 39,557

Total policy and contract liabilities 3,819,064 2,259,567

Federal income taxes payable:
Current 32,258 -
Deferred 458,932 205,706
Other taxes payable - 25,000
Commissions, salaries, wages and benefits payable 64,740 120,757
Accounts payable and accrued expenses 31,305 120,976

Total liabilities 4,406,299 2,732,006

Claims and contingencies (Note 15)

Shareholders' equity:
Common stock, no par value, 8,000,000 shares
authorized; 5,620,690 and 5,579,840 shares
issued and outstanding at December 31, 1998
and 1997 562,069 557,984
Additional paid in capital 12,180,353 12,141,546
Retained earnings - deficit (2,013,165) (2,147,562)
Accumulated other comprehensive income 97,469 14,390

Total shareholders' equity 10,826,726 10,566,358

Total liabilities and shareholders' equity $ 15,233,025 $ 13,298,364

See notes to consolidated financial statements.

</TABLE>

<PAGE>
<PAGE>F-6

<TABLE>
FIRST ALLIANCE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>

Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Revenues

Gross premium income $ 2,383,680 $ 1,279,679 $ 944,011
Reinsurance premiums ceded (89,240) (58,279) (42,427)
Net premium income 2,294,440 1,221,400 901,584

Investment activity:
Net investment income 595,612 504,831 585,244
Net realized investment
gain (loss) 6,529 (110,935) (4,368)
Other income 88,628 39,755 11,672

Total revenue 2,985,209 1,655,051 1,494,132

Benefits and expenses

Increase in policy reserves 731,958 381,888 354,648
Death claims (net of reinsurance
of $40,000 in 1996) - 24,848 68,574
Policyholder surrender values 27,374 - -
Interest credited on annuities
and premium deposits 111,171 58,642 17,520
Commissions 933,100 473,231 528,056
Policy acquisition costs deferred (1,200,412) (708,185) (859,561)
Amortization of deferred policy
acquisition costs 426,476 339,562 161,163
Selling, administrative and
general insurance expenses 333,750 225,511 215,652
Salaries, wages and employee
benefits 801,332 680,193 699,736
Compensation expense related to
stock options - 159,743 -
Professional fees 86,930 235,749 119,472
Miscellaneous taxes 23,689 38,168 80,844
Advisory board and directors fees 65,986 48,361 53,122
Rent expense 77,633 75,226 75,288
Depreciation expense 16,436 16,292 21,342
Amortization of goodwill and other
intangible assets - - 26,623
Other operating costs and expenses 150,287 162,596 119,859

Total benefits and expenses 2,585,710 2,211,825 1,682,338

Income (loss) before income tax
expense 399,499 (556,774) (188,206)

Income tax expense 265,102 123,995 111,653

Net income (loss) $ 134,397 $ (680,769) $ (299,859)

Net income (loss) per common
share-basic and diluted $ 0.02 $ (0.12) $ (0.05)

See notes to consolidated financial statements.

</TABLE>

<PAGE>
<PAGE>F-7

<TABLE>
FIRST ALLIANCE CORPORATION

CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>

Years ended December 31,
1998 1997 1996
<S>
Preferred stock: <C> <C> <C>
Balance, beginning of year $ - $ - $ 2,750,000
Sale of shares in public
offering (380,274 shares) - - -
Conversion of preferred to
common (549,960 preferred
shares to 2,199,840 common
shares) - - (2,749,800)
Other changes (200)

Balance, end of year - - -

Common stock:
Balance, beginning of year 557,984 557,984 338,000
Exercise of stock options
(40,850 shares) 4,085 - -
Conversion of preferred to
common (549,960 preferred
shares to 2,199,840 common
shares) - - 219,984

Balance, end of year 562,069 557,984 557,984

Additional paid-in capital:
Balance, beginning of year 12,141,546 11,981,803 9,411,216
Stock options granted - 159,743 -
Exercise of stock options
(40,850 shares) 38,807 - -
Cost of public offering - - 40,571
Conversion of preferred to common - - 2,530,016

Balance, end of year 12,180,353 12,141,546 11,981,803

Retained earnings-deficit:
Balance, beginning of year (2,147,562) (1,466,793) (1,166,934)
Net income (loss) 134,397 (680,769) (299,859)

Balance, end of year (2,013,165) (2,147,562) (1,466,793)

Accumulated other comprehensive
income:
Balance, beginning of year 14,390 (98,558) 9,250
Net unrealized gain (loss)
on available-for-sale securities
net of reclassification
adjustment (see below) 83,079 112,948 (107,808)

Balance, end of year 97,469 14,390 (98,558)

Total shareholders' equity $10,826,726 $10,566,358 $10,974,436

Disclosure of reclassification
amount:

Unrealized holding gains (loss)
arising during period $ 87,586 $ 104,411 $ (110,690)
Less: reclassification adjustment
for (gains) loss included in
net income (4,507) 8,537 2,882

Net unrealized gains (loss) on
securities $ 83,079 $ 112,948 $ (107,808)

See notes to consolidated financial statements.

</TABLE>

<PAGE>
<PAGE>F-8

<TABLE>
FIRST ALLIANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Operating activities:

Net income (loss) $ 134,397 $ (680,769) $ (299,859)
Adjustments to reconcile net income
(loss) to net cash provided
by/(used) in operating activities:
Interest credited on annuities
and premium deposits 111,171 58,642 17,422
Provision for depreciation 16,436 16,292 21,342
Compensation expense related to
stock options - 159,743 -
Amortization of goodwill and
other intangible assets - - 26,623
Amortization of premium and
accretion of discount on fixed
maturity investments 20,899 25,955 21,074
Realized investment loss (gains),
net (6,529) 87,935 4,368
Provision for deferred federal
income taxes 210,429 109,102 85,541
Loss on investments in
unconsolidated affiliates - 97,184 31,816
Decrease in accrued investment
income 44,397 19,603 65,262
Decrease/(increase) in
receivables from related parties 790 24,993 (46,279)
Decrease/(increase) in reinsurance
recoverable - 40,000 (40,000)
Increase in deferred policy
acquisition costs, net (773,935) (324,875) (698,398)
Decrease in unearned revenue (33,306) - -
Decrease/(increase) in premiums
due (19,179) 14,571 (42,522)
Decrease/(increase) in other
assets 45,883 (2,534) (21,539)
Increase in policy reserves 731,958 381,888 354,648
Increase/(decrease) in deposits
on pending policy applications 124,350 (30,514) 3,795
Increase/(decrease) in claims
payable - (93,794) 93,794
Increase in reinsurance premiums
payable 25,626 7,285 32,272
Increase/(decrease) in federal
income taxes payable 32,258 (2,154) (30,093)
Increase/(decrease) in
commissions, salaries, wages
and benefits (56,017) 71,046 28,790
Increase /(decrease) in accounts
payable, accrued expenses and
other liabilities (114,671) 46,362 10,725

Net cash provided by/(used in)
operating activities 494,957 25,961 (381,218)

Investing activities:
Purchase of available-for-sale
fixed maturities (782,760) (1,250,000) (8,886,387)
Sale of available-for-sale
fixed maturities 3,112,129 1,539,680 248,164
Maturity of available-for-sale
fixed maturities 700,000 750,000 1,000,000
Purchase of preferred stock - (1,000,000) -
Sale of preferred stock 999,700 - -
Purchase of common stock - (20,000) -
Short-term investments
(acquired) disposed, net - - 2,611,979
Decrease (increase) in notes
receivable 113,287 (188,827) (221,096)
Purchase of investments in
unconsolidated affiliates - - (129,000)
Purchase of investments in
related parties - - (125,000)
Purchase of furniture and
equipment (28,094) (594) (14,974)

Net cash provided by/(used)
in investing activities 4,114,262 (169,741) (5,516,314)

Financing activities:
Deposits on annuity contracts,
net 549,013 574,717 566,016
Policyholder premium deposits,
net 50,685 (3,758) 111,927
Proceeds from exercise of stock
options 42,892 - -
Cost of stock offering - - 40,571

Net cash provided by financing
activities 642,590 570,959 718,514

Increase/(decrease) in cash and
cash equivalents 5,251,809 427,179 (5,179,018)

Cash and cash equivalents,
beginning of year $ 1,335,455 $ 908,276 $ 6,087,294

Cash and cash equivalents,
end of year $ 6,587,264 $ 1,335,455 $ 908,276

See notes to consolidated financial statements.

</TABLE>

<PAGE>
<PAGE>F-9

1. Nature of Operations

First Alliance Corporation (the "Company") was incorporated on February 16,
1993 for the primary purpose of forming, owning and managing life insurance
companies. On March 4, 1994, the Company's registration statement filed with
the Securities and Exchange Commission and the Kentucky Department of Financial
Institutions for a $12,500,000 public stock offering, which included a 10%
"over-sale" provision (additional sales of $1,250,000), was declared effective.
The Company completed its public stock offering on October 28, 1995, raising
total capital of $13,750,000.

The Company has a wholly-owned insurance subsidiary, First Alliance Insurance
Company ("FAIC"), which is domiciled in Kentucky. FAIC was incorporated on
December 29, 1994 and initially capitalized with $3,000,000 on January 10,
1995. The Company made an additional $3,000,000 capital contribution on
May 15, 1995 and the Kentucky Department of Insurance ("KDI") granted FAIC a
Certificate of Authority on May 17, 1995. Insurance operations commenced on
November 1, 1995.

FAIC's initial product was a twenty pay ordinary life insurance policy with a
flexible premium deferred annuity rider and a decreasing term rider for issue
ages 0 to 50. During 1997, the Company modified the insurance product being
marketed. The revised product offers a life insurance policy with an annuity
rider similar to the inital product, however the annual income protection
benefit rider was eliminated and death benefits on the base policy modified.
Additionally, the split between life and annuity premiums and the premium
paying period were changed. In the first year, the full premium is allocated
to life insurance with all renewal premium payments being split half to life
and half to annuity. Depending on the issue age, the premium paying period is
either ten or twenty years.

The product is being sold in premium units with the ability to purchase either
fractional or multiple units. If a greater accumulated annuity value is
desired, the policyholder may continue to make the premium payments, after
the completion of the premium paying period, with the entire payment funding
the annuity. Other products currently being marketed on a limited basis are a
single premium deferred annuity and a ten year term policy. The Company is
licensed and sells its product in the states of Kentucky, Indiana, Ohio and
Kansas. Currently, the products are only marketed in Kentucky and Indiana.

The Company also has a wholly-owned venture capital subsidiary, First Kentucky
Capital Corporation ("FKCC"), which was capitalized with $224,000 during 1996
and commenced operations on April 12, 1996. An additional $92,000 capital
contribution was made during 1997. FKCC provides capital for Kentucky based
businesses for both start-up companies and for expansion of existing
businesses. Investments may take the form of loans, guarantees, commitments,
equity, or joint venture agreements, or any combination thereof. FKCC
invested in three Kentucky businesses during 1996. As of December 31, 1997,
all of these investments had been written-off.

2. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") which, for
FAIC, differ from statutory accounting practices prescribed or permitted by
the KDI.

Principals of Consolidation

The accompanying consolidated financial statements include the accounts and
operations of the Company, FAIC, FKCC and Medical Acceptance Corporation
("MAC", prior to its disposition on December 31, 1997). All intercompany
accounts and transactions are eliminated in consolidation.

<PAGE>
<PAGE>F-10

2. Significant Accounting Policies (continued)

Management's Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying
notes. As more information becomes known, actual results could differ from
those estimates.

Investments

The Company classifies all of its fixed maturity investments as available-for
- -sale. Available-for-sale fixed maturities are carried at fair value with
unrealized gains and losses, net of applicable taxes, reported in other
comprehensive income.

Cash equivalents consist of highly liquid investments with maturities of three
months or less at the date of purchase and are carried at cost which
approximates fair value.

Realized gains and losses on sales of investments are recognized in operations
on the specific identification basis. Interest earned on investments is
included in net investment income.

Preferred stock is collateralized with securities that equal the purchase
price, and therefore is reported at cost (see Note 3).

Common stock is reported at cost as these shares represent organizer shares
purchased in the initial private placement and are restricted from sale or
transfer under Rule 144 of the Act (see Note 3).

Notes receivable are reported at unpaid principal balance, net of allowance
for uncollectible amounts.

Investments in related parties are reported at cost (see Note 5).

Investments in unconsolidated affiliates consist of common stock investments
and are recorded using the equity method of accounting, with gains and losses
reported in net investment income.

Office Furniture and Equipment

Office furniture and equipment is recorded at cost less accumulated
depreciation using the 200% declining balance method over the estimated useful
life of the respective assets.

Office Lease

The Company leases approximately 6,100 square feet located at 2285 Executive
Drive, Lexington, Kentucky. At December 31, 1998, the Company leased
approximately 5,400 square feet pursuant to a lease agreement which would
expire on March 31, 1999. In February of 1999, the Company extended the 5,400
square foot lease agreement until January 31, 2001. Additionally, in February
of 1999 the Company entered into a lease agreement for an additional 700 square
feet at the same location. The lease on this additional space expires on
January 31, 2001. Annual rent expense for the years ended December 31, 1998,
1997 and 1996 totaled $77,633, $75,226 and $75,288, respectively.

Deferred Policy Acquisition Costs

Commissions and other costs of acquiring life insurance, which vary with, and
are primarily related to, the production of new insurance contracts have been
deferred to the extent recoverable from future policy revenues and gross
profits. The acquisition costs are amortized over the premium paying period
of the related policies using assumptions consistent with those used in
computing policy reserves.

<PAGE>
<PAGE>F-11

2. Significant Accounting Policies (continued)

Future Policy Benefits

The liabilities for future policy benefits on the Company's life insurance
products are computed using the net level premium method and assumptions as
to investment yields, mortality, withdrawals and other assumptions, modified
as necessary to reflect anticipated trends and to include provisions for
possible unfavorable deviations. The assumptions utilized were 7.25% for
investment yields, 1975-1980 select and ultimate tables for mortality,
and Linton BA tables for withdrawal rates.

Annuity Contract Liabilities

Annuity contract liabilities are computed using the retrospective deposit
method and consist of policy account balances, before deduction surrender
charges, which accrue to the benefit of policyholders. Premiums received on
annuity contracts are recognized as an increase in a liability rather than
premium income. Interest credited on annuity contracts is recognized
as an expense.

Policyholder Premium Deposits

Policyholder premium deposits represent premiums received for the payment of
future premiums on existing policyholder contracts. Interest is credited on
these deposits at the rate of 6%. The premium deposits are recognized as an
increase in a liability rather than premium income. Interest credited on the
premium deposits is recognized as an expense.

Premiums

Life insurance premiums for limited payment contract are recorded according
to Statement of Financial Accounting Standard ("SFAS") No. 97. "Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of Investments". Any gross
premium in excess of net premium is deferred and recognized in income in a
constant relationship with insurance in force.

Federal Income Taxes

The Company uses the liability method of accounting for income taxes.
Deferred income taxes are provided for cumulative temporary differences
between balances of assets and liabilities determined under generally accepted
accounting principles and balances determined for tax reporting purposes.

Reinsurance

Estimated reinsurance receivables are reported as assets and are recognized in
a manner consistent with the liabilities related to the underlying reinsured
contracts, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts".

Common Stock and Preferred Stock

The common stock is fully-paid and non-assessable with dividend rights subject
to the prior rights of the holders of preferred stock (prior to its conversion
to common stock) and has full voting rights. The preferred stock had no
voting rights, had a par and liquidation value of $5.00 per share of which
dividends, if and when declared, were to be paid at the rate of 6% of the par
value, and was convertible into four shares of common stock until April 28,
1996 (discussed below).

All shareholder rights conferred by the Company's Articles and By-Laws vested
in the subscribers immediately upon acceptance of the subscription by the
Company. These rights include, inter alia, voting rights, liquidation and
other preferences, etc. However, the actual issuance of ownership did not
occur until April 28, 1996. Accordingly, the stock sold in the public
offering was recorded as outstanding and not issued until April 28, 1996.
Additionally, the share certificates issued were not tradeable until July
28, 1996.

<PAGE>
<PAGE>F-12

Conversion of Preferred Stock

Pursuant to the terms of the Subscription Agreements, a subscriber could elect,
at the time of the sale, to convert their shares of preferred stock to shares
of common stock upon issuance of stock certificates. The subscriber was
allowed to revoke this conversion during a six month period starting on the
date the offering was completed. The offering was completed on October 28,
1995 and conversions were allowed until April 28, 1996. Each share of
preferred stock could be converted into four shares of common stock. On April
28, 1996, substantially all of the preferred shareholders converted their
preferred shares to common shares.

Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". All earnings and losses per share amounts for all period have been
presented to conform with the requirements of SFAS 128.

Net income (loss) per common share is based upon the weighted average number
of common shares outstanding each year. For the years ended December 31, 1997
and 1996, all shares are outstanding for the entire year. During 1998,
option shares exercised are assumed to be outstanding based on the day
exercised. The weighted average outstanding common shares was 5,583,016 in
1998 and 5,579,840 in 1997 and 1996.

3. Investments
<TABLE>

The amortized cost and fair value of investments in fixed maturities at
December 31, 1998 and 1997 are summarized as follows:
<CAPTION>

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value

December 31, 1998:
<S> <C> <C> <C> <C>
U.S. government bonds $ 2,549,148 $ 64,175 $ - $ 2,613,323
Municipal bonds 1,129,553 34,378 1,163,931
Corporate bonds 2,294,752 49,648 525 2,343,875

$ 5,973,453 $ 148,201 $ 525 $ 6,121,129
<CAPTION>

December 31, 1997:
<S> <C> <C> <C> <C>
U.S. government bonds $ 6,002,225 $ 3,515 $ (23,822) $ 5,981,918
Municipal bonds 1,242,504 28,901 (2,562) 1,268,843
Corporate bonds 1,772,162 18,251 (2,480) 1,787,933

$ 9,016,891 $ 50,667 $ (28,864) $ 9,038,694

</TABLE>
<TABLE>

The amortized cost and fair value of fixed maturities at December 31, 1998, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers may have the right to call
or prepay obligations.

<PAGE>
<PAGE>F-13

3. Investments (continued)

<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 250,152 $ 250,273
Due after one year through five years 3,160,996 3,228,018
Due after five years through ten years 2,562,305 2,642,838

$ 5,973,453 $ 6,121,129

</TABLE>

The fair values for investments in fixed maturities are based on quoted
market prices.

Included in investments are securities which have a fair value of $2,142,500
at December 31, 1998, which are on deposit with the KDI.

The Company limits credit risk by emphasizing investment grade securities and
by diversifying its investment portfolio among government, states, municipals,
political subdivisions and corporate bonds. As a result, management believes
that significant concentrations of credit risk do not exist.

On March 31, 1997, the Company purchased 500,000 shares of the $2.00 par
value Secured Non-Cumulative Redeemable Convertible Preferred Stock of U.S.
Star Financial Corporation ("U.S. Star") for $1,000,000. The Preferred shares
were collateralized with securities, which were in the possession of the
Company, that equal the total investment. All interest earned on the
collateral was retained by U.S. Star. The Preferred shares were convertible
into common shares at a rate of one share of Preferred for one share of common.
U.S. Star could have required the conversion if it met conditions set forth in
the security agreement. If the Preferred shares were not converted within
eighteen months of the date of purchase, the Preferred shares could be
redeemed at the original purchase price. On September 30, 1998, the Preferred
shares were redeemed for approximately the original purchase price. The
Preferred shares contained a provision under which the Company received
dividends in the form of common stock. During 1998, the Company received
45,000 shares of U.S. Star common stock. The common stock received is
restricted from sale or transfer under Rule 144 of the Act. Accordingly, the
value of the common stock dividend could not be determined and therefore the
Company did not recognize any dividend income or record the common stock at
any value.

On March 31, 1997, the Company purchased 200,000 shares of Paradise Plus USA,
Inc. and 200,000 shares of Paradise Plus Holding Company, Inc. for a total
investment of $20,000 or $.05 per share. Each company is offering a total of
700,000 shares of its no par value common stock through a private placement
stock offering. As these shares represent organizer shares and are restricted
under Rule 144 of the Act, the common stock investments have been recorded at
cost. In addition, the Company executed a $100,000 promissory note bearing
interest at an annual rate of 8.5% with Paradise Plus Holding Company, Inc.
on March 5, 1997. At December 31, 1998 and 1997, the unpaid principal
balance on this note was $69,636 and $74,000, respectively.

During 1996, the Company entered into a $175,000 line of credit agreement,
bearing interest at an annual rate of 10.25%, with Mr. Rick Meyer, President
of First American Capital Corporation (see Note 5). During 1997, the line of
credit agreement was converted to a thirty-six month promissory note bearing
interest at an annual rate of 10.25%. The Company has a perfected security
interest in amounts due Mr. Meyer from United Security Assurance Company which
will provide for payment of the note. The unpaid balance at December 31, 1998
and 1997 was $64,068 and $160,000, respectively.

During 1996, the Company entered into a $100,000 line of credit agreement,
which bears interest at an annual rate of 20%, with Mr. James Hayslip of
Successful Solutions, Inc. During 1997, the line of credit agreement was
extended from July 31, 1997 to July 31, 1998. The unpaid balance at December
31, 1997 was $22,042. During 1998, Mr. Hayslip paid the outstanding balance
of the note.

During 1998, the Company had gross realized investment gains of $6,988.
There were no realized investment gains during 1997 or 1996. Realized
investment losses totaled $459, $12,935 and $4,368 in 1998, 1997 and 1996,
respectively. These realized gains and losses during 1998, 1997 and 1996
were the result of the sale of available for sale fixed maturity investments.
In addition, during 1997 the Company incurred a net realized gain of $8,000
related to its disposition of MAC (see Note 6) and a gross realized loss of
$31,000 related to its line of credit agreement with LGP, Inc. ("LGP", see
Note 6).

<PAGE>
<PAGE>F-14

As of December 31, 1998 and 1997, the Company had recorded an allowance for
uncollectible accounts on notes receivable of $75,000 and $149,698,
respectively (including the allowance recorded in connection with the sale of
MAC - see Note 5).

<TABLE>

The following are the components of net investment income:
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities $ 439,310 $ 560,866 $ 581,568
Notes receivable 28,149 37,447 8,654
Short-term and other investments 147,996 26,421 53,213
Investments in unconsolidated
affiliates - (97,184) (31,816)

Gross investment income 615,455 527,550 611,619
Investment expenses (19,843) (22,719) (26,375)

Net investment income $ 595,612 $ 504,831 $ 585,244

</TABLE>

4. Concentrations of Credit Risk

Credit risk is limited by emphasizing investment grade securities and by
diversifying the investment portfolio among government and corporate bonds.
The Company has not experienced any significant losses in such investments
and believes it is not exposed to any significant credit risk.

5. Investments in and Receivables from Related Parties

The Company has investments in related parties of $125,000 at December 31,
1998 and 1997, which are reported at cost as these investments represent
organizer shares purchased in the initial private placement of the related
entities (discussed below) and are restricted from sale or transfer under
Rule 144 of the Act. The Company also had receivables from these entities of
$20,496 and $21,286 at December 31, 1998 and 1997, respectively.

First American Capital Corporation

On August 8, 1996, the Company purchased 525,000 shares of the common stock of
First American Capital Corporation ("FACC") of Topeka, Kansas, for $52,500.
At December 31, 1998, FACC had raised total capital of $14,349,649 from the
sale of private placement shares and through a $12,500,000 Kansas intrastate
public stock offering which commenced on March 11, 1997. On January 15, 1999,
FACC completed its public stock offering raising total public offering
proceeds of $13,750,000 which includes a $1,250,000 over-sale. The proceeds
of the public offering were used to form a Kansas domiciled life insurance
company, First Life America Corporation. When the public offering is completed
and the preferred stock is converted to common, the Company will own less than
10% of outstanding common stock. At December 31, 1998 and 1997, the Company
had accounts receivable from FACC of $14,134 and $6,914, respectively.

<PAGE>
<PAGE>F-15

Mid-American Alliance Corporation

On August 8, 1996, the Company purchased 725,000 shares of the common stock
of Mid-American Alliance Corporation ("MAAC") of Jefferson City, Missouri,
for $72,500. At December 31, 1998, MAAC had raised total capital of
$5,351,380 from the sale of private placement shares and through a $16,000,000
Missouri intrastate public stock offering. On December 31, 1997, MAAC
acquired Mid American Century Life Insurance Company ("MACLIC"), a Missouri
domiciled life insurance company. The proceeds of the public offering will
be used to further capitalize MACLIC. When the public offering is completed,
the Company will own less than 10% of MAAC's outstanding common stock. At
December 31, 1998 and 1997, the Company had accounts receivable from MAAC of
$6,362 and $14,372, respectively.

6. Venture Capital Subsidiary Investments

FKCC purchased newly issued common stock of MAC, Lexington, Kentucky,
representing a 51% interest, for $50,000 on April 12, 1996. MAC purchases
receivables from medical providers at a discount. The acquisition was
accounted for as a purchase and resulted in intangible assets of $26,623
($20,623 goodwill and $6,000 non-compete agreement) at the date of acquisition.
MAC has incurred operating losses since inception. As such, the Company has
included 100% of MAC's operating losses of $6,182 and $55,241 for the years
ended December 31, 1997 and 1996, respectively, in the consolidated financial
statements. Further, at December 31, 1996, the Company recorded a valuation
allowance of $26,623 relating to the intangible assets recorded in conjunction
with the acquisition. During 1996, FKCC entered into a $250,000 line of
credit agreement with MAC. The unpaid balance on this agreement was $66,708
and $105,049 at December 31, 1998 and 1997, respectively.

On December 31, 1997, FKCC entered into an agreement to sell its interest in
MAC for $8,000 in cash and notes receivable of $147,049, which includes the
unpaid balance on the line of credit agreement of $105,049 at December 31,
1997. Included in the notes receivable balance is a $72,351 contract funding
note, which bears interest at an annual rate of 7%, which will be repaid based
on the underlying patient contract payments, with the remaining balance due
June 30, 1998. Due to the uncertainty of collectibility of the notes, the
Company recorded a valuation allowance of $74,698. At the date of sale, the
investment in MAC had no carrying value. The net realized gain on this
disposition was $8,000.

FKCC also purchased a 49% interest in LGP, for $49,000 on October 18, 1996,
which is accounted for on the equity method of accounting. LGP is a dating
service using interactive-video matchmaking, which combines a television
dating show and an on-line profile library on the Internet. During 1996,
FKCC entered into a $31,000 line of credit agreement with LGP of which the
entire balance was drawn upon during 1997. At December 31, 1997, the $31,000
line of credit agreement was determined to be uncollectible and was written
- -off. Due to operating losses of $17,184 in 1996 and $31,816 in 1997, the
investment in LGP has no carrying value at December 31, 1997 or 1998.

Lastly, FKCC purchased a 40% interest in Cybertyme, Inc. ("Cybertyme"),
Glasgow, Kentucky, for $80,000 on November 12, 1996, which is also accounted
for on the equity method of accounting. Cybertyme provides individuals who
do not have access to a personal computer the ability to access the Internet
for an hourly fee. In addition, Cybertyme will provide educational classes
regarding Internet use and other personal computer applications. During 1997,
operating losses of $29,678 were recorded relative to this investment.
Management believes that Cybertyme will continue to incur operating losses and
has elected to record a valuation allowance of $50,322 which approximates the
remaining investment balance at December 31, 1997 and 1998.

7. Federal Income Taxes

<TABLE>

The Company does not file a consolidated federal income tax return with FAIC.
FAIC is taxed as a life insurance company under the provisions of the Internal
Revenue Code and must file a separate tax return for its initial six years of
existence. Federal income tax expense for the years ended December 31, 1998,
1997 and 1996 consisted of the following:

<PAGE>
<PAGE>F-16

<CAPTION>
Year ended December 31,

1998 1997 1996
<S> <C> <C> <C>
Current $ 54,671 $ 14,893 $ 26,112
Deferred 210,431 109,102 85,541

Federal income tax expense $ 265,102 $ 123,995 $ 111,653

</TABLE>

<TABLE>

Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate of 34% as follows:

<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Federal income tax expense
(benefit) at statutory rate $ 135,829 $ (189,303) $ (63,990)
Small life insurance company
deduction (74,692) (27,470) (40,138)
Increase in valuation
allowance 176,967 341,714 223,635
Surtax exemptions (9,427) (9,847) (11,750)
Goodwill and other
intangible assets - - 9,052
Other 36,425 8,901 (5,156)

Federal income tax expense $ 265,102 $ 123,995 $ 111,653

</TABLE>

<TABLE>

Deferred federal income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations.

Significant components of the Company's net deferred tax liability are as
follows:

December 31,
1998 1997
<S> <C> <C>
Deferred tax liability:
Net unrealized investment gains $ 50,210 $ 9,352
Due and deferred premiums 14,324 9,503
Deferred policy acquisition costs 527,078 310,365

Total deferred tax liability 591,612 329,220

Deferred tax asset:
Net unrealized investment losses - 1,939
Investment in unconsolidated
affiliates - 33,043
Policy reserves and contract
liabilities 76,548 53,319
Unearned revenue 35,018 46,341
Reinsurance premiums 21,114 13,449
Net operating loss carry forward 1,157,037 974,780
Alternative minimum tax credit
carry forward 44,846 30,970
Other - 8,466

Total deferred tax asset 1,334,563 1,162,307
Valuation allowance (1,201,883) (1,038,793)
Net deferred tax asset 132,680 123,514

Net deferred tax liability $ 458,932 $ 205,706

</TABLE>

<PAGE>
<PAGE>F-17

7. Federal Income Taxes (continued)

The Company has net operating loss carry forwards of approximately $3,264,200,
expiring in 2009 through 2013. These net operating loss carry forwards are
not available to offset FAIC income. FAIC has alternative minimum tax credit
carry forwards of $44,846, which have no expiration date. Federal income
taxes paid during 1998, 1997 and 1996 were $15,000, $22,000 and $56,404,
respectively.

8. Shareholders' Equity and Statutory Accounting Practices

FAIC prepares its statutory-basis financial statements in accordance with
statutory accounting practices ("SAP") prescribed or permitted by the KDI.
Currently, "prescribed" statutory accounting practices include state
insurance laws, regulations, and general administrative rules, as well as the
National Association of Insurance Commissioners ("NAIC") Accounting Practices
and Procedures Manual and a variety of other NAIC publications. "Permitted"
statutory accounting practices encompass all accounting practices that are
not prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. The NAIC is
in the process of codifying SAP ("Codification"). Codification will likely
change, to some extent, prescribed SAP and may result in changes to the
accounting practices that FAIC uses to prepare its statutory-basis financial
statements. Codification, which was approved by the NAIC in 1998, requires
adoption by the various states before it becomes the prescribed statutory
basis of accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for FAIC, the KDI must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the KDI. At this time
it is unclear whether the KDI will adopt Codification. However, based on
current draft guidance, management believes that the impact of Codification
will not be material to FAIC's statutory-basis financial statements.

<TABLE>

Net income for 1998, 1997 and 1996 and capital and surplus at December 31,
1998, 1997 and 1996 for the Company's insurance operations as reported in
these financial statements prepared in accordance with GAAP as compared to
amounts reported in accordance with SAP prescribed or permitted by the KDI
are as follows:

<CAPTION>
GAAP SAP
Net Capital and Net Capital and
Income Surplus Income Surplus
<S> <C> <C> <C> <C>
1998 $ 670,447 $ 7,458,286 $ 107,579 $ 6,306,783

1997 331,555 6,708,844 194,977 6,227,997

1996 334,910 6,286,334 78,456 6,002,781

</TABLE>

Principal differences between GAAP and SAP include: a) costs of acquiring new
policies are deferred and amortized for GAAP; b) benefit reserves are
calculated using more current assumptions relating to investments, mortality
and withdrawals for GAAP; c) deferred income taxes are provided for GAAP;
d) statutory asset valuation reserves are not required for GAAP; and
e) available-for-sale fixed maturity investments are reported at fair value
with unrealized gains and losses reported as a separate component of
shareholders' equity for GAAP.

Statutory restrictions limit the amount of dividends which may be paid by FAIC
to the Company. Generally, dividends during any year may not be paid without
prior regulatory approval, in excess of the lesser of (a) 10% of statutory
shareholder's surplus as of the preceding December 31, or (b) statutory net
operating income for the preceding year. In addition, FAIC must maintain the
minimum statutory capital and surplus, $1,250,000, required for life insurance
companies domiciled in Kentucky.

<PAGE>
<PAGE>F-18

The KDI imposes minimum risk-based capital ("RBC") requirements on insurance
enterprises that were developed by the NAIC. The formulas for determining
the amount of RBC specify various weighing factors that are applied to
financial balances or various levels of activity based on the perceived
degree of risk. Regulatory compliance is determined by ratio (the "Ratio")
of the enterprises regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level RBC, as defined by the NAIC. Enterprises
below specific trigger points or ratios are classified within certain levels,
each of which requires specified corrective action. FAIC has a Ratio that is
in excess of the minimum RBC requirements; accordingly, FAIC meets the RBC
requirements.

9. Reinsurance

To minimize the risk of claim exposure, the Company reinsures all amounts of
risk on any one life in excess of $50,000 for individual life insurance.
Credit life and accident and health benefits and accidental death benefits are
100% reinsured. All individual life insurance, except for term insurance, and
accidental death benefits are ceded to Business Men's Assurance Company
("BMA"). At December 31, 1998 and 1997, the Company ceded $66,850,411 and
$47,248,000 of insurance in-force and received reserve credits of $97,417
and $60,616 respectively. Pursuant to the terms of the agreement, FAIC pays
no reinsurance premiums on first year individual business. However, SFAS No.
113 requires the unpaid premium to be recognized as a first year expense and
amortized over the estimated life of the reinsured policies. FAIC records
this unpaid premium as "Reinsurance premiums payable" in the accompanying
balance sheet and recognized as "Reinsurance premiums ceded" in the
accompanying income statement. At December 31, 1998, and 1997, the unpaid
reinsurance premiums net of amortization totaled $65,183 and $39,557,
respectively. To the extent that the reinsurance companies are unable to meet
its obligations under the reinsurance agreement, the Company remains primarily
liable for the entire amount at risk. During 1998, 1997 and 1996, FAIC paid
$69,891, $50,994 and $10,155 of reinsurance premiums, respectively.

10. Related Party Transactions

Effective November 1, 1995, the Company entered into a service agreement with
FAIC to provide personnel, facilities, and services to FAIC. The services to
be performed pursuant to the service agreement are underwriting, claim
processing, accounting, processing and servicing of policies, and other
services necessary to facilitate FAIC's business. The agreement is in effect
until either party provides ninety days written notice of termination. Under
the agreement, FAIC pays monthly fees based on life and annuity premiums
delivered by FAIC. The percentages are 25% of first year premiums; 20% of
second year premiums; 10% of third year premiums; and 5% of premiums in years
four and thereafter. FAIC will retain general insurance expenses related to
its sales agency, such as agent training and licensing, agency meeting
expenses, and agent's health insurance. Pursuant to the terms of the
agreement, FAIC had incurred expenses of $595,146, $432,648 and $359,662 for
the years ended December 31, 1998, 1997 and 1996, respectively.

The Company entered into service agreements with FACC and MAAC effective
September 1, 1996. Pursuant to the terms of the agreements, the Company
provides investment management, data processing, accounting and reporting
services in return for a $1,000 per month service fee from each company.
Upon commencement of their public stock offerings (April 1, 1997 for FACC
and November 1, 1997 for MAAC), these fees increased to $2,000 per month.

In December of 1998, the Company contracted with FACC to provide underwriting
and accounting services for FLAC and FACC. The agreement dated September 1,
1996 between the Company and FACC was terminated with the execution of the
new agreement. Under the terms of the management agreement, the FACC pays fees
based on a percentage of delivered premiums of FLAC. The percentages are five
and one half percent (5.5%) for first year premiums; four percent (4%) of
second year premiums; three percent (3%) of third year premiums; two percent
(2%) of fourth year premiums and one percent (1%) for years six through ten
for ten year policies and one-half percent (.5%) in years six through twenty
for twenty year policies.

Under the terms of the agreements, FACC incurred expenses of $24,816 and
$21,000 during 1998 and 1997, respectively and MAAC incurred expenses of
$24,000 and $14,000 during 1998 and 1997, respectively. Further, the Company
has accounts receivable of $13,318 and $6,362 from FACC and MAAC, respectively,
at December 31, 1998 and $6,914 and $14,372 from FACC and MAAC, respectively,
at December 31, 1997 (see Note 4). Various officers and directors of the
Company hold similar positions with FACC and MAAC.

<PAGE>
<PAGE>F-19

11. Fair Values of Financial Instruments

The fair values of financial instruments, and the methods and assumptions used
in estimating their fair values, are as follows:

Fixed Maturities

Fixed maturities are carried at fair value in the accompanying consolidated
balance sheets. The fair value of fixed maturities are based on quoted market
prices. At December 31, 1998 and 1997, the fair value of fixed maturities
was $6,121,129 and $9,038,694, respectively.

Notes Receivable and Investments in Unconsolidated Affiliates

The carrying values of notes receivable and investments in unconsolidated
affiliates approximate their fair values. At December 31, 1997, the fair
values of notes receivable was $334,923. Notes receivable and investments in
unconsolidated affilates did not have any carrying value at December 31, 1998.

Preferred Stock

The carrying value of preferred stock approximates its fair value. At December
31, 1997, the fair value of preferred stock was $1,000,000. No such
investments were held at December 31, 1998.

Cash and Cash Equivalents

The carrying values of cash and cash equivalents approximate their fair values.
At December 31, 1998 and 1997, the fair value of cash and cash equivalents was
$6,587,264 and $1,335,455, respectively.

Investment Contracts

The carrying value of investment-type fixed annuity contracts approximates
their fair value. At December 31, 1998 and 1997, the fair value of
investment-type fixed annuity contracts were $1,763,029 and $1,112,551.

Common Stock and Investments in Related Parties

The Company holds an investment in common stock of $20,000 at December 31,
1998 and 1997. The Company also holds investments in related parties of
$125,000 at December 31, 1998 and 1997. These investments represent
organizer shares purchased in the initial private placement of the respective
entities and are restricted under Rule 144 of the Act. Accordingly, there are
no quoted market prices for these investments. It is not practicable to
estimate the fair value of these investments because of limited information
available to the Company. These investments are carried at cost in the
accompanying consolidated balance sheets.

12. Stock Options

The Company has adopted a stock option plan for 200,000 common stock shares.
The option exercise price pursuant to the plan is $1.05. Grantees have not
more than one year in which to exercise their options. The stock acquired
pursuant to exercise of options granted is non-transferable for a period of
two years from the date of acquisition. The Company's three founding officers
are not eligible to participate in the plan. The stock options became
available for granting on March 4, 1997.

<PAGE>
<PAGE>F-20

Stock options are accounted for in accordance with Accounting Principals Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
recognized compensation expense equal to the difference between the option
exercise price of $1.05 and the estimated fair value of the stock at the date
of grant. Compensation cost reflected in these financial statements as the
result of these 54,650 options being granted is $159,743, representing the
difference between the estimated fair value of the underlying stock at grant
date (approximately $4.00 per share) and the option exercise price.

<TABLE>

A summary of the Company's stock option activity and related information for
the years ended December 31, 1998 and 1997 follows. There were no options in
1996.

1998 1997
Options Price Options Price
<S> <C> <C> <C> <C>
Outstanding, beginning of
year 54,650 $ 1.05
Granted 54,650 $ 1.05
Exercised (40,850) 1.05
Forfeited (13,800)

Total - 54,650

Fair value of options
granted during year $ 218,600

</TABLE>

13. Comprehensive income

In 1998, the Financial Accounting and Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS 130 requires the detail of compreshensive income for the
reporting period be disclosed in the financial statements. Comprehensive
income consists of net income or loss for the current period adjusted for
income, expenses gains and losses that are reported as a separate component
of shareholders' equity rather than in the statement of operations. The
financial statements have been prepared in accordance with SFAS 130.

<PAGE>
<PAGE>F-21

<TABLE>

The components of comprehensive income along with the related tax effects are
presented for 1998, 1997 and 1996 as follows:

<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Unrealized gain on available-for
-sale securities:
Unrealized holding gains/(losses)
during the period $ 132,706 $ 158,199 $ (167,712)
Tax benefit/(expense) (45,120) (53,788) 57,022

87,586 104,411 (110,690)

Less:
Adjustment for gains realized
in net income 6,829 - -
Tax benefit/(expense) (2,322) - -

4,507 - -

Plus:
Adjustment for losses realized
in net income - 12,935 4,368
Tax benefit/(expense) - 4,398 1,486

- 8,537 2,882

Other comprehensive income $ 83,079 $ 112,948 $ (107,808)

Net income/(loss) $ 134,397 $(680,769) $ (299,859)
Other comprehensive income
/(loss) net of tax effect:
Unrealized investment gains 83,079 112,948 (107,808)

Comprehensive income/(loss) $ 217,476 $(567,821) $ (407,667)

Net income/(loss) per common
share - basic and diluted $ 0.02 $ (0.12) $ (0.05)

</TABLE>

<PAGE>
<PAGE>F-22

14. Segment Information

Prior to 1998 segment data was required to be presented on an "industry
approach" in accordance with SFAS No. 14. SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", become effective for 1998
and superseded SFAS No. 14. SFAS No. 131 requires a "management approach"
(how management internally evaluates the operating performance of its business
units) in the presentation of business segments. The segment data that
follows has been prepared in accordance with SFAS No. 131 which is consistent
with prior year presentation. The operations of the Company and its
subsidiaries have been classified into three operating segments as follows:
life and annuity insurance operations, venture capital operations, and
corporate operations. Segment information as of December 31, 1998, 1997 and
1996 and for the years then ended is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Life and annuity insurance
operations $ 2,814,106 $ 1,652,201 $ 1,287,769
Venture capital operations 4,101 (152,919) (21,790)
Corporate operations 167,002 155,769 228,153
Total $ 2,985,209 $ 1,655,051 $ 1,494,132

Income (loss) before income taxes:
Life and annuity insurance
operations $ 935,549 $ 455,550 $ 446,563
Venture capital operations 4,085 (154,015) (115,728)
Corporate operations (540,135) (858,309) (519,041)
Total $ 399,499 $ (556,774) $ (188,206)

Assets:
Life and annuity insurance
operations $ 11,850,273 $ 9,259,930 $ 7,736,441
Venture capital operations 50,343 46,258 109,455
Corporate operations 3,332,409 3,992,176 4,685,176
Total $ 15,233,025 $ 13,298,364 $ 12,531,072

Depreciation and amortization
expense:
Life and annuity insurance
operations $ 426,476 $ 339,562 $ 161,163
Venture capital operations - - 27,667
Corporate operations 16,436 16,292 20,298
Total $ 442,912 $ 355,854 $ 209,128

</TABLE>

15. Claims and Contingencies

The Company received a civil summons on October 6, 1997 related to an
automobile accident in October 1996 which involved an officer of the Company,
who was driving the automobile. The summons was served by the Circuit Court
in Fayette County, Kentucky and lists Katherine Stockton, Individually, and
as Administratrix of the Estate of Frank Novak, and as next friend of Bradley
Novak and Angela Novak, as the Plaintiffs. The legal action alleges that the
officer was acting in the course and scope of employment with the Company at
the time of the accident. The outcome of this matter is not predictable with
assurance. Although any actual liability is not determinable as of December 31,
1998, the Company believes that any liability resulting from this matter,
after taking into consideration insurance coverages, should not have a material
adverse effect on the Company's financial position.

<PAGE>
<PAGE>F-23

FIRST ALLIANCE CORPORATION AND SUBSIDIARY

SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 1998

Amount
Which Shown in
the Balance
Type of Investment Cost(1) Value(2) Sheet(3)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and
government agencies and
authorities $ 2,549,148 $ 2,613,323 $ 2,613,323
States, municipalities and
political subdivisions 1,129,553 1,163,931 1,163,931
All other corporate bonds 2,294,752 2,343,875 2,343,875
Total fixed maturities 5,973,453 6,121,129 6,121,129

Common stock 20,000 20,000 20,000
Notes receivable 296,636 221,636 221,636
316,636 241,636 241,636

Total investments $ 6,290,089 $ 6,362,765 $ 6,362,765

<FN>
<F1>
(1) Original cost of fixed maturities adjusted for amortization of premiums
and discounts.
<F2>
(2) Represents fair market value of fixed maturities at the balance sheet
date determined on the basis of year end market prices.
<F3>
(3) Excludes investments in related parties of $125,000.
</FN>

</TABLE>

<PAGE>
<PAGE>F-24

<TABLE>

FIRST ALLIANCE CORPORATION

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEET
<CAPTION>

December 31,
1998 1997
<S> <C> <C>
Assets
Available-for-sale fixed maturities, at
fair value (amortized cost, $505,365 and
$2,462,998 in 1998 and 1997, respectively) $ 505,848 $ 2,457,294
Preferred stock at cost - 800,000
Common stock at cost 20,000 20,000
Investment in subsidiaries* 7,508,630 6,755,102
Cash and cash equivalents 2,355,214 107,321
Notes receivable 218,688 287,536
Investments in related parties 125,000 125,000
Receivables from related parties 20,496 21,286
Accrued investment income 13,262 49,684
Prepaid expenses 23,427 20,662
Office furniture and equipment, less
accumulated depreciation of $69,808 and
$53,533 in 1998 and 1997, respectively 43,684 32,026
Advances to agents - -
Receivable from subsidiary* 70,829 49,493
Deferred federal income taxes - 1,939
Other assets 8,358 77,512

Total assets $ 10,913,436 $ 10,804,855

Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 64,270 $ 140,488
Salaries, wages, and benefits payable 20,708 91,864
Payable to subsidiary* 1,569 6,145
Deferred federal income taxes 164 -

Total liabilities 86,711 238,497

Shareholders' equity:
Common stock, no par value, 8,000,000
shares authorized; 5,620,690 and 5,579,840
shares issued and outstanding at December
31, 1998 and 1997, respectively; $.10
stated value 562,069 557,984
Additional paid-in capital 12,180,352 12,141,546
Retained earnings-deficit (2,013,165) (2,147,562)
Accumulated other comprehensive income 97,469 14,390

Total shareholders' equity 10,826,725 10,566,358

Total liabilities and shareholders' equity $ 10,913,436 $ 10,804,855
<FN>
<F1>
* Eliminated in consolidation
</FN>

</TABLE>

<PAGE>
<PAGE>F-25

<TABLE>
FIRST ALLIANCE CORPORATION

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Revenues
Service fee revenue* $ 595,962 $ 432,648 $ 359,662
Net investment income 118,644 171,204 223,558
Realized investment losses (459) (50,435) (4,368)
Equity in earnings of subsidiaries* 674,533 177,540 219,182
Other income 48,000 35,000 8,963
Total revenue 1,436,680 765,957 806,997

Benefits and expenses
Salaries, wages and employee
benefits 801,332 680,193 649,376
Compensation cost related to
stock options - 159,743 -
Professional fees 86,930 235,749 107,456
Insurance administration expenses 85,734 69,466 71,667
Miscellaneous taxes - - 20,085
Rent expense 77,633 75,226 72,868
Depreciation expense 16,436 16,292 20,298
Other operating costs and expenses 234,218 210,057 165,106
Total benefits and expenses 1,302,283 1,446,726 1,106,856

Net income/(loss) 134,397 (680,769) (299,859)

Other comprehensive income (loss),
net of income tax:
Unrealized investment gains 4,085 21,993 (26,912)

Comprehensive income (loss) $ 138,482 $ (658,776) $ (326,771)
<FN>
<F1>
* Eliminated in consolidation
</FN>

</TABLE>

<PAGE>
<PAGE>F-26

<TABLE>
FIRST ALLIANCE CORPORATION

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net cash used in operating activities $ (585,317) $ (634,713) $ (304,735)

Investing activities:
Purchase of available-for-sale
fixed maturities - - (4,288,438)
Sale of available-for-sale fixed
maturities 1,249,863 1,539,680 248,164
Maturity of available-for-sale
fixed maturities 700,000 - 500,000
Purchase of preferred stock - (800,000) -
Sale of preferred stock 799,700 - -
Purchase of common stock - (20,000) -
Investment in subsidiaries - (92,000) (224,000)
Investment in related parties - - (125,000)
Decrease/(Increase) in notes
receivable 68,848 - (221,096)
Purchase of furniture and equipment (28,094) (3,939) (13,603)

Net cash provided by/(used in)
investing activities 2,790,317 623,741 (4,123,973)

Financing activities:
Proceeds from stock options 42,893 - -
Cost of stock offering - - 40,571

Net cash provided by financing
activities 42,893 - 40,571

Increase (decrease) in cash and
cash equivalents 2,247,893 (10,972) (4,388,137)

Cash and cash equivalents,
beginning of year $ 107,321 $ 118,293 $ 4,506,430

Cash and cash equivalents,
end of year $ 2,355,214 $ 107,321 $ 118,293

</TABLE>

<PAGE>
<PAGE>F-27

<TABLE>
FIRST ALLIANCE CORPORATION

SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION

<CAPTION>
Future Policy
benefits Other Net
Deferred losses policy Investment
policy claims and claims and and
acquisition loss Unearned benefits Premium other
Segment costs expenses(a) premiums payable revenue income
<S> <C> <C> <C> <C> <C> <C>
December 31,
1998
Life insurance
and annuity
operations $1,848,419 $3,256,795 $102,993 $177,528 $2,294,441 $476,968
Venture capital
operations - - - - - -
Corporate
operations - - - - - 118,644

Total $1,848,419 $3,256,795 $102,993 $177,528 $2,294,441 $595,612

December 31,
1997
Life insurance
and annuity
operations $1,074,485 $1,874,359 $136,299 $117,137 $1,221,400 $430,811
Venture capital
operations - - - - - (97,184)
Corporate
operations - - - - - 210,959

Total $1,074,485 $1,874,359 $136,299 $117,137 $1,221,400 $544,586

December 31,
1996
Life insurance
and annuity
operations $ 749,610 $ 884,243 $118,046 $207,809 $ 901,584 $393,502
Venture capital
operations - - - - - (31,816)
Corporate
operations - - - - - 235,230

Total $ 749,610 $ 884,243 $118,046 $207,809 $ 901,584 $596,916

</TABLE>

<PAGE>
<PAGE>F-28

<TABLE>
FIRST ALLIANCE CORPORATION

SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (continued)

Benefits Amortization
claims, of deferred
losses and policy Other
settlement acquisition operating
Segement expenses(c) costs expenses
<S> <C> <C> <C>
December 31, 1998

Life insurance and annuity
operations $ 138,545 $ 426,476 $ 580,579
Venture capital operations - - -
Corporate operations - - 1,302,283

Total $ 138,545 $ 426,476 $ 1,882,862

December 31, 1997

Life insurance and annuity
operations $ 465,378 $ 339,562 $ 390,259
Venture capital operations - - 2,548
Corporate operations - - 1,014,078

Total $ 465,378 $ 339,562 $ 1,406,885

December 31, 1996

Life insurance and annuity
operations $ 440,742 $ 161,163 $ 239,302
Venture capital operations - - 93,937
Corporate operations - - 747,194

Total $ 440,742 $ 161,163 $ 1,080,433

<FN>
<F1>
(a) Includes annuity contract liabilities.
<F2>
(b) Includes policyholder premium deposits.
<F3>
(c) Includes interest credited on annuity contract liabilities and
policyholder premium deposits.
</FN>

</TABLE>
<PAGE>
<PAGE>F-29

<TABLE>

FIRST ALLIANCE CORPORATION

SCHEDULE IV - REINSURANCE

<CAPTION>
Percentage
of Amount
Ceded to Assumed Assumed
Gross Other from Other Net to Net
Amount Companies Companies Amount Amounts
<S> <C> <C> <C> <C> <C>
Life insurance in
force (in
thousands):

December 31, 1998 $ 119,576 $ 36,310 $ - $ 83,266 -
December 31, 1997 98,685 47,248 - 51,437 -
December 31, 1996 72,198 38,598 - 33,600 -

Premiums:

December 31, 1998 $2,383,680 $ 89,240 $ - $2,294,440 -
December 31, 1997 1,279,679 58,279 - 1,221,400 -
December 31, 1996 944,011 42,427 - 901,584 -

</TABLE>

LEASE

THE PARTIES
THIS LEASE, made and entered into this 25th day of February,
1999, by and between LIBERTY ASSOCIATES, LLC, a Kentucky limited
liability company, hereinafter "Lessor"; and FIRST ALLIANCE
CORPORATION, a Kentucky corporation, hereinafter "Lessee".

WITNESSETH:

PREMISES: That in consideration of the mutual covenants contained herein,
Lessor does hereby let and demise unto Lessee, and Lessee does hereby
lease and rent from Lessor, the premises generally described as:
Suite 104, the "Leased Premises," (i.e. the tenant space and the
portion of the common area of the 3uilding attributable to same)
being shown and described as Exhibit "A" to this Lease and being
located in the Executive Place office Building (the "Building")
located at 2285 Executive Drive, Lexington, Kentucky.

BUILDING The parties acknowledge that any and all improvements made to
STANDARDS the Leased Premises, now or in the future, shall be subject to
AND CONDITIONS approval by Lessor as set forth in Exhibit "B" Tenant
TENANT Improvements. The Lessor acting as General Contractor on
IMPROVEMENTS behalf of the Lessee, will use its best efforts to timely
deliver these premises to Lessee in accordance with the "Construction
Agreement for Tenant Improvements" (Exhibit "B") which defines the
quality and quantity of the tenant space improvements and the respective
obligations of the Lessor and Lessee relative to payment. Lessee shall
cooperate with Lessor, and/or its contractor(s) to allow the expeditious
completion of the work contemplated in Exhibit "B". It shall be the
responsibility of the Lessee to order, arrange, pay for and have
installed, at its sole expense, any communications equipment desired or
required, the installation to be accomplished concurrently with the work
hereby authorized and directed to be performed by Lessor, and delays in so
doing shall have no effect on the commencement date of the Lease.

TERM

RENT

PLACE OF
PAYMENT

TENANT SERVICES
EXPENSES

LATE PAYMENTS

1.1 Term. The term of the Lease shall be twenty-two (22) months,
commencing April 1, 1999, unless otherwise stated in Exhibit B hereto.
Termination date shall be January 31, 2001, unless sooner terminated
pursuant to the terms hereof.

2.1 Rent. The Lessee covenants and agrees to pay the Lessor as rental
for the Leased Premises the sum of $895.12 per month. Monthly rental is
payable in advance, on the first day of each month for the entire term of
this Lease, beginning on the commencement date defined in Section 1.1.
If this Lease is commenced at other than the first day of a month, lease
payments will be prorated to bring the lease payment to current by the
first day of the following month. Lessee shall pay the first month's rent
prior to the occupancy of the premises.

2.2 Place of Payment. All Payments shall be made at the office of Liberty
Associates, LLC, 400 Executive Place, 2285 Executive Drive, Lexington,
Kentucky 40505, or at such other place as Lessor may designate in writing,
and all payments shall be made without any setoff or counterclaim
whatsoever and shall not be withheld for anv reason.

Sections 2.3a, 2.3b and 2.4a are intentionally left blank.

2.4b Janitorial Service. Lessor shall provide Lessee the services of a
janitorial contractor to clean the Leased Premises in conjunction with
the cleaning of the rest of the Building. Janitorial service shall be
provided to Lessee at no cost to Lessee. Service shall be provided on a
five-day per week basis consistent with the standards of a Class A
building in Lexington, Kentucky.

2.5 Late Payments. It is understood and agreed by Lessee that time is of
the essence for payment of the monthly rentals (due the first of each
month). Rent is payable without demand. The Lessee acknowledges that
Lessor must make timely payments (including mortgage payments) in
connection with operating the Building, and Lessee shall pay a late fee
of five percent (5%) of the total monthly rent as

USE OF
PREMISES

SUBSTITUTION
OF PREMISES

COVENANT OF
QUIET
ENJOYMENTS

THE BUILDING

liquidated damages, and not as a penalty, whenever Lessee's monthly rent or
rent adjustment is delinquent five (5) days past the first day of the month
in which it is due. If payment is not received within seven (7) days after
written notice that payment is due, the failure shall conatitute a default
under Article 12.

2.6 Intereat Rate on Delinquencies. If Lessee shall fail to pay any Rent
or Rent Adjustments due hereunder for a period of more than 10 days, such
unpaid amounts (including late fees) shall bear interest at the rate of 1.5%
per month from the date due until paid. Provided, however, this Section 2.6
shall not be construed to limit Lessor's right to terminate this Lease for
failure to pay the sums due or to invoke any other penalties provided herein.

2.7 Form of Payment. All payments shall be made in lawful money of the
United States of America. If any payment is made by check and the check is not
honored, then (i) Lessee shall pay all of Lessor's fees resulting from the
dishonor and an additional 630.00 for processing; and (ii) in the event two (2)
checks are ever dishonored during this Lease, then Lessor may, at its option,
require that all future rent payments be in the form of certified funds
(money order, certified check, etc.) or cash.

3.1 Use of Premises. The Leased Premises may be used and occupied by the
Lessee only for general office use and for other uses consistent with the
Professional Office (P-1) zone. Lessee shall at all times and at its own
expense, comply with all rules, orders, regulations or requirements of all
governmental authorities or agencies with respect to use of the premises.
Lessor ahall provide service in the manner specified to permit Lessee its use
of premises during the hours of 8:00 a.m. to 6:00 p.m. Monday through Friday.
Notwithstanding this provision, Lessee may use the Leased Premises at any
time, subject to Lessor's rules and building regulations and Lessee shall have
use of air conditioning and lighting at all times.

3.2 Substitution of Premises. Lessor reserves the right on thirty (30)
days written notice to Lessee to substitute for the Leased Premises, at the
same rental as required of Lessee herein, including Rental Adjustments, other
comparable premises within the Building for all uses and purposes as though
originally leased to Lessee at the time of execution and delivery of this
Lease and subject to all terms and provisions hereof. In the event Lessor
elects to cause such substitution of premises, Lessor agrees to pay the
reasonable expenses of Lessee incidental thereto.

3.3 Covenant of Quiet Enjoyment. Lessor covenants that upon payment of
the Rents, Tenant Services Expenses and and other fees due hereunder; and
observance of all terms and conditions hereof by Lessee, Lessee may peaceably
and quietly enjoy the Leased Premises.

4.1 The Building. Lessee has examined the Building and will accept the
premises, the improvements, common areas and equipment as constructed. Lessee,
however, assumes no responsibility for hidden defects resulting from design
or construction.

FUTURE
IMPROVEMENTS its sole cost and expense, shall have the right to remodel and

4.2 Future Improvements. Subject to 3.1 above, the Lessee, at
the Leased Premises (exclusive of common areas) provided, however, that:
(a) the plans and specifications shall be first approved in writing by the
Lessor; in the event that Lessee wishes to install trade fixtures or equipment
(other than standard office equipment) which Lessee wishes to remove upon
termination or expiration of the Lease, then Lessee shall submit the list of
said trade fixtures or equipment for the prior written consent of Lessor,
which will not be unreasonably withheld; (b) Lessor may impose any such
reasonable conditions and requirements in approving the plans and
specifications for the changes, improvements and construction, and the trade
fixtures and equipment, as Lessor may deem necessary for its protection and
that of other Lessees; (c) all such remodeling and improvements, when
completed and placed upon said premises shall, as of said date, immediately
become the property of Lessor; (d) Lessee shall have the right to remove
trade fixtures or equipment installed by Lessee at the expiration of the term
of the Lease or extension thereof provided the fixtures or equipment were
shown on the list approved in writing by Lessor described above and provided
any damage caused by said removal shall be repaired at the expense of the
Lessee. In addition, at the expiration or termination of the Lease, Lessor,
at its option, may require Lessee to remove at Lessee's expense, any and all
equipment and trade fixtures and Lessee shall repair any damage caused by said
removal.

COMMON AREAS 4.3 Common Areas. Lessee, its employees, agenta, and
licensees are hereby granted the right and privilege, in common with
others, to the non-exclusive and reasonable use of such common and
public areas as are designated as such and as modified by the Lessor
from time to time. These areas shall include all common entrances to
and exits from the Building, driveways, serviceways, crosswalks and
sidewalks, hallways, stairways and common restroom facilities, except
such of the foregoing as are designated for and restricted to special
uses and purposes by Lessor from time to time, which restrictions may not
preclude or interfere with the purpose for which Lessee is leasing the
premises. subject to the provisions of Section 2.3a and b, 2.4a and
b, and Section 5.1, Lessor shall maintain all common areas of the
Building in a first class condition, shall maintain the plumbing,
heating, ventilating, air conditioning, elevators, electrical and
mechanical systems of the Building in good working order, ahall make
necessary repair to the roof and the shell of the Building, and shall
repair promptly any damage to the Building, provided however Lessee
shall reimburse Lessor for any damage to the Building or Building
equipment due to the negligence or misconduct of the Lessee, Lessee's
invitees or Lessee's employees.

MAINTENANCE 5.1 Maintenance and Repair. Lessee shall at its expense make
AND REPAIR all repairs to and maintain the interior of Lessee's portion
of the premises, including, without limitation, plumbing, lighting
(inclusive of bulb or tube replacement), exit lights, plate glass, doors,
walls (including paint or wall coverings), ceilings, floor coverings,
door locks, and all other improvements to the Leased Premises, except
for repairs necessitated by latent structural defects. The Lessor shall
maintain the heating and air conditioning unite located within
the Building and serving the Leased Premises, in good operating
condition.

CEILING PLENUM 5.2 Ceiling Plenum. Lessor reserves the right to construct,
operate and maintain HVAC equipment (including duct work) as well as
lines for plumbing, electricity and communications in the ceiling
plenum located within the Leased Premises as necessary to aerve Lessee
and other lessees within the Building. All equipment shall be
constructed and maintained in keeping with the requirements of a first
class building. Lessor reserves the right to perform routine
maintenance and emergency repairs during normal business hours,
provided, however, any construction or maintenance (other than
emergency repairs) which would materially disrupt Lessee's business
shall be performed outside of normal business hours.

RULES AND 6.1 Rules and Regulations. The Lessor, its servants, employees,
REGULATIONS agents, visitors and licensees, shall observe faithfully and
comply strictly with the "Building Rules and Regulations" set
forth in Exhibit "D" attached hereto and made a part hereof. Lessee
agrees to abide by any and all reasonable rules and regulations governing
the Building of which the Leased Premises are a part and the use of any
of the designated common areas, including parking. Lessee shall be
liable and responsible for any damages to said common area facilities
by its employees, agents, customers, or licensees. Lessor shall have
the right to make reasonable changes in and additions to the "Building
Rules and Regulations," provided such changes and additions shall not
materially affect the conduct of Lessee's business. Lessor reserves
the right to declare all public areas of the Building, including
restrooms, lobbies and stairwells, as "No Smoking" areas and Lessee's
employees shall abide by said restrictions.
SIGNS 6.2 Signs. The Lessor shall provide Lessee a sign on or near
Lessee's entry door in the building standard characters at no cost to
Lessee. Lessee shall not have any other sign visible outside the
Building or in the common areas of the Building, without the express
written permission of Lessor; said permission to be granted at
the sole discretion of Lessor.

LIABILITY INSURANCE

7.1 Liability Insurance. Lessee at its expense, shall defend and ahall
indemnify and hold harmless Lessor, and its employees from and against all
claims, causes of action, suits, losses, damages and expense (including
attorney's fees and costs of inveatigation and litigation) based upon or
arising out of the use or occupancy of Lessee's space except injury to
persons or damage to property, the sole cause of which is the negligence or
willful misconduct of Lessor or its employees. The express obligation of
indemnification shall not be limited by any provision of insurance or any
sublease agreement. Lessor shall give Lessee reasonable notice of any claims
threatened or made or suit instituted against it which could result in a
claim of indemnification.

7.2 The Lessee shall, at its sole cost and expense, carry public
liability and property damage insurance in an insurance company authorized to
do business in the Commonwealth of Kentucky with combined single limits of
not less than $1,000,000 personal injury and property damage coverage. Said
policy shall insure against all accidents and injuries to persons or property
in or about the premises. Liberty Associates, LLC shall be named aa additional
named insured on said policies without charge and a Certificate of Insurance
shall be provided to Lessor by Lessee. All such policies shall contain an
agreement by the insurers that such policies shall not be canceled without at
least fifteen days Prior written notice to the Lessor. In the event Lessee
shall fail to provide or maintain the insurance required in this section,
Lessor shall have the right, but not the obligation, to procure such insurance
upon five (5) days written notice to Lessee, and charge the cost thereof to
Lessee, said cost to be payable by Lessee upon demand by Lessor.

FIRE AND 7.3 Fire and Casualty Insurance. The Lessor shall obtain and
CASUALTY procure a policy of insurance insuring the premisea (building only
INSURANCE -no personalty of Lessee included), against the risks of fire and
extended coverage from an insurance company to be selected by the
Lessor in an amount to be determined by the Lessor. Lessee agrees,
however, to pay a pro rata share of any increases over the base
amount. Said base amount to be Lessor's annual premium for said
insurance at the time of execution of this lease. The Lessee shall
pay the amount of premium increases for which it may be liable to
the Lessor with twenty (20) days after the receipt of a billing
from the Lessor. Lessor and Lessee hereby agree that Lessee occupies
1.85% of the building and Lessee shall pay that percentage of
increases as described above.

CONTENTS LOSS 7.4 Contents Loss. It is acknowledged and agreed by Lessee that
the risk of loss for all contents and property belonging to Lessee
shall be that of the Lessee, provided such loss is not the result of
willful misconduct of Lessor, its agents, servants, or employees, and
Lessee shall purchase and maintain and pay for all property insurance
coverage required and/or desired by Lessee. Lessee further expressly
waives any and all claims against the Lesaor for loss or damage due to
fire, explosion, tornado, windstorm or rainstorm, or other casualty,
calamity or act of God.

TAXES 8.1 Taxes. Lessor shall pay, when due, all real property taxes
on said premiaea. Lessee agrees, however, to pay ita ahare of any
increases over the base period of the year ending June 30, 1999.
Lessee's liability shall be for the increase (if any) over the base
only. The Lessee shall pay the amount of tax increase for which it
may be liable to the Lessor within twenty (20) days after the receipt
of a billing from Lessor. Lessor and Lessee hereby agree that LesseE
occupies 1.85% of the building and Leasee shall pay that percentage
of increases as described above. Lessee shall pay all other taxes
including, without limitation, those measured by income, all excise
and sales taxes and all ad valorem taxes on inventory, merchandise,
fixtures and equipment belonging to Lessee.
RENT 9.1 Rent Adjustment Construction. The Lessee shall pay
ADJUSTMENT all rent, and its portion of any "Tenant Services Expenses"
CONSTRUCTION and other sums due hereunder as "Rent Adjustments". All
expenses shall be considered and construed by all parties to have been
paid by the Lessor as part of said Lessor's expenses from the adjusted
rentals.

DESTRUCTION 0.1 Destruction. Lessor covenanta and agreea that in case of
OF PREMISES damage to or destruction of any of the improvementa on the
Leased Premisea by fire or other casualty or occurrence, (without the
fault of Lessee, its employees, customers, agents, visitors or licenaees),
Lesaor will, at its own cost and expense, make such repairs, restoration,
replacement or rebuilding, of the same to the extent that (i) upon
completion of such repairs, reatorations, replacements or rebuilding, the
value of the improvements upon the Leased Premises shall not be less than
the value of the improvements on the Leased Premises immediately prior to
the happening of such casualty or occurrence; and (ii) such improvements
shall be suitable for conduct of the same type of business as was conducted
on said Leased Premises immediately prior to such damage or destruction.
However, if said improvements are damaged or destroyed in excess of fifty
percent (50%) of their then insured value, the Lessor may, at its election
terminate this Lease by giving to Lessee written notice of Lessor's
election to do so within sixty (60) days following the date of the
occurrence causing said damage or destruction. During the period of
any such reconstruction, the monthly rental payments shall be abated
by the percentage of casualty. Provided, furthermore, that if
Lessee's rent is reduced to less than 50% of the monthly payment in
effect prior to said casualty; and if Lessor shall elect to rebuild
as provided above; and if said rebuilding shall be done in a
reasonable time period; then, at Lessor's option, those months in
which Lessee pays less than 50% of the normal rent shall not be
counted against the term of this Lease and the termination date of
this Lease shall be extended equal to the number of months when rent
was less than 50% of normal rent.
CONDEMNATION 11.1 Condemnation. If the whole, or substantially the whole,
of the Building or Leased Premises shall be taken under the power of
eminent domain, (or sold under the threat of the power of eminent
domain) or for any public or quasi-public improvement, then the term
of this Lease and all rental payments shall terminate on the date of
the vesting of title in the condemner.

DEFAULT

11.2 Partial Taking. In the event that less than the whole of the Building
or Leased Premises is condemned or taken as set forth in Section 11.1 above,
then this Lease shall remain in force and in effect, provided, however, that
if the taking shall so substantially interfere with the use of the Leased
Premises as to render the continued operation thereof economically unfeasible
as reasonably determined by the American Arbitration Association, the Lessee
may, its option, terminate this Lease and the term and estate hereby granted,
as of the date of the taking of possession for such use and purchase, by
notice to the Lessor in writing of such termination.

11.3 Rental Adjustment. Upon any such taking or condemnation and the
continuing in force of this Lease as to any part of the Leased Premises, all
rentals shall be diminished by an amount representing the part of the said
rent properly allocable to the portion of the Leased Premises which may be so
condemned or taken, and Lessor shall, at its expense, proceed with reasonable
diligence to repair, alter and restore the remaining part of the Building and
the Leased Premises to substantially its former condition, due allowances
being made for the impact of such taking or condemnation.

11.4 Damages Awards. In such condemnation proceedings, Lessor shall be
entitled to receive and retain entirely any award for damages for the land,
Building and Leased Premises, and Lessee shall have no claim against Lessor
for the value of any unexpired term of this Lease. Notwithstanding the
foregoing, Lessee shall be entitled to appear and claim, prove and receive in
such condemnation proceedings an award that represents the then value of
installations made by Lessee in the Leased Premises at Lessee's expense and
for which no allowance has been made and prove and claim any other damages
not prohibited by this paragraph and receive any award therefore.

12.1 Default. If any monthly rental payment due herewith shall be unpaid
for more than seven (7) days after written notice that payment is due; OR if
any monthly rental payment or other assessment hereinbefore set forth, or any
part thereof, shall be unpaid for thirty (30) days (no written demand required);
OR if Lessee shall fail to keep and perform any of its agreements and
obligations herein contained after thirty (30) days written notice; OR if a
petition in bankruptcy be filed by the Lessee; OR if Lessee shall make an
assignment for the benefit of creditors; OR if a receiver or trustee in
bankruptcy of Lessee shall be appointed in any suit or proceeding brought by
or against Lessee; OR if the leasehold interest of Leasee shall be levied upon
under any execution; then, in any of aaid causea, Lesaor may at its option,
without demand or notice, terminate this Lease.

12.2 Acceleration. Upon termination of this Lease, Lessor may declare the
entire amount of rent which would have become due and payable during the
remainder of the lease term (as well as past due rent) to be due and payable
immediately, in which case Lessee agrees to pay the same to Lessor immediately.
Acceptance by Lessor of payment of such rent shall not constitute a waiver of
default, and Lessee agrees to indemnify Lessor for any expense, loss or
damage suffered by Lessor because of such termination with Lessee's liability
to Lessor surviving such termination.

12.3 Termination: Reletting Premisea. In the event that Leasor relets the
Leased Premises after termination but during the prior lease term, Lessor
shall be obligated to reimburse Lessee only if Lessee has paid all accelerated
rent required under Section 12.2 above, and Lessor therefore receives
duplicate rent payments from its new tenants. Any reimbursement to Lessee shall
be reduced by any expense to which Lessee's indemnity in Section 12.2 applies
and shall not include additional rent paid by the new tenants over and above
the rate paid by Lessee.

12.4 Surrender of Premises. Upon termination of this Lease by Lessor for
any of the aforesaid causes specified, or upon the expiration of this Lease
by lapse of time, Lessee shall, subject to Section 12.10, immediately remove
all personal property belonging to Lessee from the Leased Premises, and
vacate and surrender possession of the Leased Premises to Lessor.

12.5 Lessor's Re-entry. If possession of the Leased Premises be not
immediately surrendered as provided above, then Lesaor may, after five (5) days
written notice, re-enter the Leased Premises and repossess itself thereof and
remove any persons or personal property therefrom, using such force as may be
necessary for that purpose without being deemed guilty in any manner of
trespass, forcible entry, or detainer; and the mailing of a written notice of
Lessor's intention to terminate this Lease or re-enter said Leased Premises
in the manner provided for notices, five (5) days in advance of the actual
re-entry, shall be the only notice required; and the service of any demand
for the payment of rent or other money due Lessor is waived; and the service
of any and every other notice or demand within the meaning of the Kentucky
Statutes is waived.

12.6 Subsequent Payment. The receipt of money by the Lessor from the
Lessee after Lessor has given notice to Lessee of its intention to terminate
the Lease or after the termination thereof shall not operate in any way to
reinstate, continue or extend the term of this Lease, or affect any notice
given prior thereof, it being agreed that after termination or service of
notice or the commencement of a suit, or after final judgment for possession
of said Leased Premises, Lessor may recover and collect any rent due, and the
payment of said rent shall not waive or affect said notice, suit or judgment.

12.7. Personal Property. If Lessee neglects or refuses to remove all
personal property belonging to Lessee from the Leased Premises immediately
upon the termination or expiration of this Lease, Lessor may, at its option,
after five (5) days written notice remove same or any part thereof and store
such property so removed without liability for the loss thereof; Lessee shall
pay Lessor for any and all expenses incurred in removing and storing said
effects; or Lessor may, it its option and with thirty (30) days written
notice to Lessee, sell said effects or any of them for such price as Lessor
deems best, and apply the proceeds of such sale to the payment of any amounts
due Lessor from Lessee under this Lease, including the cost of removing,
storing or selling said effects and any surplus shall be paid to Lessee.

12.8 Holding Over. Lessee shall pay to Lessor, as liquidated damages and
not as a penalty, for all the time Lessee shall retain poasession of the
Leased Premises after the expiration or termination of this Lease, by lapse
of time or otherwise, a sum equal to 150 percent of the amount of rent that
would be due for auch a period (or if none due for that period, for the
immediately preceding period) at the rate specified herein; but this
proviaion ahall not operate as a waiver by Lessor of termination or waiver
of any other right.

12.9 Termination by Lessee. In the event of any act or omission by
Lessor which would give Lessee the right to terminate this Lease or to claim
a partial or total eviction, Lessee will not exercise any such right until:
(a) it has given thirty (30) days written notice by certified mail of
such act or omission to Lesaor and the holder of any recorded mortgage
affecting the property or building; and (b) a reasonable period for remedying
such act or omission shall have elapsed following such giving of written
notice; and (c) Leasor and any such holder, shall, following the giving of such
notice, have failed to commence and continue to remedy such act or omission,
or to cause the same to be remedied.

12.10 Lien. In addition to any statutory lien, but not in lieu thereof,
Leasor shall have at all times a valid, contractual lien for all rentals or
other sums of money becoming due hereunder from Lessee upon all items situated
in the Leased Premises. Upon default by Lessee, Lessor may enter upon the
Leased Premises and take possession of any and all personal property situated
on the Leased Premises without liability for trespass or conversion and sell
the same in the manner provided by law for enforcement of statutory liens at
public or private sale, at which sale Lessor or its assignees may purchase
such property. Lessor's lien rights under this section shall be superior to,
and preclude Lessee's rights to remove personal property under Section 12.4
hereinabove asserted by Lessor.

CANCELLATION 13.1 Cancellation and Surrender of the Premises. The Lessor
may cancel this Lease exercising its full rights and remedies under the
default provisions (Section 12) upon the happening of any of the
following: (a) The Lessee, or any sublessee/sublesseea hereunder,
being adjudged a bankrupt, either voluntarily or involuntarily; (b)
whenever the Lessee shall become insolvent, or execute an assignment
for the benefit of creditors; (c) when said premises are used in a
manner adjudged to be in violation of Federal or State statutes,
administrative rulings, regulations, local health ordinances and Urban
County Government Ordinances and Regulations; (d) whenever said
premises shall be, or through its use, become a nuisance, either
public or private; (e) whenever the premises are actually, effectively
or conatructively abandoned.

In the event that any litigation is filed againat Lesaor

challenging its zoning, the Lessor shall have the option to terminate
this Lease by giving notice of its intention to do so, at any time
prior to or after the commencement hereof.

In addition, in the event that the Lessor elects to cancel and

terminate this Lease for any reasons aforesaid, the Lessee agreea that
it will surrender and deliver up the said premises upon seven (7) days
written notice from the Lessor of the existence of any of the
aforesaid facts.

RIGHT TO 14.1 Right to Relet without Termination. Should Lessor elect to
RELET WITHOUT re-enter, as herein provided or should it take possession
TERMINATION pursuant to legal proceedings or pursuant to any notice
provided for by law, it may either terminate this Lease or it
may from time to time without terminating this Lease, perform such
maintenance and repairs as may be necessary in order to relet the Leased
Premises, and relet said premises or any part thereof for such term or
terms (which may be for a term extending beyond the term of this Lease)
and at such rental or rentals and upon such other terms and conditions as
Lessor in its sole discretion may deem advisable; and upon each such
reletting, all rentals received by the Lessor from such reletting shall be
applied, first, to the payment of any indebtedness other than rent due
hereunder from Lessee to Lessor; second, to the payment of any costs
and expenses of such reletting, including reasonable brokerage fees,

and reasonable attorney's fees and the reasonable costs of such maintenance and
repairs; third, to the payment of rent due and unpaid hereunder and the residue,
if any, shall be held by Lessor, and applied in payment of future rent as the
same may become due and payable hereunder. If such rentals received from such
reletting during any month by Lessor hereunder, are less than those the Lessee
was to pay, then Lessee shall pay any such deficiency to Lessor. Such deficiency
shall be calculated and paid monthly. No such re-entry or taking possession of
said premises by Lessor shall be construed as an election on its part to
terminate this Lease unless a written notice of such intention be given to
Lessee or unless the termination thereof be decreed by a court of competent
jurisdiction. Notwithstanding any such reletting without termination, Lessor
may at any time thereafter elect to terminate this Lease Lease for such
previous breach.

LIMITATION 15.1 Limitation. If Lessor shall fail to perform any covenant,
term or condition of this Lease upon Lessor's part to be performed,
and if as a consequence of such default, Lessee shall recover a money
judgment against Lessor, such judgment shall be satisfied only out of
Lessor's unencumbered interest in the Building in which the Leased
Premises are located, and Lessor shall not be liable for any
deficiency. Lessor's unencumbered interest in the Building in which
the Leased Premises are located is that portion of Lessor's interest
in the Building in which the Leased Premises are located which has
not been mortgaged, pledged or collaterally assigned to secure any
indebtedness of Lessor and shall not include any interest of Lessor
which, by reason of foreclosure, attachment, execution or the like
has become vested in any mortgagee or other lender.

ASSIGNMENT 16.1 Assignment and subletting. The Lessee shall not have the
AND SUBLETTING right to assign this Lease or sublease the premises in whole
or in part without first obtaining the written consent of the Lessor;
said consent to be granted at the sole discretion of Lessor.

REMEDIES 17.1 Cumulative Remedies of Lessor. The specified remedies to
which the Lessor may resort under the terms hereof are cumulative and
are not intended to be exclusive of any other remedies or meana of
redresa to which the Lessor may be lawfully entitled in case of any
breach by the Lessee of any provision or provisions of thia Lease.
ENTRY 18.1 Lesaor's Right to Enter upon Premises. The Lessor and/or
NOTICES

its agents shall have the right to enter upon and into said premises, or any
part thereof at any and all reasonable times for the purpose of examining same
or making repairs to this or any other portion of the Building, provided such
entry is coordinated with the local manager of Lessee and does not unreasonably
disrupt Lessee's ordinary business operation. This restriction shall not apply
in an emergency. The Lessee also agrees to permit the Lessor and/or its agents
to show the premises for the purposes of selling same, and to permit them to
place notices or signs on the premises offering the premises for sale. Lessor
shall also have the right to place notices or signs on the premises offering
the premises for rent within the last three (3) months of the end of the term
or any extended term.

18.2 Keys. Lessee shall use only those locking devices on all doors as
provided by Lessor or as designated by Lessor aa building atandard. For the
protection of the building occupants, Lessee'a suite door or doors shall at
all times be operable by the Building master key maintained by Lessor. Lessee
may, however, reserve certain rooms within the Leased Premises as "secure"
and deny Lessor access to these rooms; provided at the termination of the
Lease, for any reason, the Lessee shall provide keys to all doors within the
Leased Premises to Lessor.

19.1 Notices. All notices required herein shall be given by Certified
Mail or Personal Service, to the following addresses and any notification of
the change of addressees or their addresses shall be made in the same manner
as sending notices herein (if no address is shown for Lessee then the address
for notice to Lessee shall be the address of the Leased Premises):

Lessor:

Lessee:

Liberty Associates, LLC
400 Executive Place
2285 Executive Drive
Lexington, Kentucky 40505

First Alliance Corporation
308 Executive Place
2285 Executive Drive
Lexington, Kentucky 40505

VACATING 20.1 Vacation of Premises. At the expiration of the term
PREMISES specified in this Lease, or any extension thereof, if extended
pursuant to the terms of this Lease, the Lessee shall vacate the
premises and surrender the same to Lessor without further notice or
demand from Lessor and said premises shall be in good order and
condition, reasonable wear excepted and shall be "vacuum clean".
Lessee shall be responsible for any damages, extra charges, cleaning
or repairs made necessary to the premises as a result of furnishings
and fixture removal, the removal of remnants, trash or abandoned
property of Lessee or any other extra item of expense to Lessor in
restoring the premises as a result of the business fixtures or
activities of the Lessee. This covenant is in addition to any other
remedy reserved or granted to Lessor.

BINDING 21.1 Covenants Binding on Heirs and Assigns. All the
AGREEMENT covenants, agreements, terms, conditions, provisions and undertakings
in this Lease, or amendments hereto shall be binding upon the
successors and assigns of the Lessee and the Lessor.

SUBORDINATION 22.1 Subordination. This Lease, and all rights of Lessee
AND ESTOPPEL hereunder, are subject and subordinate to any mortgage or
CERTIFICATE mortgages, blanket or otherwise, which do now or may hereafter
affect the real property of which the Leased Premises form a part, and
to any and all renewals, modifications, consolidations, replacements and
extensions thereof. It is the intention of the parties that this
provision be self-operative, and that no further instrument shall be
required to effect such subordination of this Lease. Lessee, shall,
however, within twenty (20) days of written demand, at any time or times,
execute, acknowledge and deliver to Lessor, without expense to the
Lessor, any and all instruments that may be necessary or proper to
subordinate this Lease, (and all rights of Lessee under this Lease) to
any such mortgage or mortgages, or to confirm or evidence said
subordination. should Lessee arbitrarily refuse to execute the
required documents hereunder, or those required under Article
22.2 hereinafter, upon demand by Lessor, then Lessor shall have a
limited power of attorney from Lessee to execute the said agreement
and the estoppel certificate on behalf of Lessee. The foreclosure of
any mortgage on the real property of which the Leased Premises form a
part, placed thereon subsequent to the execution of this Lease shall
not terminate this Lease and this Lease shall be recognized upon
Lessee's request provided Lessee is not then in breach of this Lease.

22.2 Estoppel Certificate by Lessee. The Lessee agreea, at any

time and from time to time upon not leas than twenty (20) days prior
written request by the Lessor, to execute, acknowledge and deliver to
the Lessor a statement in writing certifying that this Lease is
unmodified and in full force and effect (or if there have been
modifications, that the same are in full force and effect as modified,
and stating the modifications), and the dates to which the basic rent
and other charges have been paid in advance, if any. Any such
statement delivered pursuant to this Article may be relied upon by any
prospective purchaser of the premises or mortgagee or assignee of any
mortgage upon the premises.

SECURITY DEPOSIT 23.1 Security Deposit. Lessee has paid to Lessor
upon execution of this Lease the sum of 50.00 as security for the
performance of Lessee's obligations hereunder, including the payment of
any rentals. In the event of a default by Lessee, Lessor at its option
may apply such part of the deposit as may be necessary to cure the
default, and if Lessor does so, Lessee shall upon demand redeposit with
Lessor an amount equal to that so applied so that Lessor will have the
full security deposit on hand at all times during the term of this Lease.
Upon termination of this Lease (provided Lessee is not in default
hereunder) Lessor shall refund to Lessee any then remaining balance of
the deposit without interest. In the event of a sale of the land and
Building or leasing of the Building, of which the demised premises form
a part, Lessor shall have the right to transfer the deposit to the vendee
or Lessee and Lessor herein shall thereupon be released by Lessee from
all liability for the return of said deposit; and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
deposit to a new Lessor.

FORCE MAJEURE 24.1 Force Majoure. All performance by the Lesaor herein
required ahall be performed within the times stipulated therefore and,
when no time is stipulated within a reasonable time. However,
anything in this agreement to the contrary notwithstanding, provided
such cause is not due to the willful act or neglect of the Lessor, the
Lessor shall not be deemed in default with respect to the performance
of any of the terma, covenants and conditions of thia Lease if same
shall be due to any strike, lockout, civil commotion, warlike
operation, invasion, rebellion, hostilities, military or usurped
power, sabotage, governmental regulations or controls, inability to
obtain any material or service through Act of God or other cause
beyond the control of Lessor or inability to obtain financing of
$100,000 or more.

APPLICABLE LAW 25.1 Applicable Law. This Lease shall be construed and enforced
in accordance with the laws of the Commonwealth of Kentucky and the
parties submit to the jurisdiction of any appropriate court within the
County where the premises are located for adjudication of disputes
arising from this Lease.

ENTIRE 26.1 Entire Understanding. This Lease and its exhibits contain
UNDERSTANDING the entire understanding and agreement of the parties hereto,
and no other understanding, undertaking, agreement, representation or
warranty shall alter or modify this Lease or the terms hereof unless
the same is in writing and duly executed by the parties hereto. No
subsequent alteration amendment, change or addition to this Lease
shall be binding upon Lessor or Lessee unless reduced to writing and
signed by them.

OWNER'S CONSENT 26.2 Owner's Consent. Lessor and Lessee mutually acknowledge
that this Lease is in effect a sublease between the parties herein
and that Lessor has leased a portion of the Building (including the
Leased Premises herein) from Executive Place Associates ("Owner"), a
Kentucky General Partnership which owns the Building. Furthermore,
this Lease shall not be effective without the consent of Executive
Place Associates and an executed copy of said "Owner's Consent" is
attached to this Lease and made a part hereof as "Exhibit E".

MISCELLANEOUS 27.1 Waiver. The waiver by Lessor of any breach of any term,
covenant or condition herein contained shall not be deemed to be a
waiver of any subsequent breach of the same or of any other term,
covenant or condition hereof.

27.2 Accord and Satisfaction. No payment by Lessee or receipt by

Lessor of a lesser amount than the monthly rent herein stipulated
shall be deemed to be other than on account of the earliest
stipulated rent, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment as rent be deemed as
accord and satisfaction; and Lessor may accept such check or payment
without prejudice to Lessor's right to recover the balance of such
rent or pursue any other remedy in this Lease provided.

27.3 No Partnership. Lessor does not in any way for any purpose

become a partner or agent of Lessee in the conduct of its business or
otherwise, or a joint venturer, or a member of a joint enterprise with
Lessee.

27.4 Holding Over. It is agreed and understood that any holding
over by the Lessee of the Leased Premises after the expiration of the
lease term or termination for whatever cause shall be a tenancy at the
will of the Lessor at a rental equal to 150% of the rental payable in
the most recent Lease period and may be terminated by Lessor at any
time upon notice to Lessee.

27.5 Partial Invalidity. If any term, covenant or condition of thia Lease
or the application thereof to any person or circumstances shall, to any extent,
be invalid or unenforceable, the remainder of this Lease, or the application
of such term, covenant or condition to persons or circumstances other than
those to which it is held invalid or unenforceable, shall not be affected
thereby; and such term, covenant or condition of this Lease shall be valid and
be enforced to the fullest extent permitted by law.

27.6 No Reservation. The submission of this Lease for examination does
not constitute a reservation of or option for the Leased Premises and this
Lease becomes effective as a Lease only upon execution and delivery thereof
by Lessor and Lessee.

27.7 Time is of the Essence. Time is of the essence for this Lease and
all provisions hereof unless otherwise provided herein.

27.8 Captions. The paragraph captions in this Lease are for convenience
only and shall not in any way limit or be deemed to construe or interpret the
terms and provisions hereof.

27.9 Recordation. This Lease shall not be recorded without the consent
of Lessor and Lessee. Each party shall, upon the request of the other, execute
a recordable memorandum of this Lease which memorandum may be recorded, the
cost of preparation and recording the memorandum to be borne by the party
requesting execution of the memorandum.

27.10 Exhibits. The following Exhibits are attached to this Lease and by
this reference made a part hereof.

A. Leased Premises
B. Construction Agreement for Tenant Improvements

C. No Exhibit C

D. Building Rules and Regulations
E. Owner's Consent

28.1 Contingency. Lessor and Lessee acknowledge that Lessee has executed
this Lease first in order to allow Lessor the opportunity to obtain a release
of Suite 104 from the current tenant. If this lease is not executed by Lessor
and delivered to Lessee on or before 4:30 p.m., Monday, March 8, 1999, this
Lease will be null and void.

28.2 Extension of Current Lease. Lessor and Lessee acknowledge that Lessee
is also trying to obtain from its current lessor at suite 308/312 of Executive
Place (The Wilkinson Group) an extension of Lease to January 31, 2001. Lessor
agrees that unless Lessee herein has entered into a signed extension of lease
of Suites 308/312 on or before 4:30 p.m., Monday, March 8, 1999, this Lease
shall be null and void even if signed by the Lessor and Lessee herein.

IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Lease as
of the day and year first above written.

LESSOR: LIBERTY ASSOCIATES, LLC

ITS

LESSEE: FIRST ALLIANCE CORPORATION

BY
ITS

STATE OF KENTUCKY

COUNTY OF FAYETTE

The foregoing Lease was acknowledged before me this 6th day of February, 1999,

Liberty Associates, LLC, organized and existing under the laws of the state of
Kentucky, for and on behalf of said organization.

My Commission Expires:

STATE OF KENTUCKY

COUNTY OF FAYETTE

NOTARY PUBLIC

The foregoing Lease was acknowledged before me this 6th day of February, 1999,
by

as of

of First Alliance Corporation, for and on behalf of said corporation.

NOTARY PUBLIC

My Commission Expires:
EXHIBIT B

CONSTRUCTION AGREEMENT FOR LESSEE IMPROVEMENTS

In partial consideration for the lease between FIRST ALLIANCE CORPORATION
("Lessee") and LIBERTY ASSOCIATES, LLC ("Lessor") for Suite 104 in Executive
Place, 2285 Executive Drive, Lexington, Kentucky, Lessor hereby agrees to
provide improvements as shown on Exhibit B1 attached hereto at no extra charge
to Lessee.

1. Walls: Painted walls repainted to same color as existing.
(Repair holes in walls.)

2. Floorcoverinq: Level loop, 26-ounce. Lessor to provide selection book
to Lessee. Color to be mutually agreeable to Lessor and Lessee. Four inch
vinyl base will be provided to match carpet.

3. Ceilinq: As is - 2x4 ceiling tile.

4. Doors: Painted doors with steel frames similar to existing.

5. Sprinklers: As required by code.

6. HVAC: Lessor to provide a thermostat located within the suite

7. Signage: Vinyl letters on entry door as follows:

104 Training

8. Electric: Switches and outlets to meet code. New switch at new
entry door and at least two new duplex outlets on Lessee's side of new
demising wall.

9. Closet: No repairs or improvements in the closet.

10. Windows.

Window Covering: Mini-blinds as currently provided on all

11. Cost of Improvements: Prior to the occupancy of the premises,
Lessee shall pay to Lessor the sum of $750.00 as a Lessee'_ portion of the
cost of above named improvements. Other than the previously described sum,
the above named improvements (items 1-10) will be provided to Lessee at no
additional cost. Additional improvements or upgrade of listed improvements
(including a Design and Construction Fee therefor) shall be at Lessee's
expense. The approved plan and specifications will be submitted by the Lessor
to the contractors for an estimate of improvement costs. After approval of
such estimate and before the commencement of construction, the Lessee shall
pay one-half of the improvement costs which are over and above the fit-up
specifications set forth in this Exhibit B; the balance of improvement costs
shall be paid the day before occupancy. The Lessor shall not be responsible
for delay in occupancy by the Lessee because of changes in floor plans.
Should the Lessee fail to pay for additional improvements in the above method,
such failure shall be deemed to be a breach of this Lease.

12. Substantial Completion: The commencement date of this Lease shall
be the later of the specified commencement date, or the substantial completion
of the improvements described above. Occupying all or any portion of the
premises by Lessee shall be conclusive evidence that the premises are
substantially complete and in satisfactory condition and acceptable to Lessee
subject to defects and deficiencies listed in writing by Lessee to Lessor
within thirty (30) days after the Lessee's occupation.

Provided, however, that to the extent of the delay in substantial
completion is caused by one or more of the following, Lessee shall pay rent
for that delay:

A. Lessee's failure to promptly furnish information with respect to
Lessee's request for tenant improvements and/or finish thereof.

B. Lessee's failure to promptly pay in advance the additional cost as
described in paragraph 11 above.

C. Changes by Lessee on the final plans and specifications described
in paragraph 11 above.

D. The performance by any firm or person (other than Lessor's
contractor) employed at Lessee's request and the completion of work by said
person or firm.

E. Delay of delivery of materials, finishes or installation request
by Lessee other than materials, finishes and installations described above
and used as Building Standard items.

F. Any other delay (including, without limitation, delay in providing
necessary approvals or disapprovals required of Lessee) caused by the action
or inaction of Lessee.

EST

ATTEST

LESSOR: LIBERTY ASSOCIATES LLC

BY: ITS:

DATE:

LESSEE: FIRST ALLIANCE CORPORATION

BY:

ITS:

DATE:
EXHIBIT D
Executive Place
"Building Rules and Regulations"

THE FOLLOWING RULES AND REGULATIONS ARE PRESCRIBED BY THE OWNER
FOR THE GENERAL SAFETY, SECURITY, AND BENEFIT OF ALL OCCUPANTS OF
THE BUILDING. THE OWNER SHALL AT ALL TIMES HAVE THE RIGHT TO CONTROL
AND OPERATE THE PUBLIC PORTIONS OF THE BUILDING, AS WELL AS FACILITIES
FOR COMMON USE OF OCCUPANTS, IN SUCH MANNER AS THE OWNER DEEMS
BEST. ALL RULES SHALL APPLY EQUALLY TO LESSEES AND SUBLESSEES AND
LESSEES AND SUBLESSEES SHALL BE RESPONSIBLE FOR THE ACTIONS OF THEIR
EMPLOYEES, CUSTOMERS AND OTHER INVITEES.

1. The sidewalks, entrances, passages, elevators, vestibules, stairways,
corridors, or halls shall not be obstructed by Lessees or used for any
purpose other than ingress and egress to and from the premises. Equipment,
furniture or supplies to be delivered to the premises shall be delivered using
elevators and passageways designed for such purpose by the Owner and only
during hours and in a manner approved by the Owner.

2. No awnings, antenna or other projections shall be permitted on the
outside of the building and no curtains, blinds, shades, screens or lights
shall be attached to or hung in, used in connection with any window or door of
the premises, without the prior written approval of the Owner.

3. No sign, advertisement, notice or other lettering or object shall be
affixed or exhibited on any part of the outside of the premises, or on the
inside thereof so as to be visible from the outside of the building or visible
from the corridors or vestibules adjoining the premises, without the prior
written consent of the Owner. Interior signs on doors and lobby directory
shall be in accordance with the guidelines set forth by the Owner.

4. The Owner shall have the right to control and operate the public
portions of the building and the public facilities, as well as facilities
furnished for the common use of the Lessees in such manner as it deems best
for the benefit of the Lessees generally. No Lessee shall invite to the
premises, or permit the visit of, persons in such numbers or under such
conditions as to interfere with the use and enjoyment of the entrances,
corridors, elevators and facilities of the building by other Lessees.
Lessees shall in no way obstruct the sidewalks, entry passages, pedestrian
passageways, driveways, entrances and exits; they shall use them only as
ingress to and from their work areas.

5. No showcases or other articles shall be put in front of or affixed
to any part of the exterior of the building, nor placed in the windows,
corridors, corridor walls or vestibules without the prior written consent of
the Owner.

6. Canvassing, soliciting or peddling in the building is prohibited and
each Lessee shall cooperate to prevent the same.

7. Lessees shall not advertise the business, profession or activities of
their business in any manner which violates the letter or spirit of any code
of ethics adopted by any recognized association or organization pertaining
thereto or use the name of the building for any purpose other than that of
the business address of the Lessee.

8. Lessees, upon occupancy of their suite of offices, shall provide the
Owner a key or keys to all entrance doors. Upon termination of occupancy, all
keys shall be delivered to the Owner.

9. Other than normal decorating within an office, Lessees shall not mark,
paint, drill into or in any part of the premises or the building including,
but not limited to, any walls, partitions, doors or windows. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent and limitations imposed by the Owner.

10. Lessees shall not permit any unusual or objectionable odors or
gases to be produced upon or permeate from the premises.

11. Lessees shall not make, nor permit its employees, agents or invitees
to make any unseemly or disturbing noises or vibrations, nor disturb nor
interfere with occupants of this or neighboring buildings or premises or
those having business with them, whether by the use of any musical
instruments, recording device, radio, equipment or in any other way.

12. Lessees agree that they shall not willfully do or omit to do any act
or thing which shall discriminate or segregate upon the basis of race, color,
sex, creed or national origin in the use and occupancy of the demised
premises.

13. Freight, furniture or bulky matter of any description shall be
delivered or removed only during the hours which the Owner may determine
from time to time and in a manner as prescribed by the Owner. Whenever
Lessee or its contractor is moving a substantial amount of freight or
furniture (including but not limited to a movein or move-out), Owner may
assign a custodian and/or a security guard to be on duty during such period
and Lessee shall pay the reasonable cost thereof.

14. The Owner shall have the right to prohibit any advertising by any
Lessee which, in its opinion, tends to impair the reputation of the building
of its desirability as a building for offices, and upon written notice for
the Owner, Lessees shall refrain or discontinue such advertising. Lessees
shall not, in advertising or other publicity use the name of the building or
use pictures or illustrations of the building without written consent of the
Owner.

15. Lessees shall not carry on or permit to be carried upon said
premises or any part thereof any immoral or illegal businesses, gambling, the
selling of pools, or any business that is prohibited by law.

16. The Owner shall provide Lessees with directory information strips
identifying Lessees in the building directory located on the ground floor of
the building.

17. Lessees and their authorized representatives or invitees shall not
throw cigar or cigarette butts or other substances or litter of any kind
in or about the building, except in receptacles placed in it for that purpose.
The smoking of tobacco products (including cigars, cigarettes and pipes) in
the public areas of the building is prohibited. These public areas include
all elevator lobbies, elevators, stairwells and restrooms. The carrying of
lighted cigars, cigarettes or pipes in these areas is also prohibited.
(Smoking in restrooms on a floor that is entirely leased and occupied by a
single tenant will be at the discretion of that tenant.) Employees should not
use areas directly outside building entryways as smoking break areas.

18. The toilet rooms, toilets, urinals, washbowls, and other apparatus
available to Lessees shall not be used for any purpose other than that for
which they were constructed. No foreign substance of any kind (including
sanitary napkins, etc.) shall be deposited into the system, and the expense
of any breakage, stoppage or damage resulting from the violation of the rule
shall be paid by the Lessee (or its authorized representative or invitee)
that has caused it.

19. The Owner reserves the right to close and keep locked all entrance
and exit doors of the building on Saturdays, Sundays and New York Stock
Exchange holidays, and on other days, between the hours of 6:00 p.m. and 7:00
a.m. of the following day, and during such other hours as the Owner deems
advisable for the adequate protection of the building and the property of its
Lessees. If Lessees use the premises when the building is closed and locked,
the Lessees shall see that the doors of the premises and the entry doors of
the suite are closed and securely locked before leaving the building. Lessees
must observe strict care that all water faucets or water apparatus have been
entirely shut off before Lessees or their authorized representatives or
invitees leave the building, and that all electricity has been carefully
shut off, so as to prevent waste or damage.

20. The Owner agrees that these rules and regulations shall be enforced
against all Lessees in a nondiscriminatory manner. The Lessees shall be deemed
to have read these rules and to have agreed to abide by them as a condition of
occupance of the demised premises.

21. The Owner agrees to provide all janitorial services for the building
common area.

22. The Owner reserves the right, by written notice to the Lessees, to
rescind, alter or waive any rules or regulation.

23. Lessees shall park their automobiles in the areas which have been
designated. The maintenance of the parking spaces will be the responsibility
of the Owner.

EXHIBIT D APPROVED:

OWNER:

LESSEE:

SUBLESSEE:

DATED:

EXHIBIT E

OWNER'S CONSENT

WHEREAS, Executive Place Associates ("Owner") has approved an agreement
for Transfer of Leasehold Interest effective the first day of August, 1997
("Master Lease"), whereby Liberty Associates, LLC ("Lessor") herein has
leased the first and second floors of the Executive Place office building from
Owner; and
WHEREAS, Lessor desires to enter into a Lease Agreement ("Lease") with
First Alliance Corporation, a Kentucky Corporation, ("Lessee") for the
premises known as Suite 104 Executive Place ("Leased Premises") said Lease
Agreement attached hereto and of which this Exhibit is a part thereof;

NOW, THEREFORE, the Owner, Lessor and Lessee hereby agree as follows:

1. The Owner hereby consents to the Lease described above between
Lessor and Lessee, and Owner agrees that if it shall terminate the Master
Lease for any reason, other than expiration of the Master Lease at its
completion, Owner shall honor the Lease between Lessor and Lessee and upon
termination of the Master Lease (other than by expiration), Lessee herein
shall become a Lessee of Owner. Furthermore, Lessee agrees that in case of
termination of the Master Lease (other than by expiration), it shall honor
the Lease described above and become the Lessee of Owner.

2. The Owner also agrees that if it sends any notices to Lessor that
threaten default or for which failure to comply could result in default by
Lessor and termination by Owner of the Master Lease, then copies of said
notices shall be sent by Owner to Lessee at the address provided in this
Lease.

3. Furthermore, Lessor agrees that if it sends any notices to Owner
that threaten default or for which failure to comply could result in default
by Owner and termination by Lessor of the Master Lease, then copies of said
notices shall be sent by Lessor to Lessee at the address provided in this
Lease.

4. Lessee herein agrees that owner may perform any duties on behalf
of Lessor that are required of Lessor in Lessee's Lease, and regardless of
whether said duties are performed by Owner or Lessor, the full performance of
said duties shall satisfy the requirements of Lessor. These duties shall
include, but not be limited to, maintenance of the Executive Place building,
payment of real estate taxes and provisions for property and liability
insurance. No provision herein, however, shall release Lessor from its
liability to Lessee if any such duties or requirements are not fulfilled.

5. Owner and Lessor hereby state, and Lessee acknowledges, that the
Master Lease between Owner and Lessor expires on or about July 31, 2010,
with two options to extend for five years each by Lessor. Lessee agrees that
no action by Lessee shall compel Lessor to renew or extend its lease without
the consent of Lessor which shall be at the sole discretion of Lessor.

6. For purposes of notices or statements required or permitted under
this Exhibit, the address of Lessor and Lessee shall be as stated in the
Lease. The address of Owner shall be:

Executive Place Associates

400 Executive Place
2285 Executive Drive
Lexington, Kentucky 40505

All rules regarding notices and change of address shall be as stated in the
Lease.

This EXHIBIT E is hereby acknowledged and agreed to by Owner, Lessor
and Lessee acting, as appropriate, through their duly authorized
representatives on the date indicated:

In the Presence of:

OWNER: EXECUTIVE PLACE ASSOCIATES
Wallace G. Wilkinson
D/B/A The Wilkinson Group
BY:
ITS:

DATE:

In the Presence of:

In the Presence of

BY:

ITS:

DATE:

LESSOR: LIBERTY ASSOCIATES LLC
BY:

DATE:

LESSEE: FIRST ALLIANCE CORPORATION

SECOND EXTENSION OF LEASE AGREEMENT

This agreement is made and entered into as of the 6th day of February,
1999, by and between Wallace G. Wilkinson D/B/A The Wilkinson Group ("Lessor")
and First Alliance Corporation ("Lessee") for those premises known as Suite
312 and Suite 306 of the Executive Place Office Building.

WHEREAS, by Extension of Lease Agreement and Lease of Additional
Premises dated March 9, 1998, Lessee leased the premises known as Suite 312
from Lessor; and in addition Lessor and Lessee agreed to extend the lease of
Suite 306 (previously leased by Lessee) and Suite 312 (known collectively
hereinafter as "Suite 308") to May 31, 1999; and

WHEREAS, Lessor and Lessee now mutually desire to extend the lease of
said Suite 308;

NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, Lessor and Lessee hereby agree as
follows:

The lease between Lessor and Lessee for Suite 308 of the Executive Place
Office Building is hereby extended to January 31, 2001.

2. Rent for Suite 308 for the period from execution of this lease to
January 31, 2000, shall continue at the current rate of $6,536.25 per month.

3. Rent for Suite 308 for the twelve month period from February 1, 2000
to January 31, 2001, shall be $6,754.12 per month.

4. By this agreement, any and all options contained in that agreement
dated March 9, 1998, are hereby cancelled and terminated.

5. Lessor and Lessee acknowledge that this Second Extension of Lease
is contingency upon Lessee obtaining a lease of Suite 104 of Executive Place
from Liberty Associates, LLC and unless lessee herein has entered into a
signed agreement for lease of Suite 104 on or before 4:30 p.m., Monday, March
8, 1999, this lease shall be null and void even if signed by Lessor and Lessee
herein.

Unless otherwise specifically amended herein, all other terms of the
lease between Lessor and Lessee shall remain in full force and effect.

In witness whereof, Lessor and Lessee have signed below by their duly
authorized representatives.

LESSOR: WALLACE G. WILKINSON
D/B/A THE WILKINSON GROUP

BY:

ITS:

DATE:

LESSEE: FIRST ALLIANCE CORPORATION

BY:

ITS:

DATE:

MANAGEMENT AGREEMENT

This agreement is entered into this day of , 1998 between
First American Capital Corporation, incorporated under the laws of and domiciled
in the State of Kansas (hereinafter referred to as "the Company") and First
Alliance Corporation, a life insurance holding company incorporated and
domiciled in Kentucky (hereinafter referred to as "FAC").

The principal place of business of the Company is 3360 SW Harrison Street,
Topeka, Kansas 66611 and the principal place of business of FAC is 2285
Executive Drive, Suite 308, Lexington, Kentucky 40505.

RECITALS

A. The Company has need of numerous services, expertise and premises in the
management of its life insurance and annuity business conducted by its
wholly-owned life insurance subsidiary, First Life America Corporation ("FLAC")
including the following:

1) Accounting & reporting of investments;

2) Administrative Support management and staff including compensation, taxes
and benefits;

3) Professional Services including Accounting, Data Processing and
miscellaneous Consulting;

4) Regulatory Report Preparation a. Annual and quarterly statutory financial
statements b. Federal, State and County tax returns (including premium tax
returns, if any) c. Any reports required by Insurance regulator;

5) Accounting, auditing and reporting services a. Performing all accounting
functions including but not limited to accounts payable, general ledger posting
& maintenance, all account reconciliations, reconciliation of data processing
reports, preparation of financial statements & review thereof with Company
management b. Processing and maintenance of the Company and FLAC investment
portfolio c. Interface with the Company's independent auditors, prepare audit
work papers, assist auditors in the conduct of the audit, prepare financial
statements pursuant to Generally Accepted Accounting Principles (GAAP) d.
Prepare all annual & quarterly reports & financial statements necessary for
filing with the Securities & Exchange Commission e. Miscellaneous other
accounting, auditing and reporting detail task;

6) Underwriting, Policy Issue and Policyholder Service a. Requesting and
handling medical exams and attending physician statements b. Requesting
Inspection reports c. Medical Information Bureau (MIB) processing d. Issuance of
contracts; e. Evaluating all underwriting information and issuing underwriting
decision, including consultation with the Medical Director, when
necessary.

7) Reinsurance a. Negotiating reinsurance Agreements b. Processing
reinsurance cessions to reinsurer c. Processing of reinsurance terminations to
reinsurer d. Reconciling monthly reinsurance billings and remitting payment

8) Transfer Agent a. Interfacing with the transfer agent to process transfer
of the Company's stock b. Assisting and scheduling of transfer agent
information required for annual shareholders meetings c. Assisting and training
Company personnel in processing transfer request

9) Policy Development & other actuarial interface services a. Assisting in
the development of additional products to be marketed by FLAC b. Working with
FLAC independent actuaries for year end statutory and GAAP actuarial
certifications c. Working with FLAC illustrations actuary to help determine
required marketing illustrations.

10) Claims processing a. Investigating, processing, denying or paying
insurance policy claims b. Reporting death claims to reinsurance company and
receiving reimbursement.

B. First Alliance Corporation desires to provide the above described services
and expertise.

In consideration of the above recitals and the terms and covenants of this
agreement, the parties agree as follows: SECTION ONE (EFFECTIVE DATE)

This agreement shall become effective on the date of its execution by the
parties hereto. However, in the event this agreement is required to be filed
with the Kansas Department of Insurance, the effective date shall be the date
the Department of Insurance approves this agreement.

SECTION TWO (COMPANY OBLIGATIONS)

First Alliance Corporation shall provide (and bear the expense of so providing)
all of the services, expertise and premises described in Recital A above EXCEPT
that the First Alliance Corporation shall neither provide nor bear the expense
of providing same in any matter 1.) not related to the conduct of the Company's
life insurance and annuity business; or 2.) arising out of the interpretation or
enforcement of this agreement. First Alliance Corporation shall be responsible
for any losses incurred by the Company and its wholly-owned subsidiary, FLAC,
resulting from the providing of the services and expertise enumerated in Recital
A as a result of negligence.

SECTION THREE (Company-RETAINED EXPENSES)

The Company shall be directly responsible for the payment of the following
expenses and, accordingly, are not included as a part of this contract. These
expenses generally relate to the operation of the Company's home office located
in Topeka, Kansas and to the conduct of its general business plan and are not
necessarily limited to the items enumerated below.

1. Fees to independent auditors, actuaries, legal counsel, investment
advisors, or any other professional advisor or consultant; 2. Filing fees
required of any Federal, State or Local government authorities for the filing of
any annual, quarterly or other period reports; 3. Federal, State or local
income, capital, franchise, premium or any other type of tax on
revenue, income, assets or capital; 4. Interest on any indebtedness; 5.
Medical Director fees and fees for Attending Physician Statements, inspection
reports, and para-med exams; 6. Fees for membership in the Medical Information
Bureau and monthly processing charges; 7. Fees or costs related to
publications including but not limited to the National Insurance Law Services,
Investment publications and etc.; 8. Cost related to the merger or acquisition
of an insurance or insurance related company such as due diligence cost of
independent expert, brokers fees, legal fees and etc. Further, personnel of FAC,
other than its Secretary/Treasurer, used for merger or acquisition purposes
shall be reimbursed at cost plus 10%, cost to included all payroll related cost
and benefits; 9. Office rent, general office expenses such as postage,
telegraph, telephone, printing bank service & administrative fees, service
bureau fees, bureau & association dues, publications, periodicals, office
supplies, equipment rental and any other general or miscellaneous business
expenses; 10. Compensation, payroll tax expense and benefits of Company
employees including travel, entertainment or other employee related expenses;
11. Computer hardware and software cost including any data transmission
requirements 12. Any and all cost or expenses related to the conduct of the
Company's venture capital business.

SECTION FOUR (EXPENSES NOT ENUMERATED)

In the event that any expense is incurred by the Company which is neither
enumerated nor described in this agreement, First Alliance Corporation shall
have no obligation to bear the cost of same. However, the parties may enter into
agreements separate and apart from this agreement with respect to said expenses
provided that those agreements are not in violation of any applicable laws or
regulations in any jurisdiction in which the Company conducts an insurance or
annuity business.

SECTION FIVE (PAYMENTS FOR SERVICES)

In consideration for the services enumerated in Recital A above, the Company
shall pay to First Alliance Corporation a percentage of the life insurance and
annuity premiums "delivered" by First Life America Corporation's life insurance
agents. The percentages shall be five and one-half percent (5.5%) of first year
premiums; four percent (4%) of second year premiums; three percent (3%) of third
year premiums; two percent (2%) of fourth year premiums; one percent (1%) of
fifth year premiums; one percent (1%) for years six (6) through ten (10) for ten
pay contracts and one-half percent (.5%) for years six (6) through twenty (20)
for twenty pay contracts. Delivered premiums (and Policies) shall be defined as
premium received on new written business which has been underwritten by FLAC and
the policy accepted by the policy owner upon delivery by the agent.

SECTION SIX (TIME OF PAYMENTS)

The payments to the Company arising out of the calculations set forth in Section
Five above are to be remitted on a monthly basis and are due on or before the
fifth day of the month following the incurrence of the obligation to pay.

SECTION SEVEN (GOVERNING LAW)

It is agreed that this agreement shall be governed by, constructed and enforced
in accordance with the laws of the State of Kansas.

SECTION EIGHT (BINDING ARBITRATION)

It is agreed by the parties herein that any disputes arising under this
agreement shall be submitted to binding arbitration under the rules of
commercial arbitration of the American Arbitration Association.

SECTION NINE (ENTIRE AGREEMENT)

This agreement shall constitute the entire agreement between the parties. Any
prior understanding or representation of any kind preceding the date of this
agreement shall not be binding on either party except to the extent expressly
set out in this agreement.

SECTION TEN (MODIFICATION)

Any modification of this agreement or additional obligation assumed by either
party in connection with this agreement shall be binding only if evidenced in a
written document signed by both parties. Said written document shall first have
been submitted to the Departments of Insurance in all states in which FLAC is
authorized to conduct any insurance or annuity business, if necessary, and has
not been disapproved by any such State's Department of Insurance.

SECTION ELEVEN (BINDING EFFECT)

This agreement shall inure to the benefit of and be binding upon the parties to
this agreement, their successors and assigns.

SECTION TWELVE (TERM OF AGREEMENT)

This agreement shall be for a period of five years or the period of time the
Company markets the " First America 2000" initial contract, whichever occurs
first. Upon the termination of this contract, the fees to be paid First
Alliance Corporation pursuant to Section Five (Payment for Services) shall
continue until all such earned fees have been received by First Alliance
Corporation.

SECTION THIRTEEN (PARTIAL INVALIDITY)

The invalidity of any part of this agreement will not and shall not be deemed to
affect the validity of any other part. In the event that any provision of this
agreement is held to be invalid, the parties agree that the remaining provisions
shall remain in full force and effect as if they had been executed by both
parties subsequent to the expungement of the invalid provision.

SECTION FOURTEEN (NOTIFICATION)

Any notices required under this agreement shall be made to the party to receive
notice at the party's principal place of business as described in the first
paragraph of this agreement unless said party has notified the other party in
writing of a change of address pursuant to this section.

SECTION FIFTEEN (PARAGRAPH HEADINGS)

The titles to the paragraphs of this agreement are solely for the convenience of
the parties and shall not be used to explain, modify or simplify the provisions
of this agreement.

SECTION SIXTEEN (FAILURE TO INSIST ON PERFORMANCE)

Failure at any time to insist on performance of any term or provision of this
agreement shall not be deemed a waiver of any right reserved or any other
provision of this agreement.

SECTION SEVENTEEN ( FORCE MAJEURE)

Neither party shall be liable for delays in the performance of any of its
obligations hereunder due to causes beyond its reasonable control including,
without limitation, acts of God, strikes, computer equipment malfunction or
inability to obtain timely services or materials from usual sources.

SIGNATURES

In witness whereof each party to this agreement has caused it to be executed in
Lexington, Fayette County, Kentucky on the date indicated below.

FIRST AMERICAN CAPITAL CORPORATION (the Company)

by: Date

Title

FIRST ALLIANCE CORPORATION ("FAC")

by: Date

Title

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