FORM 10-QSB

              {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                      OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1998

                 ----------------------------------------------
                         Commission File Number: 0-22271
                 ----------------------------------------------

                               CFI MORTGAGE, INC.
             (Exact Name of Registrant as Specified in its Charter)

                                    DELAWARE
            (State of jurisdiction of incorporation or organization)

                       2200 FLORIDA MANGO ROAD, SUITE 201
                            WEST PALM BEACH, FL 33409
                     (Address of principal executive office)

                                   52-2023491
                      (IRS Employer Identification Number)

                                 (561) 689-8040
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by  Section  13 or 15(d) of the  Securities  Act of 1934  during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to filing  requirements  within
the past 90 days.
                                  Yes _X_ No __

The number of shares outstanding of each of the issuer's classes of common stock
was 3,301,406  shares of common stock,  par value $.01 per share, as of November
23,1998.



<PAGE>

                       CFI MORTGAGE INC. AND SUBSIDIARIES

                               SEPTEMBER 30, 1998

                                   (Unaudited)


                                    I N D E X
<TABLE>
<CAPTION>
                                                                                 Page No.
                                                                                 --------
<S>                                                                             <C>
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

          Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
          and December 31, 1997 ................................................F-2 and F-3

          Unaudited Consolidated Statements of Operations For the Nine Months
          Period ended September 30, 1998 and 1997 .............................   F-4

          Unaudited Consolidated Statement of Changes in Stockholders' Equity
          (Deficit) for the Nine Months Ended  September 30, 1998 ..............   F-5

          Unaudited Consolidated Statements of Cash Flows For the Nine Month
          Period Ended September 30, 1998 and 1997 .............................   F-6

          Notes to the Unaudited Consolidated Financial Statements .............   F-7

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations ..................................................F-8 to F-

PART II - OTHER INFORMATION

          Item 1: Legal  Proceedings ...........................................   F-

          Item 2: Changes in  Securities .......................................   F-

          Item 3: Defaults upon Senior  Securities .............................   F-

          Item 4: Submission of Matters to a Vote of Security  Holders .........   F-

          Item 5: Other  Information ...........................................   F-

          Item 6: Exhibits and Reports on Form 8-K .............................   F-

                    Signatures .................................................   F-
</TABLE>

                                       1

<PAGE>

                       CFI Mortgage Inc. and Subsidiaries
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                     September 30,  December 31,
                                                                         1998           1997
                                                                      -----------   -----------
                                                                      (Unaudited)
<S>                                                                   <C>           <C>
CURRENT ASSETS
    Cash and cash equivalents                                         $   133,050   $ 1,705,216
    Interest receivable                                                   385,879       621,751
    Mortgage loans held for sale (net of allowance of  $930,171
       and $450,000, respectively)                                     39,051,170    36,046,571
    Miscellaneous receivables                                              47,939       155,843
    Prepaid expenses                                                      222,653       274,211
    Due from related parties                                              104,427       105,564
    Other current assets                                                   53,802       568,666
                                                                      -----------   -----------

         Total current assets                                          39,998,920    39,477,822
                                                                      -----------   -----------


PROPERTY AND EQUIPMENT
    Furniture and equipment                                               695,525     1,352,212
    Automobile                                                             52,584        99,047
                                                                      -----------   -----------

                                                                          748,109     1,451,259
    Less accumulated depreciation and amortization                        184,385       272,137
                                                                      -----------   -----------

              Total property and equipment                                563,724     1,179,122
                                                                      -----------   -----------


OTHER ASSETS
    Property held for sale                                                              207,500
    Deposits                                                               92,065       167,229
    Deferred tax asset                                                    331,525       558,000
                                                                      -----------   -----------

              Total other assets                                          423,590       932,729
                                                                      -----------   -----------

                                                                      $40,986,234   $41,589,673
                                                                      ===========   ===========
</TABLE>


The accompanying notes are an integral part of these statements.

                                       2

<PAGE>

                       CFI Mortgage Inc. and Subsidiaries

                     CONSOLIDATED BALANCE SHEETS (continued)


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                     September 30,   December 31,
                                                                                         1998             1997
                                                                                     ------------    ------------
                                                                                      (Unaudited)
<S>                                                                                  <C>             <C>
CURRENT LIABILITIES
    Warehouse finance facilities                                                     $ 39,532,037    $ 35,463,034
    Cash overdraft                                                                                        264,409
    Current maturities of long-term debt                                                   86,969         366,495
    Due to related parties                                                                 80,479
    Accounts payable, accrued expenses and other
       current liabilities                                                              4,566,525       3,477,063
                                                                                     ------------    ------------

         Total current liabilities                                                     44,266,010      39,571,001
                                                                                     ------------    ------------


LONG-TERM LIABILITIES
    Long-term debt, less current maturities                                               213,849         554,745
                                                                                     ------------    ------------

                Total liabilities                                                      44,479,859      40,125,746
                                                                                     ------------    ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
    Common Stock,  $.01 par value; authorized, 20,000,000; issued and
        outstanding, 2,785,598 shares                                                      27,856          22,000
    Preferred Stock, $.01 par value; authorized, 10,000,000; issued and
        outstanding 3,000 shares; voting, liquidation preferences $1,000 per share             30              21
    Additional paid-in capital                                                          9,876,397       6,992,430
    Retained earnings (deficit)                                                       (13,397,908)     (5,550,524)
                                                                                     ------------    ------------

               Total stockholders' equity (deficit)                                    (3,493,625)      1,463,927
                                                                                     ------------    ------------

                                                                                     $ 40,986,234    $ 41,589,673
                                                                                     ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       3

<PAGE>

                       CFI Mortgage Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              For the Nine Months Ended               For the Three Months Ended
                                                                     September 30,                           September 30,
                                                           --------------------------------        --------------------------------
                                                               1998                1997                1998                1997
                                                           ------------        ------------        ------------        ------------
<S>                                                        <C>                 <C>                 <C>                 <C>
Revenues
    Commissions and fees                                   $  9,612,493        $  5,883,680        $  1,831,814        $  2,674,254
    Interest                                                  2,969,632             516,128             847,915             461,660
                                                           ------------        ------------        ------------        ------------
                                                             12,582,125           6,399,808           2,679,729           3,135,914
                                                           ------------        ------------        ------------        ------------

Expenses
    Selling                                                   6,326,156           3,278,732           1,851,967           1,534,432
    General and administrative                               11,189,888           4,138,093           3,553,885           2,030,192
    Interest                                                  3,013,499             336,431             937,949             255,467
                                                           ------------------------------------------------------------------------
                                                             20,529,543           7,753,256           6,343,801           3,820,091
                                                           ------------------------------------------------------------------------

Loss from continuing operations                              (7,947,418)         (1,353,448)         (3,664,072)           (684,177)
Gain on disposal of BDMC                                        536,664                   0             536,664                   0
                                                           ------------------------------------------------------------------------
               Net loss before income tax credit             (7,410,754)         (1,353,448)         (3,127,408)           (684,177)
       Income tax credit
               Current                                                0                   0                   0              68,000
               Deferred                                               0                   0                   0              22,000
                                                           ------------------------------------------------------------------------
                                                                      0                   0                   0              90,000


                                                           ========================================================================
                NET LOSS                                   $ (7,410,754)       $ (1,353,448)       $ (3,127,408)       $   (774,177)
                                                           ========================================================================

Basic EPS calculation
    Net income (loss)                                      $ (7,410,754)                           $(3,127,408)
    Less: Preferred stock dividend                             (136,630)                               (66,630)
          Preferred stock discount                             (300,000)                              (150,000)
                                                           ------------                            -----------
       Income available for common stockholders            $ (7,847,384)                           $(3,344,038)
                                                           ============                            ===========

<CAPTION>
                                                  Fraction of           Weighted          Fraction of         Weighted
   Dates Outstanding      Shares Outstanding         Period          Average Shares          Period        Average Shares
   -----------------      ------------------         ------          --------------          ------        --------------
<S>                            <C>                   <C>                <C>                   <C>            <C>
January 1 - March 2            2,200,000             61/273             491,575
Issuance on March 3            2,305,467            150/273            1,266,740              30/92            751,783
Issuance on July 31            2,406,146             10/273               88,137              10/92            261,538
Issuance on Aug. 10            2,630,882             39/273              375,840              39/92          1,115,265
Issuance on Sept. 18           2,706,699              6/273               59,488               6/92            176,524
Issuance on Sept. 24           2,785,598              7/273               71,426               7/92            211,948
                                                                      ----------                            ----------

Weighted-average shares                                                2,353,206                             2,517,057
                                                                      ==========                            ==========

<S>                                                        <C>                 <C>                 <C>                 <C>
Per share amounts:
            Loss from continuing operations                 $     (3.56)                              $   (1.54)
            Gain on disposal of BDMC                               0.23                                    0.21
                                                            -----------                               ---------
            Net loss                                        $     (3.33)                              $   (1.33)
                                                            ===========                               =========

Pro forma information
       Pro forma net income (loss)
              Historical net income (loss)                                    $  (1,353,448)                            $  (774,177)
              Pro forma  provision (credit) for income taxes                       (472,637)                               (319,880)
                                                                              -------------                             -----------
                     Pro forma net income (loss)                              $    (880,811)                            $  (454,297)
                                                                              =============                             ===========

Pro forma per share data
       Pro forma  net income (loss) per share                                  $      (0.54)                            $     (0.21)
                                                                               ============                             ============
       Weighted-average shares outstanding                                        1,644,445                               2,200,000
                                                                               ============                             ============
</TABLE>


The accompanying notes are an integral part of these statements.

                                       4

<PAGE>

                       CFI Mortgage Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

                  For the Nine Months Ended September 30, 1998

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                               Common Stock                 Preferred Stock            Additional
                                                           --------------------          ---------------------          Paid-in
                                                           Shares        Amount          Shares         Amount          Capital
                                                           ------        ------          ------         ------          -------

<S>                                                       <C>         <C>                   <C>      <C>             <C>
Balance at December 31, 1997                              2,200,000   $     22,000          2,060    $         21    $  6,992,430

Conversion of  preferred stock on March 3, 1998             103,427          1,034           (500)             (5)         (1,029)
Preferred dividends paid in stock on March 3, 1998            2,040             21                                          9,842

Issuance of preferred stock on June 30, 1998                                                1,000              10         999,990

Accretion of preferred stock discount                                                                                     300,000

Conversion of preferred stock on July 31, 1998              100,000          1,000           (500)             (5)           (995)
Preferred dividends paid in stock on July 31, 1998              679              7                                          3,390

Conversion of preferred stock on August 10,1998             214,254          2,142           (560)             (6)         (2,136)
Preferred dividends paid in stock on August 10, 1998         10,482            105                                         27,292

Conversion of debt on August 19, 1998                                                       1,700              17       1,536,358

Conversion of preferred stock on September 18, 1998          71,301            713           (100)             (1)           (712)
Preferred dividends paid in stock on Sept. 18, 1998           4,516             45                                          6,289

Conversion of preferred stock on September 24, 1998          74,106            741           (100)             (1)           (740)
Preferred dividends paid in stock on Sept. 24, 1998           4,793             48                                          6,418

Preferred stock dividends

Net loss for the nine months ended Sept. 30, 1998                 0              0              0               0               0
                                                       -----------------------------------------------------------------------------

Balance at September 30, 1998                             2,785,598   $     27,856          3,000    $         30    $  9,876,397
                                                       =============================================================================


<CAPTION>
                                                          Retained
                                                          Earnings
                                                          (Deficit)         Total
                                                          ---------         -----

<S>                                                     <C>             <C>
Balance at December 31, 1997                            $ (5,550,524)   $  1,463,927

Conversion of  preferred stock on March 3, 1998
Preferred dividends paid in stock on March 3, 1998                             9,863

Issuance of preferred stock on June 30, 1998                               1,000,000

Accretion of preferred stock discount                       (300,000)

Conversion of preferred stock on July 31, 1998
Preferred dividends paid in stock on July 31, 1998                             3,397

Conversion of preferred stock on August 10,1998
Preferred dividends paid in stock on August 10, 1998                          27,397

Conversion of debt on August 19, 1998                                      1,536,375

Conversion of preferred stock on September 18, 1998                            6,334
Preferred dividends paid in stock on Sept. 18, 1998

Conversion of preferred stock on September 24, 1998
Preferred dividends paid in stock on Sept. 24, 1998                            6,466

Preferred stock dividends                                   (136,630)       (136,630)

Net loss for the nine months ended Sept. 30, 1998         (7,410,754)     (7,410,754)
                                                       -----------------------------

Balance at September 30, 1998                           $(13,397,908)   $   (493,625)
                                                       =============================
</TABLE>


The accompanying notes are an integral part of these statements.

                                       5

<PAGE>

                       CFI Mortgage Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                      For the Nine Months Ended
                                                                                                             September 30
                                                                                                   ================================
                                                                                                        1998               1997
<S>                                                                                                <C>                 <C>
Cash flows from operating activities:
    Net income (loss)                                                                              $ (7,410,754)       $ (1,353,448)
    Adjustments to reconcile net income (loss) to net cash
       used in operating activities
         Depreciation and amortization                                                                  223,686              66,330
         Provision for doubtful accounts                                                              1,114,034
         (Increase) decrease in operating assets:
           Interest receivable                                                                          212,783            (352,409)
           Mortgage loans held for sale                                                             (10,180,189)        (24,534,437)
           Miscellaneous receivables                                                                     38,555             (63,903)
           Prepaid expenses                                                                              (1,636)           (451,566)
           Other current assets                                                                         175,975            (167,664)
           Deposits                                                                                     (14,341)            (83,806)
         Increase (decrease) in operating liabilities:
             Accounts payable, accrued expenses and other current liabilities                         2,335,402           1,478,598
                                                                                                   --------------------------------
                                                                                                     (6,095,731)        (24,108,857)
                                                                                                   --------------------------------
         Net cash used in operating activities                                                      (13,506,485)        (25,462,305)
                                                                                                   --------------------------------
Cash flows from investing activities:
    Expenditures for property and equipment                                                            (275,871)           (745,881)
    Disposal of BDMC, net of cash received                                                             (388,200)
    Proceeds (payments) for related party receivable                                                      1,087            (201,240)
                                                                                                   --------------------------------
         Net cash used in investing activities                                                         (662,984)           (947,121)
                                                                                                   --------------------------------
Cash flows from financing activities:
    Warehouse borrowings                                                                             10,387,292          22,277,228
    Proceeds from issuance of common stock                                                                                3,920,525
    Proceeds from issuance of preferred stock                                                         1,000,000
    Increase (decrease) in cash overdraft                                                              (264,409)             90,500
    Proceeds from related party payable                                                                  80,479
    Proceeds from long-term debt                                                                      1,961,156             211,089
    Conversion of debt into preferred stock                                                            (163,625)
    Payments for long-term debt                                                                        (403,590)           (207,502)
                                                                                                   --------------------------------
         Net cash provided by financing activities                                                   12,597,303          26,291,840
                                                                                                   --------------------------------
         NET DECREASE IN CASH AND CASH EQUIVALENTS                                                   (1,572,166)           (117,586)
Cash and cash equivalents at beginning of year                                                        1,705,216             644,685
                                                                                                   --------------------------------
Cash and cash equivalents at end of period                                                         $    133,050        $    527,099
                                                                                                   ================================

Supplemental disclosures of cash flow information:
Cash paid during the period for:
       Income taxes                                                                                $          0        $          0
                                                                                                   ================================
       Interest                                                                                    $  3,420,978        $    160,111
                                                                                                   ================================

Supplemental schedules of noncash investing and financing activities:
    Dividend paid by transfer of investment in 430 Carroll Street, Inc.                            $          0        $    175,224
                                                                                                   ================================
    Conversion of 1,760 shares of preferred stock into 563,088 shares
      of common stock                                                                              $          0        $          0
                                                                                                   ================================

    Capital asset and lease obligation additions                                                   $    330,064        $    269,061
                                                                                                   ================================
</TABLE>



The accompanying notes are an integral part of these statements.

                                       6

<PAGE>

                       CFI MORTGAGE INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1998
                                   (Unaudited)

NOTE 1 - GENERAL

A.   Organization

     Creative Industries, Inc. was incorporated in the State of Florida in April
     1989,  and operates as a licensed  mortgage  lender.  In October 1990,  the
     Corporation's name was changed to Creative  Financing,  Inc. and on May 24,
     1995 the Corporation's  name was changed to CFI Mortgage  Corporation ("CFI
     Mortgage").  CFI Mortgage Inc.  ("CFI" or "Company")  was  incorporated  in
     Delaware on March 18,  1997.  Immediately  prior to the  Company's  initial
     public offering on May 27, 1997, the existing  stockholders of CFI Mortgage
     contributed  all of their  shares of CFI  Mortgage  common  stock to CFI in
     exchange for 1,200,000 shares of CFI common stock.

B.   Business

     Through its wholly-owned subsidiary, Direct Mortgage Partners Inc. ("DMP"),
     CFI is engaged in purchasing  and selling loans secured  primarily by first
     mortgage on one to four unit  residential  properties  and  purchasing  and
     selling  servicing  rights  associated  with  such  loans.  The  loans  are
     nonconforming   loans   originated   and  sold  through  DMP.   Significant
     inter-company   accounts  and   transactions   have  been   eliminated   in
     consolidation.

C.   Geographic Concentration

     The Company is licensed  and  registered  to do business in 22 states.  DMP
     operates through its nine regional offices.  The Company achieved it's goal
     of geographic  diversification  in the second  quarter of 1998 with Florida
     production accounting for less than 50% of total DMP loan production. While
     CFI's results of operations  and financial  condition  remain  sensitive to
     general  trends in the  Florida  economy  and its  residential  real estate
     market,  this  dependency  is being reduced to a more  acceptable  level of
     risk.

D.   Basis of Presentation

     The  accompanying  unaudited  consolidated  financial  statements have been
     prepared in accordance with generally  accepted  accounting  principles for
     interim  financial  information  and the  instruction  of Form  10-QSB  and
     Regulation  S-B.  Accordingly,  they do not include all the information and
     footnotes required by generally accepted accounting principles for complete
     financial  statement  presentation.  In  the  opinion  of  management,  all
     adjustments,  consisting of normal recurring accruals, considered necessary
     for a fair  presentation  of the results  for the interim  period have been
     included.  Operating  results for the quarter ended  September 30, 1998 are
     not  necessarily  indicative  of the results  that may be expected  for the
     fiscal year ending December 31, 1998.

                                       7

<PAGE>

     The consolidated  financial  statements of the Company include the accounts
     of all wholly owned subsidiaries.  All significant  inter-company  balances
     and transactions have been eliminated in consolidation.

NOTE 2 - LONG TERM DEBT

     On May  18,  1998,  the  Company  issued  $1,700,000  principal  amount  of
     convertible  debentures to a single investor.  The investor is committed to
     purchase a further  $500,000  principal  amount of such debentures upon the
     effective  date of a  registration  statement  registering  the  underlying
     common stock.  The  debentures  are due April 30, 2000,  bear interest at a
     rate of 10% per annum (payable in cash or Common Stock at the option of the
     Company) and are convertible into shares of the Company's Common Stock at a
     conversion  rate  equal  to the  lesser  of  $9.625  or  85% of the  lowest
     three-day  average  closing bid price of the Company's  Common Stock during
     the  fifteen  day  period  ending  on the day  prior  to  conversion.  Such
     conversion  price  shall  be 80%  of  such  market  price  for  conversions
     subsequent  to 240 days  following  the closing  date of May 18,  1998.  In
     addition, the holder may convert only up to one-third of the issue upon the
     effective date of the registration  statement,  and an additional one-third
     on each of the 30th and the 60th days  after such date.  In  addition,  the
     holder is limited to converting no more than 10% of the principal amount in
     any calendar  week.  The Company has the right to redeem the  debentures at
     any time at a price of 115% of the principal  amount,  plus any accrued but
     unpaid interest.  The debentures are subordinate to the Company's bank line
     and two  warehouse  line of credit  agreements.  The investor also received
     warrants to purchase 50,000 shares of the Company's Common Stock at a price
     of $8.75 per share. The foregoing securities were sold without registration
     in a transaction  qualifying  for exemption from  registration  afforded by
     Section 4(2) of the Securities Act.

     On August  19,  1998,  the  entire  convertible  debenture  was  retired in
     exchange for the  issuance of 1,700  shares of Series "C", 10%  convertible
     preferred  stock,   $0.01  par  value  in  a  private  placement  on  terms
     substantially  identical to the original debenture. In connection with this
     issuance of Series "C" preferred stock,  warrants to purchase 50,000 shares
     of the  Company's  Common  stock at a price  of  $8.75 a share  held by the
     debenture  holder  were  surrendered  in favor of new  warrants to purchase
     50,000  shares of the  Company's  Common  stock at a price of  $2.6563  per
     share,  which was the closing market bid price on the effective date of the
     exchange.

     In 1997 and 1998,  CFI  acquired  certain  property  and  equipment  assets
     partially  financed  through  various bank notes.  The equipment  purchased
     collateralized  the notes. The Company also leases certain office equipment
     under various capital leases.  The economic substance of the leases is that
     the Company is financing the  acquisition of the assets through the leases.
     At September 30, 1998, the balances  payable under the notes and leases are
     as follows:

     Bank notes payable in equal monthly installments
       of $1,496.87; interest rates ranging from
       7.751% to 11.123%                                                  21,558

     Various capitalized lease obligations                               279,260
                                                                      ----------
                                                                         300,818
     Less portion payable in one year                                     86,969
                                                                      ----------
     Long-term debt payable                                           $  213,849
                                                                      ==========

     Annual maturities of long-term debt are as follows:

                                            Remainder of 1998             20,869
                                                         1999             88,974
                                                         2000             88,677
                                                         2001             53,246
                                                         2002             39,646
                                                   Thereafter              9,406
                                                                       ---------
                                                                         300,818
                                                                       =========

                                       9

<PAGE>

NOTE 3 - RELATED PARTY TRANSACTIONS

     In February  1996,  the  company  acquired a 49%  interest  for $5,000 in a
     corporation  that performed  title searches for the Company.  An officer of
     the company  effectively owns 25% of this affiliate.  The company paid fees
     of $20,000 in 1996 to this entity.  The  company's  $5,000  investment  was
     charged to  operations  in 1996.  Such fees were  regulated by the State of
     Florida  Office of  Insurance  Commission.  Another  officer of the Company
     acquired a 49% interest in a corporation in 1996 that performed  $82,500 of
     appraisal  services for the Company in 1996. In January 1997, both of these
     entities ceased operations.

     The Company has made advances to three officers  aggregating  approximately
     $83,000 as of  December  31,  1997.  During the third  quarter of 1998,  an
     additional  advance  was made to  officers  in the  amount of  $15,144  The
     advances are non-interest bearing and are due on demand and included in due
     from related parties.

     In addition, On July 15, 1998 Mr. Vincent C. Castoro, Chairman of the Board
     of Directors,  personally  loaned CFI Mortgage  Inc.  $100,000 (One Hundred
     thousand  Dollars) and in return  holds a promissory  note with an interest
     rate of 6% and a due date of August 15, 1998. The Company did not repay the
     loan principal or interest on the due date and is therefor in default under
     the terms of the note.




NOTE 4 - COMMITMENTS and CONTINGENCIES

     a.)  Warehouse lines of credit

          Warehouse  lines  of  credit  are  used for  short-term  financing  of
          mortgages  held  for  sale and are  collateralized  by the  underlying
          mortgages held for sale. CFI currently has outstanding borrowings from
          two  warehouse  lenders,  however  only  one of these  lenders,  Nikko
          Financial   Services,   continues  to  make   advances  for  new  loan
          originations.  The other lender,  Bank One Texas had  outstandings  of
          $1,046,676 at September 30, 1998.  The Nikko  facility has a committed
          limit of $35 million  and an  additional  $15 million on a  negotiated
          basis with total outstandings of $38,485,361 at September 30, 1998.

          At  September  30, 1998 the total  outstandings  under all  facilities
          totaled $39.5 million and carried interest rates based on LIBOR plus a
          margin of 125 to 150 basis points or Fed Funds plus a margin of 175 to
          250 basis points.  Interest  expense from utilization of the warehouse
          lines was $3,013,499 for the nine months ended  September 30, 1998. On
          November 17, 1998 Nikko  notified  CFIM that,  effective  November 30,
          1998 further advances under the existing  warehouse  agreement will be
          on a  discretionary  rather than committed  basis.  The loss of CFIM's
          only remaining active warehouse commitment raises serious doubts as to
          CFIM's ability to continue its lending  operations beyond November 30,
          1998.  Management is seeking  alternative  warehouse  lending sources,
          however  there  can be no  assurances  that an  alternative  source of
          warehouse  financing  will be found in time to sustain  CFIM's lending
          ability beyond November 30, 1998.

     b.   Mortgage Purchase Agreements and Revolving Purchase Facilities

          In its  normal  course  of  business,  CFI has  entered  into  various
          mortgage  purchase  agreements and two revolving  purchase  agreements
          with  various  banks and  investors.  Under  these  mortgage  purchase
          agreements,  the banks and investors  purchase mortgages held for sale
          from CFI without recourse.

          Under the revolving repurchase  agreements,  CFI sells mortgage loans,
          subject  to  certain   warranties   as  defined,   to  two   financial
          institutions  that have a takeout  commitment  from an  investor.  The
          mortgage  loans  that CFI has sold to  these  financial  institutions,
          which are pending  settlement with takeout  investors at September 30,
          1998,  totaled  $13,528,525.  The sales price to the takeout investors
          carries up to an additional  150 basis points of revenue that CFI will
          recognized  when the loans  close  with the take out  investor.  As of
          September  30, 1998 the mortgage  purchase  agreements  and  revolving
          purchase agreements were terminated.

                                       10

<PAGE>


     c.   Leases

          CFI leases its  corporate  headquarters,  loan office  facilities  and
          certain office equipment under various  operating  leases.  The office
          leases generally require CFI to pay certain  escalation costs for real
          estate taxes, operating expenses,  usage and common area charges. Rent
          expense for real  property  leases  charged to  operations in the Nine
          months ended  September 30, 1998 was $826,549 while  equipment  rental
          and lease expenses during the same period was $301,200.

          Minimum future rental payments under  non-cancelable  operating leases
          having  remaining terms in excess of one year as of September 30, 1998
          are as follows:

                                                                     Capitalized
                                                Operating               Lease
                                                  Leases             Obligations
                                               -----------           ----------
     Years ending December 31,
     Remainder of 1998                         $   162,070           $   29,251
                  1999                             544,063              117,006
                  2000                             411,104              109,489
                  2001                              53,060               67,328
                  2002                              10,321               45,305
     Thereafter                                        682                9,810
                                               -----------           ----------
     Total minimum future payments             $ 1,181,300              378,189
                                               ===========
     Less amount representing interest                                   98,929
                                                                     ----------
                                                                       $279,260
                                                                     ==========

     d.   Legal Proceedings

          The  Company is a party to various  legal  proceedings  arising in the
          ordinary  course of its  business.  Management  believes  that none of
          these actions,  individually or in the aggregate, will have a material
          adverse effect on the results of operations or financial  condition of
          the Company.

     e.   Employment Contracts

          The Company has entered into several employment contracts with certain
          officers and employees that expire between 1998 and 2002

NOTE 5 - STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE

     a.)  On May  30,  1997,  CFI  completed  the  initial  public  offering  of
          1,000,000 shares of its common stock at $5 per share. The net proceeds
          from the sale, after deducting  underwriting discounts and commissions
          and offering expenses,  aggregated $3,800,525.  In connection with the
          offering,  CFI granted the  underwriter  warrants to purchase  100,000
          shares of  common  stock at an  exercise  price of $6 per  share.  The
          warrants are  exercisable  for a period of four years  commencing  May
          1998.

          On December 3, 1997,  CFI issued and sold 2,000  shares of Series A 8%
          convertible preferred stock, $0.01 par value, at $1,000 per share in a
          private  placement.  The net proceeds from the sale,  after  deduction
          selling  and  other  related  expenses,   aggregated  $1,821,753.  The
          preferred  stock is convertible  for two years into common shares at a
          price  equal to 85% of the  five-day  average  bid prices  immediately
          prior to the conversion  date.  The discount on the conversion  price,
          which was  $300,000,  is accounted  for as a charge  against  retained
          earnings and is amortized over the non-convertible period. Included in
          the statement of changes in

                                       11

<PAGE>

          stockholders equity are charges of $150,000 in the year ended December
          31, 1997 and $150,000 in the quarter  ended March 31, 1998 pursuant to
          the conversion discount. On March 3, 1998, 500 shares of the preferred
          stock,  plus accrued interest of approximately  $10,000 were converted
          into 105,467 of common shares.

          On June  30,1998,  CFI issued  and sold  1,000  shares of Series B, 8%
          convertible preferred stock, $0.01 par value, at $1,000 per share in a
          private placement.  The net proceeds from the sale, after deduction of
          selling and other related expenses, aggregated $905,000. The preferred
          stock is convertible for two years into common shares at a price equal
          to 85% of the  five-day  average bid prices  immediately  prior to the
          conversion date,  subject to a minimum floor conversion price of $5.00
          per common  share.  The discount on the  conversion  price,  which was
          $150,000,  is accounted for as a charge against retained  earnings and
          is amortized over the non-convertible period.

     During the third quarter  there were  additional  conversions  of preferred
     stock to common  shares.  On July 31,  1998,  500  shares  of the  Series B
     preferred stock plus accrued interest of $3,397 were converted into 100,679
     shares of CFI common stock and on August 10, 1998, 560 shares of the Series
     A preferred  stock plus  accrued  interest of $30,684 were  converted  into
     224,736 shares of CFI common stock. On September 10, 1998 100 shares of the
     A preferred stock plus accrued interest of $ 6,334 were converted to 75,817
     shares of CFI  common  stock.  On  September  24,  1998 100 shares of the A
     preferred  stock plus accrued  interest of $ 6,465 were converted to 78,899
     shares of CFI common stock.

     In connection  with the preferred  stock  transaction,  the Company granted
     warrants to its underwriters,  Straussbourger,  Pearson,  Tulcin & Wolff to
     purchase  240,000  shares of common stock at an exercise price of $6.00 per
     share. The warrants are exercisable  until September 17, 2001. In addition,
     the Company  issued 60 shares of preferred  stock with  identical  terms as
     payment  for fees for the private  placement.  The cost will be included in
     the net  proceeds  from  the  transaction  and will be  amortized  over the
     non-conversion term.

     Redemption of Convertible Subordinate Debenture in exchange for Convertible
     Preferred  Stock.  On May  18,  1998  the  company  issued  a $2.2  million
     Convertible  Subordinate  Debenture  to Thomson,  Kernaghan & Co.,  Ltd. of
     which $1.7 million was outstanding at June 30, 1998. On August19,  1998 the
     company  redeemed the outstanding  balance of the Debenture in exchange for
     the issuance of 1,700  shares of  Convertible  Preferred  Stock to Thomson,
     Kernaghan  & Co.,  Ltd.  The effect of this  transaction  on the  Company's
     balance  sheet will be to convert a $1.7  million  debt to $1.7  million of
     equity, subject to certain discounts.

     Convertible-Redeemable  Preferred  Stock  Offering.  In  August  1998,  the
     company entered into an agreement with Union Trading-Financial  Limited for
     the placement of the Company's  Convertible-Redeemable Preferred Stock. The
     Preferred  Stock Units will be offered at $20 each and will be  convertible
     into the  Company's  Common  Stock at the rate of 1  preferred  unit to 2.5
     shares of Common Stock.

     The offering was expected to generate  net  proceeds  after  marketing  and
     advisory  services  costs of up to $14 million by April 1999 at the rate of
     $1 million to $2 million  per month.  On August 19,  1998 the  Company  had
     received  three  executed  subscription  agreements for $10.2 million and a
     letter from the underwriter, Union Trading-Financial,  that $3 million cash
     was on deposit as the partial  proceeds from these  initial  subscriptions.
     However, as of November 23, 1998 there has been no cash received from these
     initial subscriptions raising significant doubt as to the collectability of
     the subscriptions.  Given the significant doubt as to collectability,  CFIM
     has not  recorded  the  preferred  stock  subscribed  under  this  Series D
     Preferred Stock offering.

     Furthermore,  the  terms of CFIM's  initial  public  offering  underwriting
     agreement require the consent of CFI's  underwriter,  Strasbourger  Pearson
     Tulcin and Wolff for any issuance of common stock or securities convertible
     into common stock.  In a letter dated  October 28, 1998 CFIM's  underwriter
     denied  its  consent  for CFIM to issue it Series D  Convertible  Preferred
     Stock  offering.  With the recent  decline  in the  market  price of CFIM's
     common  stock,  the  underwriter  of the  Series D has  requested  that the
     conversion features of the Series D Preferred be altered from a 1 preferred
     share for 2.5 common shares to 1 preferred share for 5 common shares.

     Given  that no  cash  has yet  been  received  on the  Series  D  Preferred
     offering,  that CFIM's IPO underwriter has denied consent for this offering
     and that there is a current  proposal to modify the terms of the  offering,
     it appears  highly  unlikely  that any proceeds  from this offering will be
     received before the end of the first quarter of 1999 if at all.

                                       12

<PAGE>

     b.)  Earnings per share (EPS) have been presented on a non-dilutive  basis.
          Diluted  EPS  reflects  the  potential  dilution  that could  occur if
          securities or other  contracts to issue common stock were exercised or
          converted  into common  stock or  resulted  in the  issuance of common
          stock that then share in the earnings of the entity.  Since the effect
          of outstanding  warrants,  options and preferred  stock  conversion is
          antidilutive, it has been excluded from the computation of EPS.

NOTE 6 - SUBSEQUENT EVENTS

     a.)  Termination  of Del Mar Asset  Purchase  Transaction - The Company had
          previously announced that on September 30, 1998 it had entered into an
          Asset  Purchase  Agreement and Plan of  Reorganization  among Del Mar,
          CFIM and Michael  Shustek,  subject to completion of due diligence and
          approval by both companies  shareholders  and CFIM's IPO  underwriter.
          The  transaction  as proposed  called for the  purchase of 100% of the
          assets of Del Mar Mortgage and Del Mar Holdings for 5.5 million shares
          of CFI common  stock.  By letter dated  October 28,  1998,  CFIM's IPO
          underwriters  denied  consent for the company to issue  common  shares
          under the Del Mar Asset Purchase transaction.  Further, on October 28,
          1998  management of Del Mar notified the Company that "a merger of the
          two  companies  would  not be in the best  interest  of Del Mar or its
          shareholders" and so Del Mar terminated the agreement.

     b.)  Common Stock Subscription - On October 30, 1998 the company received a
          subscription agreement from MediForce Inc., a publicly traded company,
          to purchase  1,333,333  shares of CFI Common Stock for $2 million.  In
          connection with this transaction,  Mediforce  advanced $150,000 to CFI
          and provided a note in the amount of $1,850,000. The terms of the note
          call for a payment of $850,000 on November 14, 1998 and  $1,000,000 on
          November 30, 1998. As of November 23, 1998 there have been no payments
          made under this note by Mediforce.

          In a letter dated  November 13, 1998 CFI's IPO  underwriter  indicated
          that they were only  willing to grant  consent for CFIM to sell shares
          of common stock to Mediforce,  Inc and thereby raise critically needed
          capital  if  the  Company  made   significant  cash  payments  to  the
          underwriter.  In as much as the Company had no means to make  payments
          to the  underwriter,  consent has not been  granted.  By letter  dated
          November  23,  1998,  MediForce,  Inc.  notified  the Company that the
          Subscription  Agreement  and  Promissory  Note are withdrawn and of no
          further  force  and  effect  and has made  demand  for  return  of the
          original $150,000 advance.

     c.)  Sale of Series C  Convertible  Preferred  Shares - On October 30, 1998
          the Company and General  Information  Technologies Inc. (GETI) entered
          into an  agreement  with  Thomson  Kernaghan & Co.  Limited  (Thomson)
          whereby Thomson sold its interest in the Company,  consisting of 1,700
          Series  C  Convertible  Preferred  shares,  to  GETI  for  the  sum of
          $2,125,000.  GETI is a wholly owned  subsidiary of MediForce Inc., the
          party that executed the  subscription  agreement  described in NOTE 6,
          section a. above.  The closing  date of the  agreement is November 12,
          1998.   Payment  of  the  purchase  price  consists  of  a  $1,700,000
          promissory note issued by GETI to Thomson and 212,500 common shares of
          CFI to be  issued by the  Company  to  Thomson  as  consideration  for
          $170,000 of interest and $255,000 premium.  In a letter dated November
          13, 1998 the Company's IPO underwriter  withheld their consent for the
          Company  to  issue  the  portion  of the  212,500  shares  under  this
          agreement that related to prepaid interest and the premium.

          If, on May 1, 1999,  the prior 5 day average  closing bid price of the
          common  shares of the company is below  $2.00,  then the company  will
          deliver  another 70,500 of its common shares to Thomson.  In the event
          that  funding  is  obtained  from the  Company's  Series  D  Preferred
          offering in the amount of $5,000,000 or more, Thomson will be paid not
          less than 25% of such  funding  up to the  balance  of the  promissory
          note.  As part of the  agreement,  the  exercise  price  of  Thomson's
          warrants to  purchase  50,000  shares of CFI common  stock was reduced
          from $2.6563 to $2.00.

     d.)  Sale of Series A and B Convertible  Preferred  Shares - Although not a
          party to this transaction, the Company is aware that the holder of its
          Series  A and B  Convertible  Preferred  Shares  had  entered  into an
          agreement  with GETI to sell its  interest in those  issues  effective
          October 30, 1998.

     e.)  CFI Common Stock moved to OTC-Bulletin  Board Market - As of March 31,
          1998 and  again  as of June 30,  1998,  the  Company  did not meet the
          required  minimum  standards  for  continued  inclusion  in the Nasdaq
          SmallCap  Market in that its net  tangible  assets  had  fallen  below
          $2,000,000  and so  the  Company  had  received  a  formal  notice  of
          delisting  from  Nasdaq.  On July 31, 1998 the company  appealed  this
          notice at an oral hearing and had been awaiting a final  decision from
          Nasdaq.  On November  17, 1998 Nasdaq  informed  the Company by letter
          that a determination had been made to delist the Company's  securities
          from The Nasdaq Stock Market  effective  with the close of business on
          November 17, 1998.

                                       13

<PAGE>

     f.)  Change in Nikko warehouse  facility - On November 18, 1998 the Company
          received a notification  from Nikko that  effective  November 30, 1998
          further  advances for new loan fundings  would be under the Repurchase
          agreement which provides Nikko with the ability to evaluate whether or
          not it will enter into any new transactions with CFIM. In effect,  the
          Company will no longer have a committed  warehouse  facility effective
          November 30, 1998. Any future  warehouse  advances will be entirely at
          Nikko's discretion. Given that Nikko may decline the Company's request
          for loan fundings  after November 30, 1998, it would not be prudent to
          make loan funding commitments beyond that date.

     g.)  Voluntary Plan of  Reorganization  - The Company has received a verbal
          commitment from an investor to recapitalize  the company with up to $2
          million if the  Company  can  successfully  restructure  its  existing
          liabilities.  Accordingly,  the Company will be presenting a voluntary
          plan of reorganization to all its creditors wherein all creditors will
          be offered 1 share of CFIM common  stock for each dollar owed by CFIM.
          The  success  of  this   reorganization  plan  is  dependent  on  full
          acceptance  by all of the  Company's  creditors and the consent of its
          underwriters  to issue  the  related  common  shares.  There can be no
          assurance  that all the creditors  will accept CFIM's common shares in
          lue of payment,  that the underwriters will consent to the issuance of
          the underlying  shares or that the investor  promising to recapitalize
          the Company will perform as  indicated.  In the event that the plan is
          not  successful  by  December  11,  1998,  management  intends to seek
          liquidation of the Company though the filing of a Chapter 7 bankruptcy
          action on December 14, 1998.

NOTE 7 - GOING CONCERN RISK

     As discussed in Note 1, the  accompanying  financial  statements  have been
     prepared  assuming that the Company will continue as a going  concern.  The
     Company  has  incurred  losses  and  negative  cash  flow  from  continuing
     operations and has accumulated a retained  deficit of $13.4 million through
     September 30, 1998. Total Stockholders  Equity is a deficit of $3.5 million
     as of September 30, 1998.

     The Company's working capital is not sufficient to sustain operations. CFIM
     has not been able to pay any of its employees since October 31, 1998 and so
     on November 18, 1998 all the employees of CFIM were laid off. Approximately
     35 to 40 employees  remain and are voluntarily  working for no compensation
     in the effort to structure a voluntary reorganization of the Company and to
     complete sales of loans  currently held in the warehouse.  The lack of cash
     to fund the haircut on new loan  fundings has  resulted in a suspension  of
     all new lending  activity  and the  closure of all but one  lending  branch
     location.

     The Company's  ability to return to normal  operations is totally dependent
     on the success of its previously mentioned voluntary plan of reorganization
     and subsequent  additional capital infusion. If this plan is not successful
     or the additional  capital is not forthcoming,  management  intends to move
     the Company into a Chapter 7 bankruptcy liquidation.

     Such  conditions  raise  substantial  doubt about the Company's  ability to
     continue as a going concern.  The consolidated  financial statements herein
     do not include any  adjustments  that might result from the outcome of this
     uncertainty.

                                       14

<PAGE>

Note 8 - Sale of Subsidiary

     On September 11, 1998 CFI Mortgage Inc. (CFIM) completed the sale of one of
     its two operating subsidiaries, Bankers Direct Mortgage Corporation (BDMC),
     to IMN  Financial  Corp.  (IMNF)  by means of a sale of all of the  capital
     stock of BDMC to IMNF.  The Sale  was  made  pursuant  to a stock  Purchase
     Agreement  dated as of  September  4,  1998,  the  form of  which  has been
     previously  filed as an exhibit  with the 8K on  September  29,  1998.  The
     purchase price  consisted of the assumption of all  liabilities of BDMC and
     IMNF's  agreement to pay CFIM one-eighth of one percent of the value of all
     closed  loans  by BDMC for the two  years  following  closing,  but only if
     BDMC's  operations  are  profitable  in the quarter in which such loans are
     closed.  Further,  such payments will only be made if the net book value of
     BDMC was at least $0 at  closing  or  if less than $0, then  such  payments
     will be first be applied  to make up any  negative  net worth in BDMC.  The
     company  agreed not to engage in the retail  conforming  mortgage  business
     conducted by BDMC for a period of five years  following  the closing.  IMNF
     also hired Vincent J. Castoro,  the company's  former vice  president and a
     Director as an employee of IMNF as of the closing. Mr. Castoro continues to
     serve as a director of CFIM.

     Prior  to the  consummation  of the sale of BDMC,  there  were no  material
     relationships  between  CFIM or BDMC or any of their  respective  officers,
     directors  or  affiliates,  and IMNF or any of its  directors,  officers or
     affiliates.  The terms of the transaction  were established by arm's-length
     negotiation. Below is the Pro Forma Financial Information


     The Actual Balance Sheet contained in the body of this financial  statement
     above  (Page F-2 & F3) is the  Balance  Sheet at  September  30, 1998 which
     accounts  for  the  sale  of  BDMC.  The  following   unaudited  pro  forma
     Consolidated Statement of Operations indicates the Consolidated figures for
     CFIM & DMP as if the  sale of BDMC had been  effective January  1, 1998 and
     1997.

     The unaudited pro forma financial information should be read in conjunction
     with the historical financial statements and related notes of the company.





                                       15


<PAGE>

CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited Pro Forma )

<TABLE>
<CAPTION>
                                                            For the Nine       For the Nine        For the Three       For the Three
                                                            Months Ended       Months Ended        Months Ended        Months Ended
                                                            September 30,      September 30,       September 30,       September 30,
                                                                1998                1997                1998               1997
                                                            -------------      -------------       -------------       ------------
<S>                                                          <C>                <C>                 <C>                 <C>
            Commissions and fees                             $ 5,821,844        $ 1,262,824         $   971,240         $ 1,262,824
            Interest                                           2,354,468            162,362             774,123             147,521
                                                             -----------        -----------         -----------         -----------

                                                               8,176,312          1,425,187           1,745,364           1,410,345
                                                             -----------        -----------         -----------         -----------

Expenses
            Selling                                            3,703,571            404,060           1,167,118             404,060
            General and administrative                         8,462,463          1,304,975           2,904,519           1,302,371
            Interest                                           2,319,609            102,196             806,751             102,196
                                                             -----------        -----------         -----------         -----------

                                                              14,485,643          1,811,231           4,878,389           1,808,627
                                                             -----------        -----------         -----------         -----------

Loss from continuing operations                               (6,309,331)          (386,044)         (3,133,025)           (398,281)

Gain on disposal of BDMC                                         536,664                  0             536,684                   0
                                                             -----------        -----------         -----------         -----------

Net loss before income tax credit                             (5,772,668)          (386,044)         (2,596,361)           (398,281)

Income tax credit
            Current                                                    0                  0                   0                   0
            Deferred                                                   0                  0                   0                   0

                                                             -----------        -----------         -----------         -----------

                                                             -----------        -----------         -----------         -----------

NET LOSS                                                     $(5,772,668)       $  (386,044)        $(2,596,361)        $  (398,281)
                                                             ===========        ===========         ===========         ===========
</TABLE>



                                       16

<PAGE>

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

          Forward Looking Statements

          Certain of the matters discussed herein may constitute forward-looking
          statements  within the  meaning of the Private  Securities  Litigation
          Reform Act of 1995.  As such,  these  forward-looking  statements  may
          involve  known and unknown risks and  uncertainties  and other factors
          that may cause the actual results,  performance or achievements of the
          Company  to  be  materially   different   from  any  future   results,
          performance,   or   achievements   expressed   or   implied   by  such
          forward-looking  statements.  The Company  undertakes no obligation to
          release publicly any revisions to these forward-looking  statements to
          reflect  events or  circumstances  after the date hereof or to reflect
          the occurrence of anticipated or unanticipated events.

          General Business

          CFI  Mortgage,  Inc.  is a mortgage  banker  engaged  in  originating,
          purchasing and selling conventional,  government insured and sub prime
          (B/C)  loans  on one to four  family  residential  units  through  its
          wholly-owned  subsidiaries,  Bankers Direct  Mortgage  Corporation and
          Direct  Mortgage  Partners,  Inc. CFI common  shares are traded on the
          NASDAQ small cap market  system  under the symbol CFIM until  November
          17, 1998 at which time the Company's securities were moved to the Over
          the Counter Bulletin Board.

          The following  comparative  analysis and  discussion may be misleading
          due to the following.  Information for the Nine months ended September
          30, 1997 includes nine months of operations of Bankers Direct Mortgage
          Corporation  "BDMC"  and only one month for Direct  Mortgage  Partners
          "DMP". In addition due to the sale of BDMC on August 31, 1998 the Nine
          Months ended  September  30, 1998 only  includes  eight months of BDMC
          operations and Nine months of DMP operations.

          In  1997  Management  had  concentrated  on  the  development  of  the
          wholesale  production  offices  of  DMP  by  opening  new  offices  in
          Plantation,  Florida,  Parsippany,  New Jersey and  Portland,  Oregon.
          Closings for DMP in the first Nine months of 1998 totaled $204 million
          as  compared  to the  comparable  period  in  1997 of $18  million  an
          increase of $186 million. In addition BDMC opened an additional retail
          office in Lakewood,  Colorado.  BDMC had also concentrated on internal
          development of the existing offices through the hiring of quality loan
          officers.  BDMC's  production  increased from $97 million in the first
          Nine months of 1997 to $150 million in the comparable  period for 1998
          an increase of $53 million.

          With  the  increased  production,  Direct  Mortgage  Partners  support
          operations were expanded to effectively handle the workload.  However,
          as a result of the sale of Banker Direct  Mortgage  Corporation  total
          headcount  has  decreased  from  236 at  December  31,  1997 to 142 at
          September  30, 1998.  The 142 employees  consisted of 23  commissioned
          sales  personnel  and  119  production   support  and   administrative
          personnel.


          Comparison for the first Nine months Ended September 30, 1998 and 1997

          The primary source of the Company's revenue is from activities related
          to providing  homeowner  financing  solutions  through  either Bankers
          Direct  Mortgage,  the  Company's  retail  conforming  and  government
          insured mortgage banking  subsidiary,  Direct Mortgage  Partners,  the
          Company's  wholesale  sub prime  lending  subsidiary,  or by brokering
          loans to other  lenders  who  provide a  competitive  product  for the
          particular type of loan required.

          During the Nine months ended  September 30, 1998 total lending  volume
          was $354 million with 31.2% from BDMC, 58% from DMP and 10.8% brokered
          to other  lenders.  During the Nine months ended  September  30, 1997,
          total lending volume was $173 million with 68.8%from BDMC,  10.6% from
          DMP and 20.6%  brokered to other lenders.  Sub prime lending  activity
          from DMP can  generate  profit  margins  nearly  twice  that of BDMC's
          conforming  and  government   retail   production.   For  that  reason
          management  has  focused  on  increasing  DMP  funding  activity.  The
          increase from 10.6% of the total funding volume during the Nine months
          ended  September  30,  1997  to  58%  of  funding  volume  during  the
          comparable  period in 1998  indicates a very positive trend related to
          DMP's contribution to company revenues.

                                       17


<PAGE>

          Revenues

          The Company's  revenues,  including interest income,  were $12,582,125
          for the Nine months ended  September  30, 1998,  which  represents  an
          increase of 96.6% or $6,182,316  from the Nine months ended  September
          30, 1997 revenues of $6,399,808. This dramatic increase in revenues is
          reflective of several factors.

          The first factor impacting improved revenue levels involved loan sales
          activity,  both in  terms  of the  balance  of  loans  sold and of the
          product  mix  between  conforming  /  government  and sub  prime.  The
          majority of revenue from the Company's  business  activity is recorded
          upon sale of the loans it has originated to third party investors.  In
          the Nine months ended  September 30, 1998,  total loan sales were $351
          million  vs. only $163  million  during the same Nine months last year
          for an increase of $188 million or 115%. Additionally,  there was only
          $18  million  in sub prime loan sales  during  the Nine  months  ended
          September  30, 1997 while  current  year same Nine months sales of sub
          prime loans reached $195 million. Sub prime loans carry profit margins
          that can be more  than  twice  the  profit  margins  of  conforming  /
          government loans which further amplified the effect of increased sales
          activity.

          The other major  factor  responsible  for the increase in revenues was
          interest  income.  The Company earns  interest  income on the loans it
          originates at the note interest  rates from the time it funds the loan
          until  the loan is sold to third  party  investors.  Sub  prime  loans
          typically  carry note interest  rates that can be 2% to 4% higher than
          rates  on  conforming  /  government  loans.  Management  successfully
          established  warehouse borrowing  facilities late in 1997 that allowed
          the Company the  opportunity  to hold loans  longer  before sale to an
          investor.  As a result  of the  higher  loan  funding  levels,  longer
          holding  period and higher note rates on the sub prime  portion of the
          Company's portfolio,  interest income increased  from only $516,128.52
          during  the same  Nine  months  last year to  $2,969,632  for the Nine
          months ended September 30, 1998.

          Expenses

          Selling  Expenses  for the Nine months ended  September  30, 1998 were
          $6,326,156,  which  represents an increase of $3,047,424 from the same
          Nine  months  last year.  The higher  level of  Selling  Expenses  was
          related to the higher commission costs driven by the increase in total
          loans  originated.  As  a  percentage  of  loans  originated,  Selling
          Expenses  decreased by .13% between the comparable  Nine months period
          ended September 30, 1998 and 1997.

          General and  Administrative  Expenses were $11,189,888 during the Nine
          months ended  September  30, 1998 which was an increase of  $7,051,795
          over  the same  comparable  period  last  year.  Compensation  related
          expenses,  including temporary services, accounted for $6.7 million or
          55% of this increase.  The growth in loan origination activity created
          an  immediate  need  for  administrative   and  operational   staffing
          increases.   Management  believes  that  the  staffing  infrastructure
          currently  in place is capable of  supporting  the  Company's  planned
          growth  through the  remainder  of 1998  without  further  significant
          increases.

          The  growth  in branch  locations  and  business  volume  resulted  in
          increased occupancy and equipment related expenses. Occupancy costs in
          the Nine months ended  September  30, 1998  increased by $415,697 over
          the same comparable  period last year.  Equipment  related expenses of
          depreciation and leasing charges were up by $302,172 in the first Nine
          months of 1998 over the same comparable  period in 1997. The occupancy
          and equipment  related  expense  increases  represented  approximately
          10.2% of the total G&A expense increases.

          General office  expenses  related to office supplies and postage costs
          were  also  higher  in the  first  Nine  months  of 1998  vs the  same
          comparable  period  in  1997.  This  category  of  expenses  was up by
          $274,089  and  accounted  for 3.89% of the total G&A  increase.  These
          expense  increases are consistent with the added branch  locations and
          overall increase in business activity.

          Professional  service  fees,  primarily  accounting  and  legal,  were
          $750,461  higher  in the  first  Nine  months  of 1998  over  the same
          comparable  period in 1997, and reflect the additional effort required
          to support the  company's  increased  reporting  activities  as an SEC
          registrant  in  1998.  The  Company  was  still  a  closely  held  "S"
          corporation  during the first Five months of 1997,  and so the Company
          needed much less support in the area of accounting  and legal services
          at that time.

                                       18


<PAGE>

          The final significant increase in G&A expenses occurred in the area of
          loan loss  provision,  which was up $1,126,964  between the first Nine
          months of 1997 and 1998. The Company's higher lending activity coupled
          with the  introduction  of higher  risk  sub-prime  loan  originations
          required the establishment of a correspondingly higher reserve against
          potential loan losses.

          Interest  Expense  is  primarily  the  cost  of  funds  borrowed  from
          warehouse lenders to fund the Company's loan  originations  during the
          holding  period  between  funding and sale to an investor.  During the
          Nine months ended September 30, 1998, interest expense was $3,013,498,
          which was $2,677,067 higher than the same comparable period last year.
          This increase was due to extending  the holding  period of loans while
          increasing the absolute size of loans being held in warehouse.

          Net Income (Loss)

          The Company  generated a net loss before taxes of  ($7,410,754) in the
          Nine months  ended  September  30, 1998 vs. a loss before  taxes of ($
          1,353,448) during the same comparable period last year, an increase of
          $6,057,306. The operating losses experienced by the Company during the
          Nine months ended  September 30, 1998 were  significantly  impacted by
          several non-recurring events, primarily during the second quarter. The
          most significant impact involved an increase in reserves for potential
          future loan losses of  $690,857  which was  recorded at the end of the
          second  and  third  quarters.  Somewhat  related  to the loss  reserve
          analysis was the reversal of nearly  $300,000 in interest income which
          had been  accrued  on non  performing  loans as long ago as the  first
          quarter of 1997.

          Another major factor in the operating losses was the impact of a major
          branch expansion effort in California,  which proved to be too capital
          intensive  for the Company to adequately  fund the growth  required to
          reach  sustained  profitability.  During the Six months ended June 30,
          1998, the California  operations lost in excess of $500,000 and so, at
          the end of the second quarter the Company withdrew from its California
          expansion effort. Costs and contingent liabilities from the withdrawal
          will not be material,  and so the losses from this effort  effectively
          ceased at the end of the second quarter of 1998.

          The Company's numerous capital raising efforts, and related regulatory
          filing   requirements,   have  resulted  in   dramatically   increased
          consulting,  legal, accounting and brokerage fees. Total costs related
          to  capital  raising  efforts  in the  first  half of 1998  approached
          $400,000 and are not expected to reoccur in future periods.

          And  finally,  the Company has  evaluated  it's two  mortgage  banking
          operations to clearly  determine  relative  contribution  to operating
          results relative to capital investment  required.  As a result of this
          process,  it was determined that one of its susidiary's Bankers Direct
          Mortgage Corporation would be sold and on August 31, 1998 the sale was
          transacted.

          Comparison for The Three Months Ended September 30, 1998 and 1997

          During the three months ended  September 30, 1998 total lending volume
          was $96 million with 32.1% from BDMC, 62.0% from DMP and 5.9% brokered
          other lenders. During the three months ended September 30, 1997, total
          lending volume was $79.7 million with 57.6% from BDMC,  23.1% from DMP
          and 19.3% brokered to other lenders.  Sub prime lending  activity from
          DMP can generate profit margins nearly twice that of BDMC's conforming
          and  government  retail  production.  For that reason  management  has
          focused on increasing DMP funding activity. The increase from 19.3% of
          the total funding  volume during the three months ended  September 30,
          1997 to  62.0%  of  funding  volume  during  the  three  months  ended
          September 30, 1998  indicates a very  positive  trend related to DMP's
          contribution to company revenues.

          Revenues

          The Company's revenues, including interest income, were $2,679,729 for
          the three months ended September 30, 1998, which represents a decrease
          of 150% or $456,184  from the three  months ended  September  30, 1997
          revenues of $3,135,914.  This decrease is mainly  attributable  to the
          sale of BMDC on August 31, 1998 and lower non-conforming loan sales in
          the quarter.

                                       19

<PAGE>

          The main factor  impacting  reduced revenue levels involved loan sales
          activity,  both in  terms  of the  balance  of  loans  sold and of the
          product  mix  between  conforming  /  government  and sub  prime.  The
          majority of revenue from the Company's  business  activity is recorded
          upon sale of the loans it has originated to third party investors.  In
          the three months ended  September 30, 1998,  total loan sales were $98
          million  vs. $61  million  during the same three  months  last year an
          increase of 37 million. Although sales volume increased in the current
          period as compared  to the same prior year period it did not  increase
          at the same rate as expenses in the comparable period.

          Expenses

          Selling  Expenses in the three  months ended  September  30, 1998 were
          $1,851,967,  which  represents  an increase of $317,535  from the same
          three  months  last year.  The higher  level of Selling  Expenses  was
          related to the higher commission costs driven by the increase in total
          loans  originated.  As  a  percentage  of  loans  originated,  Selling
          Expenses  remained  constant at 1.90% of loans originated for both the
          three months ended September 30, 1998 and 1997.

          General and  Administrative  Expenses were $3,553,885 during the three
          months ended  September  30, 1998 which was an increase of  $1,523,693
          over the same three months last year.  Compensation  related expenses,
          including temporary services,  accounted for $2.2 million or 52.98% of
          this  increase.  The growth in loan  origination  activity  created an
          immediate need for administrative and operational  staffing increases.
          Management  believes  that the  staffing  infrastructure  currently in
          place is capable of supporting  the Company's  planned  growth through
          the remainder of 1998.

          The  growth  in branch  locations  and  business  volume  resulted  in
          increased occupancy and equipment related expenses. Occupancy costs in
          the three months ended  September  30, 1998  increased by $97,234 over
          the same  three  months  last  year.  Equipment  related  expenses  of
          depreciation  and  leasing  charges  were up by  $40,852  in the three
          months  ended  September  30, 1998 over the same three months in 1997.
          The occupancy  and equipment  related  expense  increases  represented
          approximately 6.38% of the total G&A expense increases.

          General office  expenses  related to office supplies and postage costs
          were also higher in the three months ended  September  30,1998 vs. the
          same three months in 1997. This category of expenses was up by $52,874
          and  accounted  for  3.47% of the total G&A  increase.  These  expense
          increases are consistent  with the added branch  locations and overall
          increase in business activity.

          Professional  service  fees,  primarily  accounting  and  legal,  were
          $357,818  higher in the three months ended September 30, 1998 over the
          same three months in 1997, and reflect the additional  effort required
          to support the  company's  increased  reporting  activities  as an SEC
          registrant  in  1998.  The  Company  was  still  a  closely  held  "S"
          corporation  during the first five months of 1997,  and so the Company
          needed much less support in the area of accounting  and legal services
          at that time.

          The final significant increase in G&A expenses occurred in the area of
          loan loss provision,  which was up $254,465 between three months ended
          September 30, 1998 and 1997.  The Company's  higher  lending  activity
          coupled  with  the   introduction   of  higher  risk   sub-prime  loan
          originations  required the establishment of a  correspondingly  higher
          reserve against potential loan losses.

          Interest  Expense  is  primarily  the  cost  of  funds  borrowed  from
          warehouse lenders to fund the Company's loan  originations  during the
          holding  period  between  funding and sale to an investor.  During the
          three months ended September 30, 1998,  interest  expense was $937,948
          which was $682,481  higher than the same three month period last year.
          This increase was due to extending  the holding  period of loans while
          increasing the absolute size of loans being held in warehouse.

          Net Income (Loss)

          The Company generated net loss before taxes of $3,127,408 in the three
          months ended  September 30, 1998 vs. a loss before taxes of $2,443,231
          during the same three  months last year,  an increase of of  $684,177.
          The  operating  losses  experienced  by the  Company  during the three
          months ended  September 30, 1998 were mainly  impacted by reduced loan
          sales in the current quarter.

                                       20


<PAGE>

          And  finally,  the Company has  evaluated  it's two  mortgage  banking
          operations to clearly  determine  relative  contribution  to operating
          results relative to capital investment  required.  As a result of this
          process,  it was determined that one of its susidiary's Bankers Direct
          Mortgage Corporation would be sold and on August 31, 1998 the sale was
          transacted.

          Financial Condition

          September 30, 1998 compared to December 31, 1997:

          Cash in banks, net of overdrafts,  decreased $1,572,166 to $133,050 at
          September  30, 1998 from $1,705,216  at  December  31,  1997.  The net
          decrease resulted from a the losses incurred through the third quarter
          ended  September 30, 1998 The overdraft at December 31, 1997 was fully
          funded in the first quarter of 1998.

          Mortgage loans held for sale totaled $39,051,170 at September 30, 1998
          and  relate  directly  to the  warehouse  finance  facilities  debt of
          $39,532,037.  Each  of  these  items  increased  less  than 9% and 12%
          respectively compared to their respective December 31, 1997 balances.

          Total  liabilities  excluding  warehouse debt increased by $285,110 or
          6% from December 31, 1997 to September 30, 1998.

          Capital Expenditures, Liquidity and Capital Resources

          The  Company's  normal  cash  requirements  are to fund  its new  loan
          production, to meet operating expenses,  including sales and marketing
          activities,  to satisfy accrued  liabilities and accounts payable,  to
          fund expansion of the branch network and to satisfy other  liabilities
          as they become due.

          Cash Flows

          The Company  experienced  a decrease in cash and cash  equivalents  of
          $1,572,166  during the Nine months ended September 30, 1998,  compared
          to a decreasing  cash of $117,586 during the same period last year Net
          cash used in operating activities during the first Nine months of 1998
          was  $13,506,485  vs. a net cash use of  $25,462,305  during  the same
          comparable period in 1997. The single largest component of cash use in
          the  current  period  was from  Mortgage  Loans  held for sale,  which
          increased  by,  and used cash of  $10,180,189  during  the Nine  month
          period ended 1998.

          Net cash used in investing activities totaled $662,984 during the Nine
          months ended September 30, 1998 as compared to the same period in 1997
          when cash used in investing activities was $947,121.

          Net cash provided by financing  activities totaled  $12,597,303 during
          the  Nine  months  ended  September  30,  1998 vs.  net  cash  used by
          financing  activities of $26,291,840 during the same period last year.
          The primary source of financing cash provided  during the current year
          was from warehouse borrowings,  which is consistent with loan balances
          being held for sale,  issuance of  preferred  stock and an increase in
          long term debt.

          Liquidity and Capital Resources

          The Company's primary ongoing cash requirements include the funding of
          (i) mortgage  originations  and  purchases  pending  their sale,  (ii)
          administrative  and  other  operational  expenses,   and  (iii)  costs
          associated   with   equipment   and   facility    expansion   efforts.
          Historically,  the Company  has relied on a small  group of  warehouse
          lenders to fund its mortgage origination and purchase activity,  while
          relying  on a  combination  of  Capital  infusions  and cash flow from
          operations for other cash needs.

          The Company uses one  traditional  warehouse  line.  At September  30,
          1998, The utilized and outstanding portions of this warehouse line was
          $39,129,307.  The aggregate  warehouse  line limit was $50 million and
          carries  interest  rates  based on LIBOR  plus a margin  of 125 to 150
          basis points or Fed Funds plus a margin of 175 to 250 basis points.

          The company  previously  had a warehouse line of $15 million with Bank
          One,  Texas,  NA,  which has been  discontinued  as of  September  30,
          1998.The Company's other warehouse line, which is with Nikko Financial
          Services,  has been  terminated  effective  November 30,  1998.  As of
          September  30,  1998,  the Company was in  violation  of the net worth
          covenant of this agreement.  In addition, the company previously had a
          purchase facility agreement with Fidelity Bank and Trust aggregating $
          25 million. As of September 30, 1998 the use of that facility has been
          terminated.

                                       21

<PAGE>

          Liquidity and Capital Resources (Continued)

          The Company  raised  additional  capital during the quarter ended June
          30, 1998 through the issuance of a $1 million, 8% Series "B" preferred
          stock  offering.   Additionally,  the  company  issued  a  convertible
          subordinate  debenture  for $1.7  million  during the  quarter,  which
          subsequent  to quarter end, was exchanged for a like amount 10% Series
          "C" preferred  stock. In addition to these  transactions,  the Company
          will need additional capital in order to attract and retain new, lower
          cost borrowing  relationships,  to fund its current  operations and to
          support its expansion plans. Accordingly,  management has entered into
          an underwriting agreement with Union Trading-Financial Limited for the
          placement  of the  Company's  Convertible-Redeemable  Preferred  Stock
          entirely  outside  of  the  United  States   exclusively  to  non-U.S.
          residents.  The Preferred  Stock Units will be offered at $20 each and
          will be convertible  into the Company's  Common Stock at the rate of 1
          preferred  unit to 2.5 shares of Common Stock on a best efforts basis.
          The offering is expected to generate net proceeds to the Company of up
          to $14  million  by April 1999 at the rate of $1 million to $2 million
          per month.  On August 19, 1998 the  Company  received  three  executed
          subscription  agreements  totaling $10.2 million and a confirmation of
          $3 million on deposit from Union  Trading-Financial as the partial net
          proceeds under this initial subscription.

          Management believes that the proceeds from this initial tranche of the
          Union  Trading  Underwriting,  when  received,  together with existing
          borrowing  relationships  will be  sufficient  to fund  the  Company's
          continued operations for the next twelve to eighteen months at current
          levels  of  lending  activity.  There  can be no  assurance  as to the
          timeliness  of the  receipt  of the  initial  proceeds,  nor  that the
          company  will be able to  obtain  additional  proceeds  from the Union
          Trading  Underwriting,  or that existing borrowing  relationships will
          remain in place on favorable  terms.  Accordingly,  the Company may be
          limited in its ability to fund  current  operations  or to achieve its
          growth  objectives  if its  cash  needs  are  not  met by the  sources
          indicated.

          Management believes that cash from operating activities, together with
          the  proceeds  from  the  planned   Series  D   Convertible-Redeemable
          Preferred Stock offering and existing  borrowing  relationships may be
          sufficient  to fund  the  Company's  current  operations  through  the
          remainder of 1998.  There can be no assurance that the Company will be
          able to obtain an additional  capital infusion or obtain new warehouse
          borrowing relationships in a timely manner.  Accordingly,  the Company
          is limited in its ability to fund  current  operations  or achieve its
          growth objectives due to the fact circumstances mentioned above.

          Capital Expenditures

          Capital  Expenditures  during the Nine months ended September 30, 1998
          were $275,871  which was  primarily in the area of computer  equipment
          and computer  software.  These expenditures were in support of certain
          system upgrades and production branch expansion.

          Risk Factors

          The Company wishes to take  advantage of the "safe harbor"  provisions
          of the Private Securities  Litigation Reform Act by cautioning readers
          that numerous important factors discussed below, among others, in some
          cases have caused,  and in the future could cause the Company's actual
          results   to  differ   materially   from   those   expressed   in  any
          forward-looking  statements made by, or on behalf of, the Company. The
          following  include some, but not all, of the factors or  uncertainties
          that could cause actual results to differ from projections:

          o    Possible Delisting of Securities; Risk of Low Priced Stocks

          As of March 31, 1998, June 30, 1998and again as of September 30, 1998,
          the Company didnot meet the required standards for continued inclusion
          in the NASDAQ  SmallCap  Market in that its net  tangible  assets were
          below  $2,000,000,  and the  Company has  received a formal  notice of
          delisting  from NASDAQ.  As of November 17, 1998 the Company stock has
          been  delisted  from the NASDAQ Small Cap Market and moved to the Over
          the Counter Bulletin Board Market.

                                       22

<PAGE>

          o    General Business Risks

          The Company's business is subject to various business risks.  Economic
          conditions  affect the decision to buy or sell residences.  Changes in
          the level of  consumer  confidence,  real  estate  values,  prevailing
          interest  rates  and  investment  returns  expected  by the  financial
          community   could  make  mortgage  loans  of  the  types   originated,
          refinanced  and purchased by the Company less  attractive to borrowers
          or investors. In addition, a decline in real estate values will have a
          negative impact on the  loan-to-value  ratio for the related  mortgage
          loans,  weakening  the  collateral  coverage and  resulting in greater
          exposure in the event of a default.

          o    Dependence on Availability of Funding Sources

          The Company's ability to originate and purchase mortgage loans depends
          to a large extent upon its ability to secure  financing on  acceptable
          terms. The Company  currently funds  substantially all of the loans it
          originates and purchases through borrowings under  collateralized loan
          purchase  agreements  ("Purchase  Agreements") with several commercial
          banks,  which  generally are terminable at will by either party. As of
          November  30,  1998 the  Company  will no  longer  have the use of its
          committed  warehouse  credit facility with Nikko. The Warehouse credit
          facility with Bank One, Texas, N.A. ("Bank One") matured on August 31,
          1998 and was not  renewed  at the  option of Bank One.  The  Company's
          borrowings  are in turn  repaid  with  the  proceeds  received  by the
          Company  from  selling  such loans.  The Company has relied upon a few
          lenders  to  provide  the  primary  credit  facilities  for  its  loan
          originations  and  purchases.  Accordingly,  the  failure  to renew or
          obtain adequate  funding under the Company's  financing  facilities or
          other financing arrangements, or any substantial reduction in the size
          of or increase in the cost of such  facilities,  could have a material
          adverse  effect on the Company's  results of operations  and financial
          condition.  To the extent the Company is not successful in maintaining
          or replacing existing  financing,  it may have to curtail its mortgage
          loan purchase and origination activities,  which could have a material
          adverse  effect on the  Company's  financial  condition and results of
          operations.

          o    Credit Risks Associated with Nonconforming Loans

          The Company is subject to various risks  associated  with  originating
          nonconforming  loans,  including,  but not  limited  to, the risk that
          borrowers  will not satisfy  their debt  service  payments,  including
          payments of interest and principal,  and that the realizable  value of
          the property  securing  such loans will not be sufficient to repay the
          borrower's  obligations  to the  Company.  Because  of  the  Company's
          increasing  focus on  credit-impaired  borrowers,  the actual rates of
          delinquencies,  foreclosures  and losses on such loans could be higher
          under adverse economic conditions than delinquencies, foreclosures and
          losses  currently  experienced  in the  mortgage  lending  industry in
          general.   These  risks  increase  during  an  economic   downturn  or
          recession.   Any   sustained   period  of   increased   delinquencies,
          foreclosures,  losses or increased  costs could  adversely  affect the
          Company's  ability to sell,  and could  increase  the cost of selling,
          loans  on a  whole  loan  basis,  which  could  adversely  affect  the
          Company's financial condition and results of operations.  In addition,
          in an  economic  slowdown  or  recession,  the value of the  Company's
          mortgage servicing rights may be impaired.

          o    Liabilities Under Representations and Warranties

          In the ordinary course of business,  the Company makes representations
          and  warranties to the  purchasers  and insurers of mortgage loans and
          the purchasers of mortgage servicing rights regarding  compliance with
          laws,  regulations  and  program  standards  and  as  to  accuracy  of
          information.  The Company generally  receives similar  representations
          and warranties from the  correspondents  from whom it purchases loans.
          Although the Company has not incurred  losses in any material  respect
          as  a  result  of  mortgage  loan   repurchases  due  to  breaches  in
          representations  and  warranties,  there can by no assurance  that the
          Company  will not  experience  such losses in the  future."  below and
          "Business--Environmental Matters."

                                       23

<PAGE>

          o    Managing Potential Growth

          Since its inception, the Company has grown rapidly, and has a total of
          142  full-time  employees  as of  September  30, 1998. This growth has
          placed a significant  strain on the company's  management and physical
          and capital  resources.  The Company  anticipates that it will need to
          reduce   personnel   in  order  to   implement   fully  its   business
          restructuring plan. No assurance can be given as to whether,  when, if
          ever,  and under what terms the Company  will be able to  successfully
          complete this restucturing  plan Further,  management will be required
          to  successfully  maintain  relationships  with  various  governmental
          agencies,   real  estate   professionals,   institutional   investors,
          providers of  warehouse  loans,  advertising  agencies and other third
          parties and to maintain  control over the  strategic  direction of the
          Company in a rapidly changing  marketplace.  There can be no assurance
          that the Company's current personnel,  systems, procedures and quality
          and  accounting  controls  will be adequate  to support the  Company's
          future  operations,  that management  will be able to identify,  hire,
          train,  motivate or manage  needed and  qualified  personnel,  or that
          management will be able to identify and exploit existing and potential
          opportunities.  If the Company is unable to manage growth effectively,
          the Company's business, financial condition and operating results will
          be materially adversely affected.

          o    Factors  Affecting  Market  Price of the Common  Stock;  Possible
               Volatility of Stock Price

          The  market  price  of the  Common  Stock  may be  influenced  by many
          factors,  including  the depth and  liquidity  of the  market  for the
          Common Stock,  investor  perceptions  of the Company and its industry,
          and general  economic and market  conditions.  The market price of the
          Common Stock may also be  significantly  influenced by factors such as
          the  announcement  of new products by the Company or its  competitors,
          quarter-to-quarter  variations in the Company's  results of operations
          and conditions in the industry. In addition, in recent years the stock
          market has experienced extreme price and volume fluctuations that have
          had a  substantial  effect on the  market  prices of  emerging  growth
          companies, including financial services companies. These extreme price
          and volume  fluctuations  experienced by emerging growth companies may
          be unrelated to the operating  performance  of a specific  company and
          may be caused  by  investors'  perceptions  of the  prospects  for the
          general economy,  the stock market in general,  emerging  companies or
          financial  services  companies.  There  can be no  assurance  that the
          market  price of the Common  Stock will be stable or will  increase in
          accordance with operating performance by the Company.

          o    No Dividends

          The Company has not paid any cash dividends  (except for S corporation
          distributions to the Existing  Stockholders) on its Common Stock since
          its inception and does not currently  anticipate  paying  dividends on
          its Common  Stock in the  foreseeable  future.  The  Company  conducts
          substantially   all  of  its  operations   through  its  subsidiaries.
          Accordingly,  the Company's ability to pay dividends is also dependent
          upon the ability of its subsidiaries to make cash distributions to the
          Company.  The payment of dividends to the Company by its  subsidiaries
          is and will  continue to be  restricted  by or subject to, among other
          limitations,   applicable   provisions  of  state  and  federal  laws,
          contractual provisions,  the earnings of such subsidiaries and various
          business considerations.

          o    A general economic slowdown.

          o    The  unanticipated   expenses  of  assimilating   newly  acquired
               business into the Company's business  structure,  as well as, the
               impact of unusual  expenses from ongoing  evaluations of business
               strategies,  asset  valuations,  acquisitions,  divestitures  and
               organizational structures.

          o    Unpredictable  delays  or  difficulties  in  development  of  new
               product programs.

          o    Rapid  or   unforeseen   escalation  of  the  cost  of  regulator
               compliance  and/or  litigation,  including  but not  limited  to,
               environmental compliance,  licenses, adoptions of new, or changes
               in accounting  policies and practices and the application of such
               policies and practices.

          o    The effects of changes in monetary and fiscal policies,  laws and
               regulations,  other  activities  of  governments,   agencies  and
               similar  organizations,   and  social  and  economic  conditions,
               unforeseen  inflationary pressures and monetary fluctuation,  the
               ability or inability of the Company to hedge against fluctuations
               in interest rates.

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<PAGE>

          o    The ability or  inability  of the company to continue its current
               practices relating to mortgage loans held for sale.

          o    Increased competition within the company's markets.

          In addition to the risk factors  discussed above, the mortgage banking
          industry is generally subject to seasonal trends. These trends reflect
          the general  pattern of resales of homes,  which sales  typically peak
          during the spring and summer seasons and decline from January  through
          March.  Additionally,  the  primary  home  market in Florida  tends to
          increase  during the fourth  quarter,  while the  second  home  market
          increases  from October  through April.  Refinancing  tends to be less
          seasonal and more closely related to changes in interest rates.

                                       25

<PAGE>

                           PART II - OTHER INFORMATION


Item 1. LEGAL PROCEEDINGS

During the reporting period,  the Company was not involved in any material legal
proceedings.  The Company was involved in routine  litigation that is incidental
to its business.

Item 2. CHANGES IN SECURITIES

During the  quarter  ended  June 30,  1998 the  Company  completed  two  private
placements to institutional investors. The first transaction was the issuance of
a $1.7 million convertible  debenture on May 18, 1998 and the second transaction
as the issuance of a $1 Million Series B Convertible Preferred Stock on June 30,
1998. See MD*A-Liquidity and Capital Resources for further discussion.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

Not Applicable

Item 5. OTHER INFORMATION

Not Applicable

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

The  Company  did not file any  Reports  on Form 8-K during  the  quarter  ended
September 30, 1998.


                                       26

<PAGE>

                                    SIGNATURE

In accordance  with the  requirements  of the  Securities  and Exchange Act, the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                CFI MORTGAGE INC.
                                (Registrant)


Date: August 19, 1998           /s/      Vincent C. Castoro
                                ------------------------------------------------
                                Vincent C. Castoro
                                (CEO and Principal Executive Officer)


Date: August 19 1998            /s/      Vincent J. Castoro
                                ------------------------------------------------
                                Vincent J. Castoro
                                (President and Principal Administrative Officer)


Date: August 19 1998            /s/      Paul R. Garrigues
                                ------------------------------------------------
                                Paul R. Garrigues
                                (CFO and Principal Financial Officer)


                                       27