<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                  FORM 10-QSB
 
(Mark One)
 
[X]  Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

           For the quarterly period ended March 31, 1997.
 
[ ]  Transition report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

           For the transition period from          to           .
 
                         Commission File Number: 0-9774

                       HOMECAPITAL INVESTMENT CORPORATION
       (Exact Name of Small Business Issuer as Specified in its Charter)

               Nevada                              95-3614463
(State or Other Jurisdiction of                (I.R.S. Employer
 Incorporation or Organization)               Identification No.)


                            6836 Austin Center Blvd.
                                   Suite 280
                              Austin, Texas 78731
                    (Address of Principal Executive Offices)

                                 (512) 343-8911
               (Issuer's Telephone Number, Including Area Code)

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

     As of April 30, 1997, there were 8,226,883 shares of common stock of the
issuer outstanding.

     Transitional Small Business Disclosure Format (check one):  
Yes [ ]  No  [X]

               The Exhibit Index appears on page 31.
<PAGE>
 
                       HOMECAPITAL INVESTMENT CORPORATION

                              Index to Form 10-QSB

 
PART I.       FINANCIAL INFORMATION                                Page No.
                                                                   --------
Item 1.       Financial Statements.
 
              Consolidated Balance Sheet (Unaudited)
              As of March 31, 1997                                      3
 
              Consolidated Statements of Operations (Unaudited)
              For the Six Months Ended March 31, 1997
              and 1996                                                  4
              Consolidated Statements of Operations (Unaudited)
              For the Three Months Ended March 31, 1997
              and 1996                                                  5
 
              Consolidated Statements of Cash Flows (Unaudited)
              For the Six Months Ended March 31, 1997
              and 1996                                                  6
 
              Notes to Consolidated Financial Statements                7
 
Item 2.       Management's Discussion and Analysis or
              Plan of Operation.                                       23
 
PART II.      OTHER INFORMATION
 
Item 6.       Exhibits and Reports on Form 8-K                         31
 
SIGNATURES                                                             32
 

                                       2
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                 March 31, 1997
                                  (Unaudited)
<TABLE>
<S>                                                                     <C>
                            ASSETS
    Cash                                                                $ 1,497,708
    Cash deposits, restricted                                               595,070
    Loans held for sale, net                                              3,756,086
    Interest-only strip receivable                                       14,379,230
    Prepaid and other assets                                                892,175
    Furniture, fixtures and equipment, net                                  932,212
    Deferred tax assets                                                     384,119
                                                                        -----------
                        Total assets                                    $22,436,600
                                                                        =========== 
            LIABILITIES AND STOCKHOLDERS' EQUITY
    Note payable                                                        $   108,341
    Revolving lines of credit                                             7,990,588
    Capital lease obligations                                                 7,637
    Accrued expenses and other liabilities                                1,437,578
    Allowance for credit losses on loans sold                               545,000
    Income taxes payable                                                  2,022,629
                                                                        -----------
                        Total liabilities                                12,111,773

Commitments and contingencies

Stockholders' equity:
    Preferred stock, $.01 par value; 10,000,000 shares authorized;
       1,500,000 shares of cumulative convertible Series A stock
       issued and outstanding(liquidation value of $2,250,000)               15,000
    Common stock, $.01 par value; authorized 100,000,000 shares;
         8,226,883  shares issued and outstanding                            82,269
    Additional paid-in capital                                            5,683,710
    Retained earnings                                                     4,838,566
    Valuation allowance for securities available for sale                  (237,467)
    Notes receivable for stock                                              (57,251)
                                                                        -----------
                        Total stockholders' equity                       10,324,827
                                                                        -----------
                        Total liabilities and stockholders' equity      $22,436,600
                                                                        ===========
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       3
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                For the Six Months Ended March 31, 1997 and 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                               1997         1996
                                                              ------       ------
<S>                                                         <C>          <C>
Revenues:
    Gain on sale of loans                                   $ 8,618,767  $2,559,652
    Net unrealized gain on valuation of
       interest-only strip receivable                           427,975          --
    Interest - loans                                            694,416     174,913
    Interest - investments                                      539,959          --
    Loan servicing income                                       422,482      60,127
    Other income                                                 98,714      76,820
                                                            -----------  ----------
                        Total revenues                       10,802,313   2,871,512
                                                            -----------  ----------
Costs and Expenses:
    Salaries and employee benefits                            1,872,780   1,009,159
    Servicing costs                                             179,909      54,129
    Loan costs                                                  808,550     114,801
    General and administrative                                1,313,174     745,972
    Occupancy                                                   258,483     134,396
    Interest                                                    532,049     167,513
                                                            -----------  ----------
                        Total costs and expenses              4,964,945   2,225,970
                                                            -----------  ----------
Income before income taxes                                    5,837,368     645,542
Provision for income taxes                                    2,048,512          --
                                                            -----------  ----------
                        Net income                          $ 3,788,856  $  645,542
                                                            ===========  ==========
Income per common and common equivalent share:
    Primary:
        Earnings per common share                           $       .43  $     .084
                                                            ===========  ==========
        Weighted average number of common and common
            equivalent shares outstanding                     8,489,979   7,662,662
                                                            ===========  ==========
    Fully Diluted:
        Earnings per common share                           $       .38  $     .081
                                                            ===========  ==========
        Weighted average number of  fully diluted common
            shares outstanding                               10,058,256   7,966,803
                                                            ===========  ==========
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       4
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
               For the Three Months Ended March 31, 1997 and 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                               1997         1996
                                                              ------       ------
<S>                                                         <C>          <C>
Revenues:
    Gain on sale of loans                                   $ 3,831,648  $1,191,421
    Net unrealized gain on valuation of
       interest-only strip receivable                           427,975          --
    Interest - loans                                            329,973      73,991
    Interest - investments                                      538,723          --
    Loan servicing income                                            --      47,071
    Other income                                                 61,643      32,931
                                                            -----------  ----------
                        Total revenues                        5,189,962   1,345,414
                                                            -----------  ----------
Costs and Expenses:
    Salaries and employee benefits                            1,092,831     499,001
    Servicing costs                                                  --      44,404
    Loan costs                                                  467,723      56,241
    General and administrative                                  815,549     393,656
    Occupancy                                                   147,158      69,113
    Interest                                                    288,573      81,319
                                                            -----------  ----------
                        Total costs and expenses              2,811,834   1,143,734
                                                            -----------  ----------
Income before income taxes                                    2,378,128     201,680
Provision for income taxes                                      833,435          --
                                                            -----------  ----------
                        Net income                          $ 1,544,693  $  201,680
                                                            ===========  ==========
Income per common and common equivalent share:
    Primary:
        Earnings per common share                           $       .17  $     .026
                                                            ===========  ==========
        Weighted average number of common and common
            equivalent shares outstanding                     8,810,027   7,696,803
                                                            ===========  ==========
    Fully Diluted:
        Earnings per common share                           $       .15  $     .025
                                                            ===========  ==========
        Weighted average number of  fully diluted common
            shares outstanding                               10,317,394   7,966,803
                                                            ===========  ==========
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       5
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the Six Months Ended March 31, 1997 and 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                           1997           1996
                                                          ------         ------
<S>                                                    <C>            <C>
Cash flows from operating activities:
   Net income                                          $  3,788,856   $    645,542
   Adjustments to reconcile net income
      to net cash provided by
      (used in) operating activities:
   Depreciation and amortization                            348,484         68,230
   Deferred tax benefit                                     (71,285)            --
   Provision for credit losses                              342,805             --
   Gain on sales of loans                                (8,618,767)    (2,559,652)
   Unrealized gain from sales of loans                     (427,975)            --
   Proceeds from sales of loans                          75,397,612     42,454,021
   Purchase and origination of loans                    (75,476,991)   (40,445,344)
   Change in operating assets and liabilities:
      Decrease in cash deposits, restricted                 110,682             --
      (Increase) decrease in accrued
         interest receivable                                (53,256)         1,379
      Increase in prepaid and other assets                 (624,333)       (51,588)
      Increase in accrued expenses and
         other liabilities                                1,090,891        118,184
                                                       ------------   ------------
   Net cash provided by (used in)
      operating activities                               (4,193,277)       230,772
                                                       ------------   ------------
Cash flows from investing activities:
   Purchase of furniture, fixtures and
      equipment                                            (392,185)      (153,301)
                                                       ------------   ------------
Cash flows from financing activities:
   Increase (decrease) in revolving lines of credit       3,926,408           (908)
   Payments on notes payable                                (49,998)       200,096
   Proceeds from exercise of Series A Warrants            1,911,919             --
   Proceeds from exercise of other Warrants                  92,700             --
   Payments on capital lease obligations                     (6,714)       (16,761)
   Preferred stock dividends                               (134,629)            --
                                                       ------------   ------------
      Net cash provided by financing
         activities                                       5,739,686        182,427
                                                       ------------   ------------
Increase in cash                                          1,154,224        259,898
Cash, beginning of period                                   343,484         25,716
                                                       ------------   ------------
Cash, end of period                                    $  1,497,708   $    285,614
                                                       ============   ============
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       6
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                         NOTES TO FINANCIAL STATEMENTS

1.   NATURE OF OPERATIONS

THE COMPANY AND SUBSIDIARY

HomeCapital Investment Corporation, a public holding company, ("Company," or
"HomeCapital") was incorporated in the state of Nevada on October 8, 1980.  As a
result of a reverse acquisition transaction with HomeOwners Mortgage & Equity,
Inc. ("Home") in August 1994 (the "Home Transaction"), Home became the wholly-
owned subsidiary of the Company, and the previous shareholders of Home held
approximately 83% of the outstanding common stock of the Company.  The Company
currently conducts its business entirely through Home.  Home originates and
purchases home improvement loans and is approved to engage in lending activities
under the Department of Housing and Urban Development ("HUD") Title I program.
As such, Home is subject to regulation and examination by that agency.

As of the date of the Home Transaction, the Company was a public company with no
business operations and net liabilities of $7,500.  The reverse acquisition was
accounted for as a recapitalization with carryover basis of assets and
liabilities.  The financial statements reflect the financial condition and
results of operations of Home consolidated with the Company.  All intercompany
transactions and balances have been eliminated in the accompanying consolidated
financial statements.


DESCRIPTION OF OPERATIONS

The Company through its loan correspondents, direct mail solicitation, and home
improvement contractors originates and purchases home improvement loans
("Loans") and is approved to engage in lending activities under the Department
of Housing and Urban Development ("HUD") Title I Program.  As such, the Company
is subject to regulation and examination by this agency.  Pursuant to that
program, 90% of the principal balances of the Loans are U.S. Government insured
("Title I Loans").

                                       7
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ADJUSTMENTS TO INTERIM FINANCIAL STATEMENT

The interim financial statements of the Company at March 31, 1997 and for the
six months and quarter ended March 31, 1997 and 1996, respectively, reflect all
adjustments (consisting solely of normal recurring adjustments), which in the
opinion of management, are necessary to make the financial statements not
misleading.

CASH DEPOSITS, RESTRICTED

Restricted cash represents unremitted funds received in connection with the
servicing of Loans sold with residual interests retained that have not been
remitted to the purchasers of such Loans as of March 31, 1997.  The liability
for these unremitted funds is included in the Balance Sheet under the caption of
accrued expenses and other liabilities.

LOANS HELD FOR SALE, NET

Loans held for sale are carried at the lower of aggregated cost or market value
in the accompanying Balance Sheet.  Loans held for sale at March 31, 1997 have
been either originated by the Company or purchased from its Loan Correspondents.
The Company funds these Loans primarily through its warehouse line of credit.
Purchase premiums, discounts, loan origination fees and related direct
origination costs are included in the stated cost of Loans held for sale, and
are deferred until the related Loans are sold.

Provision for credit losses relating to Loans held for sale is charged to income
in amounts sufficient to maintain the allowance at a level considered adequate
to provide for anticipated losses resulting from liquidation of outstanding
Loans.  The provision for credit losses is based upon periodic analysis of the
portfolio, economic conditions and trends, historical credit loss experience,
borrowers' ability to repay, collateral values and giving effect to estimated
Federal Housing Administration ("FHA") Insurance recoveries on Title I Loans.

                                       8
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

REVENUE RECOGNITION

Gain on sale of Loans and Mortgage Backed Securities ("MBS") is recognized upon
delivery of Loans or MBS to investors.  The gain on sale of Loans and MBS is
calculated based upon the difference between the net proceeds from sale and the
allocated carrying amount of Loans or MBS sold, together with an Interest-only
strip receivable determined on the date of sale.  The allocated carrying values
are based upon the relative fair value of Loans or MBS sold and the Interest-
only strip receivable retained.  The difference between the fair value and
allocated carrying amounts for securities classified as available for sale is
included as a component of stockholders' equity.

INTEREST-ONLY STRIP RECEIVABLE

The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (SFAS No. 125) as of January 1, 1997.

SFAS No. 125 provides new accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities.  This
statement also provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings and
requires that liabilities and derivatives incurred or obtained by transferors as
part of a transfer of financial assets be initially measured at fair value.

As a result of adopting the statement, the Excess servicing receivable
previously shown on the Balance Sheet as of December 31, 1996 has been renamed
as Interest-only strip receivable, and classified as an "available for sale"
security.  Interest-only strip receivables arising from sale of Loans and MBS in
the three months ended March 31, 1997, are classified as "trading" securities.
The Company recorded as revenue, a net unrealized gain of $427,975 on the
valuation of the Interest-only strip receivable for Loans and MBS sold in the
quarter ended March 31, 1997.

The fair value of the Interest-only strip receivable is calculated based upon
the present value of the estimated future interest income after considering the
effects of estimated prepayments, defaults and future expenses.  The discount
rate utilized is based upon assumptions that market participants would use for
similar financial instruments subject to prepayments, defaults, collateral value
and interest rate risks.

                                       9
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

INTEREST-ONLY STRIP RECEIVABLE, CONTINUED

For Loans and MBS during the three months ended March 31, 1997, the estimated
fair value of cash flows were discounted using rates that averaged 11%.  The
Company has developed its prepayment and default assumptions based on experience
with its own portfolio, available market data and information from regulatory
agencies.  In determining fair value of expected cash flows, management
considers economic conditions at the date of sale.

The Company periodically reviews the fair value of the Interest-only strip
receivable.   Changes in the fair value of securities available for sale is
recognized as an adjustment to stockholders' equity and changes in the fair
value of trading securities is reflected in operations.

ALLOWANCE FOR CREDIT LOSSES ON LOANS SOLD

Loans sold by the Company are sold with limited recourse.  These transactions
are accounted for as sales because 1) the Company surrenders control of the
future economic benefits of the loans, 2) the obligation under the recourse
provision can be reasonably estimated and 3) the purchaser cannot require the
Company to repurchase the loans except pursuant to the recourse provision.  The
Company provides an estimate for credit losses related to this recourse
provision.  Such amounts are incurred over the period subject to recourse.

Recourse to the Company on sales of Loans and MBS is governed by the agreements
between the purchasers and the Company.  The allowance for credit losses on
Loans sold represents the Company's best estimate of its probable future credit
losses to be incurred over the life of the Loans and MBS, giving effect to
estimated FHA Insurance recoveries on Title I Loans. The allowance for losses on
Loans sold with recourse is shown separately as a liability on the Company's
Balance Sheet.

                                       10
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FURNITURE, FIXTURES AND EQUIPMENT, NET

Furniture, fixtures and equipment are stated at cost less accumulated
depreciation.  Expenditures for major renewals and improvements are capitalized
while minor replacements, maintenance and repairs which do not improve or extend
the life of such assets are charged to expense.  Gains or losses on disposal of
fixed assets are reflected in operations.

Depreciation is computed using the straight-line method over the estimated
useful lives of the depreciable assets, ranging from 5 to 7 years.  Leasehold
improvements are depreciated over the term of the lease, ranging from 1 to 5
years.

FEDERAL AND STATE INCOME TAXES

The Company and Home file separate Federal and state income tax returns.  The
liability method is used in accounting for income taxes.  Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax basis of assets and liabilities and measured
using the enacted tax rates and laws.

CREDIT CONCENTRATIONS

Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, Loans held for sale and Interest-only
strip receivable.  Concentration of credit risk and mitigating factors regarding
Loans and Interest-only strip receivable are described above.  The Company
places its cash in several major financial institutions thereby limiting the
Company's exposure to concentrations of credit risk.  The operating accounts of
the Company exceeded the amount insured by the Federal Deposit Insurance
Corporation by an aggregate of $1,225,950 at March 31, 1997.

The Company is party to financial instruments with off-balance sheet credit risk
in the normal course of business.  These financial instruments include
commitments to extend credit to borrowers and commitments to purchase loans from
others.  As of March 31, 1997, the Company had outstanding commitments to extend
credit or purchase loans in the amounts of approximately $27,167,000.

                                       11
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

IMPAIRMENT OF LONG-LIVED ASSETS

Effective October 1, 1996 the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived and Long Lived Assets to be Disposed Of".  SFAS No. 121
prescribes that an impairment loss is recognized in the event that facts and
circumstances indicate that the carrying amount of an asset may not be
recoverable, and an estimate of future undiscounted cash flows is less than the
carrying amount of the asset. Impairment is recorded based on an estimate of
future discounted cash flows as identified at the lowest level for which there
are identifiable cash flows for a particular group of assets. The Company
concluded through analysis of these cashflows that there was no impairment of
long lived assets recorded on the financial statements at March 31, 1997.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation."  SFAS No. 123 establishes fair value-
based financial accounting and reporting standards for all transactions in which
a company acquires goods or services by issuing its equity instruments or by
incurring a liability to suppliers in amounts based on the price of its common
stock or other equity instruments.  The Company will continue to account for
stock-based compensation as prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and will make the required
disclosures which include the proforma effect on the income statement in its
1997 fiscal year-end financial statements.

EARNINGS PER SHARE

The computation of primary earnings per share is based on the weighted average
number of common shares outstanding during the period plus, when dilutive,
common equivalent shares which includes stock options (see Note 12) using the
treasury stock method.   Fully diluted earnings per share additionally assumes
conversion of the Company's 1,500,000 outstanding shares of Preferred Stock,
Series A. The number of contingent shares used in the fully diluted calculation
is based on the market price of the Company's common stock as of March 31, 1997.
Net earnings used in the computation of primary earnings per share are reduced
by preferred stock dividend requirements.

                                       12
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

EARNINGS PER SHARE, CONTINUED

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." SFAS No. 128
specifies the computation, presentation, and disclosure requirements for
earnings per share.  The Company has not yet determined the effect that the
implementation of SFAS No. 128 will have on the earnings per share calculation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain accounts and balances in the financial statements for the six months and
quarter ended March 31, 1996, have been reclassified to be consistent with the
1997 account classifications.

FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet.  Fair values are based on estimates using present value or other
valuation techniques in cases where quoted market prices are not available.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows.  In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.

SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.  Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

                                       13
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED

Estimated fair values, carrying values and various methods and assumptions used
in valuing the Company's financial instruments at December 31, 1996 are set
forth below.

<TABLE>
<CAPTION>
 
                                             Carrying    Estimated Fair
                                               Value         Value
                                             --------    --------------
<S>                                         <C>          <C>
Financial Assets:
     Cash (a)                               $ 1,497,708     $ 1,497,708
     Loans held for sale (b)                  3,756,086       4,122,178
     Interest-only strip  receivable (c)     14,379,230      14,379,230
Financial Liabilities:
     Debt obligations (d)                     8,106,566       8,106,566
</TABLE>
--------------
(a) The carrying value of cash is considered to be a reasonable estimate of fair
    value.
(b) The fair value is estimated by using current investor yields or outstanding
    commitments from investors after consideration of non-qualified loans and
    the collateral securing such Loans.
(c) The fair value is estimated by discounting future cash flows using rates
    available for instruments with similar risks, terms and remaining
    maturities.
(d) The debt obligations are primarily adjustable rate instruments and indexed
    to the prime rate or Federal Funds rate; therefore, carrying value is a
    reasonable estimate of fair value. Capitalized equipment leases have
    implicit fixed interest rates ranging from 14.4% to 25.6%, which approximate
    fair value in the aggregate.

The fair value estimates made at March 31, 1997 were based upon pertinent market
data and relevant information on the financial instruments at that time.  These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire portion of the financial instrument.  Because no
market exists for a portion of the financial instruments, fair value estimates
may be based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments and
other factors.  These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision.  Changes in assumptions could significantly affect
the estimates.

Fair value estimates are based on existing on-and-off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.  In addition, the tax implications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in any of the estimates.

                                       14
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

3.  LOANS HELD FOR SALE

Loans held for sale consisted of the following at March 31, 1997:

<TABLE>
<CAPTION>
                                            1997
                                           ------
<S>                                      <C>
Title I Loans                            $3,558,435
Conventional loans                          134,589
Commercial loans                             25,000
Capitalized loan origination fees and
    costs, net                              135,867
                                         ----------
                                          3,853,891
Allowance for credit losses                 (97,805)
                                         ----------
     Total                               $3,756,086
                                         ==========
</TABLE>

The serviced Loan portfolio which includes Loans sold to investors and Loans
retained by the Company aggregated approximately $158,101,000 at March 31, 1997.

4. ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses for Loans consisted of the following:

<TABLE>
<CAPTION>
 
                                                         1997
                                                        ------
<S>                                                   <C>
Balance at January 1, 1997                            $ 498,509
Provisions for credit losses                            350,000
Credit losses incurred                                 (205,704)
                                                      ---------
Balance at March 31, 1997                             $ 642,805
                                                      =========
Components of Allowance:
Allowance for credit losses on Loans held for sale    $  97,805
Allowance for credit losses on Loans sold               545,000
</TABLE>

                                       15
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

5.   INTEREST-ONLY STRIP RECEIVABLE

     The activity in the Interest-only strip receivable is summarized as follows
for the three months ended March 31, 1997:

<TABLE>
<CAPTION>
 
 
<S>                                             <C>
Balance, January 1, 1997                        $10,521,807
Additions                                         4,467,468
Deductions                                         (250,246)
Change in fair value                               (359,799)
                                                -----------
Balance, March 31, 1997                         $14,379,230
                                                ===========
</TABLE> 

6.   FURNITURE, FIXTURES AND EQUIPMENT
 
Furniture, fixtures and equipment consisted of the following at March 31:

<TABLE> 
<CAPTION> 
                                                 1997
                                                ------
<S>                                         <C> 
Furniture and fixtures                      $   296,792
Equipment                                       509,510
Leasehold improvements                           38,850
Software cost                                   383,395
                                            -----------
                                              1,228,547

Accumulated depreciation                       (296,335)
                                            -----------
                                            $   932,212
                                            ===========
</TABLE> 

7.   REVOLVING LINES OF CREDIT

The Company finances its loans held for sale through a $15,000,000 revolving
line of credit agreement, effective September 17, 1996, which matures January
31, 1998, and had an outstanding balance of $2,990,588 at March 31, 1997.  The
Company receives funding for approximately 98% of the principal on each loan it
originates or purchases through the warehouse line.  The outstanding principal
is collateralized by the original notes and mortgages and repaid upon their
sale.  Interest accrues at the lower of 350 basis points over the Federal Funds
rate (7.07% at March 31, 1997) or 150 basis points over the prime interest rate
(8.50%, at March 31, 1997) and is due monthly.  The agreement stipulates that
the bank will hold the original notes and mortgages for all loans funded under
the line as collateral.  Upon sale of the loans, the purchaser will fund the
bank directly and the collateral will be released.

                                       16
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

7.   REVOLVING LINES OF CREDIT, CONTINUED

On November 8, 1996 the Company entered into a separate working capital line of
credit (servicing collateralized) for $3,000,000 (increased to $5,000,000
effective January 1, 1997) which matures January 31, 1998.  The interest rate on
the working capital line of credit is prime plus 2.25%.

In connection with the above borrowings, the Company has agreed to certain
financial covenants regarding tangible net worth, leverage ratios, and
liquidity.  The Company is permitted to pay dividends as long as the financial
ratios are maintained.

The composition of the revolving lines of credit was as follows at March 31,
1997:

Payable to financial institution, warehouse line             $2,990,588
Payable to financial institution, working capital line        5,000,000
                                                             ----------
                                                             $7,990,588
                                                             ==========

8.   PREFERRED STOCK

On June 18, 1996, the Company issued 1,500,000 shares of Preferred Stock, Series
A, par value $.01 per share ("Series A Preferred Stock), for the purchase price
of $1.50 per share or an aggregate of $2,250,000.  A total of 1,000,000 shares
of the Series A Preferred Stock was purchased by an unaffiliated entity pursuant
to a Preferred Stock Purchase Agreement, dated May 3, 1996, as amended.

The Series A Preferred Stock has a cumulative annual preferred dividend of $.18
per share, payable quarterly before any distribution to holders of Common Stock,
with mandatory payment of dividends required for the first year after issue, and
shares of Series A Preferred Stock are convertible at any time into Common Stock
at a conversion rate, subject to certain adjustments, of one share of Common
Stock for each share of Series A Preferred Stock.  The Series A Preferred Stock
is redeemable at par, plus accrued, unpaid dividends, at the option of the
Company, at any time after two years from the date of issuance. Each share of
Series A Preferred Stock is entitled to one vote with respect to all matters
submitted to a vote of the stockholders of the Company, and holders of Series A
Preferred Stock are entitled to vote as a class as provided by law in connection
with any amendment to the Articles of Incorporation or Bylaws of the Company, or
any other corporate action that would adversely affect the holders of Series A
Preferred Stock.  Shares of Series A Preferred Stock are entitled to a
liquidation preference of $1.50 per share, plus any accrued, unpaid dividends,
before any distribution to holders of Common Stock upon dissolution of the
Company.

                                       17
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

8.   PREFERRED STOCK, CONTINUED

Holders of the Series A Preferred Stock were granted "piggyback" registration
rights covering the shares of Common Stock into which the Series A Preferred
Stock is convertible after nine months from the date of issuance of the Series A
Preferred Stock, which rights terminate after three years from the date of
issuance of the Series A Preferred Stock.
 
9.    INCOME TAXES

The provision for income taxes for the three months ended March 31, 1997 is
comprised of the following:

<TABLE>
<CAPTION>
                                                 1997
                                                ------
<S>                                           <C>
 Current:                                    
   Federal                                     $763,546
   State                                         31,087
                                               --------
                                                794,633

 Deferred provision                              38,802
                                               --------
 Provision for income taxes                    $833,435
                                               ======== 
</TABLE> 

The components of deferred tax assets and liabilities were as follows at March
31:

<TABLE> 
<CAPTION> 
                                                        1997
                                                       ------
<S>                                                   <C> 
 Deferred tax liabilities:
  Depreciation and amortization                       $(47,985)
                                                      --------
 Deferred tax assets:                         
  Net operating loss carry forwards                     73,230
  Allowance for credit losses                          218,554
  Unrealized gain                                      213,550
                                                      --------
                                                       505,334

  Valuation allowance                                  (73,230)
                                                      --------
  Total deferred tax assets                            432,104
                                                      --------
 Net deferred tax assets                              $384,119
                                                      ========
</TABLE>

                                       18
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

9.   INCOME TAXES, CONTINUED

 The reconciliation between the income tax provision and the income tax expense
using the Federal statutory rate for the three months ended March 31, 1997 is as
follows:

<TABLE>
<CAPTION>
                                                    1997
                                                   ------
<S>                                               <C>
Federal tax at statutory rate of 34%              $808,564
State income taxes, net of federal tax benefit      21,591
Expenses not deductible for tax purposes             3,280
                                                  --------
Total income tax provision                        $833,435
                                                  ========
</TABLE>

There was no income tax provision for the six months and quarter ended March 31,
1996 due to the carryforward of net operating losses from prior years and
accordingly no rate reconciliation is provided.

10.  GAIN ON SALE OF LOANS

     Gain on sale of Loans, as defined in Note 2, and the related cost is as
follows for the three month period ended March 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                1997         1996
                               ------       ------
<S>                         <C>           <C>
Gain on whole Loan sales    $ 1,456,121   $1,515,303
Interest-only strip gain      3,864,442      208,205
                            -----------   ----------
                              5,320,563    1,723,508

Premiums, net                (1,488,915)    (532,087)
Transaction costs                    --           --
                            -----------   ----------
Gain on sale of Loans       $ 3,831,648   $1,191,421
                            ===========   ==========
</TABLE>

11.  COMMITMENTS AND CONTINGENCIES

The Company leases its office space at its corporate headquarters and eleven
branch offices through operating leases expiring through 2001.  Rent expense for
the three month periods ended March 31, 1997 and 1996 totaled $112,809 and
$56,850, respectively.

                                       19
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, continued

11.  COMMITMENTS AND CONTINGENCIES, CONTINUED

The Company also leases certain office equipment under various capital leases.
The economic substance of these leases is that the Company is financing the
acquisition of the assets through the leases.  Required minimum rental payments
for the remaining terms of the leases are as follows:

<TABLE>
<CAPTION>
 
    Years Ending                           Capital Leases   Operating Leases
    ------------                           --------------   ----------------
    <S>                                    <C>              <C>
    1997 remaining                              $ 2,229         $  123,370
    1998                                          6,125            278,155
    1999                                            472            277,912
    2000                                             --            208,615
    2001                                             --            177,619
    Less amount representing interest            (1,189)                --
                                                -------         ----------
                                                $ 7,637         $1,065,671
                                                =======         ==========
</TABLE>

The Loans sold by the Company are sold with limited recourse.  In the event that
the borrower defaults on its first payment, the Company is committed to
repurchasing the loan.  The Company submits a claim for 90% of the principal
amount of the loan to HUD under the Title I insured loan program for such
repurchased loans after exhausting collection efforts as required under the
program.  The remaining 10% of the loan is therefore uninsured.

The Company is a party to various lawsuits from time to time which arise during
the normal course of business.  In the opinion of management, the potential
claims against the Company from the lawsuits would not materially affect the
Company's financial position, results of operations, or cash flows.

Home is required to maintain adjusted net worth, as defined by HUD, amounting to
$250,000.  At March 31, 1997, Home had adjusted net worth of $10,386,300.

12.  STOCK OPTIONS

In June of 1993, Home issued options to purchase 555 shares of its common stock
at $120 per share to one of its employees.  As a result of the acquisition of
HomeCapital, these options were converted into options to purchase 409,668
shares of HomeCapital stock at $.16 per share. The options, which are fully
exercisable as of March 31, 1997, expire in the year 2001.  No shares have been
exercised.

                                       20
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, Continued

12.  STOCK OPTIONS, CONTINUED

Effective March 21, 1996, the Board of Directors of the Company adopted the
HomeCapital Investment Corporation 1996 Stock Option Plan, which was ratified by
stockholder vote on August 16, 1996.   The Stock Option Plan provides that up to
500,000 shares of Common Stock may be issued upon exercise of options granted
under the Stock Option Plan, subject to adjustment to reflect stock splits,
stock dividends, mergers and similar transactions.  At March 31, 1997, options
to purchase an aggregate of 450,000 shares of Common Stock had been granted
under the Stock Option Plan.  Exercise prices per share range from $3.50 to
$9.00.

13.  SEGMENT INFORMATION

For the three month periods ended March 31, 1997 and 1996, Title I Loan
origination and production (exclusive of paydowns and repurchases) is summarized
as follows:

<TABLE>
<CAPTION>
                                     1997                1996
                               ---------------     --------------
 Source of Loan Production     Amount       %      Amount      %
 -------------------------     ------      ---     ------     ---
<S>                          <C>          <C>    <C>          <C>
Correspondent Loans          $31,801,408  89.3   $15,881,280  75.9
Dealer Loans                   1,750,588   4.9     4,108,716  19.6
Direct Loans                   2,069,664   5.8       944,807   4.5
                             -----------   ---   -----------  ----
Total Title I Loans          $35,621,660   100   $20,934,803   100
                             ===========  ====   ===========  ====
</TABLE>

The Company also originates conventional home improvement Loans through several
arrangements with other home improvement lenders on a pre-approved basis.  Total
conventional loans originated for the three months ended March 31, 1997 and 1996
were $1,045,335 and $935,787, respectively.  At March 31, 1997 and 1996,
$134,589 and $0, respectively, of conventional loans were held for sale under
firm purchase commitments.

Prior to October 1995, the Company sold all of its loans held for sale on a
servicing released basis.  In October 1995, the Company commenced selling the
majority of its loan production to its then warehouse lender on a servicing
retained basis.  Additionally, effective March 1, 1996, the Company was approved
as a Seller/Servicer with Fannie Mae to sell Title I Loans to Fannie Mae with
servicing retained.  The Company began selling Title I Loans to Fannie Mae in
June 1996.  Following is a summary of loans sold during the three month periods
ended March 31, 1997 and 1996:

                                       21
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                    NOTES TO FINANCIAL STATEMENTS, Continued

13.  SEGMENT INFORMATION, CONTINUED

<TABLE>
<CAPTION>
 
Title I Loans Sold:                    1997         1996
-------------------                   ------       ------
<S>                                 <C>          <C>
    Servicing released              $   609,526  $        --
    Servicing retained:
        Financial institutions               --   20,159,345
        Fannie Mae - Whole loans     22,237,065           --
        Fannie Mae - MBS             14,816,156           --
                                    -----------  -----------
                                     37,053,221   20,159,345
                                    -----------  -----------
Total Title I Loans Sold            $37,662,747  $20,159,345
                                    ===========  ===========
</TABLE>

                                       22
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The Company conducts its operations entirely through its wholly-owned
subsidiary, HomeOwners Mortgage and Equity, Inc. ("Home"). See Note 1 to Notes
to Consolidated Financial Statements.

Home is a specialized consumer finance company organized in 1993 to originate,
purchase, sell and service home improvement and other second mortgage loans
secured by residential property.  Home primarily finances Title I home
improvement loans ("Title I Loans") and conventional consumer and home equity
loans that may fund a variety of borrower needs ("Conventional Loans").  Loans
originated or purchased by Home are financed through bank warehouse credit lines
and then sold to the Federal National Mortgage Association ("Fannie Mae"),
secondary market mortgage investors and other financial institutions.  Home
originates its loans primarily through a national network of mortgage company
loan correspondents ("Correspondents"), through direct mail solicitation of
individual homeowners ("Direct Loans"), and through pre-qualified home
improvement contractors ("Dealers") principally in the Southwestern and Western
regions of the United States.  Additionally, the Company has continued to pursue
special arrangements for loans to customers of home improvement supply and
installation firms ("Corporate Alliances").  The Corporate Alliances
relationships provide another source for Direct Loans.

In November 1996, Home concluded a marketing agreement with Builders Square,
Inc., a subsidiary of Kmart Corporation, under which, on an exclusive basis,
Home will market its MoneyLink loan products through the Builders Square stores.
The agreement called for an initial test period of six months.  Effective May
31, 1997, the test period will conclude early and Home will proceed with
implementing the MoneyLink program on a national basis to Builders Square
customers in its 168 stores in the United States and Puerto Rico.

RESULTS OF OPERATIONS

SIX MONTHS ENDED MARCH 31, 1997 ("1997 period"), COMPARED TO SIX MONTHS ENDED
MARCH 31, 1996 ("1996 period"):

     A comparison of results of operations of the 1997 period to the 1996 period
reflects the substantial shift of the business from cash loan sales to sales of
loans and Mortgage-backed Securities ("MBS") to Fannie Mae, with the retention
of servicing of the assets transferred.  It also reflects the significant growth
the Company has attained during the past year in both loan production volume and
geographical diversity of its area of operations.  The Company originated $75.5
million of loans during the 1997 period compared to $41.6 million of loans
during the 1996 period, an increase of 81.4%.  This increase is a result of an
increase in the number of active Correspondents, increase in the level of Direct
Loan originations and an expansion in the number of states served.  At March 31,
1997, the Company had approximately 209 active Correspondents and 237 active
Dealers, compared to approximately 105 active Correspondents and 154 active
Dealers at March 31, 1996.  As of March 31, 1997, the Company was approved by
state regulatory authorities for loan originations in 36 states.  This
represented an increase of 13 states during the six months ended March 31, 1997.
Additionally, during the six months 

                                       23
<PAGE>
 
ended March 31, 1997, the Company opened 6 new branch offices. New offices were
opened in Seattle, Denver, Chicago, Pittsburgh, Cleveland, and Atlanta. Further,
the Phoenix office was expanded to accommodate direct mail loan solicitations.
Of the $75.5 million of loans originated in the 1997 period, $74.0 million were
Title I Loans and $1.5 were Conventional Loans.

     The following table sets forth certain data regarding loans originated by
the Company during the 1997 period and the 1996 period:

<TABLE>
<CAPTION>
 
                                  Six Month Period
                                  Ended March 31,
                                 1997         1996
                                ------       ------
<S>                           <C>          <C>
Principal amount of loans:
Correspondents:
Title I                       $63,547,512  $28,141,876
Conventional                    1,522,864    1,631,557
                              -----------  -----------
Total Correspondent            65,070,376   29,773,433
Dealers - Title I               4,394,927    9,987,526
Direct - Title I                6,030,052    1,864,649
                              -----------  -----------
Total                         $75,495,355  $41,625,608
                              ===========  ===========
Number of loans:
Correspondents:
Title I                             2,728        1,276
Conventional                           74           60
                              -----------  -----------
Total Correspondent                 2,802        1,336
Dealers - Title I                     331          696
Direct - Title I                      337          105
                              -----------  -----------
Total                               3,470        2,137
                              ===========  ===========
</TABLE>

     Total revenues increased 276% to $10.8 million for the 1997 period from
$2.9 million for the 1996 period.  The increase was primarily the result of the
increased volume of loans originated and the sale of such loans, with the
retention of servicing of assets transferred.

                                       24
<PAGE>
 
     The following table sets forth the principal balance of loans sold and
related gain on sale data for the 1997 period and 1996.
<TABLE>
<CAPTION>
 
                                              Six Month Period
                                              Ended March 31,
                                             1997          1996
                                            ------        ------
<S>                                      <C>           <C>
Principal amount of loans sold:
 Title I                                 $74,779,847   $39,475,564
Conventional                               1,442,425     1,631,557
                                         -----------   -----------
Total                                    $76,222,272   $41,107,121
                                         ===========   ===========
Gain on sale of loans                    $ 8,618,767   $ 2,559,652
Gain on sale of loans as a percentage
   of principal balance of loans sold           11.3%          6.2%
</TABLE>

Gain on sale of loans, as a percentage of the principal balance of loans sold,
increased in the 1997 period over the 1996 period, primarily due to the
Interest-only strip component of the gain in the 1997 period.  The increase in
gain on sale of loans increased from $2.6 million in the 1996 period to $8.6
million in the 1997 period.  The Interest-only strip component of the gain
totaled $9.5 million in the 1997 period.

     On January 1, 1997, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" - FASB Statement No. 125, became
effective and established new accounting rules regarding the computation of gain
on sale of loans and MBS.  SFAS No. 125 requires certain reclassifications of
the Company's balance sheet and statement of operations. As a result of adopting
the statement, the Excess servicing receivable previously shown on the Balance
Sheet as of December 31, 1996 has been renamed as Interest-only strip
receivable, and classified as an "available for sale" security.  Interest-only
strip receivables arising from sale of Loans and MBS in the three month period
ended March 31, 1997, are classified as "trading" securities.  The Company
recorded as revenue, a net unrealized gain of $427,975 on the valuation of the
Interest-only strip receivable for Loans and MBS sold in the quarter ended March
31, 1997.

In the year ended September 30, 1996, the Company commenced selling loans,
retained the right to service such assets, and additionally retained an
Interest-only receivable associated with the transfer and sale of the assets.
Prior to January 1, 1997, the income from the servicing of the assets was
classified as Loan Servicing Income.  With the adoption of SFAS 125, the revenue
will now be classified as interest income on the Statement of Operations.

Loans serviced totaled approximately $158,100,000 at March 31, 1997, as compared
to $38,400,000 March 31, 1996.
 
Interest income-loans increased 297% to $694,416 during the 1997 period from
$174,913 during the 1996 period.  The increase was primarily the result of the
increase in the size of the portfolio of assets serviced and loans held for
sale.

                                       25
<PAGE>
 
     As a result of the adoption of SFAS No. 125, amounts previously reported as
loan servicing income were reported as interest-investments during the three
month period ended March 31, 1997.  Accordingly, no servicing costs were
recorded for the three months ended March 31, 1997.  Instead, those costs were
netted against the cash flows associated with the Interest-only strip
receivable.  Those cash flows are recorded as a deduction of the Interest-only
strip receivable.  The investment interest income reflects the accreted income
associated with the discount rate of the Interest-only strip receivable.

     The provision for credit losses increased from zero in the 1996 period to
$550,000 in the 1997 period.  The provision for credit losses is based upon
periodic analysis of the portfolio, economic conditions and trends, historical
credit loss experience, the borrowers' ability to repay, collateral values, and
estimated FHA insurance recoveries on loans originated and sold. The increase in
the provision for credit losses was due primarily to the increase in loan
production during the six months ended March 31, 1997.  Presently, upon sale of
loans by Home the purchaser assumes all credit risk, except for first payment
default, fraud and certain other limited exceptions.  If Home changes its loan
disposition strategy in ways that increase its credit risk by securitizing or
otherwise holding the loans longer in portfolio, then the provision for credit
losses as a percentage of loans originated can be expected to increase.

     Salaries and employee benefits increased 86% to $1,872,780 for the 1997
period from  $1,009,159 for the 1996 period, primarily as a result of an
increase in the pay rates of employees and the increase in hiring professionals
required for growth.  During the 1997 period, in order to provide adequate
infrastructure for anticipated future growth, the Company increased the number
of new hire professional staff relative to clerical staff hirings.  This
decision to increase the hiring of senior professionals resulted in increased
employment costs when compared to the 1996 period when new hires were
predominately clerical personnel.  At the end of the 1997 period, the Company
had total employment of 87 as compared to 43 at the end of the 1996 period.

     Loan costs, consisting primarily of costs for credit reports, flood
reports, title reports, inspection fees, and the provision for credit losses,
increased 604% to $808,550 for the 1997 period from $114,801 for the 1996 period
due primarily to the provision for credit losses of $550,000, as well as the
increase in loan production of $33.9 million from the 1996 period to 1997.

     Total general and administrative expenses increased 76% to $1,313,174 for
the 1997 period from $745,972 for the 1996 period.  The increase was primarily
as a result of increases in postage and courier costs, telecommunication costs,
stationary and office supplies expenses, travel costs, advertising expenses, and
depreciation expense.  The increase in these costs was primarily attributable to
the increased volume of loan originations, loans serviced, and the new offices
opened.

     Interest expense increased 218% to $532,049 for the 1997 period from
$167,513 for the 1996 period.  The increase was the direct result of increased
loan originations, the corresponding increase in the average outstanding balance
of the warehouse credit line, and the financing of the Interest-only strip
receivable.

                                       26
<PAGE>
 
     The provision for income taxes in the 1997 period was $2,048,514. Prior to
June 30, 1996, the Company recorded no tax provisions due to net accumulated
operating losses. For the six month period ended March 31, 1997, the Company had
income before income taxes of $5.8 million as compared to $645,542 for the six
month period ended March 31, 1996. A valuation allowance of $73,230 on deferred
tax assets remains at the end of the 1997 period due to net operating loss
carryforwards generated by the Company which it may not be able to utilize in
future periods. The Company and Home file separate Federal and state income tax
returns.

     The effective income tax provision for the 1997 period was 35%. This
percentage differs from the federal statutory rate of 34% due primarily to the
effect of state income taxes.

     As a result of the foregoing, net income increased to $3.8 million ($.38
per share) for the 1997 period from $645,542 ($.081 per share) for the 1996
period.

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996

     The net income for the second quarter of fiscal 1997 ended March 31, 1997,
as compared to the first quarter of fiscal 1997 ended December 31, 1996,
declined by $699,467, from $2,244,160 to $1,544,693, respectively.  Revenues
declined from $5,612,349 in the first quarter to $5,189,962 in the second
quarter primarily due to the lower gain on sale of the MBS transactions closed
in the quarter ended March 31, 1997, and the additional premium paid associated
with the acquisition of higher credit-quality loans.  Total costs and expenses
for the second quarter ended March 31, 1997, were $2,811,834 as compared to
$2,153,112 for the first quarter ended December 31, 1996.  The increase of
$658,722, or 31%, resulted primarily from the opening of several new offices,
the increase in personnel and expenses to support the direct mail marketing
program, and the increase in personnel and administrative costs required to
implement the Company's new Corporate Alliance with Builders Square. The Company
anticipates that in future periods it will realize increased loan production
from the personnel and facilities established with these expenditures, beginning
in the third quarter of fiscal 1997.


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash requirements arise from the cost of loan originations
and payments of operating expenses, interest and income taxes. Loan originations
are initially funded principally through the Company's warehouse line of credit
pending the sale of loans in the secondary market. Substantially all of the
loans originated by the Company are sold. Net cash provided by (used in) the
Company's operating activities for the six months ended March 31, 1997 and 1996
was approximately ($4.2 million) and $.2 million, respectively. The net cash
from the Company's operating activities resulted primarily from the proceeds
from the sale of loans totaling $75.4 million and $42.5 million for the six
month periods ended March 31, 1997 and 1996, respectively.

                                       27
<PAGE>
 
     Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans in the secondary market, are essential for
the continuation of the Company's loan origination operations.  At March 31,
1997, the Company had a $15 million warehouse line of credit (the "Warehouse
Line").  The Warehouse Line matures January 31, 1998.  At March 31, 1997, $3.0
million was outstanding under the Warehouse Line and $12.0 million was
available.  The Warehouse Line, as amended, bears interest at the lower of prime
plus 1.5% per year or the Federal funds rate plus 3.5% per year and is
collateralized by loans held for sale.  The agreement with the lender requires
the Company to maintain a minimum adjusted tangible net worth of $7.2 million.
In addition, the Company secured a $3.0 million working capital line of credit
(the "Working Capital Line") on November 8, 1996 (increased to $5.0 million
effective January 1, 1997) from the same lender, which is collateralized by a
pledge of the Company's Interest-only strip receivable.  The Working Capital
Line has a 12-month revolving credit period, bears interest, payable monthly, at
prime plus 2.25% per year, and requires the Company to maintain a minimum
adjusted tangible net worth of $7.2 million. Borrowings under the Working
Capital Line cannot exceed the lesser of (i) the book value of the Interest-only
strip receivable or, (ii) 50% of the appraised value of the Interest-only strip
receivable as determined by the lender. While the Company believes that it will
be able to maintain its existing credit facilities and obtain replacement
financing as its credit arrangements mature and obtain additional financing, if
necessary, there can be no assurance that such financing will be available on
favorable terms, or at all.
 
     Until October 1995, the Company's principal source of liquidity was the
sale of whole loans, servicing released. While this enabled the Company to meet
its operating cash requirements, it limited the Company's growth potential and
return on its loan originations. To remedy this situation, the Company embarked
on a strategy in fiscal 1995 that would enable the Company to position itself to
retain the servicing rights and the related interest-only spread associated with
its loan originations and look to various other sources to securitize its loan
production, such as sales to Fannie Mae under the Title I Loan program and the
securitized sale of loan pools in the secondary market. The Company was approved
as a Seller/Servicer under the Fannie Mae Title I Loan purchase program in March
1996 and required to obtain expanded warehouse financing and additional capital
to support loan sales to Fannie Mae. During the six month period ended March 31,
1997, the Company sold $71.3 million in loans and MBS to Fannie Mae, retaining
servicing rights and the Interest-only strip receivable. The Company intends to
continue selling substantially all of its qualified Title I Loans to Fannie Mae
until it is able to privately assemble and securitize such loans in the
secondary market on a cost effective basis. Any such securitization program
would necessarily entail its own liquidity demands, including without
limitation, funding of reserves and other credit enhancements, income taxes and
significant issuance costs, and require larger warehouse lines of credit and
additional capital to meet rating agency requirements and the increased
liquidity demands.

     While the increase in its Warehouse Line, Working Capital Line, and
additional capital have enabled the Company to significantly increase its loan
originations and Loan sales to Fannie Mae, such sales, with the retention of the
Interest-only strip receivable, create additional short-term cash requirements.
Loan sales to Fannie Mae are generally made at a lower premium, and include the
retention for the life of the loan of up to 500 basis points of the initial
spread 

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<PAGE>
 
between the coupon rate of the Loans and the pass-through rate to Fannie Mae,
and must be accounted for on a basis, as described above, that generates a much
larger gain on sale for income tax purposes. This gain is subject to federal and
state income tax currently payable, even though the cash interest income from
the related Loan sales will be received over the life of the Loans. Accordingly,
in order for the Company to continue to grow its loan originations and servicing
portfolio, it must constantly raise additional capital through the sale of debt
and/or equity securities until the servicing portfolio is large enough to be
self-funded.

     Beginning in the three month period ended March 31, 1997, as an alternative
to whole loan sales to Fannie Mae, the Company began participating in the Fannie
Mae FHA Title I Mortgage-Backed Securities Program ("MBS Program").  Under the
MBS Program, the Company delivers qualifying Title I Loans to Fannie Mae and
mortgage-backed securities are created.  This MBS Program allows an interest
spread up to 250 basis points to be retained by the Company and results in a
mortgage-backed security that could be held by the Company or sold in the
secondary market for cash.  For the three months ended March 31, 1997, the
Company sold approximately $14.8 million in Fannie Mae FHA Title I MBS.  These
transactions generated cash gains of $1.2 million and $.9 million in Interest-
only strip receivables.

     In May 1997, Home engaged Prudential Securities Incorporated to assist it
in the implementation of a securitization program.  Under this securitization
program, Home intends to convert its loans into mortgage pass-through
securities, and subsequently securitize these mortgage pass-through securities
by issuing asset backed securities collateralized by these mortgage pass-through
securities.  Prior to securitization, Home intends to finance the accumulation
of the mortgage pass-through securities under a $50,000,000 repurchase agreement
with Prudential Securities Incorporated.

     During the 1997 period, the Company used $392,185 in investing activities,
primarily for furniture, fixtures and equipment, including $90,000 for the
further development of the Lot$Pro computer system, and provided $5.7 million in
financing activities through increasing usage of its revolving lines of credit
and the issuance of Common Stock through the exercise of warrants.

     The Company expects to spend approximately $250,000 for additional
furniture, fixtures and equipment through the remainder of fiscal 1997 for the
expansion of its lending network, and approximately $100,000 for additional
upgrades and enhancements to its computer system.

     The Company believes that it will need to raise approximately $10 million
in debt and/or equity funds to support its anticipated growth in fiscal 1997.
There can be no assurance that the Company will be able to raise such funds.
The failure to raise such funds may impair the Company's ability to implement
its business strategy and grow its business, and may have a material adverse
effect on the financial condition, results of operations and liquidity of the
Company.

                                       29
<PAGE>
 
SAFE HARBOR STATEMENT

The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995: Some of the statements contained in this document
that are not historical facts are forward looking statements.  Actual results
may differ from those projected in the forward looking statements.  These
forward looking statements involve risks and uncertainties, including but not
limited to the following risks: changes in the performance of the financial
markets, in the demand for and market acceptance of the Company's loan products,
and in general economic conditions, including interest rates, presence of
competitors with greater financial resources and the impact of competitive
products and pricing; the effect of the Company's policies; and the continued
availability to the Company of adequate funding sources.  Investors are also
directed to other risks discussed elsewhere in this document and in other
documents filed by the Company with the Securities and Exchange Commission.

                                       30
<PAGE>
 
                                    PART II

                               OTHER INFORMATION

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

     (a)  Exhibits:

          Exhibit 10.1  Fifth Amendment to the Warehouse Loan Agreement, dated
                        as of January 1, 1997, among the Company, Home, and
                        Guaranty Federal Bank, F.S.B.

          Exhibit 10.2  First Amendment to the Working Capital Line of Credit
                        and Security Loan Agreement dated as of January 1, 1997,
                        among the Company, Home, and Guaranty Federal Bank,
                        F.S.B.

          Exhibit 27   Financial Data Schedule (Electronic Filing Only)

     (b)  Reports on Form 8-K:  None

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<PAGE>
 
                                   SIGNATURES

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

                              HomeCapital Investment Corporation
                              (Registrant)


Date:  May  14, 1997
                                    By: /s/ John W. Ballard
                                       --------------------------------------
                                       John W. Ballard, President,    
                                       Chairman of the Board of Directors and 
                                       Chief Executive Officer

Date:  May 14, 1997
                                    By: /s/ Michael B. Thimmig
                                       -------------------------------------- 
                                       Michael B. Thimmig, Executive Vice
                                       President, Chief Financial Officer and
                                       Treasurer

                                       32