<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 December 31, 1996.
 
[ ]   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                           (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 January 31, 1997, there were 8,226,600 shares of common stock of the
issuer outstanding.

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

          The Exhibit Index appears on page 27.

 

                                       1
<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 December 31, 1996                                   3
 
              Consolidated Statements of Operations (Unaudited)
              For the Three Months Ended December 31, 1996
              and 1995                                                  4
 
              Consolidated Statements of Cash Flows (Unaudited)
              For the Three Months Ended December 31, 1996
              and 1995                                                  5
 
              Notes to Consolidated Financial Statements                6
 
Item 2.       Management's Discussion and Analysis or
              Plan of Operation                                        21
 
PART II.      OTHER INFORMATION
 
Item 6.       Exhibits and Reports on Form 8-K                         27
 
SIGNATURES                                                             28
 

                                       2
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEET
                               December 31, 1996
                                  (Unaudited)
 
                     ASSETS

Cash                                                $     931,263
Cash deposits, restricted                                 468,108
Loans held for sale, net                                5,967,814
Excess servicing receivable                            10,521,807
Prepaid and other assets                                  551,962
Furniture, fixtures and equipment, net                    817,514
Deferred tax assets                                       300,590
                                                    -------------
          Total assets                              $  19,559,058
                                                    =============
 
 
            LIABILITIES AND STOCKHOLDERS' EQUITY
 
Notes payable                                       $     133,340
Revolving lines of credit                               8,437,870
Capital lease obligations                                  11,456
Accrued expenses and other liabilities                  1,219,831
Allowance for credit losses on loans sold                 375,000
Income taxes payable                                    1,259,473
                                                    -------------     
          Total liabilities                            11,436,970
 
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; 7,986,364  shares 
  issued and outstanding                                   79,863
Additional paid-in capital                              4,724,028
Retained earnings                                       3,360,448
Notes receivable for stock                                (57,251)
                                                  ---------------
          Total stockholders' equity                    8,122,088
                                                  ---------------
          Total liabilities and                     $  19,559,058
            stockholders' equity                  ===============


                                              
              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 Three Months Ended December 31, 1996 and 1995
                                  (Unaudited)

 
 
                                                   1996          1995
                                               ------------   ------------
 
Revenues:
    Gain on sale of loans                      $  4,787,120   $  1,368,231
    Interest - loans                                364,443        100,922
    Interest - other                                  1,235          1,141
    Loan servicing income                           422,482         13,056
    Other income                                     37,069         42,748
                                               ------------   ------------
          Total revenues                          5,612,349      1,526,098
                                               ------------   ------------
 
Costs and Expenses:
    Salaries and employee benefits                  779,949        510,158
    Servicing costs                                 179,909          9,725
    Loan costs                                      340,828         58,560
    General and administrative                      497,625        352,316
    Occupancy                                       111,325         65,283
    Interest                                        243,476         86,194
                                               ------------   ------------
          Total costs and expenses                2,153,112      1,082,236
                                               ------------   ------------
 
Income before income taxes                        3,459,237        443,862
Provision for income taxes                        1,215,077           --    
                                               ------------   ------------
          Net income                           $  2,244,160   $    443,862
                                               ============   ============
 
Income per common and common equivalent  share:
    Primary:
      Earnings per common share                $        .26   $        .06
                                               ============   ============
       Weighted average number of common 
         and common equivalent shares
           outstanding                            8,217,626      7,502,965
                                               ============   =============
                                        
    Fully Diluted:
      Earnings per common share                $        .23
                                               ============
      Weighted average number of
        fully diluted common shares 
          outstanding                             9,757,910
                                               ============

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

                                       4
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             For the Three Months Ended December 31, 1996 and 1995
                                  (Unaudited)
 
                                                   1996             1995
                                             ---------------   ---------------
 
Cash flows from operating activities:
   Net income                                $     2,244,160   $       443,862
   Adjustments to reconcile net income
      to net cash provided by
      (used in) operating activities:
   Depreciation and amortization                     265,108            58,068
   Deferred tax benefit                             (110,088)             --
   Provision for credit losses                       200,000              --
   Gain on sales of loans                         (4,787,120)       (1,368,231)
   Proceeds from sales of loans                   36,258,086        21,199,478
   Purchase and origination of loans             (38,618,789)      (19,770,036)
   Change in operating assets and
      liabilities:
      Decrease in cash deposits, restricted          237,646              --  
      (Increase) decrease in accrued
         interest receivable                          10,289            (5,911)
      Increase in prepaid and other assets          (323,698)          (77,254)
      Increase in accrued expenses and
         other liabilities                           109,988            93,291
                                             ---------------   ---------------
    Net cash provided by (used in)
      operating activities                        (4,514,418)          573,267
                                             ---------------  ---------------
Cash flows from investing activities:
   Purchase of furniture, fixtures and
      equipment                                     (218,075)          (87,348)
                                             ---------------   ---------------
Cash flows from financing activities:
   Increase (decrease) in revolving            
    lines of credit                                4,373,690          (406,883)
   Payments on notes payable                         (24,999)          (24,999) 
   Proceeds from exercise of Series A 
     Warrants                                        949,831              --
   Proceeds from exercise of other                
    Warrants                                          92,700              --
   Payments on capital lease obligations              (2,896)           (8,229)
   Preferred stock dividends                         (68,054)             --
                                             ---------------   ---------------
      Net cash provided by financing
         activities                                5,320,272          (440,111)
                                             ---------------   ---------------
Increase in cash                                     587,779            45,808
Cash, beginning of period                            343,484            25,715
                                             ---------------   ---------------
Cash, end of period                          $       931,263   $        71,523
                                             ===============   ===============


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

                                       5
<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 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").

                                       6
<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 December 31, 1996 and
     for the three months ended December 31, 1996 and 1995, 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 servicing retained that have not been remitted
     to the purchasers of such Loans as of December 31, 1996.  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 December
     31, 1996 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.

     REVENUE RECOGNITION
     
     Gain on sale of Loans is recognized upon delivery of Loans to investors.
     Gain on sale of Loans is calculated based upon the difference between the
     net sales proceeds and the carrying amount of the Loans sold, together with
     excess servicing receivable determined on the date of sale.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
    
     REVENUE RECOGNITION, CONTINUED
    
     The Company retains the right to service loans it sells to others for which
     it receives a servicing fee expressed as a percent of the loan amount. The
     servicing fee ranges from 1.00% up to a maximum of 5.00% of the outstanding
     principal balance of the serviced loans. The Company presently subcontracts
     the loan servicing activities for a fee of  0.75%, which the Company
     believes is a normal servicing fee.

     EXCESS SERVICING RECEIVABLE

     The excess servicing receivable is calculated based upon the present value
     of the estimated future servicing revenues after considering the effects of
     the estimated prepayments, defaults, servicing costs and other costs.  The
     discount rate utilized is based upon the assumptions that market
     participants would use for similar financial instruments subject to
     prepayments, defaults, collateral value and interest rate risks.   The
     carrying value of the excess servicing receivable is amortized in
     proportion to and over the period of estimated net future excess servicing
     fee income, for which the amortization is recorded as a charge against
     servicing fee income.

     The estimated future servicing cash flows were discounted using rates that
     averaged 12.5% for the three months ended December 31, 1996.  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 expected cash flows, management
     considers economic conditions at the date of sale.

     The Company periodically reviews the excess servicing receivable for
     impairment.  This review is performed on a disaggregated basis for the
     predominant risk characteristics of the underlying loans which are loan
     type, term, and credit quality.  The Company generally makes loans to
     individuals whose borrowing needs may not be met by traditional financial
     institutions due to credit exceptions.  The Company has found that these
     borrowers are payment sensitive rather than interest rate sensitive.
     Consequently, the Company does not consider interest rates a predominant
     risk characteristic for purposes of impairment.  Impairment, if any, is
     recognized through a valuation allowance in the period of impairment.
     There were no material adjustments to the carrying value of the excess
     servicing receivable during the three month period ended December 31, 1996.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
     
     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 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, 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.

     LOAN SERVICING INCOME
     
     Fees for servicing Loans originated or acquired by the Company and sold
     with servicing rights retained are generally based on a stipulated
     percentage of the outstanding principal balance of such Loans and are
     recognized when earned.  Interest received on Loans sold, less amounts paid
     to investors, is reported as loan servicing income.  Excess servicing
     receivable is amortized systematically to reduce loan servicing income to
     an amount representing normal servicing income and the present value
     discount.  Late charges and other ancillary income are recognized when
     collected.

     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.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
     
     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 excess servicing receivable.  Concentration of credit risk and
     mitigating factors regarding Loans and excess servicing 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
     $1,641,690 at December 31, 1996.

     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 December 31, 1996, the Company had outstanding
     commitments to extend credit or purchase loans in the amounts of
     approximately $33,993,000.

     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 December 31, 1996.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
     
     RECENTLY ISSUED ACCOUNTING STANDARDS
     
     In May 1995, the FASB issued SFAS No. 122 which requires that upon sale or
     securitization of servicing-retained finance contracts, the Company
     capitalize the cost associated with the right to service the finance
     contracts based on their relative fair values.  Fair value is determined by
     the Company based on the present value of estimated net future cash flows
     related to servicing income.  The cost allocated to the servicing right is
     amortized in proportion to and over the period of estimated net future
     servicing fee income.  SFAS No. 122 became effective for the Company on
     October 1, 1996.  There was no effect on the financial statements from the
     adoption because the Company's existing practice of cost capitalization of
     servicing rights is consistent with the provision.

     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.

     The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing
     of Financial Assets and Extinguishments of Liabilities."  This statement
     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.  It also requires that servicing assets be measured by
     allocating the carrying amount between the assets sold and retained
     interests based on their relative fair values at the date of transfer.
     Additionally, this statement requires that the servicing assets and
     liabilities be subsequently measured by (a) amortization in proportion to
     and over the period of estimated net servicing income and (b) assessment of
     impairment or increased obligation based on their fair values.  The Company
     has not adopted the new standard for the current period, but must adopt the
     new requirements for transactions occurring on or after January 1, 1997.
     The Company has not determined the effect on results of operations or
     financial condition in the period of adoption.

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


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
     
     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
     14) 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 December 31, 1996.  Net earnings used in the
     computation of primary earnings per share are reduced by preferred stock
     dividend requirements.

     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 three
     month period ended December 31, 1995, have been reclassified to be
     consistent with the 1996 account classifications


3.   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.

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

3.   FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED
     
     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.

     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.
 
                                                Carrying      Estimated Fair
                                                  Value          Value
                                                ----------------------------
     Financial Assets:
       Cash (a)                              $     931,263    $    931,263
       Loans held for sale (b)                   5,967,814       6,700,468
       Excess servicing receivable (c)          10,521,807      10,521,807
     Financial Liabilities: 
       Debt obligations (d)                      8,582,666       8,582,666
                
          (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 December 31, 1996 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.

                                       13
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED
 
4.   LOANS HELD FOR SALE
     
Loans held for sale consisted of the following at December 31, 1996:
 
                                                           1996
                                                      ---------------
 
        Title I Loans                                 $     5,769,634
        Conventional loans                                     60,385
        Commercial loans                                       26,620
        Capitalized loan origination fees 
          and costs, net                                      234,684
                                                      ---------------
                                                            6,091,323
   
    Allowance for credit losses                              (123,509)
                                                      ---------------
                   Total                              $     5,967,814
                                                      ===============
     The serviced Loan portfolio which includes Loans sold to investors and
     Loans retained by the Company aggregated approximately $126,193,780 at
     December 31, 1996.

5.   ALLOWANCE FOR CREDIT LOSSES
     
     Changes in the allowance for credit losses for Loans consisted of the
     following:
 
                                                            1996
                                                      ---------------
 
        Balance at October 1, 1996                    $       300,000
        Provisions for credit losses                          200,000
        Credit losses incurred                                 (1,491)
                                                      ---------------
        Balance at December 31, 1996                  $       498,509
                                                      ===============
        Components of Allowance:
        Allowance for credit losses on Loans 
          held for sale                               $       123,509
        Allowance for credit losses on Loans sold             375,000
 
 
6.   EXCESS SERVICING RECEIVABLE
      
     The activity in the excess servicing receivable is summarized as follows
      for the three months ended December 31, 1996:
 
        Balance, October 1, 1996                      $     5,078,584
        Excess servicing additions                          5,659,559
        Amortization                                         (216,336)
                                                      ---------------
        Balance, December 31, 1996                    $    10,521,807
                                                      ===============

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


7.   FURNITURE, FIXTURES AND EQUIPMENT
     
     Furniture, fixtures and equipment consisted of the following at 
     December 31:
 
                                                      1996
                                                 --------------
 
        Furniture and fixtures                   $      278,751
        Equipment                                       413,619
        Leasehold improvements                           23,661
        Software cost                                   338,395
                                                 --------------
                                                      1,054,426
 
        Accumulated depreciation                       (236,912)
                                                 --------------
                       
                                                 $      817,514
                                                 ==============

     At December 31, 1996, furniture and fixtures includes $55,523 of assets
     under capital lease with an associated accumulated depreciation of $25,541.


8.   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
     matured January 31, 1997, (extended to February 28, 1997) and had an
     outstanding balance of $5,249,067 at December 31, 1996.  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 (6.26% at December 31, 1996) or 150 basis points
     over  the prime interest rate (8.25%, at December 31, 1996) 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.

     On November 8, 1996 the Company entered into a separate working capital
     line of credit (servicing collateralized) for $3,000,000 which matures
     November 7, 1997.  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.

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


8.   REVOLVING LINES OF CREDIT, CONTINUED
     
     The composition of the revolving lines of credit was as follows at 
     December 31:
 
                                                                  1996
                                                             --------------

        Payable to financial institution, 
          warehouse line                                     $    5,249,067
        Payable to financial institution, 
          working capital line                                    3,000,000
        Payable to financial institution, 
          matured July 31, 1996                                     188,803
                                                             --------------
                                                             $    8,437,870
                                                             ==============
 
9.   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.

     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.

                                       16
<PAGE>
 
               HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
                   NOTES TO FINANCIAL STATEMENTS, CONTINUED
 
 
10.  INCOME TAXES

     The provision for income taxes for the three months ended December 31, 1996
     is comprised of the following:
 
                                                                 1996
                                                             -------------
        Current:
          Federal                                            $   1,268,695
          State                                                     56,470
                                                             -------------
                                                                 1,325,165
 
        Deferred (benefit) provision                              (110,088)
                                                             -------------
 
        Provision for income taxes                           $   1,215,077
                                                             =============
 
     The components of deferred tax assets and liabilities were as follows at
     December 31:
                                                                 1996
                                                             -------------
         
        Deferred tax liabilities:
          Depreciation and amortization                      $     (43,226)

        Deferred tax assets:
          Net operating loss carry forwards                         73,230
          Allowance for credit losses                              138,883
          Unrealized gain                                          204,933
                                                             -------------
                                                                   417,046

          Valuation allowance                                      (73,230)
                                                             -------------
          Total deferred tax assets                                343,816
     
        Net deferred tax assets                              $     300,590
                                                             =============
 
     The reconciliation between the income tax provision and the income tax
     expense using the Federal statutory rate is as follows:
 
                                                                 1996
                                                             --------------
 
        Federal tax at statutory rate of 34%                 $    1,176,141
        State income taxes, net of federal tax benefit               37,270
        Expenses not deductible for tax purposes                      1,666
                                                             --------------
 
        Total income tax provision                           $    1,215,077
                                                             ==============

     There was no income tax provision at December 31, 1995 due to the
     carryforward of net operating losses from prior years and accordingly no
     rate reconciliation is provided.

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

 
11.  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 December 31, 1996 and 1995:
 
                                                   1996             1995
                                               ------------     ------------
 
        Gain on whole Loan sales               $    429,412     $  1,539,523
        Excess servicing gain                     5,659,559          180,742
                                               ------------     ------------
                                                  6,088,971        1,720,265
 
        Premiums, net                            (1,293,154)        (352,039)
        Transaction costs                            (8,697)            --
                                               ------------     ------------
 
        Gain on sale of Loans                  $  4,787,120     $  1,368,231
                                               ============     ============
12.  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 December 31, 1996 
     and 1995 totaled $82,227 and $58,478, respectively.

     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:
 
              Years Ending                Capital Leases      Operating Leases
              ------------                --------------      ----------------
 
                1997 remaining            $        6,716      $        246,740
                1998                               6,124               278,155
                1999                                 472               277,912
                2000                                --                 208,615
                2001                                --                 177,619
    Less amount representing interest             (1,856)                --
                                          --------------      ----------------
                                          $       11,456      $      1,189,041
                                          ==============      ================

     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.

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


12.  COMMITMENTS AND CONTINGENCIES, CONTINUED
     
     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 December 31, 1996, Home had adjusted net worth
     of $8,283,310.


13.  STOCK WARRANTS
     
     At December 31, 1996, HomeCapital had 5,233,932 Series A Warrants
     outstanding.  Holders of Series A Warrants are entitled to purchase one
     share of HomeCapital common stock at $4 per share for each 100 warrants.
     All Series B Warrants expired effective December 31, 1996.  The Series A
     Warrants which were scheduled to expire December 31, 1996, were extended to
     January 31, 1997.

     In addition, 456,170 warrants issued by Home prior to the acquisition of
     HomeCapital were exercised during the three month period ended December 31,
     1996.  Each of these warrants entitled the holders to purchase one share of
     HomeCapital common stock for $.20 per share.

14.  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 December 31, 1996, expire in the
     year 2001.  No shares have been exercised.

     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 December 31, 1996, options to purchase an aggregate of
     425,000 shares of Common Stock had been granted under the Stock Option
     Plan, including 225,000 options granted in the first quarter of fiscal
     1997, with exercise prices ranging from $3.50 to $6.125 per share.

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


15.  SEGMENT INFORMATION
     
     For the three month periods ended December 31, 1996 and 1995, Title I Loan
     origination and production (exclusive of paydowns and repurchases) is
     summarized as follows:
 
                                       1996                     1995
                               --------------------     --------------------
    Source of Loan Production     Amount        %         Amount         %
    -------------------------  -------------  ----      ------------   ---- 

    Correspondent Loans        $  33,268,968  86.7%     $  12,260,596  64.3%
    Dealer Loans                   2,644,339   6.9          5,878,810  30.8
    Direct Loans                   2,437,524   6.4            919,842   4.8
                               -------------  ----      -------------  ----
 
       Total Title I Loans     $  38,350,831   100%     $  19,059,248   100%
                               =============  ====      =============  ====

     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 in the 1996 period and 1995
     period were $477,529 and $695,770, respectively.  At December 31, 1996 and
     1995, $60,385 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 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 December 31, 1996 and 1995:
  
    Title I Loans Sold:               1996               1995
    -------------------           -------------      -------------
 
    Servicing released            $   3,381,867      $   1,955,889
    Servicing retained:
    Financial institutions                --            18,056,100
    Fannie Mae                       34,204,839              --
                                 --------------      -------------
                                     34,204,839         18,056,100
                                 --------------      -------------
       Total Title I Loans Sold  $   37,586,706      $  20,011,989
                                 ==============      =============
 
 

                                       20
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

HomeOwners Mortgage and Equity, Inc. ("Home") was organized as a Delaware
corporation in May 1993 to originate, purchase, sell and service home
improvement and other consumer loans secured by liens on improved property.  On
August 26, 1994, the founders of Home, which currently conducts all of the
Company's mortgage lending activities, acquired, in a reverse acquisition,
approximately 83% of the outstanding common stock of the Company, a publicly
owned corporate shell then named Andromeda Capital Corporation ("Andromeda") and
organized in Nevada in 1980, in exchange for all of the issued and outstanding
common stock of Home, and changed its name to HomeCapital Investment
Corporation.  In connection with such acquisition, all of the former officers
and directors of Andromeda resigned and were replaced by the management of 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
guaranteed or purchased by Home are financed through bank warehouse credit lines
and then sold to the Federal National Mortgage Association ("Fannie Mae"),
secondary mortgage market investors and other financial institutions.  Home
originates its loans primarily through pre-qualified home improvement
contractors ("Dealers") principally in the Southwestern and Western regions of
the United States, and through a national network of mortgage company loan
correspondents ("Correspondents").  The Company has recently initiated special
arrangements for loans to customers of home improvements supply and installation
firms ("Corporate Alliances").


RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 1996 ("1996 PERIOD"), COMPARED TO THREE MONTHS
ENDED DECEMBER 31, 1995 ("1995 PERIOD"):

          A comparison of results of operations of the 1996 period to the 1995
period reflects the substantial shift of the business from cash loan sales to
sales of loans to Fannie Mae servicing retained.  It also reflects the
significant growth the Company has attained during the past year.  The Company
originated $38.8 million of loans during the 1996 period compared to $19.8
million of loans during the 1995 period, an increase of 96%.  This increase is a
result of an increase in the number of active Correspondents and Dealers and an
expansion in the number of states served.  At December 31, 1996, the Company had
approximately 116 active Correspondents and 28 active Dealers, compared to
approximately 55 active Correspondents and 105 active Dealers at December 31,
1995.  Of the $38.8 million of loans originated in the 1996 period, $38.3
million were Title I Loans and $.5 were Conventional Loans.

                                       21
<PAGE>
 
          The following table sets forth certain data regarding loans originated
by the Company during the 1996 period and the 1995 period:

                                           Three Month Period
                                            Ended December 31
                                         1996             1995
                                     -------------    ------------

    Principal amount of loans:
    Correspondents:
      Title I                        $  33,268,968   $  12,260,596
 
      Conventional                         477,529         695,770
                                     -------------   -------------
 
        Total Correspondent             33,746,497      12,956,366
 
    Dealers - Title I                    2,644,339       5,878,810
 
    Direct - Title I                     2,437,524         919,842
                                     -------------   -------------
 
        Total                        $  38,828,360   $  19,755,018
                                     =============   =============
 
    Number of loans:
    Correspondents:
      Title I                                1,441             559
 
      Conventional                              34              28
                                     -------------   -------------
 
        Total Correspondent                  1,475             587
 
    Dealers - Title I                          196             405
 
    Direct - Title I                           146              54
                                     -------------   -------------
 
        Total                                1,817           1,046
                                     =============   =============

     Total revenues increased 268% to $5.6 million for the 1996 period from $1.5
million for the 1995 period.  The increase was primarily the result of the
increased volume of loans originated and the sale of such loans, servicing
retained.

     The following table sets forth the principal balance of loans sold and
related gain on sale data for the 1996 period and 1995.

                                           Three Month Period
                                            Ended December 31,
                                          1996           1995
                                     -------------   -------------
 
    Principal amount of 
      loans sold:
        Title I                      $  37,117,100   $  19,316,219
 
        Conventional                       469,606         695,770
                                     -------------   -------------
 
        Total                        $  37,586,706    $ 20,011,989
                                     =============    ============
 
    Gain on sale of loans            $   4,787,120    $  1,368,231
 
    Gain on sale of loans as 
      a percentage of principal 
        balance of loans sold                 12.7%            6.8%

                                       22
<PAGE>
 
     Gain on sale of loans, as a percentage of the principal balance of loans
sold, increased in the 1996 period over the 1995 period, primarily due to the
excess servicing component of the gain in the 1996 period.  The increase in gain
on sale of loans increased from $1.4 million in the 1995 period to $4.8 million
in the 1996 period.  The excess servicing component of the gain totaled $5.7
million in the 1996 period.

     Loan servicing income, which commenced in the year ended September 30,
1996, totaled $422,482 for the 1996 period.  Such income was derived from
servicing on approximately $126 million of loans sold with servicing retained
and is net of amortization of excess servicing receivable through December 31,
1996.  Loan servicing cost totaled $179,909 in the 1996 period.

     Interest income on loans held for sale increased 261% to $364,443 during
the 1996 period from $100,922 during the 1995 period.  The increase was
primarily the result of the increase in the average size of the portfolio of
loans held for sale.

     The provision for credit losses increased from zero in the 1995 period to
$200,000 in the 1996 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 three months ended December 31, 1996.  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 53% to $779,949 for the 1996
period from $510,158 for the 1995 period, primarily as a result of an increase
in the pay rates of employees and the increase in hiring professionals required
for growth.

     Loan costs, consisting primarily of costs for credit reports, flood
reports, title reports, inspection fees, and the provision for credit losses,
increased 482% to $340,828 for the 1996 period from $58,560 for the 1995 period
due primarily to the provision for credit losses of $200,000 as well as the
increase in loan production of $19.3 million from the 1995 period to 1996.

     Total general and administrative expenses increased 41% to $497,625 for the
1996 period from $352,316 for the 1995 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 and loans serviced.

     Interest expense increased 182% to $243,476 for the 1996 period from
$86,194 for the 1995 period.  The increase was the direct result of increased
loan originations and the corresponding increase in the average outstanding
balance of the warehouse credit line.

                                       23
<PAGE>
 
     The provision for income taxes in the 1996 period was $1,215,077.  Prior to
June 30, 1996, the Company recorded no tax provisions due to net accumulated
operating losses.  For the three month period ended December 31, 1996, the
Company had income before income taxes of $3.5 million as compared to $443,862
for the three month period ended December 31, 1995.  A valuation allowance of
$73,230 on deferred tax assets remains at the end of the 1996 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 1996 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 $2.2 million ($.26
per share) for the 1996 period from $443,862 ($.06 per share) for the 1995
period.

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 three months ended December 31,
1996 and 1995 was approximately ($4.5 million) and $0.6 million, respectively.
The net cash from the Company's operating activities resulted primarily from the
proceeds from the sale of loans totaling $36.3 million and $21.2 million for the
three month periods ended December 31, 1996 and 1995, respectively.


     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 December 31,
1996, the Company had a $15 million warehouse line of credit (the "Warehouse
Line").  The Warehouse Line matured January 31, 1997, (extended to February 28,
1997), at which time it is expected to be renewed to  January 31, 1998.  At
December 31, 1996, $5.2 million was outstanding under the Warehouse Line and
$9.8 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 from the same
lender, which is collateralized by a pledge of the Company's excess servicing
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 excess servicing receivable or, (ii) 50% of the appraised
value of the excess servicing 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 

                                       24
<PAGE>
 
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 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 three month period ended December 31, 1996, the Company
sold $34.2 million in loans to Fannie Mae, retaining all servicing rights.  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 sales to Fannie Mae, such sales, with servicing retained,
create additional short-term cash requirements.  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 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 tax
purposes.  This gain is subject to federal and state income tax currently
payable, even though the cash 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.

     As an alternative to whole loan sales to Fannie Mae, the Company is
reviewing the FHA Title I Mortgage-Backed Securities Program ("MBS Program")
recently announced by Fannie Mae.  Under the MBS Program, the Company would
deliver qualifying Title I Loans to Fannie Mae and mortgage-backed securities
would be created.  This MBS Program would allow a servicing fee of up to 250
basis points to be retained by the Company and result in a mortgage-backed
security that could be held by the Company or sold in the secondary market for
cash.  Initial discussions with potential purchasers indicate prices of 104 to
106 for the mortgage-backed securities.  This possible disposition strategy
would provide additional cash from the sale of loans.

                                       25
<PAGE>
 
     During the 1996 period, the Company used $218,075 in investing activities,
primarily for furniture, fixtures and equipment, including $45,000 for the
further development of the Lot$Pro computer system, and provided $5.3 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 $375,000 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.

                                       26
<PAGE>
 
                                    PART II


                               OTHER INFORMATION


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

 
     (a)  Exhibits:

          Exhibit 10    Fourth Amendment to the Loan Agreement dated as of 
                        January 31, 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

                                       27
<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:  February 13, 1997          By: /s/ John W. Ballard
                                      __________________________________
                                      JOHN W. BALLARD, President,
                                      Chairman of the Board of
                                      Directors, Chief Executive Officer
 
 
 
Date:  February 13, 1997          By: /s/ Tommy M. Parker
                                      __________________________________
                                      TOMMY M. PARKER, Treasurer
                                      and Chief Financial Officer
 
 

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