<PAGE>   1

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

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

                                   FORM 10-Q

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

For the quarterly period ended September 30, 1995
                               ------------------

                                       OR

/ /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from              to 
                              --------------  ------------

Commission File Number 1-9742
                       ------

                       HARBOURTON FINANCIAL SERVICES L.P.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          Delaware                                               52-1573349
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

7926 Jones Branch Rd., Suite 700, McLean, VA                           22102
--------------------------------------------                         ----------
 (Address of principal executive offices)                            (Zip Code)

      Registrant's telephone number, including area code: (703) 821-0875
                                                          --------------

          Securities registered pursuant to Section 12(b) of the Act:

Title of each class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
  Preferred Units                               New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None
                                                                    ----

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

  Number of units outstanding of registrant's Preferred Units at September 30,
                              1995 was 41,902,891.


                                  Page 1 of 39
<PAGE>   2
                       HARBOURTON FINANCIAL SERVICES L.P.

                               INDEX TO FORM 10-Q

                    For the Quarter Ended September 30, 1995

<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                     Number
                                                                                                     ------
<S>             <C>                                                                                  <C>
                                     PART I.  FINANCIAL INFORMATION

Item     1.      Financial Statements

                 Consolidated Balance Sheets as of September 30, 1995
                   (unaudited) and December 31, 1994  . . . . . . . . . . . . . . . . . . . . . . .      3

                 Consolidated Statements of Operations (unaudited) for the three and
                   nine months ended September 30, 1995 and September 30, 1994  . . . . . . . . . .      4

                 Consolidated Statements of Cash Flows (unaudited) for the nine
                   months ended September 30, 1995 and September 30, 1994 . . . . . . . . . . . . .      5

                 Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . .      7

Item     2.      Management's Discussion and Analysis of Financial
                   Condition and Results of Operations  . . . . . . . . . . . . . . . . . . . . . .      24

                                     PART II.  OTHER INFORMATION

                 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      39
</TABLE>


                                  Page 2 of 39
<PAGE>   3
              HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    (Unaudited)
                                                                   September 30,  December 31,
                                                                       1995           1994
                                                                       ----           ----
<S>                                                                <C>            <C>
ASSETS
    Cash and cash equivalents, including restricted cash of $110
      and $0, respectively                                            $  7,585      $  1,670
    Mortgage loans held for sale, net                                  180,104        45,237
    Mortgage loans held for investment                                   1,802         1,084
    Short-term investments                                              10,000            --
    CMO bonds, residual interests and investment securities              2,771           424
    Notes receivable - affiliates                                        1,022           988
    Advances receivable, net                                            21,602        22,252
    Mortgage servicing rights, net of accumulated amortization of
      $18,855 and $13,489, respectively                                 70,375        33,899
    Deferred acquisition, transaction and loan costs, net of
      accumulated amortization of $1,114 and $598, respectively          2,781         1,394
    Property, equipment and leasehold improvements, net of
      accumulated amortization of $2,952 and $1,338, respectively        3,836         2,969
    Investment in affiliates                                                --         1,907
    Excess cost over identifiable tangible and intangible assets
      acquired, net of accumulated amortization of $379 and $85,
      respectively                                                       5,497           540
    Other assets                                                         7,591         3,837
                                                                      --------      --------
TOTAL ASSETS                                                          $314,966      $116,201
                                                                      ========      ========

LIABILITIES AND PARTNERS'  CAPITAL

Liabilities:
    Installment purchase obligations - servicing                      $ 15,445      $  1,074
    Foreclosure reserves                                                 8,332         5,980
    Lines of credit                                                    179,280        54,065
    Term loans                                                          39,282        22,333
    Notes payable - affiliates                                          11,345           600
    Due to affiliates                                                    1,076            46
    Accounts payable and other liabilities                               8,075         6,334
                                                                      --------      --------
    Total Liabilities                                                  262,835        90,432

PARTNERS' CAPITAL                                                       52,131        25,769
                                                                      --------      --------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                               $314,966      $116,201
                                                                      ========      ========
</TABLE>

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


                                  Page 3 of 39
<PAGE>   4
              HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                           (UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    Three Months Ended          Nine Months Ended
                                                                    ------------------          -----------------
                                                                       September 30,              September 30,
                                                                       -------------              -------------
                                                                    1995           1994         1995          1994
                                                                    ----           ----         ----          ----
<S>                                                                <C>            <C>         <C>           <C>
REVENUES
    Loan servicing fees                                            $ 5,188        $4,755      $14,110       $10,080
    Sub-servicing fees received from affiliates                         --            --           --           233
    Ancillary income                                                 1,569         1,240        4,466         2,708
    Gain on sale of defaulted loans to affiliates                      361            --          907           250
    Investment income net of interest expense on escrows             1,103           891        3,170         2,639
                                                                   -------        ------      -------       -------
         Total servicing revenue                                     8,221         6,886       22,653        15,910

    Gain (loss) on sale of mortgage loans and related mortgage
      servicing rights                                               2,064          (432)       2,603         5,039
    Interest income, net of related warehouse interest expense         426           112          887           783
    Other production income                                          1,242            55        1,573           147
                                                                   -------        ------      -------       -------
         Total production income (loss) - gross                      3,732          (265)       5,063         5,969

    Other investment and interest income                               195           184          161           259
                                                                   -------        ------      -------       -------
         Total Revenue                                              12,148         6,805       27,877        22,138

EXPENSES
    Servicing costs                                                  1,476         1,839        4,322         4,183
    Prepayment costs and interest curtailments                         295           154        1,129           501
    Provision for foreclosure losses                                 1,381           627        2,765         1,281
    Amortization of mortgage servicing rights                        2,203         1,655        5,366         5,073
                                                                   -------        ------      -------       -------
         Total servicing expenses                                    5,355         4,275       13,582        11,038

    Loan production and secondary marketing costs                    2,800           681        5,204         3,235
    General and administrative costs, including management fees
      and reimbursed costs to its general partner of $316, $75,
      $741, and $225, respectively                                   1,946         1,017        4,800         3,583
    Interest expense - term loans                                      695           254        1,611           658
    Other interest expense-affiliates, net of interest income-
      affiliates of $30, $89, $155 and $143, respectively              426           176          951           268
    Other amortization and depreciation                                482           105        1,374           321
                                                                   -------        ------      -------       -------
         Total Expenses                                             11,704         6,508       27,522        19,103

NET INCOME BEFORE EQUITY IN EARNINGS OF AFFILIATES AND GAIN ON
         BULK SALE OF SERVICING                                        444           297          355         3,035
                                                                   -------        ------      -------         -----
Equity in earnings of affiliates                                        --          (170)        (255)         (186)
Gain on bulk sale of servicing                                          --            --        9,148         2,957
                                                                   -------        ------      -------        ------

NET INCOME                                                         $   444        $  127      $ 9,248       $ 5,806
                                                                   =======        ======      =======       =======

Net Income per Preferred Unit (including series B), based on
31,689,230; 30,087,826; 35,778,744; 30,087,826 Preferred
Units, respectively                                                $   .01        $  .00       $  .26        $  .19
                                                                   =======        ======       ======        ======
</TABLE>

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


                                  Page 4 of 39
<PAGE>   5
              HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended September 30,
                                                                                     -------------------------------
                                                                                         1995              1994
                                                                                         ----              ----
<S>                                                                                    <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net Income                                                                         $   9,248        $   5,806

    Adjustments to reconcile net income to net cash flows from operating
    activities:
         Gain on bulk sale of servicing                                                   (9,148)          (2,957)
         Gain on sale of defaulted loans
                                                                                            (907)            (250)
         Gain on sale of retained servicing                                               (3,638)
         Unrealized loss on CMO bonds and residual interests                                 245               --
         Amortization and depreciation
                                                                                           6,740            5,394
         Amortization of CMO bonds, residual interests and investment
           securities                                                                        680               --

         Equity in earnings from affiliates                                                  255              186
         Provision for foreclosure losses                                                  2,765            1,281
         Changes in operating assets and liabilities:
             Mortgage loans held for sale and investment, net                           (124,386)         118,937
             Advances receivable                                                           3,685              159
             Other assets                                                                  3,458              529
             Due to/from affiliates                                                        1,074           (2,006)
             Accounts payable and other liabilities                                           17           (4,527)
                                                                                       ---------        ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES                                                (109,912)         122,552
NET CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from bulk sale of servicing                                                   9,148            4,058
    Net acquisition of mortgage servicing rights                                          (4,870)         (13,584)
    Purchase of short-term investments                                                   (10,000)              --
    Decrease (increase) in notes receivable - affiliates                                      32           (4,753)
    Increase in restricted cash                                                             (110)              --
    Funding of deferred acquisition and transaction costs                                 (1,775)            (480)
    Purchases of property and equipment                                                   (1,087)            (407)
    Funding of acquisition advances                                                           --           (3,641)
    Cash acquired in Exchange Transaction                                                  2,715               --
                                                                                       ---------        ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES                                                  (5,947)         (18,807)
CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal payments on term loans                                                     (31,602)          (2,571)
    Term debt advances                                                                    41,350           20,308
    Partner distributions                                                                     --           (8,982)
    Payment on partner notes receivable                                                      300              257
    Net (repayments) borrowings on lines of credit                                       103,743         (112,783)
    Net (repayments) borrowings from notes payable - affiliates                            7,873           (8,594)
                                                                                      ----------        ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES                                                 121,664         (112,365)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                           5,805           (8,620)
CASH AND CASH EQUIVALENTS, EXCLUDING RESTRICTED CASH, AT BEGINNING OF PERIOD               1,670            9,721
                                                                                      ----------        ---------
CASH AND CASH EQUIVALENTS, EXCLUDING RESTRICTED CASH, AT END OF PERIOD                $    7,475        $   1,101
                                                                                      ==========        =========
</TABLE>

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


                                  Page 5 of 39
<PAGE>   6
              HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                           (UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                Nine Months Ended September 30,
                                                                                -------------------------------
                                                                                     1995               1994
                                                                                     ----               ----
<S>                                                                                 <C>                <C>
NON-CASH INVESTMENT AND FINANCING ACTIVITIES:
Acquisition and consolidation of HBT, TMC, HFC, and TMC Mortgage Corp.,
net of cash acquired:
    Mortgage loans held for sale, net                                               12,922                --
    Mortgage loans held for investment                                                 222                --
    CMO bonds and residual interests                                                 3,177                --
    Notes receivable - affiliates                                                      314                --
    Advances receivable                                                              5,875                --
    Mortgage servicing rights, net                                                  16,631                --
    Deferred acquisition and loan costs, net                                            86                --
    Property and equipment, net                                                        468                --
    Investment in affiliates                                                        (1,652)               --
    Excess cost over identifiable tangible and intangible assets acquired            4,923                --
    Other assets                                                                     7,212                --
                                                                                   -------
         Total Assets                                                               50,178                --

    Foreclosure reserves                                                             3,334                --
    Warehouse / foreclosure lines of credit and other short-term
         funding obligations                                                        11,890                --
    Term loans                                                                       7,202                --
    Short-term borrowings                                                            9,582                --
    Notes payable - affiliates                                                       5,588                --
    Due to affiliates                                                                  (44)               --
    Accounts payable and other liabilities                                           1,724                --
                                                                                   -------
         Total Liabilities                                                          39,276                --

Contribution of investment in affiliate                                                 --             2,221
Installment purchases of mortgage servicing rights                                 (14,371)            9,902
Distribution to affiliates                                                          (6,284)               --
Conversion of debt in exchange for preferred units                                   9,000                --
Unrealized gain (loss) on available for sale securities                               (146)               53
Contribution of investment in settlement of note receivable from affiliate             249                --

Allocation of purchase price in connection with purchase of management
interest:
    Purchased servicing rights                                                         389                --
    Excess cost over identifiable tangible and intangible assets acquired              238                --
                                                                                   -------            ------
                                                                                   $   627            $   --
</TABLE>


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


                                  Page 6 of 39
<PAGE>   7
              HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              SEPTEMBER 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994


Note 1.  Description of Business and Organization

Harbourton Financial Services L.P. ("HBT" or the "Partnership") was created
pursuant to a Certificate of Limited Partnership filed with the Secretary of
the State of Delaware on August 12, 1987 and a limited partnership agreement
(the "HBT Agreement") dated as of August 12, 1987.  Harbourton Mortgage
Corporation (the "General Partner") was incorporated in the State of Delaware
on August 12, 1987.  The General Partner at all times has at least a 1%
interest in HBT.  The General Partner manages the business and affairs of HBT
and has exclusive authority to act on behalf of HBT.  HBT's termination date is
December 31, 2050 unless sooner dissolved or terminated pursuant to the HBT
Agreement.

Harbourton Assignor Corporation ("Assignor Limited Partner") is the sole
limited partner of HBT.  Pursuant to the HBT Agreement, the Assignor Limited
Partner holds for the benefit of the holders of the Preferred Units all of the
limited partnership interests underlying such Preferred Units.  Each Preferred
Unit is evidenced by a beneficial assignment certificate, which is issued by
the Assignor Limited Partner and HBT in fully registered form.  Each holder of
a Preferred Unit is entitled to all of the economic rights and interests in the
underlying limited partnership interest held by the Assignor Limited Partner,
and each holder of a Preferred Unit has the right to direct the Assignor
Limited Partner on voting and certain other matters with respect to such
underlying limited partnership interests.

On August 5, 1994, Harbourton Holdings, L.P. ("Harbourton"), a Delaware limited
partnership, acquired from JHM Capital Corporation ("JCC") (i) all of the
issued and outstanding capital stock of the General Partner of HBT and (ii) all
of the issued and outstanding Subordinated Units of HBT, pursuant to the terms
of a definitive acquisition agreement (the "Transfer Agreement").

Pursuant to the Transfer Agreement and New York Stock Exchange rules, on March
14, 1995, HBT obtained the approval from existing Unitholders to issue to
Platte Valley Servicing Co., L.P. ("PVSC"), an affiliate of Harbourton,
21,513,509 Preferred Units of HBT in exchange for PVSC's ownership interest of
(i) all of the issued and outstanding limited partnership interest of
Harbourton Mortgage Co., L.P. (formerly Platte Valley Funding, L.P.) ("HMCLP")
and (ii) all of the issued and outstanding capital stock of Harbourton Funding
Corporation (formerly Platte Valley Funding Corporation) ("HFC"), the general
partner of HMCLP (the "Harbourton Transaction").  Pursuant to an agreement
dated October 1, 1994 (the "TMC Mortgage Agreement"), which was joined in by
HBT with the unanimous consent of the independent directors of the General
Partner, TMC Mortgage Corp. and two of its shareholders (the "TMC Parties")
agreed to contribute to HBT their aggregate direct and indirect 50% interest in
TMC Mortgage Co., L.P. ("TMC"), a partnership engaged in the origination and
sale of mortgage loans in the eastern United States, in exchange for 829,119
Preferred Units (the "TMC Transaction").  On the same date, HMCLP agreed to
include its 50% aggregate direct and


                                  Page 7 of 39
<PAGE>   8
indirect equity interest in TMC as part of the assets owned by it at the time
of the consummation of the Harbourton Transaction (collectively, the "Exchange
Transaction").

Upon the consummation of the Exchange Transaction, HMCLP became a subsidiary of
HBT and TMC became a subsidiary of HBT, with an aggregate 50% equity interest
owned by HBT and an aggregate 50% equity interest owned by HMCLP.  The effect
of the Exchange Transaction was that PVSC acquired approximately 75.7% of the
issued and outstanding Preferred Units of HBT, and the TMC Parties acquired
approximately 2.9% of the issued and outstanding Preferred Units. HBT has
continued to exist in accordance with the provisions of the HBT Agreement,
which was unchanged by the Exchange Transaction.

On July 31, 1995 the Partnership completed its acquisition of Western Sunrise
Holdings, L.P. (the "Western Transaction") and its subsidiaries, Western
Sunrise Mortgage Co., L.P. and its general partner Western Sunrise Mortgage
Corporation (collectively "Western").  Western had been an affiliated mortgage
originator and servicer headquartered in Sacramento, California and was a
subsidiary of Harbourton.  The purchase price for Western was approximately
$15.7 million, and in exchange for Western, Harbourton received approximately
8.6 million Series B Preferred Units having generally the same rights as the
outstanding Preferred Units. In addition, if the performance of the production
operations of Western exceed certain projections during a 24 month period,
Harbourton will receive additional preferred units.  The Western Transaction
was accounted for as a reorganization of entities under common control similar
to a pooling-of-interests.

In conjunction with the Western Transaction, the Partnership merged Western
into HMCLP.  Simultaneously, the other mortgage banking subsidiary of the
Partnership, TMC, was also merged into HMCLP and the Partnership transferred
all of HBT's mortgage banking-related assets to HMCLP.

The Partnership's primary business activity is mortgage banking which consists
of the origination, purchase, sale and servicing of residential mortgage loans,
and the purchase and sale of servicing rights associated with such loans. The
Partnership also holds investments in other mortgage related assets, including
collateralized mortgage obligations ("CMOs") and residual interests in CMOs,
some of which were held during 1994 by Harbourton REIT Corporation I (formerly
JHM REIT Corporation I) ("REIT I"), a subsidiary of HBT.  On March 10, 1995,
REIT I was liquidated.  The Partnership is an approved Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"),
and Federal Home Loan Mortgage Corporation ("Freddie Mac") licensee.

Note 2.  Summary of Significant Accounting Policies

Basis of Presentation - The consolidated financial statements include the
accounts of HBT and HBT's subsidiaries, Western, TMC, HMCLP and its general
partner, HFC.  These entities are collectively referred to as the Partnership
unless otherwise noted.  The consolidated financial statements and notes
reflect the Western Transaction for all periods presented in accordance with
pooling-of-interests transactions.  All intercompany accounts have been
eliminated upon consolidation.  Prior to March 31, 1995, HMCLP reflected its
50% interest in TMC, which was


                                  Page 8 of 39
<PAGE>   9
contributed to HMCLP by Harbourton on September 30, 1994, using the equity
method of accounting.

The consolidated financial statements as of September 30, 1995 and for the
three and nine month periods ended September 30, 1995 and 1994 have been
prepared by the Partnership, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain information and
footnote disclosures, normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and regulations, although the
Partnership believes that the disclosures are adequate to make the information
presented not misleading.  In the opinion of management, the unaudited
consolidated financial statements reflect all adjustments (normal recurring in
nature) considered necessary to present fairly the consolidated balance sheet
as of September 30, 1995, the results of operations for the three and nine
months ended September 30, 1995 and 1994, and cash flows for the nine months
ended September 30, 1995 and 1994.  It is suggested that these unaudited
consolidated financial statements be read in conjunction with the audited
consolidated financial statements of HMCLP and Western at December 31, 1994.

Cash and Cash Equivalents - Cash and cash equivalents consist of cash on hand
and in banks and short-term instruments with original maturities of three
months or less.

Mortgage Loans Held for Sale - Mortgage loans held for sale are stated at the
lower of aggregate cost, net of  deferred loan production fees and costs, or
market value.

Mortgage Loans Held for Investment - Mortgage loans held for investment are
stated at the amount of unpaid principal, reduced by an allowance for loan
losses if necessary, based upon management's evaluation of the economic
conditions of borrowers, loan loss experience, collateral value and other
relevant factors.

Short-term Investments - Short-term investments consist of highly liquid
investments with original maturities of more than three months.  The
Partnership uses these short-term investments in its cash management program.
Short-term investments are stated at cost plus accrued interest, which
approximates market.

Advances Receivable - Funds advanced for the purpose of purchasing loans out of
securitized mortgage loan pools and funds advanced for mortgagor escrow
deficits, foreclosures and other investor requirements are recorded as advances
receivable in the consolidated balance sheets.  Such receivables are generally
recoverable from the insurers or guarantors, which are generally government
agencies, or the mortgagors through increased monthly payments, as applicable.
A reserve for uncollectible items has been established for those receivables
which management estimates are not recoverable.

Mortgage Servicing Rights - The Partnership capitalizes the cost of mortgage
servicing rights and amortizes such costs in proportion to, and over the period
of, estimated future undiscounted net servicing income.  See also Note 4.





                                  Page 9 of 39
<PAGE>   10

CMO Bonds, Residual Interests and Investment Securities - The Partnership
classifies its CMO bonds and residual interests portfolio as trading securities
since the securities are being held with the intent of selling them in the near
term.  Accordingly, such assets are stated at fair value and unrealized gains
and losses are recognized in earnings.

The amortization of CMO bonds and residual interests is determined using the
level yield method.  The future expected yields of certain CMO bonds and
residual interests are adjusted using management's estimate of floating
interest rates based upon current market rates at the balance sheet date. CMO
bonds have certain characteristics similar to CMO residual interests, and,
therefore, are classified together in the accompanying consolidated financial
statements.

Deferred Acquisition, Transaction and Loan Costs - Deferred loan costs are
amortized over the life of the term loan or agreement using the effective
interest method.  Deferred acquisition and transaction costs are amortized over
a period of five years using the straight-line method.

Property, Equipment and Leasehold Improvements - Property, equipment and
leasehold improvements are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the assets' useful
lives, which are estimated to be 30 years for depreciable real property and 2
to 15 years for furniture, fixtures and equipment.  Leasehold improvements are
amortized using the straight-line method over the lease life.

Investment in Affiliates - At December 31, 1994, HMCLP recorded its investment
in affiliates based on the equity method of accounting.  HMCLP's carrying
amount of its investment in affiliates exceeded its underlying equity in net
assets by approximately $1.1 million for which amortization of $18 thousand has
been recognized in the accompanying statement of operations for the three
months ended March 31, 1995.  Excess cost is amortized on a straight-line basis
over a period of 15 years.

Excess Cost Over Identifiable Tangible and Intangible Assets Acquired - Excess
cost over identifiable tangible and intangible assets acquired is amortized
using the straight-line method over 15 years.

Loan Servicing Fees - Loan servicing fees are based on a contractual percentage
of the unpaid principal balance of the related loans and are recognized in
income as earned.  Loan servicing expenses are charged to operations as
incurred.

Loan Production Fees and Costs - Certain direct loan production fees and costs
associated with mortgage loans held for sale are deferred until the related
loans are sold.

Foreclosure Reserves - Foreclosure reserves are maintained to provide for an
estimate of the losses associated with delinquent loans and loans in
foreclosure or bankruptcy ("Defaulted Loans").  The reserves are established
based on management's expectations and historical loss experience and are
adjusted periodically through charges to current operations to reflect changes
in the Defaulted Loans, net of actual charge-offs.  The Partnership establishes
foreclosure reserves related to Defaulted Loans for each purchased servicing
asset at the time of acquisition in accordance with its existing reserve
policy.


                              Page 10 of 39
<PAGE>   11

Income Taxes - The Partnership is a limited partnership and is not liable for
federal income taxes, however, individual unitholders have liability for income
taxes.  The Partnership could be taxed as a corporation for federal income tax
purposes for its tax year beginning on January 1, 1998.  Commencing with the
1998 tax year, (i) Unitholders may recognize gain on the deemed distribution of
stock of the "new" corporation on January 1, 1998; (ii) the taxable income of
the Partnership could be subject to corporate income tax; (iii) distributions
to Unitholders would be treated as dividends to the extent of the current or
accumulated earnings and profits of the Partnership and (iv) Unitholders would
not report income, gains or losses recognized by the Partnership on their tax
returns.

During the year ended December 31, 1993, the Partnership adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109").  Under SFAS No. 109, the Partnership is required to provide deferred
taxes on any temporary differences between the basis of its assets and
liabilities for financial reporting and income tax purposes that are
anticipated to exist after the Partnership is treated as a corporation.  As of
September 30, 1995, no deferred taxes had been recorded as the Partnership's
management believes that the Partnership would have a net deferred tax asset
for which collectibility is not probable.

SFAS  No. 107 - In December 1991, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.  107, Disclosures about
Fair Value of Financial Instruments ("SFAS No. 107"), which is effective for
the Partnership in its fiscal year ending after December 15, 1995.  SFAS No.
107 requires that companies disclose the fair value of financial instruments,
where practicable, and the method(s) and significant assumptions used to
estimate those fair values.  The Partnership will adopt the new standard for
the year ended December 31, 1995.

SFAS  No. 119 - In October 1994, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.  119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments ("SFAS
No. 119"), which is effective for the Partnership in its fiscal year ending
after December 15, 1995.  SFAS No. 119 requires additional disclosures about
derivative financial instruments and how companies use them.  The Partnership
will adopt the new standard for the year ended December 31, 1995.

Note 3.          Mortgage Servicing Portfolio

The Partnership's mortgage servicing and subservicing portfolio included loans
in all fifty states and the District of Columbia.  The following table shows
the geographic concentration of the mortgage servicing portfolio:


                         Page 11 of 39
<PAGE>   12
<TABLE>
<CAPTION>
                              September 30,                         December 31,
                                  1995                                  1994
                                  ----                                  ----
<S>                           <C>                                   <C>
California                        27.8%                                 26.0%
Texas                              9.0%                                  9.2%
Florida                            9.0%                                  8.9%
Colorado                           4.5%                                  6.1%
Other*                            49.7%                                 49.8%
                                 -----                                 -----
Total                            100.0%                                100.0%
</TABLE>

*   Loans from no other state exceed 5% of the principal balance of loans in
    the portfolio in either year.

The Partnership's servicing and subservicing portfolio (unpaid principal
balances and number of loans) was comprised of the following (in thousands
except number of loans):

<TABLE>
<CAPTION>
                                                September 30, 1995                         December 31, 1994
                                           ----------------------------               -------------------------
                                           Principal          Number of               Principal       Number of
                                            Balance             Loans                  Balance          Loans
<S>                                        <C>                <C>                   <C>                <C>
Servicing:
   GNMA Loans                              $3,030,045           58,501               $3,129,359         59,169
   Non-GNMA Loans                           1,430,872           16,869                  921,171         12,786
                                           ----------          -------               ----------         ------
Total Servicing                             4,460,917           75,370                4,050,530         71,955

Subservicing:
   Subserviced for affiliates                 143,534            2,497                1,077,235         15,920
   Subserviced for others                     134,778            1,428                   98,702          1,038
                                           ----------          -------               ----------         ------
Total Subservicing                            278,312            3,925                1,175,937         16,958

GNMA Loans subserviced by others
                                            1,418,272           25,186                       --             --
                                           ----------          -------               ----------         ------

Total Portfolio                            $6,157,501          104,481               $5,226,467         88,913
                                           ==========          =======               ==========         ======
</TABLE>

As of September 30, 1995 and December 31, 1994, the total GNMA loans serviced
and subserviced include loans insured by the FHA of 43,906 and 44,099,
respectively, and loans guaranteed by the VA of 14,893 and 15,269,
respectively.  In addition, at September 30, 1995, the Partnership services
1,426 FHA loans for FNMA which are potentially subject to the same losses
experienced on GNMA FHA loans that complete the foreclosure process and are
conveyed to FHA.  At December 31, 1994, loans subserviced for affiliates
consisted of loans subserviced for HBT (prior to the Exchange Transaction).

Non-GNMA loans serviced by the Partnership are generally securitized through
FNMA or FHLMC programs on a non-recourse basis, whereby foreclosure losses are
generally the responsibility of FNMA or FHLMC and not of the Partnership.
Similarly, the  GNMA loans


                                 Page 12 of 39
<PAGE>   13
serviced by the Partnership are securitized through GNMA programs, whereby the
Partnership is insured against loss by the FHA or partially guaranteed against
loss by the VA.  In addition, the Partnership is not responsible for
foreclosure losses associated with loans subserviced for others.

In connection with mortgage servicing and subservicing activities, the
Partnership segregates tax and insurance ("T&I") escrow and principal and
interest ("P&I") custodial funds in separate trust accounts maintained at
federally insured financial institutions and excludes these balances from its
consolidated balance sheet.  As of September 30, 1995  and December 31, 1994,
these T&I and P&I balances averaged approximately $95.6 million and $75.7
million, respectively.

At September 30, 1995, errors and omissions and fidelity bond insurance
coverage was $7.5 million and $7.5 million, respectively.

In conjunction with the performance of mortgage banking activities, the
Partnership is subject to minimum net worth requirements established by GNMA,
FNMA, Freddie Mac and HUD.  At September 30, 1995, the Partnership's eligible
net worth exceeded these requirements.

Note 4.   Mortgage Servicing Rights

In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights--An amendment of FASB Statement No. 65 ("SFAS No. 122"), which is
effective for fiscal years beginning after December 15, 1995, with earlier
application encouraged. SFAS No. 122, however, prohibits retroactive
application to prior years.  SFAS No. 122, among other things, modifies the
treatment of the capitalization of servicing rights by mortgage banking
enterprises.  The change eliminates the separate treatment of servicing rights
acquired through loan origination and those acquired through purchase
transactions, as previously required under SFAS No. 65, Accounting for Certain
Mortgage Banking Activities.  Accordingly, the Partnership's consolidated
financial statements for 1994 were accounted for under SFAS No. 65.  The
Partnership adopted SFAS No. 122 in the quarter ended September 30, 1995 and
its consolidated financial statements for the first and second quarters of 1995
were restated to reflect the impact of adopting SFAS No. 122.  The overall
impact on the Partnership's consolidated financial statements of adopting SFAS
No. 122 was an increase in net earnings for the three and nine months ended
September 30, 1995 of $2.7 million and $3.5 million, or $0.07 and $0.12 per
Preferred Unit, respectively.

SFAS No. 122 requires that a portion of the cost of originating a mortgage loan
be allocated to the mortgage servicing right based on its fair value relative
to the loan as a whole.  The fair value of the mortgage servicing
rights created during the nine months ended September 30, 1995 was determined 
by an independent third-party valuation based on market characteristics during 
the quarter in which the mortgage servicing rights were created.


                                 Page 13 of 39
<PAGE>   14

SFAS No. 122 also requires that all capitalized mortgage servicing rights
("MSRs") be evaluated for impairment based on the excess of the carrying amount
of the MSRs over their fair value.  In determining servicing value impairment
at the end of the quarter, the mortgage servicing portfolio was disaggregated
into its predominant risk characteristics.  The Partnership has determined
those risk characteristics to be loan type and interest rate.  These segments
of the portfolio were then valued by an independent third party to determine 
the fair value of the MSRs.  The fair value was then compared with the
book value of each segment to determine if a reserve for impairment was
required.  As of September 30, 1995 no such valuation allowance was required.

The following table presents a summary rollforward of the Partnership's
mortgage servicing rights, net of accumulated amortization (in thousands):

<TABLE>
<S>                                                                      <C>
Balance, at December 31, 1993                                            $22,194
Acquisitions                                                              18,729
Sales                                                                       (867)
Scheduled Amortization*                                                   (5,692)
Amortization due to acquisitions                                          (1,453)
Reduction in scheduled amortization due to changes in anticipated 
  prepayments                                                                988
                                                                         -------
Balance, at December 31, 1994                                            $33,899
Acquisitions transactions                                                 36,259
Capitalized OMSRs in connection with SFAS No. 122                          5,583
Scheduled Amortization*                                                   (3,900)
Amortization due to acquisitions                                          (1,466)
                                                                         -------
Balance, at September 30, 1995                                           $70,375
                                                                         =======
</TABLE>

*  Scheduled amortization is based on estimates made at the beginning of the
   fiscal year.

During the quarter ended September 30, 1995, the Partnership acquired
approximately $1.5 billion of GNMA mortgage servicing rights from an
unaffiliated third party.  The Partnership has negotiated with the third party
to subservice the mortgage loans until the fourth quarter of 1995, at which
time the loans will be transferred to the Partnership.  During that time
period, the Partnership will receive servicing fees and ancillary income and
pay a subservicing fee.

Note 5.   Mortgage Loan Production

During the nine months ended September 30, 1995 and 1994, HMCLP originated
approximately $900.7 million and $889.6 million of mortgage loans,
respectively.  For the three months ended September 30, 1995 and 1994, HMCLP
originated approximately $467.7 million and $175.8 million of mortgage loans,
respectively.  During the nine months ended September 30, 1995, total mortgage
loan originations consisted of government (42%) and conventional conforming and
non-conforming (58%) loans.  These loans were originated primarily in
California, Florida, Virginia, Georgia and Maryland.  During the nine months
ended September


                                 Page 14 of 39
<PAGE>   15
30, 1994, total mortgage loan originations consisted of government (55%) and
conventional conforming and non-conforming (45%) loans.

Note 6.   CMO Bonds, Residual Interests and Investment Securities

As of September 30, 1995, the Partnership's CMO bonds and residual interests
portfolio consisted primarily of FNMA issues with various durations ranging
from five to eleven years. These securities are classified as trading
securities since the Partnership is actively seeking to sell the portfolio. The
securities are carried at fair value and unrealized gains and losses are
reported in earnings.  Because no quoted market prices are available for CMO
bonds and residual interests, fair value generally represents the estimated
amount at which such CMO bonds and residual interests could be exchanged in a
transaction between willing parties.  Fair value is based on anticipated future
cash flows utilizing projections of future prepayment rates based on current
market participants' prepayment rate assumptions and future long-term estimates
of short-term interest rates.  Projected cash flows are discounted using
estimates of discount rates established in market transactions for financial
instruments with similar underlying characteristics and risks.

At September 30, 1995 and December 31, 1994, the balance of investment
securities consists of a 100% and 50% interest, respectively, in an
interest-only strip derivative (see Note 9) of a pool of FNMA mortgage-backed
securities.  The securities had an original principal balance of $12 million on
April 1, 1988.  The interest-only security had an outstanding principal balance
of approximately $2.3 million (unaudited) as of September 30, 1995, a maturity
date of April 1, 2018, and a coupon rate of 8.5%.

Note 7.   Other Mortgage-Related Securities

The Partnership owns a prepayment cap to reduce the prepayment risks associated
with the CMO bond and residual interest portfolio.  The Partnership is entitled
to a monthly payment when the reference portfolio runoff rate exceeds the
strike PSA of 485%.  The reference portfolio is a FNMA 10% mortgage-backed
security issued in 1986.  The prepayment cap did not meet the requirements for
hedge accounting and therefore, was accounted for as a trading instrument.  The
prepayment cap had a market value of $0 at September 30, 1995.  The termination
date of the cap is January 31, 1997.

In addition, the Partnership owns a LIBOR interest rate floor instrument to
help manage a portion of the interest rate risk associated with its mortgage
servicing rights.  The LIBOR floor did not meet the requirements for hedge
accounting and therefore, was accounted for as a trading instrument.  The
Partnership is entitled to a monthly payment when the LIBOR rate falls below
the strike rate of 4.00%.  At September 30, 1995, the fair market value of the
instrument was $0.  The termination date of the floor is December 31, 1997.


                                 Page 15 of 39
<PAGE>   16
Note 8.   Bank Debt

Term loans consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                         September 30,  December 31,
                                                             1995           1994
                                                             ----           ----
<S>                                                      <C>            <C>
Term loan due in quarterly principal installments
totaling approximately $2.1 million each quarter.
Interest is paid monthly.  The term loan matures June
30, 2000 and is secured by substantially all of the
assets of the Partnership, other than mortgage loans
held for sale and assets securing other debt.                39,282             --

Term loan (HMCLP) due in monthly principal installments
totaling approximately $667 thousand plus accrued
interest. The term loan matured July 31, 1995.  The
loan was secured by substantially all of the assets of
HMCLP, other than mortgage loans held for sale and
assets securing other debt.                                 $    --        $22,333
                                                            -------        -------

Total                                                       $39,282        $22,333
                                                            =======        =======

Lines of credit held with banks consisted of the following (in thousands):

<CAPTION>
                                                         September 30,  December 31,
                                                             1995           1994
                                                             ----           ----
<S>                                                      <C>            <C>
A warehouse line of credit to fund the purchase or
origination of residential mortgage loans with a
maximum availability of $150 million at September 30,
1995.  This line of credit matures July 31, 1996 and
advances under this line are secured by the individual
mortgage loans and related assets.                           150,000           --

A line of credit to fund taxes and insurance advances
made on behalf of borrowers of residential mortgage
loans with a maximum availability of $5 million at
September 30, 1995.  This line of credit matures July
31, 1996 and advances under this line are secured by
the individual mortgage loans and related assets.              5,000           --
</TABLE>





                                 Page 16 of 39
<PAGE>   17

<TABLE>
<CAPTION>
                                                         September 30,  December 31,
                                                             1995           1994
                                                             ----           ----
<S>                                                      <C>            <C>
A $30 million line of credit to finance the
acquisitions of high-grade short-term investments as
defined pursuant to the Investment Loan and Security
Agreement.  Advances on the line of credit are secured
by the acquired investments.                                  10,000

A warehouse line of credit (HMCLP) to fund the purchase
or origination of residential mortgage loans with a
maximum availability of $10.0 million at December 31,
1994, and a foreclosure line sublimit for loans
purchased out of securitized pools of $6.3 million at
December 31, 1994.  This line of credit matured July
31, 1995, and advances under this line were secured by
the individual mortgage loans  and related assets.                --         3,861

A warehouse line of credit (HMCLP) to fund the purchase
or origination of residential mortgage loans with a
maximum availability of $12.1 million at December 31,
1994, and a foreclosure line sublimit for loans
purchased out of securitized pools of $4.5 million at
December 31, 1994.  This line of credit matured July
31, 1995, and advances under this line were secured by
the individual mortgage loans and related assets.                 --         3,350

A warehouse line of credit (Western) to fund the
purchase or origination of residential mortgage loans
with a maximum committed availability of $35 million at
December 31, 1994.  A sublimit of $1 million was
available to finance the repurchase of foreclosure or
buyback loans.  This line was secured by the individual
mortgage loans and substantially all of the assets of
Western.  The line terminated concurrent with the
Western Transaction (see Note 1).                                 --        36,771
</TABLE>





                                 Page 17 of 39
<PAGE>   18

<TABLE>
<CAPTION>
                                                         September 30,  December 31,
                                                             1995           1994
                                                             ----           ----
<S>                                                      <C>            <C>
A warehouse line of credit (Western) to fund the
purchase or origination of residential mortgage loans
with a maximum committed availability of $35 million at
December 31, 1994.  The line terminated concurrent with
the Western Transaction (see Note 1).                            --          5,510

Short-term funding obligations                               12,474          4,573
                                                           --------        -------

Total                                                      $177,474        $54,065
                                                           ========        =======
</TABLE>

Short-term funding obligations represent obligations to fund originations.
These funding obligations were met through subsequent bank borrowings
and/or the Partnership's available liquidity.

In addition, the Partnership has a line of credit to fund principal and
interest advances made on behalf of borrowers of residential mortgage loans
with a maximum availability of $15.0 million at September 30, 1995.  This line
of credit matures July 31, 1996 and advances under this line are secured by the
individual mortgage loans and related assets.

At September 30, 1995, the Partnership also had borrowings consisting of
repurchase agreements with a securities dealer (Bear Stearns) of approximately
$1.8 million.  The Partnership's borrowings under various repurchase agreements
with securities dealers are secured by the Partnership s CMO bond and residual
interest. The repurchase liability amounts mature monthly and bear interest at
LIBOR plus 1.50%.

Note 9.  Transactions with Affiliates

Pursuant to the HBT Agreement, the General Partner manages and controls the
Partnership's business and operations.  The General Partner receives an annual
fee, from HBT, equal to 1/2 of 1% of the Initial Investment. The Initial
Investment represents the cash or fair value of  property contributed to the
Partnership in consideration for the issuance of Preferred Units (including
Series B).  For the six months ended September 30, 1995, the Initial Investment
averaged approximately $106.5 million resulting in a management fee due to the
General Partner of approximately $266 thousand.

The General Partner is reimbursed for all direct expenses it incurs or disburses
on behalf of HBT and the portion of its indirect expenses allocable to its
activities in connection with HBT's business.  The maximum aggregate amount of
allocable expenses for which HBT is obligated to reimburse the General Partner
in any fiscal year is .90% of the Initial Investment.  The Partnership has
accrued approximately $252 thousand as an estimate of total allocable expenses
to be incurred by the General Partner.


                                 Page 18 of 39
<PAGE>   19

During the third quarter of 1995, Harbourton and its affiliates converted $9.0
million of notes from the Partnership into equity in the Partnership.  In
connection with the debt to equity conversion, Harbourton and its affiliates
received approximately 4.9 million of Series B Preferred Units having generally
the same rights as the outstanding Preferred Units.  Following the consummation
of the Western transaction and the debt to equity conversion, Harbourton and
its affiliates own approximately 83.5% of all of the series of preferred units
of the Partnership.

As of September 30, 1995, the Partnership is indebted to Harbourton and its
affiliates for approximately $11.3 million resulting from short-term borrowings
to fund operations of the Partnership.  These borrowings generally bear interest
at prime plus 1.5%.  These borrowings were substantially paid down during the
fourth quarter of 1995.

Western was a party to a management services agreement with Harbourton.
Western paid Harbourton approximately $225 thousand, $225 thousand, $75
thousand, and $75 thousand in management fees under the management services
agreement during the nine months ended September 30, 1995, and 1994, and for
the three months ended September 30, 1995 and 1994, respectively.

During August 1993, Western received a promissory note for approximately $500
thousand from Harbourton as consideration for Harbourton receiving a 50%
participation interest in an interest-only security (see Note 6).  The note
bears interest at a rate of 5.5%, and is due on December 31, 1995.  Harbourton
was entitled to receive, as payment from Western, 50% of monthly cash flows
that are distributed to Western related to ownership of the interest-only
security (net of any interest due Western, as holder of the promissory note
given by Harbourton as consideration for its participation interest).
Harbourton was also entitled to receive, as payment from Western, 50% of sale
or distribution proceeds net of 50% of any costs incurred by Western to sell or
otherwise dispose of the security and net of any interest and/or principal that
remains payable to Western under the terms of the promissory note given by
Harbourton as consideration for its participation in the security.  Further, on
September 30, 1995, Harbourton exchanged its 50% interest in its interest-only
security with the Partnership in partial settlement of a note payable to the
Partnership.

On August 21, 1992, Western issued to certain of its officers notes related to
limited partnership interests.  The notes accrued interest at prime plus 1% and
had a scheduled maturity date of August 21, 1999.  The notes required mandatory
prepayments for bonuses and distributions paid in future periods in accordance
with the terms of the individual notes and respective employment agreements.
Effective January 1, 1995, management exchanged their interests in Western for
limited partnership interests in Harbourton.  This transaction was accounted
for as a purchase of Western s limited partnership interest by Harbourton at
fair value.  The fair value of the interests in Harbourton exceeded 
management's basis by approximately $627 thousand.  In accordance with 
Harbourton's established accounting policy, the excess fair value was 
"pushed-down" to Western.  Accordingly, the transaction resulted in a write-up 
of purchased servicing rights and excess costs over identifiable tangible and 
intangible assets of $389 thousand and $238 thousand, respectively.


                                 Page 19 of 39
<PAGE>   20

The Partnership has entered into transactions pursuant to which it repurchases
delinquent loans from GNMA pools which it services and resells such loans on a
servicing retained basis to Santa Cruz Partners, Skillman Partners, and
Harbourton Reassurance, Inc., affiliates of the Partnership and Harbourton.  As
of September 30, 1995 and December 31, 1994, loans with unpaid principal
balances totaling approximately $128.8 million and $117.3 million were
purchased out of securitized pools and sold to these affiliates.  These loans
are being serviced on behalf of the affiliated companies.  The associated
mortgage servicing is reflected in the Non-GNMA Loans Serviced portion of the
Partnership's servicing portfolio.  Such transactions are expected to benefit
the Partnership by reducing the Partnership's related foreclosure loss through
the reduction of the pass-through rate due to the investor (owner of the loan).
The reduction in foreclosure loss reserve requirement is reflected as a gain on
sale of defaulted loans to affiliates in the accompanying consolidated
financial statements.  In addition, the Partnership's remittance day advance
requirement for its GNMA servicing will be reduced as the servicing contract
with the affiliates is actual/actual as opposed to GNMA's scheduled/scheduled
requirement.

Through the ordinary course of business, the Partnership acquires mandatory
forward commitments to sell whole loans and mortgage backed securities through
a dealer, whose owners also own less than an aggregate 5% limited partnership
interest in Harbourton.

Note 10.   Partners' Capital

On October 27, 1988, HBT completed its Initial Public Offering of 4,633,643
Preferred Units. Simultaneously with the closing of that offering, HBT issued
an additional 366,357 Preferred Units to JCC and certain of its subsidiaries in
exchange for their interests in certain residual cash flows.  On November 4,
1991, 733,333 Preferred Units were issued in connection with the settlement of
a note issued in connection with the purchase of a servicing portfolio.  On
December 31, 1993, HBT issued 334,580 Preferred Units to JCC, which have not
been registered with the Securities and Exchange Commission, to discharge
amounts owed to JCC and certain of its subsidiaries for expenses incurred on
its behalf or fees for services rendered to HBT.  On March 15, 1995, in
conjunction with the Exchange Transaction, HBT issued to PVSC and the TMC
Parties 21,513,509 and 829,119 Preferred Units, respectively. On July 31, 1995,
in conjunction with the acquisition of Western, the Partnership issued to
Harbourton and its affiliates approximately 8.6 million Series B Preferred
Units having generally the same rights as the outstanding Preferred Units.
Further, on July 31, 1995, the Partnership issued to Harbourton and its
affiliates approximately 4.9 million of  Series B Preferred Units having
generally the same rights as the outstanding Preferred Units in settlement of
$9.0 million in notes owed to Harbourton and its affiliates.

Note 11.   Western Transaction

As noted previously, on July 31, 1995 the Partnership completed its acquisition
of Western.  The Western Transaction was accounted for as a reorganization of
entities under common control similar to a pooling-of-interests.  Accordingly,
the results of operations for the nine months ended September 30, 1995 and
1994, include the operations of both Western and HMCLP as though the
combination took place at the beginning of the respective periods.  Similarly,
the balance sheets of the separate partnerships have been combined as of
December 31, 1994.  The


                                 Page 20 of 39
<PAGE>   21
following table summarizes the financial condition and operations for the
individual partnerships prior to the combination (in thousands):

<TABLE>
<CAPTION>
                            December 31, 1994                    June 30, 1995
                        --------------------------          -------------------------
                        Western        Partnership          Western       Partnership
                        -------        -----------          -------       -----------
<S>                     <C>            <C>                  <C>           <C>
Total Assets            $51,761          $64,440            $94,075         $124,160
Total Liabilities        43,703           46,729             87,093           89,428
Partners'  Capital        8,058           17,711              6,982           34,732
</TABLE>

<TABLE>
<CAPTION>
                        Six Months Ended                   Six Months Ended
                          June 30, 1995                      June 30, 1994
                    --------------------------          --------------------------
                    Western        Partnership          Western        Partnership
                    -------        -----------          -------        -----------
<S>                 <C>            <C>                  <C>            <C>
Revenues*           $   631          $22,827             $6,877          $10,824
Expenses              2,457           13,076              3,606            8,415
                    -------          -------             ------          -------
Net Income           (1,826)           9,751              3,271            2,409
</TABLE>


*        Includes gain on bulk sale of originated servicing of $0, $9,148,
         $2,898 and $0, respectively, and equity in earnings of affiliates of
         $0, $255, $0 and $0, respectively.

Note 12.   Proforma Earnings

As noted previously, on March 15, 1995, the Exchange Transaction was
consummated.  Accordingly, HMCLP became a subsidiary of HBT and TMC became a
subsidiary of HBT, with an aggregate 50% equity interest owned by HBT and an
aggregate 50% equity interest owned by HMCLP.  In addition, on August 1, 1995,
the Western Transaction was completed, TMC was merged into HMCLP and HBT's
mortgage banking assets were merged into HMCLP.  Had the transactions occurred
at the beginning of the periods presented in the accompanying statements of
operations, pro forma results of operations would have been as follows (in
thousands):

<TABLE>
<CAPTION>
                                     Nine Months Ended September 30,
                                     -------------------------------
                                       1995                    1994
                                       ----                    ----
<S>                                   <C>                     <C>
Total revenues*                       $40,953                 $29,785
Total expenses                         29,461                  22,521
                                      -------                 -------

Net income                            $11,492                  $7,264
                                      =======                  ======
</TABLE>

*  Includes gain on bulk sale of servicing of approximately $9,148 and $2,957.


                                 Page 21 of 39
<PAGE>   22
Note 13.         Commitments and Contingencies

The Partnership is a party to transactions with off-balance sheet risk in the
normal course of business through the origination and selling of mortgage
loans.  These transactions include commitments to extend credit to mortgagors
(i.e., mortgage loan pipeline) and mandatory forward commitments to sell whole
loans or mortgage-backed securities.  Those transactions involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statements of financial condition.

The mortgage loan pipeline of the Partnership represents agreements to lend to
a mortgagor as long as there is no violation of any condition established in
the application or contract.  Such commitments generally have fixed expiration
dates or other termination clauses.  The Partnership evaluates each mortgagor's
credit worthiness on a case-by-case basis.  Collateral is limited to
residential properties.  As of September 30, 1995, the Partnership's mortgage
loan pipeline consisted of approximately $105.8 million locked interest rate
commitments with interest rate risk.

The Partnership had both mandatory and optional forward commitments outstanding
matched against mortgage loans held for sale and its mortgage loan pipeline at
September 30, 1995 and December 31, 1994.  To the extent mortgage loans are not
available to fill these commitments, the Partnership has interest rate risk.

The Partnership is subject to inherent losses in its loan servicing portfolio
due to loan foreclosures.  Certain agencies have the authority to limit their
repayment guarantees on foreclosed loans resulting in increased foreclosure
costs being borne by servicers.  The Partnership has evaluated its exposure to
such losses based on loan delinquency status, foreclosure expectancy rates and
historical foreclosure loss experience.  The Partnership has established a
reserve for advances receivable and for losses it will experience in future
periods as loans complete the foreclosure process totaling approximately $10.5
million and $7.2 million as of September 30, 1995 and December 31, 1994,
respectively.  Required adjustments, if any, to the established reserve will be
reflected in earnings in the periods in which they become known.  The total
reserve at September 30, 1995 and December 31, 1994 has been allocated between
reserves for advances receivable and foreclosure reserves as follows (in
thousands):

<TABLE>
<CAPTION>
                                               September 30,        December 31,
                                                   1995                1994
                                                   ----                ----
<S>                                            <C>                  <C>
Reserves for advances                              $ 2,193              $1,210
Foreclosure reserves                                 8,332               5,980
                                                   -------              ------

Total reserves                                     $10,525              $7,190
                                                   =======              ======
</TABLE>


                                 Page 22 of 39
<PAGE>   23
The following is a roll-forward of the total reserve for advances receivable
and foreclosure reserves for the nine months ended September 30 (in thousands):

<TABLE>
<CAPTION>
                                                         1995            1994
                                                         ----            ----
<S>                                                     <C>             <C>
Beginning Balance                                       $ 7,190         $ 1,577
Provision for foreclosure losses                          2,765           1,281
Establishment of reserves in connection with
   acquisitions of servicing rights                       4,108           3,434
Net charge-offs                                          (3,538)         (1,730)
                                                        -------         -------
Ending Balance                                          $10,525         $ 4,562
                                                        =======         =======
</TABLE>

The Partnership's liquidity is also affected by the level of loan delinquencies
and prepayments due to servicer's advance requirements on the loans it
services.  Under certain types of servicing contracts, particularly contracts
to service loans that have been pooled or securitized (primarily GNMA and FNMA
mortgage-backed securities), the  servicer must forward all or a part of the
scheduled payments (principal and interest) on the specified remittance day to
the security holder (owner of the loan) even though payments may not have been
received from the mortgagor.  In accordance with the terms of the servicing
contracts, servicers may offset the remittance day advances against funds
collected but not required to be remitted to the security holders (including
prepayments and early payments).  The servicer's advance requirement is reduced
during high refinance periods due to the amount of prepayment funds available
to offset the required delinquent payment advance.  However, during periods of
reduced runoff the advance requirement of the servicer is increased.  The
servicer's advance, if any, is typically recovered within 15 days, through
mortgagor payment receipts which replenish the offsetting advance within the
related custodial account.


                                 Page 23 of 39
<PAGE>   24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following is management's discussion and analysis of the financial
condition and results of operations of the Partnership.  The discussion and
analysis should be read in conjunction with the unaudited consolidated
financial statements and footnotes included herein.

RECENT DEVELOPMENTS

Completed Transactions

As a result of the Partnership's endeavor to enhance its mortgage banking
operations, the Partnership completed the following transactions during the
third quarter of 1995.  The following is a brief description of each of these
completed transactions:

Western Transaction

On July 31, 1995 the Partnership completed its acquisition of Western, an
affiliated mortgage originator and servicer headquartered in Sacramento,
California.  Western had been a subsidiary of Harbourton.  The purchase price
for Western was approximately $15.7 million.  In exchange for Western,
Harbourton received approximately 8.6 million Series B Preferred Units having
generally the same rights as the outstanding Preferred Units. In addition, if
the performance of the production operations of Western exceed certain
projections during a 24 month period, Harbourton will receive additional
preferred units.  Western, which originated loans primarily on a wholesale
basis in the western United States, had mortgage origination volume of
approximately $846 million in 1994 and $466 million during the seven months
ended July 31, 1995 (i.e., prior to the acquisition by the Partnership).  At
the acquisition date Western owned approximately $644 million of servicing
rights, which had been subserviced by the Partnership since the latter part of
1994. The Partnership acquired Western to provide broader geographic coverage,
economies of scale through greater production volumes, and to act as a valuable
hedge against prepayment risk associated with the Partnership's servicing
portfolio.

The Western Transaction has been accounted for as a reorganization of entities
under common control similar to a pooling-of-interests.  Consistent with
pooling-of-interests accounting, the historical financial statements of the
Partnership have been combined with the historical financial statements of
Western and are presented as the consolidated financial statements of the
Partnership contained herein. See also the notes to the consolidated financial
statements for a discussion of the impact of recording the Western Transaction.

Debt Refinancing

In addition to the restructuring transactions, the Partnership refinanced the
separate credit facilities of Western, TMC, Harbourton Mortgage Co., L.P. and
itself with a new syndicated credit facility.  The syndicated facility was
completed by the end of the third quarter of 1995 and consists of the
following: i) a $150.0 million warehouse facility, (ii) a $76.4 million
servicing secured facility which consists of four tranches as follows: a) a
$41.4 million servicing term facility, which was funded at closing, and
amortizes in twenty equal quarterly payments, b) a $15.0 million line of
credit, available for two years, to finance up to 65% of the purchase price of
future bulk servicing acquisitions, c) a $15.0 million revolving credit line


                                 Page 24 of 39
<PAGE>   25
to finance mid-month principal and interest advance receivables, maturing July
31, 1996 and repaid during the first week of the month following each advance,
and d) a $5.0 million revolving credit line used to finance taxes and insurance
and foreclosure advance receivables, maturing July 31, 1996.

The syndicated facility is subject to minimum debt service coverage
requirements, net worth requirements, and loan-to-value restrictions.  The
borrower on the facility is HMCLP and borrowings are guaranteed by HBT.  The
Partnership incurred and paid an up-front fee in the amount of $414 thousand
on tranches a) and b), as noted above, of the servicing secured facility.  See
also the notes to the consolidated financial statements for a further
description of the credit facility.  This refinancing will enable the
Partnership to increase its servicing portfolio (as noted below) and its
origination operations through strategic acquisitions of servicing and
origination entities.

Debt Conversion

During the third quarter of 1995, Harbourton and its affiliates converted $9.0
million of notes from the Partnership into equity in the Partnership.  In
connection with the debt to equity conversion, Harbourton and its affiliates
received approximately 4.9 million of Series B Preferred Units having generally
the same rights as the outstanding Preferred Units.

Following the consummation of the Western transaction and the debt to equity
conversion, Harbourton and its affiliates own approximately 83.5% of all of the
series of Preferred Units of the Partnership.

Servicing Acquisition

During the third quarter of 1995, the Partnership entered into a Purchase and
Sale Agreement for the acquisition of approximately $1.5 billion of GNMA
mortgage servicing rights.  The Purchase and Sale Agreement, among other
things, called for an effective acquisition date of August 31, 1995 with a
November 1, 1995 transfer of the servicing responsibilities.  The Partnership
funded the initial down payment during the third quarter of 1995 and has
reflected the remaining payments due to the seller in installment purchase
obligations in the accompanying consolidated balance sheets.  In conjunction
with the Purchase and Sale Agreement, the Partnership entered in to an Interim
Servicing Agreement with the seller to perform the servicing functions, for the
period from August 31, 1995 to the transfer date, on behalf of the Partnership.
As a result the Partnership will not benefit from any economies of scale
achieved with this acquisition until the servicing responsibilities are
transferred.

The Partnership expects to continue to pursue transactions which management
believes will further enhance the Partnership's mortgage banking operations.
No assurance can be given that any such transactions will be consummated and if
consummated, that they will have a favorable impact on the Partnership.

Impact of Financial Accounting Standards Board Statement No. 122

The Partnership adopted SFAS No. 122 during the third quarter of 1995 effective
as of the beginning of its fiscal year, January 1, 1995.  As a result, the
Partnership's operating results for the first and second quarters of 1995 have
been restated.  SFAS No. 122 prohibits retroactive


                                 Page 25 of 39
<PAGE>   26
application to prior years, therefore, the historical results for 1995 and
1994, presented herein, are reported using different accounting rules (i.e.,
SFAS No. 122 in 1995 versus SFAS No. 65 in 1994).  The primary differences
between the accounting rules, as it applies to the Partnership, relate to the
accounting treatment for originated mortgage servicing rights ("OMSRs") and the
methodology for evaluating and measuring impairment of capitalized mortgage
servicing rights ("MSRs").

Prior to the adoption of SFAS No. 122, the Partnership did not capitalize its
OMSRs.  As a result, the Partnership's historical financial statements, prior
to January 1, 1995, did not recognize the additional value of the OMSRs,
although the OMSRs had market value at the time they were created.  Under the
new accounting rules, OMSRs are treated as an asset separate from the
underlying loan and capitalized as MSRs.  Subsequent to the adoption of SFAS
No. 122, the cost of creating a mortgage loan was allocated, at the time of
origination, between the loan and the servicing right based on their respective
fair values.  Additionally, gains on the sales of loans, attributable to the
allocation of value to the MSRs, were recognized at the time the related loan
was sold, although the MSR asset was recognized on the date the loan was
originated.  The following table summarizes the impact of the adoption of SFAS
No. 122 to the Partnership's historical statements of operations (in
thousands):

<TABLE>
<CAPTION>
                                         Three Months            Nine Months
                                            Ended                   Ended
                                      September 30, 1995      September 30, 1995
                                      ------------------      ------------------
<S>                                   <C>                     <C>
Increase in gain on sales of
     mortgage loans and related
     mortgage servicing rights              $2,692                  $3,638
Increase in amortization of
     mortgage servicing rights                 (40)                   (107)
                                            ------                  ------
Total increase in net earnings              $2,652                  $3,531
                                            ======                  ======
</TABLE>

Further, the Partnership has capitalized approximately $1.9 million of MSRs for
which the underlying loan has not been sold as of September 30, 1995.

In addition to the capitalization of OMSRs as MSRs, the Partnership has changed
its methodology for evaluating and measuring the impairment of capitalized
mortgage servicing rights.  Prior to September 30, 1995, the Partnership
evaluated the impairment of each purchased servicing right on an acquisition by
acquisition basis, on a disaggregated basis, based on the future undiscounted
net servicing income related to each acquired portfolio.  SFAS No. 122 requires
that, for the purpose of evaluating and measuring impairment of MSRs, a
mortgage bank  stratify its MSRs based on one or more predominant risk
characteristics associated with the underlying loans.  The amount of impairment
recognized is the amount by which the capitalized MSRs for each risk stratum
exceed the respective fair value of the MSRs.  Impairment is recognized through
adjustments to a valuation allowance to reflect changes in the measurement of
impairment.  Fair value in excess of the amount capitalized as MSRs is not
recognized. In determining servicing value impairment at the end of the
quarter, the mortgage servicing portfolio was disaggregated into its
predominant risk characteristics.  The Partnership has determined those risk
characteristics to be loan type and interest rate.  The individual tranches of





                                 Page 26 of 39
<PAGE>   27
the portfolio were valued by an independent third party to determine the fair
value of the MSRs.  The fair value was then compared to the book value of each
risk stratum to determine if a reserve for impairment was required.  As of
September 30, 1995 no such impairment adjustment was required.

As previously discussed, SFAS No. 122 prohibits retroactive application for
OMSRs created prior to the fiscal year in which the Partnership adopted the new
accounting pronouncement.  As a result the Partnership, at September 30, 1995,
owns approximately $689 million of servicing rights that are not capitalized in
its consolidated financial statements.  Further, SFAS No. 122 prohibits the
recognition of  fair value in excess of the book basis of the MSRs.  As a
result, the Partnership has off-balance sheet value associated with its
non-capitalized MSRs, as well as the excess in fair value of the MSRs
capitalized in the consolidated financial statements.

GENERAL

As previously discussed, the results of operations presented in the
consolidated financial statements herein, reflect a series of recently
completed transactions; a) the Exchange Transaction, b) the TMC Transaction and
c) the Western Transaction.  The following is a brief discussion relating to
the accounting and reporting implementation of these transactions:

Exchange and TMC Transactions

On March 14, 1995, the existing Unitholders of HBT approved the issuance of
21.5 million Preferred Units of HBT (a 75.7% controlling interest in HBT) in
exchange for 100% ownership interest in HMCLP and HFC (the "Exchange
Transaction").  Because of the change in control of HBT, this transaction was
accounted for as a reverse acquisition.  Concurrent with the Exchange
Transaction, HBT acquired a 50% interest in TMC in exchange for .8 million
Preferred Units of HBT (a 2.9% interest) (the "TMC Transaction").  This
interest, combined with the 50% interest previously contributed to HMCLP by
Harbourton, in June of 1994, resulted in HBT's 100% control of TMC.

Accounting for a reverse acquisition requires that the historical results of
operations (prior to the Exchange Transaction) reflect the operations of HMCLP
as the continuing accounting entity.  Further, under the accounting for a
reverse acquisition, HBT is reported as if it were purchased as of the date of
the Exchange Transaction.  Therefore, the historical results of operations
exclude the operating results of HBT prior to the date of the Exchange
Transaction.  These results are reflected in the purchase adjustments
associated with the recognition of this transaction.

The operating results of TMC are reflected as equity in earnings in affiliates
in the operating results of HMCLP for the period from June 30, 1994 to the date
of the Exchange Transaction.  Thereafter, the results of operations of TMC are
reflected as a 100% owned subsidiary of the Partnership and reported in the
consolidated statements of operations.

Western Transaction

As previously discussed, on July 31, 1995, HBT acquired Western in exchange for
8.6 million Series B Preferred Units (the "Western Transaction").  This was a
transaction between entities under common control, therefore, the transaction
was accounted for using the pooling-of-interests method of accounting.  Under
the pooling method of accounting, the results of


                                 Page 27 of 39
<PAGE>   28
operations of Western are presented as if the transaction occurred on January
1, 1994 (the earliest date presented).

In summary, the historical consolidated results of operations presented herein
primarily represent the following: i) HMCLP and Western for the periods prior
to June 30, 1994, b) HMCLP and Western plus a 50% equity interest in TMC for
the period from July 1, 1994 through March 31, 1995, c) HMCLP, Western, HBT and
TMC, from April 1, 1995 through July 31, 1995 and d) HBT consolidated with
HMCLP from August 1, 1995 to September 30, 1995.

As a result of the transactions discussed above, the Partnership has completed
name changes for the entities listed in the following table:

<TABLE>
<CAPTION>
Previous Name                      Current Name                        Abbreviated Name
-------------                      ------------                        ----------------
<S>                                <C>                                 <C>
JHM Mortgage Securities L.P.       Harbourton Financial Services L.P.  HBT or the Partnership
JHM Mortgage Capital Corporation   Harbourton Mortgage Corporation     General Partner
Platte Valley Funding, L.P.        Harbourton Mortgage Co., L.P.       HMCLP
Platte Valley Funding Corporation  Harbourton Funding Corporation      HFC
</TABLE>

Business Strategy

The Partnership's primary business currently is focused on mortgage banking
which consists of (i) mortgage loan servicing activities, including the
acquisition and sale of mortgage servicing rights, (ii) the origination and
purchase of mortgage loans, including the securitization and sale of the
mortgage loans with the related servicing rights retained or released, and
(iii) investments in other mortgage-related securities.

The Partnership's concentration in mortgage banking consists primarily of
mortgage servicing and originations.  Accordingly, the Partnership is subject
to the risks associated with these operations. These risks include, (i) the
possible adverse effect of regulatory changes, since virtually all aspects of
the Partnership's business are subject to federal and state regulation; (ii)
the adverse effect on loan originations and servicing costs of downturns in
real estate cycles or general economic conditions; (iii) the continued need to
maintain financing availability to fund warehouse lines, finance bulk
acquisitions of servicing rights and to fund advance requirements; (iv) the
need for efficient and sound operations to achieve profitability and to avoid
excessive foreclosure losses and underwriting problems; (v) the servicer's
responsibility in connection with GNMA pools (which constitute most of the
Partnership's servicing) for foreclosure expenses not reimbursed by FHA or VA
(such as attorneys fees, unreimbursed interest and other expenses), provided
further that VA has the authority to limit its obligation to the reimbursement
of the lesser of a percentage of the defaulted loan's outstanding principal or
a specified maximum guaranteed amount (a so-called "VA no-bid") and the
servicer then takes the market risk of disposing of the property to recover the
unreimbursed principal plus unpaid interest and foreclosure costs; and (vi)
market and interest rate risk associated with the origination and secondary
marketing of mortgage loans, such as the adverse effects of changes in interest
rates after the mortgage originator has issued commitments to the mortgage
borrower or the secondary market purchaser.  The Partnership,


                                 Page 28 of 39
<PAGE>   29
to a limited degree, is also subject to the risks associated with its
derivative securities investments, including, without limitation, other factors
(such as foreclosure rates and pay-offs from home sale activity) which affect
the rate of prepayment on the mortgage loans underlying the derivative
security, actual operating expenses with respect to the underlying
mortgage-backed security, potential tax liabilities and market conditions
unique to such securities.

Mortgage Servicing Portfolio

At September 30, 1995, the Partnership's servicing and subservicing portfolio
consisted of residential mortgage loans with underlying principal balances of
approximately $6.2 billion. The value and income from mortgage servicing rights
are affected by, among other things, changes in both short-term and long-term
interest rates.  Generally, mortgage servicing portfolios increase in value as
interest rates increase (benefits from escrows being used in compensating
balance arrangements increase when short-term rates rise and the expected
income stream from servicing lengthens as prepayments slow when long-term rates
increase).  The benefit from increases in short-term rates generally is
partially offset by the increased financing costs on borrowings incurred to
fund the acquisition of mortgage servicing rights and other working capital
requirements.  Decreases in rates generally have the opposite effect of
decreasing the value and income from mortgage servicing rights.  The
Partnership will attempt to mitigate this negative impact by adding loans to
its existing servicing portfolio through (i) refinancing a portion of the
prepaying loans, (ii) originating new loans and retaining the servicing and
(iii) purchasing servicing from third parties.  In contrast, in periods of
decreasing long-term rates, which stimulate new home financing and the
refinancing of existing mortgage loans, loan production operations should
provide an increased contribution to earnings as mortgage originations rise.

Mortgage Loan Originations

The sale of originated mortgage loans to third parties may generate a gain or
loss to the Partnership.  Gains or losses result primarily from two factors.
First, mortgage loans may be originated at a price (i.e., interest rate and
discount) which is higher or lower than the Partnership would receive if it
immediately sold the mortgage loan in the secondary market.  These pricing
differences occur principally as a result of competitive pricing conditions in
the wholesale loan origination market.  Second, gains or losses may result from
changes in interest rates which result in changes in the market value of the
mortgage loans, or commitments to purchase mortgage loans, from the time the
price commitment is given to the borrower or correspondent until the time that
the mortgage loan is sold by the Partnership or until it enters into a forward
delivery commitment.

Typically, the purchaser of mortgage loans for resale, such as the Partnership,
endeavors to minimize its interest rate risk on commitments made to customers
by entering into forward sale commitments on mortgage-backed securities and
mortgage loans.  Net commitment positions are constantly adjusted by entering
into new commitments to sell or by buying back commitments to sell.  The amount
of forward commitments outstanding is equal to the closed mortgage loans held
in inventory plus a portion of the mortgage loans that the Partnership has
committed to make to customers.  The aggregate amount of commitments is reduced
for hedging purposes by an estimate of mortgage loans which will not close.
The Partnership's


                                 Page 29 of 39
<PAGE>   30
projection of the portion of loans that it expects to close is based on
numerous factors including anticipated changes in interest rates.  The forward
sale commitments are an effort to mitigate the Partnership's risk resulting
from potential changes in market interest rates between the time that it
commits to make or purchase a mortgage loan at an agreed price and the time
that the mortgage loan is closed and sold.  The use of forward commitments as a
strategy to minimize interest rate risk requires the Partnership to make
certain assumptions and projections about future interest rates and general
economic trends.

Mortgage-Related Securities

"Mortgage-related securities" are securities that, directly or indirectly,
represent participation in, or are secured by and payable from, mortgage loans
secured by single family and multifamily residential real property and
commercial property. The cash flow generated by the mortgage assets underlying
an issue of mortgage-related securities is applied first to make the required
payments on such mortgage-related securities and second to pay the related
administrative expenses.  The residual cash flow in a mortgage-related
securities transaction generally represents the excess cash flow remaining
after making such payments (the "residual cash flows" or "CMO residual
interest").  The investment characteristics of mortgage-related securities
differ from traditional debt securities.  The major differences include the
fact that interest payments and principal repayments on mortgage-related
securities are made more frequently (usually monthly), and principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time.  These differences can result in
significantly greater price and yield sensitivity than is the case with
traditional fixed-income securities.  The Partnership's investments in
mortgage-related securities represents approximately 5% of its total partners'
capital as of September 30, 1995.

LIQUIDITY AND CAPITAL RESOURCES

General

The new credit facility, coupled with the $9.0 million debt to equity
conversion, provided the Partnership with approximately $20.0 million in
liquidity.  In addition, the $15.0 million acquisition revolver has provided
the Partnership with additional liquidity for a total of approximately $35.0
million, less the funds required to complete the $1.5 billion servicing
acquisition, to further expand its servicing portfolio and other investments.
As of September 30, 1995, all of the Partnership's excess liquidity has been
used to fund mortgage loans held for sale.

As an additional source of liquidity, the Partnership has a subordinated line
of credit with Harbourton.  At September 30, 1995, the Partnership is indebted
to Harbourton and its affiliates for approximately $11.3 million.  These
borrowings generally bear interest at prime plus 1.5%.

The Partnership's remaining sources and uses can be categorized into Mortgage
Servicing Portfolio and Mortgage Loan Production.


                                 Page 30 of 39
<PAGE>   31
Mortgage Servicing Portfolio

A source of liquidity and cash flow available to the Partnership is its owned
portfolio of servicing rights on mortgage loans, net of its servicing term
loan, with underlying principal balances aggregating approximately $6.0 billion
at September 30, 1995.  Currently, there is a liquid and active market for the
sale and acquisition of servicing rights.  The Partnership has term loans
secured by its mortgage servicing portfolio.  Principal and interest on the
term loans is paid monthly.

The Partnership's liquidity is affected by the level of loan delinquencies and
prepayments due to the servicer's advance requirements on the loans it
services.  Under certain types of servicing contracts, particularly contracts
to service loans that have been pooled or securitized (primarily GNMA and FNMA
mortgage-backed securities), the servicer must forward all or part of the
scheduled payments (principal and interest) on the specified remittance day to
the security holder (owner of the loan) even though payments may not have been
received from the mortgagor.  In accordance with the terms of the servicing
contracts, servicers may offset the remittance day P&I advances against funds
collected but not yet required to be remitted to the security holders
(including prepayments and early payments).  The servicer's principal and
interest (P&I) advance requirement is reduced during high pay-off periods due
to the amount of prepayment funds available to offset the required delinquent
payment advance.  However, during periods of reduced prepayments, the advance
requirement of the servicer is increased.  The servicer's P&I advance, if any,
is typically recovered within 15 days, through mortgagor payment receipts which
replenish the offsetting advance within the related custodial account.  The
Partnership maintains a revolving line of credit to provide necessary liquidity
to meet such advances.  These lines of credit have been sufficient to meet the
Partnership's liquidity requirements relating to these items; however, the rise
in interest rates and increased delinquencies has caused an increase in the
Partnership's remittance day advance requirement.

The Partnership is also required as a servicer to fund advances for mortgage
and hazard insurance and tax payments on the scheduled due date even though
sufficient escrow funds may not be available.  The Partnership's sources of
liquidity to meet these advance requirements are internally generated operating
cash flow, its existing lines of credit, and additional defaulted loan
repurchase and sale transactions with affiliated parties as discussed above.

Mortgage Loan Production

One of the Partnership's other primary financing requirements will be the
financing of its mortgage loan originations and purchases until funded by
secondary market investors and the cost of its loan originations.  The
Partnership will finance its short-term loan funding requirements principally
through warehouse lines of credit.  This financing requirement will begin at
the time of loan closing and extends until the loan is sold into the secondary
market.

With the acquisition of Western, the Partnership's financing requirements
became increasingly important.  For the seven months ended July 31, 1995
Western originated approximately $466 million compared to HMCLP's $125 million.


                                 Page 31 of 39
<PAGE>   32
RESULTS OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 1995 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1994

Summary

Net income for the third quarter of 1995 totaled approximately $.4 million or
$.01 per share, an increase of approximately $.3 million or $.01 per share over
the approximately $.1 million or $.00 per share earned during the third quarter
of 1994.  As previously discussed, the Partnership's third quarter 1995 results
were accounted for under the new accounting pronouncement, SFAS No. 122.  SFAS
No. 122 prohibits retroactive application to prior years.  Accordingly, the
Partnership's third quarter 1994 historical results were accounted for under the
original SFAS No. 65.  If the Partnership had not applied this new accounting
standard in the third quarter of 1995, the Partnership would have reported a net
loss of approximately $(2.2) million or $(.07) per share. The decline in
non-adjusted SFAS No. 122 results of operations for the third quarter of 1995 as
compared to the third quarter of 1994 is primarily attributed to the following
items: i) the increased amount of retained servicing created in 1995 of
approximately $175 million compared to 1994's level of approximately $60
million. An increase in the level of retained servicing prior the implementation
of SFAS No. 122 has the negative impact of reducing earnings for the costs
associated with creating the servicing without the recognition of the positive
impact associated with the value added for the OMSRs, ii) an increase in general
and administration expenses associated with the completion of the transactions
and restructuring previously discussed, and iii) an increase in interest expense
associated with the additional leverage obtained by the Partnership, resulting
from the completion of its new credit facility. The increased leverage should
allow the Partnership to expand its mortgage banking operations.

The following table summarizes the Partnership's operating results (in
thousands):

<TABLE>
<CAPTION>
                                                  Three Months        Three Months
                                                     Ended               Ended
                                               September 30, 1995  September 30, 1994
                                               ------------------  ------------------
<S>                                            <C>                 <C>
Net income from servicing operations                 $ 2,866               $ 2,611
Net income (loss) from production operations             932                  (946)
General and administrative expenses                   (1,946)               (1,017)
Net other income (expense)                            (1,408)                 (351)
Equity in earnings of affiliates                          --                  (170)
                                                     -------               -------

Net Income                                           $   444               $   127
                                                     =======               =======
</TABLE>

Servicing

Net income from servicing increased approximately $.3 million or 9.8% for the
third quarter of 1995 compared to the third quarter of 1994.  The increase in
the contribution from servicing primarily resulted from the growth in the
servicing portfolio.  The average principal balance of loans serviced for the
three month period ended September 30, 1995 (based on beginning of the month
totals) increased to approximately $5 billion from approximately $3.6 billion
for the same period during 1994.

The growth in the servicing portfolio is principally due to the acquisition of
a $1.5 billion bulk servicing portfolio with an effective acquisition date of
August 31, 1995, the acquisition of the HBT portfolio of approximately $1.1
billion effective April 1, 1995 resulting from the Exchange Transaction, and
the sale of approximately a $493 million bulk servicing portfolio effective
January 31, 1995.

The $1.5 billion bulk servicing acquisition was acquired with an effective
acquisition date of August 31, 1995 and a transfer date of November 1, 1995.
As a result, the effects of the acquisition are reflected for one month during
the third quarter of 1995.  In addition, pursuant


                                 Page 32 of 39
<PAGE>   33
to the terms of the acquisition and interim servicing agreements, the seller is
responsible for servicing the portfolio for the period prior to the transfer
date of November 1, 1995.  The Partnership is obligated to compensate the
seller for performing the servicing obligations during the interim servicing
period.  As a result, the Partnership will not achieve the economies of scale
normally obtained by acquiring servicing portfolios until the fourth quarter of
1995.

The increases in gross servicing revenues for the three month period ended
September 30, 1995, as compared to the same period for 1994 was principally due
to the growth in the servicing portfolio.

Although the average servicing portfolio increased in size for the three month
period ended September 30, 1995 as compared to the same period for 1994, total
servicing costs decreased to $1.5 million from $1.8 million for the respective
periods.  In September 1994, Western contracted with HMCLP to subservice its
servicing portfolio.  As a result, the Partnership's "as-pooled" operating
results include the cost of maintaining and operating two separate servicing
centers for most of the third quarter of 1994.

Amortization of mortgage servicing rights increased to approximately $2.2
million for the quarter ended September 30, 1995 from approximately $1.7
million for the same period in 1994, a net change of approximately $.5 million.
Approximately $.9 million of the net change relates to additional amortization
associated with the acquisitions discussed above, and the increased
amortization associated with the implementation of SFAS No. 122.

Production

Net income from production operations increased to $.9 million for the quarter
ended September 30, 1995 from a loss of $(.9) million for the quarter ended
September 30, 1994.  The net income for the third quarter ended 1995 was
affected by the implementation of SFAS No. 122.  Under SFAS No. 122, a higher
gain on sale of the loan is recorded as compared to SFAS No. 65 because under
SFAS No.  122 the acquisition cost of the loan is reduced by the amount
allocated to the fair value of the originated mortgage servicing rights.  If
the Partnership had not applied this new accounting in the third quarter of
1995, income from production operations would have been a net loss of
approximately $(1.8) million. The decline in non-adjusted SFAS 122 production 
earnings for the third quarter of 1995, as compared with 1994, relates to the 
increased amount of retained servicing in 1995 (see discussion above).

The principal balance of loans produced for the third quarter increased to
approximately $468 million from approximately $176 million for the third
quarter of 1994, an increase of approximately $292 million or 166%.  The third
quarter of 1994 excluded the production volume of TMC. TMC was recorded and
reported on the equity method of accounting prior to the consummation of the
TMC Transaction in March 1995.  As a result, approximately $117 million of the
$292 million increase can be attributed to the addition of TMC.  Excluding the
impact of TMC, the Partnership's volume increased $175 million, or 100%.

The increase in production net income is primarily related to the increase in
volume as well as an improvement in the overall profit margins realized by the
Partnership.


                                 Page 33 of 39
<PAGE>   34

In addition, the Partnership is in the process of completing a reorganization
and consolidation of all production support functions.  The reorganization
consists of centralizing and eliminating duplicate production support functions
such as accounting, treasury, secondary marketing, shipping, and quality
control.  The reorganization began August 31, 1995 and is expected to be
completed by the end of 1995.  The elimination of duplicate functions should
increase future profitability of the production division of the Partnership.

General and Administrative Expenses

General and administrative expenses increased to approximately $1.9 million
from $1.0 million for the third quarter of 1995 as compared to the third
quarter of 1994.  The increase in general and administrative expenses can be
attributed to a number of factors including the recognition of transactional
costs associated with the completion of the transactions previously discussed
above and one time non-recurring expenses associated with the reorganization
and consolidation of the Partnership's mortgage banking operations into one
entity.  In addition, the Partnership's general and administrative expenses
have increased due to the functions required to maintain and support a larger
more diverse publicly traded master limited partnership.

Net Other Income (Expense) Items

The increase in net other income (expense) items is attributed to the increase
in term interest and other interest expense associated with the completion of
the Partnership's term facility in August 1995.  The increased leverage
resulted in an increase of interest expense to $.7 million for the third
quarter 1995 from approximately $.3 million for the third quarter 1994, an
increase of approximately $.4 million.  The increased leverage should enable
the Partnership to expand its existing mortgage banking operations and take
advantage of achieving economies of scale within its mortgage banking
operations. The remaining net increase in other items is primarily attributable
to the increase in depreciation and amortization of excess cost over
identifiable tangible and intangible assets acquired.

Equity in Earnings of Affiliates

Equity in earnings of affiliates for the third quarter of 1994 represents the
Partnership's 50% interest in TMC.  As previously discussed, prior to March 31,
1995, the Partnership reported its interest in TMC using the equity method of
accounting.  Subsequent to March 31, 1995 TMC's operations are consolidated and
included in the consolidated operating results of the Partnership.

NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1994

Summary

Net income for the nine months ended September 30, 1995 totaled approximately
$9.3 million or $.26 per share, an increase of approximately $3.4 million or
$.07 per share over the approximately $5.8 million or $.19 per share earned
during the nine months ended September 30, 1994.  As previously discussed, the
Partnership's 1995 results were accounted for under the new accounting
pronouncement, SFAS No. 122.  This pronouncement prohibits retroactive
application to prior years.  Accordingly, the Partnership's 1994 historical
results


                                 Page 34 of 39
<PAGE>   35
were accounted for under SFAS No. 65.  If the Partnership had not applied this
new accounting pronouncement in 1995, the Partnership would have reported net
income of approximately $5.7 million or $.16 per share.

The following table summarizes the Partnership's operating results (in
thousands):

<TABLE>
<CAPTION>
                                                  Nine Months          Nine Months
                                                     Ended                Ended
                                               September 30, 1995   September 30, 1994
                                               ------------------   ------------------
<S>                                            <C>                  <C>
Net income from servicing operations                 $ 9,071              $ 4,872
Net income (loss) from production operations            (141)               2,734
General and administrative expenses                   (4,800)              (3,583)
Net other income (expense)                             5,373                1,969
Equity in earnings of affiliates                        (255)                (186)
                                                     -------              -------

Net Income                                           $ 9,248              $ 5,806
                                                     =======              =======
</TABLE>

Servicing

Net income from servicing increased approximately $4.2 million or 86% for the
nine months ended September 30, 1995 compared to the nine months ended
September 30, 1994.  The increase in the contribution from servicing primarily
resulted from the growth in the servicing portfolio.  The average principal
balance of loans serviced for the nine month period ended September 30, 1995
(based on beginning of the month totals) increased to approximately $5.0
billion from approximately $3.4 billion for the same period 1994.

The growth in the servicing portfolio is principally due to the acquisition of
a $1.5 billion bulk servicing portfolio with an effective acquisition date of
August 31, 1995, the acquisition of the HBT portfolio of approximately $1.1
billion effective April 1, 1995 resulting from the Exchange Transaction, and
the sale of approximately a $493 million bulk servicing portfolio effective
January 31, 1995.

The $1.5 billion bulk servicing acquisition was acquired with an effective
acquisition date of August 31, 1995 and a transfer date of November 1, 1995.
As a result, the effects of the acquisition are reflected for one month during
the nine months ended September 30, 1995.  In addition, pursuant to the terms
of the acquisition and interim servicing agreements, the seller is responsible
for servicing the portfolio for the period prior to the transfer date of
November 1, 1995.  The Partnership is obligated to compensate the seller for
performing the servicing obligations during the interim servicing period.  As a
result the Partnership will not achieve the economies of scale normally
obtained by acquiring servicing portfolios until the fourth quarter of 1995.
During the nine month period ending September 30, 1994, the Partnership
acquired three bulk servicing portfolios totaling approximately $2.0 billion of
GNMA servicing and sold one bulk servicing portfolio totaling approximately
$456 million all with an effective transaction date of June 30, 1994.  As a
result, the effects of such transactions are reflected for the three month
period ending September 30, 1994.


                                 Page 35 of 39
<PAGE>   36

The increases in gross servicing revenues for the nine month period ended
September 30, 1995, as compared to the same period for 1994 was principally due
to the growth in the servicing portfolio.

Although the average servicing portfolio increased in size for the nine month
period ended September 30, 1995 as compared to the same period for 1994, total
servicing costs grew only slightly to approximately $4.3 million for the nine
month period ended September 30, 1995 to $4.1 million for the nine month period
ended September 30, 1994.

Amortization of mortgage servicing rights also increased only slightly to
approximately $5.4 million for the nine months ended September 30, 1995 from
approximately $5.0 million for the same period in 1994, a net change of only
$.4 million.  Approximately $1.5 million of the net change relates to
additional amortization associated with the acquisitions discussed above, and
the increased amortization associated with the implementation of SFAS No. 122.

Production

Net income from production operations decreased to near break-even for the nine
months ending September 30, 1995 from $2.7 million for the nine months ended
September 30, 1994.  Origination volumes and gain on sale of originated loans
were adversely effected in early 1995 due to the increase in market interest
rates.  The decrease in the profitability of the origination operations during
1995 was offset by the implementation of SFAS No. 122.  Under SFAS No. 122, a
higher gain on sale of the loan is recorded as compared to SFAS No. 65 because
under SFAS No. 122 the acquisition cost of the loan is reduced by the amount
allocated to the fair value of the originated mortgage servicing rights.  If
the Partnership had not applied this new accounting in 1995, income from
production operations would have been a net loss of approximately $3.8 million.

The principal balance of loans produced for the nine months ended September 30,
1995 increased to approximately $900.7 million from approximately $889.6
million for the same period of 1994, an increase of approximately $11.1 million
or 1%.  The nine months ended September 30, 1994 excluded the production volume
of TMC. TMC was recorded and reported on the equity method of accounting prior
to the consummation of the TMC transaction in March 1995.  Included in the
consolidated 1995 production volumes are $185 million in production for TMC for
the period from March 31, 1995 to September 30, 1995.  Excluding the impact of
TMC, the Partnership's volume decreased $173.9 million or 20%.

The decrease in production net income is primarily related to increased pricing
competition in the market, resulting in a decreased profit margin.

In addition, the Partnership is in the process of completing a reorganization
and consolidation of all production support functions.  The reorganization
consists of centralizing and eliminating duplicate production support functions
such as accounting, treasury, secondary marketing, shipping, and quality
control.  The reorganization began August 31, 1995 and is expected to be
completed by the end of 1995.  The elimination of duplicate functions should
increase future profitability of the production division of the Partnership.


                                 Page 36 of 39
<PAGE>   37
General and Administrative Expenses

General and administrative expenses increased to approximately $4.8 million
from $3.6 million for the nine months ended September 30, 1995 as compared to
the same period of 1994.  The increase in general and administrative expenses
can be attributed to a number of factors including the recognition of
transactional costs associated with the completion of the transactions
previously discussed above and one time non-recurring expenses associated with
the reorganization and consolidation of the Partnership's mortgage banking
operations into one entity.  In addition, the Partnership's general and
administrative expenses have increased due to the functions required to
maintain and support a larger more diverse publicly traded master limited
partnership.

Net Other Income (Expense) Items

The increase in net other income (expense) items is attributed to the gain on
bulk sale of servicing partially offset by an increase in term interest and
other interest expense associated with the completion of the Partnership's term
facility in August 1995 and additional amortization and depreciation expense.
During the nine months ended September 30, 1995 the Partnership sold servicing
rights for a gain of $9.1 million compared to a gain on sale of servicing
rights of $3.0 million for the same period of 1994.  The increased term debt
leverage resulted in an increase of interest expense to $1.6 million for the
nine months ended September 30, 1995 from approximately $.7 million for the
same period of 1994, an increase of approximately $.9 million.  The increased
leverage should enable the Partnership to expand its existing mortgage banking
operations and take advantage of achieving economies of scale within its
mortgage banking operations.  The remaining net increase in other items is
primarily attributable to the increase in depreciation and amortization of
excess cost over identifiable tangible and intangible assets acquired.

Equity in Earnings of Affiliates

Equity in earnings of affiliates for the period from June 30, 1994 to September
30, 1994, represents the Partnership's 50% interest in TMC. Equity in earnings
of affiliates for the period from January 1, 1995 to March 31, 1995, represents
the Partnership's 50% interest in TMC.  As previously discussed, prior to March
31, 1995, the Partnership reported its interest in TMC on the equity method of
accounting.  Subsequent to March 31, 1995 TMC's operations are consolidated and
included in the consolidated operating results of the Partnership.


                                 Page 37 of 39
<PAGE>   38
                          PART II.  OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

None

ITEM 2.  CHANGES IN SECURITIES

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits:

10(b)     Revolving Warehouse Credit Facility and Servicing Credit Facility
          dated July 31, 1995
10(c)     Mortgage Servicing Purchase and Sale Agreement dated September 15,
          1995

b. Reports on From 8-K:

1)        Form 8-K filed August 14, 1995 (dated July 31, 1995) and Form 8-K/A
          filed October 12, 1995 (dated July 31, 1995).


                                 Page 38 of 39
<PAGE>   39
SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                       HARBOURTON FINANCIAL SERVICES L.P.

                                       By: Harbourton Mortgage Corporation,
                                            General Partner

Date:  November 13, 1995               By: /s/ Rick W. Skogg
                                           -------------------------------------
                                           Rick W. Skogg
                                           President and Chief Operating Officer

Date:  November 13, 1995               By: /s/ Paul Szymanski
                                           -------------------------------------
                                           Paul Szymanski
                                           Chief Financial Officer

Date:  November 13, 1995               By: /s/ Bill L. Reid, III
                                           -------------------------------------
                                           Bill L. Reid, III
                                           Chief Accounting Officer


                                 Page 39 of 39

<PAGE>   40
                                EXHIBIT INDEX


10(b)     Revolving Warehouse Credit Facility and Servicing Credit Facility
          dated July 31, 1995
10(c)     Mortgage Servicing Purchase and Sale Agreement dated September 15,
          1995

27        Financial Data Schedule