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

                                    FORM 10-K

             [X]  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     For the Fiscal Year Ended June 30, 1998
                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                 For the Transition Period from ______ to ______
                          Commission File Number 1-6802

                             Liberte Investors Inc.
             (Exact name of registrant as specified in its charter)

          DELAWARE                                               75-1328153
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

               200 Crescent Court, Suite 1365, Dallas, Texas 75201
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (214) 871-5935
           Securities registered pursuant to Section 12(b) of the Act:

          Title of each class          Name of each exchange on which registered
          -------------------          -----------------------------------------
Common Stock, $.01 par value per share          New York Stock Exchange

           Securities registered pursuant of 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___

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment on this
Form 10-K. [ ]

     The aggregate market value of the voting stock held by nonaffiliates of the
registrant,  based on the  closing  price of these  shares on the New York Stock
Exchange  on  September  23,  1998 was  $31,256,892.  For the  purposes  of this
disclosure  only,  the  registrant  has assumed  that its  directors,  executive
officers and beneficial  owners of 5% or more of the  registrant's  common stock
are the affiliates of the registrant.

              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.

                                 Yes _X*_ No____

* The  registrant's  confirmed  plan of  reorganization  under Chapter 11 of the
Bankruptcy Code did not provide for a distribution of securities;  however,  all
required  documents and reports have been timely filed by the  registrant  after
confirmation of the plan.

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

The registrant had 20,256,097  shares of common stock, $.01 per share par value,
outstanding as of September 23, 1998.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's  Proxy Statement to be furnished to stockholders in
connection  with its 1998 Annual Meeting of  Stockholders  are  incorporated  by
reference in Part III of this Report.

<PAGE>

                             LIBERTE INVESTORS INC.

                FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
<S>                                                                                                      <C>
PART I
   Item 1.   Business...................................................................................   3

   Item 2.   Properties.................................................................................   6

   Item 3.   Legal Proceedings..........................................................................   6

   Item 4.   Submission of Matters to a Vote of Security Holders........................................   6

PART II
   Item 5.   Market for the Company's Common Equity and Related Stockholder Matters.....................   7

   Item 6.   Selected Financial Data....................................................................   9

   Item 7.   Management's Discussion and Analysis of Financial Condition and Results of
                  Operations............................................................................   9

   Item 8.   Financial Statements and Supplementary Data................................................  14

   Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial
                  Disclosure............................................................................  14

PART III
   Item 10.  Directors and Executive Officers of the Company............................................  15

   Item 11.  Executive Compensation.....................................................................  15

   Item 12.  Security Ownership of Certain Beneficial Owners and Management.............................  15

   Item 13.  Certain Relationships and Related Transactions.............................................  15

PART IV
   Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K............................  16

   Signatures...........................................................................................  18

   Index to Consolidated Financial Statements...........................................................  F-1
</TABLE>

                                       2
<PAGE>


                                     PART I

Item 1.  Business

     Liberte  Investors Inc. ("LBI" or the "Company") is a Delaware  corporation
which was  organized in April of 1996 in order to effect the  reorganization  of
Liberte  Investors,  a  Massachusetts  business  trust (the "Trust")  originally
created pursuant to a Declaration of Trust dated June 26, 1969, as amended.

     At a special  meeting of the  shareholders  of the Trust held on August 15,
1996,  (the  "Special  Meeting"),  the Trust's  shareholders  approved a plan of
reorganization  whereby  the Trust  contributed  its assets to the  Company  and
received all of the Company's outstanding common stock, par value $.01 per share
("Shares" or "Common Stock").  The Trust then distributed to its shareholders in
redemption of all  outstanding  shares of beneficial  interest in the Trust (the
"Beneficial  Shares") the Shares of the Company.  The Company assumed all of the
Trust's assets and outstanding  liabilities  and  obligations.  Thereafter,  the
Trust was terminated.

     The  principal  business  activity  of the  Trust  was  investing  in notes
receivable,  primarily  first  mortgage  construction  notes and first  mortgage
acquisition and development notes.  Beginning in fiscal 1988, however, the Trust
progressively  curtailed  its  lending  activities  and  reduced the size of its
portfolio  of  foreclosed  real  estate in an effort to repay  indebtedness.  On
October 25, 1993, the Trust filed a voluntary petition for reorganization  under
Chapter 11 of the United States  Bankruptcy  Code.  On April 7, 1994,  the Trust
emerged   from   bankruptcy   pursuant   to  a  plan  of   reorganization   (the
"Reorganization")  whereby certain assets and liabilities,  including  remaining
senior indebtedness, were transferred to Resurgence Properties Inc. ("RPI"), and
RPI's common  stock was  distributed  to the holders of the Trust's  outstanding
subordinated  indebtedness in full  satisfaction of such holders' claims against
the Trust.  After the Trust  emerged from  bankruptcy  proceedings,  it became a
virtually debt-free entity with cash and cash equivalents,  real estate mortgage
notes  receivable,  foreclosed  real estate and tax net  operating  loss ("NOL")
carryforwards.  Although the bankruptcy plan  contemplated  that the Trust would
continue as a financial services company,  the Board of Trustees opted to forego
further real estate mortgage lending and seek to purchase or create an operating
business in order to realize the value of the NOL  carryforwards.  Further,  the
Board of Trustees  determined that additional  Beneficial Shares could be issued
to  generate  cash  to  finance  an  acquisition  or  startup   company  without
restricting the Trust's NOL carryforward.

     On January 16, 1996, the Trust entered into a Stock Purchase  Agreement (as
amended, the "Stock Purchase Agreement") with Hunter's Glen/Ford,  Ltd., a Texas
limited  partnership  ("Hunter's  Glen"),  pursuant to which the Trust agreed to
sell   8,102,439   newly-issued   Shares  to  Hunter's  Glen  for   $23,091,951,
representing a purchase price of $2.85 per Share (the "Purchase").  The Purchase
was approved by the Trust's shareholders at a Special  Stockholder's Meeting and
was consummated on August 16, 1996.  Immediately prior to the sale of the Shares
pursuant  to the  Stock  Purchase  Agreement,  the  Trust  reorganized  into the
Company,  and shareholders of the Trust became  shareholders of the Company on a
share for share  basis.  Gerald J. Ford,  a general  partner of  Hunter's  Glen,
became the Chief Executive Officer and Chairman of the Board of Directors of the
Company.

     Since August of 1996, the Company has been actively pursuing  opportunities
to acquire one or more operating companies.





                                       3
<PAGE>

Portfolio Review

     At June 30, 1998, the Company owned  foreclosed  real estate  totaling $3.0
million.  At June 30, 1998, there were no outstanding  notes receivables and all
foreclosed real estate was classified as nonearning.

     Foreclosed real estate consisted of four properties,  all of which are held
for sale. The following  table sets forth  undeveloped  land by type of property
and  geographic  location at June 30, 1998.  See also Notes 2 and 12 of Notes to
Consolidated Financial Statements.

                                        Texas         California         Total
                                      ----------      ----------      ----------
Single family lots                    $       --      $  213,052      $  213,052
Land                                   2,815,221              --       2,815,221
                                      ----------      ----------      ----------
                                      $2,815,221      $  213,052      $3,028,273
                                      ==========      ==========      ==========

     At June 30, 1998,  the Company's  notes  receivable  had been  collected or
written-off, resulting in no outstanding notes receivable.

     At June 30,  1998,  the Company had impaired  loans from prior  foreclosure
related  deficiency  notes and/or  judgments  with no carrying  value.  The face
amounts ranged from $12,000 to $3,118,000.  These receivables are unsecured, and
collections are doubtful.  Should any amount be collected on these  receivables,
the Company  would  recognize a gain.  See also Note 3 of Notes to  Consolidated
Financial Statements.

Prior Management - Related Party Activity

     Lomas  Management,  Inc.,  a  wholly-owned  subsidiary  of Lomas  Financial
Corporation,  managed the Trust from its inception in 1969 until  February 1995.
Lomas Financial  Corporation was the original sponsor of the Trust. The terms of
certain  management  agreements  in effect  during  that  period  of time  often
required Lomas Financial  Corporation or one of its  subsidiaries to participate
in real  estate  loans  originated  by the Trust.  In 1995,  however,  the Trust
terminated its management agreement with Lomas Management,  Inc. and assumed its
own operating  and  accounting  responsibilities.  Management of assets owned at
that time were addressed in an Asset  Disposition  Agreement  dated February 28,
1995  between  the  Trust  and a  wholly-owned  subsidiary  of  Lomas  Financial
Corporation (the "Asset Disposition Agreement").

     The Asset  Disposition  Agreement  provided  for an exchange  of  ownership
positions  in various  pieces of  foreclosed  real estate and one  earning  note
receivable.  No gain or loss was  recognized  by the  Company as a result of the
exchange,  and at June 30,  1995,  the Trust owned 100% of its  foreclosed  real
estate and note receivable portfolio with the exception of one real estate asset
(which  was  subsequently  sold) and one  mortgage  note  receivable.  The Asset
Disposition  Agreement  also  addressed  a group of shared  receivables  with no
carrying  value that  related to  deficiency  notes  obtained  through  previous
foreclosure   proceedings   and  outlined   procedures  to   distribute   future
collections, if any.

     On April  24,  1996,  the  Trust  entered  into a  supplement  to the Asset
Disposition  Agreement  whereby  100% of the  outstanding  common  stock  of LNC
Holdings,  Inc., whose sole asset is one tract of undeveloped  real estate,  was
transferred to the Trust and the remaining mortgage note receivable not resolved
in  the  Asset  Disposition  Agreement  was  exchanged  for  a  comparable  note
receivable held by a subsidiary of Lomas Financial Corporation.



                                       4
<PAGE>

     In accordance with the Asset Disposition Agreement and the Supplement,  the
subsidiary of Lomas Financial  Corporation received compensation of $69,237 from
the Company for the asset  administration and collection services in fiscal year
ended  June 30,  1996.  See  also  Note 6 of  Notes  to  Consolidated  Financial
Statements.

Competition

     In its ongoing  efforts to liquidate  its real estate  assets,  the Company
competes  with  commercial  banks,  savings  and loan  associations,  and  other
financial  institutions  that  are  seeking  to sell  their  own  portfolios  of
foreclosed real estate.  The primary factors affecting  competition when selling
real estate are the value of the foreclosed real estate,  the price at which the
seller is willing to sell the asset, and the seller's ability and willingness to
provide or arrange financing for the prospective buyer.

     With regard to efforts to identify  suitable  acquisition  candidates,  the
Company competes with numerous prospective buyers,  including various investment
funds,  other  companies  in  similar   industries,   corporate   conglomerates,
individual investors, etc. Recent market conditions have resulted in substantial
amounts  of  cash  becoming  available  for  new  acquisition  activity  by both
institutional and individual investors. Consequently, many potential acquisition
candidates  targeted by the Company  have been  pursued by numerous  prospective
buyers and bidding has been competitive.

Certain Customers

     In  1994,   upon  emerging  from   bankruptcy   pursuant  to  the  plan  of
reorganization,  the  Company  received  a note  receivable  (the  "Note")  from
Resurgence Properties,  Inc. ("RPI") in the original amount of $6.0 million. The
Note was  collateralized by a pool of first mortgage loans and by deeds of trust
on various real estate  assets owned by RPI. RPI  repurchased  the Note from the
Company  on  June  27,  1996  for  $4.09  million  representing  98.75%  of  the
outstanding balance in a negotiated transaction.  The Company charged $51,740 to
the allowance for possible losses on notes receivable related to this sale.

     Revenue from RPI for the fiscal year ended June 30, 1998 and 1997 consisted
solely of dividend income totaling  $40,100 and $33,500,  respectively.  Revenue
from RPI provided greater than 10% of the Company's total revenue for the fiscal
year  ended June 30,  1996,  and  consisted  of: (i)  interest  income  totaling
$389,958 on the RPI Note receivable and (ii) dividend income totaling $21,375 on
RPI preferred stock.

Federal Income Tax

     Effective  July 1, 1993,  the Trust no longer  qualified  as a real  estate
investment  trust as defined by the Internal  Revenue  Code.  Subsequently,  the
Company was organized in 1996 as a Delaware  corporation  in order to effect the
reorganization of the Trust by merging the Trust into the Company.  Accordingly,
the Trust and the  Company  are  subject to  federal  income  taxes and  adopted
Statement of  Financial  Accounting  Standards  No. 109  "Accounting  for Income
Taxes".

     At June 30, 1998,  the Company had net  operating  loss  carryforwards  for
federal income tax purposes of approximately  $227 million,  which are available
to offset future federal taxable income. These carryforwards will expire in 2005
through 2011. See also Note 7 of Notes to Consolidated Financial Statements.



                                       5
<PAGE>

Personnel

     At June 30, 1998, the Company had two full-time  employees and no part-time
employees.  The Company engages real estate consultants as needed with regard to
real estate  related  matters and  utilizes  independent  accountants  and legal
advisors as needed when evaluating a potential acquisition.


Item 2.  Properties

     The  Company's  principal  executive  offices were located at 600 N. Pearl,
Suite  420,  Dallas,  Texas  at June  30,  1997  under a month  to  month  lease
arrangement.  On July 14, 1997, the Company  relocated its executive  offices to
200 Crescent  Court,  Suite 1365,  Dallas,  Texas and is occupied by the Company
under a lease  agreement  expiring  December  31,  2000.  See Note 5 of Notes to
Consolidated Financial Statements.


Item 3.  Legal Proceedings

     The Company is involved in routine  litigation  incidental  to its business
which,  in the  opinion of  management,  will not  result in a material  adverse
impact on the Company's consolidated financial condition, results of operations,
or  cash  flows  without  regard  to  any  possible  insurance  or  third  party
reimbursement.


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

     Not applicable.



                                       6
<PAGE>

                                     PART II

Item 5.  Market for the Company's Common Equity and Related Stockholder Matters

Price Range of Common Stock

     The common stock of Liberte  Investors Inc. is listed on the New York Stock
Exchange (the "NYSE") under the symbol "LBI." The following table sets forth the
high and low sales price per share for the Common  Stock as reported on the NYSE
Composite Transaction Tape for the periods indicated:

Fiscal Year                                         High              Low
-----------                                         ----              ---
1998
        First Quarter.....................      $  4 1/2          $  3 11/16
        Second Quarter....................         4 3/4             3 11/16
        Third Quarter.....................         4 1/8             3 13/16
        Fourth Quarter....................         4 1/8             3 5/8

1997
        First Quarter.....................      $  5 1/4          $  3 3/8
        Second Quarter....................         5                 4 1/8
        Third Quarter.....................         4 1/2             3 3/4
        Fourth Quarter....................         4 1/2             3 5/8

     The high and low sales  price per share of Common  Stock as reported on the
NYSE  Composite  Transaction  Tape on September 23, 1998, was $3.00 and $2.8125,
respectively.  At  September  23, 1998,  there were 1,581 record  holders of LBI
common stock.

Dividend Policy

     On June 10, 1998, the Board of Directors of the Company  declared a special
cash  dividend  of $0.031 per share paid to  stockholders  of record on June 30,
1998. Other than this cash dividend,  the Company has not paid cash dividends on
its Common Stock during the past two fiscal years.  The Company  currently  does
not  anticipate  paying  cash  dividends  in the  future,  but intends to retain
earnings for use in acquiring an operating business.

Stock Transfer Restrictions

     The  Company's   Certificate  of  Incorporation  (the  "Charter")  contains
prohibitions on the transfer of its common stock to avoid limitations on the use
of the net operating loss  carryforwards and other federal income tax attributes
that the Company inherited from the Trust. The Charter  generally  prohibits any
transfer of Common  Stock,  any  subsequent  issue of voting stock or stock that
participates in the earnings or growth of the Company,  and certain options with
respect to such  stock,  if the  transfer of such stock would cause any group or
person to own 4.9% or more of the outstanding  shares of, increase the ownership
position of any person that  already owns 4.9% or more (by  aggregate  value) of
the outstanding shares, or cause any person to be treated like the owner of 4.9%
or more  (by  aggregate  value)  of the  outstanding  shares  for tax  purposes.
Transfers  in violation of this  prohibition  will be void,  unless the Board of
Directors  consents to the transfer.  If void,  upon demand by the Company,  the
purported  transferee  must return the shares to the Company's agent to be sold,
or if already sold the purported transferee must forfeit some, or possibly,  all
of the sale proceeds.  In addition,  in connection


                                       7
<PAGE>

with certain  changes in the ownership of the holders of the  Company's  shares,
the Company may require the holder to dispose of some or all of such shares. For
this purpose,  "person" is defined broadly to mean any individual,  corporation,
estate, debtor,  association,  company,  partnership,  joint venture, or similar
organization.

Registration Rights

     In connection with the Purchase, Hunter's Glen and the Company entered into
a Registration Rights Agreement (the "Purchaser Registration Rights Agreement"),
pursuant to which Hunter's Glen and certain  subsequent holders of the shares of
Common Stock (the "Hunter's Glen Shares")  acquired in the Purchase were granted
certain  registration  rights with  respect to such shares until (i) such shares
have  been sold  pursuant  to a resale  registration  statement  filed  with the
Securities  and Exchange  Commission,  (ii) such shares have been sold under the
safe-harbor  provision of Rule 144 under the  Securities Act of 1933, as amended
(the "Securities Act"), or (iii) such shares have been otherwise transferred and
the Company has issued new stock certificates representing such shares without a
legend  restricting  further  transfer.  The holders of not less than 20% of the
Hunter's  Glen  Shares may  require  the  Company  to file a shelf  registration
statement registering their sale of such shares. The Company will be required to
maintain the  effectiveness  of such  registration  statement for two years.  In
addition,  the holders of not less than 20% of the Hunter's Glen Shares may make
two  demands  upon  the  Company  to  register  their  sale  of such  shares  in
underwritten  offerings,  provided that the shares to be sold have a fair market
value in excess of $5.0  million.  Finally,  the  holders of the  Hunter's  Glen
Shares may  require  the  Company to  register  the sale of their  shares if the
Company  proposes to file a registration  statement under the Securities Act for
its account or the  account of its  securityholders,  other than a  registration
statement  concerning a business  combination,  an exchange of  securities or an
employee  benefit plan.  The holders of these  registration  rights may exercise
them at any time during the period  beginning on August 16, 1997 and ending when
the holders of such shares own an aggregate  of less than 5% of the  outstanding
Shares and are no longer  affiliates  of the  Company  under the  United  States
federal  securities  laws.  The Company  will bear all of the  expenses of these
registrations, except any underwriters' commissions, discounts and fees, and the
fees and  expenses  of any legal  counsel to the  holders of the  Hunter's  Glen
Shares.

     At the  closing of the  Purchase,  Hunter's  Glen,  the Company and certain
other  persons  entered into an Agreement  Clarifying  Registration  Rights (the
"Agreement  Clarifying   Registration  Rights").   Under  this  agreement,   the
registration rights that the Trust had previously extended to 400,000 Beneficial
Shares owned by the Enloe Descendants' Trust were extended to the 759,000 Shares
that the Enloe Descendants'  Trust, Mr. Robert Ted Enloe, III and his wife owned
upon the  consummation  of the  Reorganization  and the Purchase.  The Agreement
Clarifying  Registration  Rights also  defined the  relationship  between  these
registration  rights and the  registration  rights  extended under the Purchaser
Registration  Rights Agreement.  The Agreement  Clarifying  Registration  Rights
generally  permits  Hunter's Glen to require the Company to register the sale of
its shares in connection with any exercise of demand  registration rights by the
Enloe Descendants'  Trust, and permits the Enloe  Descendants'  Trust, Mr. Enloe
and his wife to require  the  Company to  register  the sale of their  shares in
connection with any exercise of demand  registration rights by Hunter's Glen. In
addition,  this Agreement provides that the Enloe Descendants' Trust, Mr. Enloe,
his wife and Hunter's Glen will not publicly sell their Shares during the period
beginning ten days before the filing of a  registration  statement in connection
with certain  underwritten  offerings and ending ninety days after the effective
date  of  such  registration   statement.   Finally,  the  Agreement  Clarifying
Registration  Rights provides that the  registration  rights with respect to the
Shares  held by the Enloe  Descendants'  Trust,  Mr.  Enloe and his wife will be
transferable to the subsequent holders of such shares.




                                       8
<PAGE>

Item 6.  Selected Financial Data (in thousands, except per share amount)

     The  following  table sets  forth  selected  statement  of  operations  and
statement of financial  condition  data at and for the five years ended June 30,
1998. In October 1993, the Trust filed a voluntary  petition for  reorganization
under  Chapter  11 of  the  United  States  Bankruptcy  Code  and  emerged  from
bankruptcy in April of 1994. As a result,  information  for years ended June 30,
1998, 1997, 1996, and 1995 are not comparable to 1994 amounts.  This information
should be read in conjunction  with the  Consolidated  Financial  Statements and
related  Notes  thereto of the Company  and with  "Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations,"  which are included
elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                                    Year Ended June 30,    
                                                        ---------------------------------------------------------------------------
                                                           1998             1997            1996            1995             1994 
                                                        ----------        --------        --------        --------         --------
                                                                       (dollars in thousands, except per share data)
<S>                                                     <C>               <C>             <C>             <C>              <C>     
Statement of Operations Data:
  Revenues                                              $    2,778        $  2,527        $  2,784        $  2,172         $ 10,019
  Interest expense                                              --              --              --              --            7,673
  Provision for loan losses                                     --              --             187           3,192            3,175
  Net income (loss)                                          1,450           1,309             835          (2,868)         (16,341)
  Basic net income (loss)
    per common share                                          0.07            0.07            0.07           (0.23)           (1.34)
  Cash dividends declared per share                          0.031              --              --              --               --

<CAPTION>
                                                                                          June 30, 
                                                        ---------------------------------------------------------------------------
                                                           1998             1997            1996            1995             1994 
                                                        ----------        --------        --------        --------         --------
                                                                                    (dollars in thousands)
<S>                                                     <C>               <C>             <C>             <C>              <C>     
Statement of Financial Condition Data:
  Total assets                                                   $57,535        $56,445        $33,354        $32,036        $36,316
  Stockholders' equity                                            57,027         56,206         32,852         31,620         34,914
</TABLE>


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

     Statements  contained  in this  Annual  Report on Form  10-K  which are not
historical  facts are  forward-looking  statements.  In  addition,  the Company,
through its senior management,  from time to time makes  forward-looking  public
statements concerning its expected future operations and performance,  including
its ability to acquire  businesses in the future, and other  developments.  Such
forward-looking  statements are necessarily  estimates  reflecting the Company's
best  judgment  based upon  current  information,  involve a number of risks and
uncertainties,  and there can be no assurance that other factors will not affect
the  accuracy of such  forward-looking  statements.  While it is  impossible  to
identify all such factors,  factors  which could cause actual  results to differ
materially from those estimated by the Company include,  but are not limited to,
the  uncertainty as to whether the Company will be able to make future  business
acquisitions  or that any such  acquisitions  will be successful,  the Company's
ability to obtain financing for any possible acquisitions, general conditions in
the economy and capital markets,  and other factors which may be identified from
time to time in the Company's  Securities  and Exchange  Commission  filings and
other public announcements.


                                       9
<PAGE>


General

     During  the  fiscal  year  ended  June 30,  1998,  Liberte  Investors  Inc.
continued to explore the potential  acquisition of a viable operating company in
order to  increase  value to existing  stockholders  and provide a new focus and
direction  for the  Company.  Although  substantial  efforts  have  been made to
identify  quality  acquisitions  in fiscal 1998, the Company has not yet entered
into any definitive acquisition agreements.

1998 compared with 1997

     Net income for the year ended June 30, 1998  increased to  $1,450,000  from
$1,309,000  for the year ended June 30, 1997, an increase of 11%. This change in
operating results is discussed below.

     Interest  income  on  interest-bearing   deposits  in  banks  increased  to
$2,721,000  for the year ended June 30, 1998 from  $2,364,000 for the year ended
June 30, 1997. This increase is due to growth in the  unrestricted  cash balance
available for interest-bearing deposits.  Unrestricted cash increased from $52.5
million at June 30,  1997 to $54.0  million at June 30,  1998  primarily  due to
interest  earned on  unrestricted  cash accounts.  This increase in unrestricted
cash resulted in a higher average daily balance of interest-bearing deposits for
the year ended June 30, 1998 as compared to June 30, 1997.

     Notes  receivable  interest income decreased to $41 for the year ended June
30, 1998 from $112,000 for the year ended June 30, 1997. The $2,000  outstanding
balance of notes receivable at June 30, 1997 was collected or written-off during
the year ended June 30, 1998. There were no receivables  outstanding at June 30,
1998.

     There  were no gains on sales of  foreclosed  real  estate  during the year
ended June 30, 1998 as  compared  to $11,000  for the same  period in 1997.  The
gains on sales  of real  estate  represent  proceeds  received  from the sale of
foreclosed  real estate in excess of its  carrying  value.  The gain  recognized
during the year ended June 30, 1997 resulted from the sale of single-family lots
in San Antonio, Texas.

     Other  income  increased  to $57,000  for the year ended June 30, 1998 from
$39,000 for the year ended June 30,  1997.  Other income for the year ended June
30, 1998 consisted primarily of dividends on Resurgence Properties, Inc. ("RPI")
preferred and common stock and interest received on property tax refunds.  Other
income for the year ended June 30, 1997 represented  primarily  dividends on RPI
preferred stock.

     Insurance  expense  decreased  to $151,000 for the year ended June 30, 1998
from  $307,000 for the year ended June 30, 1997.  This decrease is primarily due
to decreased premiums related to Directors' and Officers' insurance coverage.

     Foreclosed real estate  operations  expense decreased $64,000 from $257,000
for the year ended June 30, 1997 to $193,000  for the year ended June 30,  1998.
The  decrease is  primarily  due to lower  property  tax expense for fiscal 1998
resulting from reduced appraised values on land owned in San Antonio,  Texas and
higher  property  tax expense for 1997 due to an accrual to  establish  1996 and
1997  property  taxes on 40 acres of land held by LNC  Holdings,  Inc.  which is
encumbered by delinquent taxes.

     Loss on  write-down  of  foreclosed  real estate was  $407,000 for the year
ended June 30, 1998. There were no write-downs of foreclosed real estate for the
year ended June 30, 1997. The write-down 


                                       10
<PAGE>

for 1998 was to more  accurately  reflect  estimated sales proceeds less selling
costs of  single  family  lots in  Fontana,  California.  These  lots  were sold
subsequent to June 30, 1998.

     Legal,  audit and consulting  fees were $73,000 for the year ended June 30,
1998, a decrease of $95,000  from the  $168,000  incurred in the year ended June
30,  1997.  Fees in 1997 were  primarily  for real estate  consulting  services,
additional  expenses related to the collection of deficiency notes that had been
previously   written-off   and  legal   advisory   work   related  to  potential
acquisitions.

     Directors  fees and expenses  increased  from $46,000 in 1997 to $64,000 in
1998.  Director  fees  increased  in 1998 due to an  increase  in the  number of
compensated directors of the Company from four in 1997 to five in 1998.

     Franchise tax expense increased from $65,000 in 1997 to $96,000 in 1998 due
to higher Delaware franchise tax expense for 1998.

     Compensation  and employee  benefits  decreased  by $45,000  from  $135,000
during the year ended June 30, 1997 to $90,000 for the year ended June 30, 1998.
The  decrease is due to a decrease in the number of  employees  from nine at the
beginning of 1997 to two in 1998.

     General and  administrative  expense  increased  from $225,000 for the year
ended June 30, 1997 to $253,000 for the year ended June 30,  1998.  The increase
is primarily  due to an increase in rent  expense when the Company  relocated to
new office space in July 1997.

1997 compared to 1996

     Net income for the year ended June 30, 1997  increased to  $1,309,000  from
$835,000  for the year ended June 30, 1996,  an increase of 57%.  This change in
operating results is discussed below.

     Interest  income  on  interest-bearing   deposits  in  banks  increased  to
$2,364,000  for the year ended June 30, 1997 from  $1,182,000 for the year ended
June  30,  1996.  This  increase  is due  to the  increase  in  the  balance  of
unrestricted  cash and cash  equivalents  to $52.5 million on June 30, 1997 from
$27.2  million on June 30, 1996.  The increase in cash  balances was primarily a
result of the sale of 8,102,439 shares of newly-issued  common stock to Hunter's
Glen in August of 1996 for $23.1  million and the  collection of $1.3 million on
notes receivable during the year ended June 30, 1997.

     Notes  receivable  interest income decreased to $112,000 for the year ended
June 30,  1997 from  $525,000  for the year  ended  June 30,  1996  because  the
outstanding balance of notes receivable declined to $2,000 on June 30, 1997 from
$1.3  million on June 30,  1996.  The  Company  had  collected  all but one note
receivable with a nominal balance as of June 30, 1997.

     Gains on sales of foreclosed real estate  decreased to $11,000 for the year
ended June 30, 1997 from $599,000 for the year ended June 30, 1996. The gains on
sales of real  estate  represent  proceeds  received  from the sale of assets in
excess of carrying value.  The gain recognized in 1997 resulted from the sale of
single-family lots in San Antonio,  Texas. The gain in 1996 was primarily due to
the sale of single-family lots in Murrieta, California.

     Other  income  decreased  to $39,000  for the year ended June 30, 1997 from
$478,000  for the year ended June 30,  1996.  Other  income in 1997  represented
primarily  dividends on RPI  preferred  stock.  Other  income in 1996  consisted
primarily of cash  collections on impaired loans which had no carrying value and
the RPI dividends.  



                                       11
<PAGE>

     Insurance  expense  increased  to $307,000 for the year ended June 30, 1997
from  $216,000 for the year ended June 30, 1996.  This increase is primarily due
to increased premiums related to Directors' and Officers'  insurance coverage as
required by the Stock Purchase Agreement between the Company and Hunter's Glen.

     Foreclosed real estate operations  expense increased $139,000 from $118,000
for the year ended June 30, 1996 to $257,000  for the year ended June 30,  1997.
The increase is primarily due to an accrual in fiscal 1997  established for 1996
and 1997 property taxes on 40 acres of land held by LNC Holdings,  Inc. which is
encumbered by delinquent  taxes and an increase in the accrual for 1997 property
taxes.

     Legal,  audit and consulting fees were $168,000 for the year ended June 30,
1997, a decrease of $411,000  from the $579,000  incurred in the year ended June
30, 1996.  Fees in 1997 were primarily for real estate  consulting  services and
legal  advisory work related to potential  acquisitions.  Prior period  activity
included  legal and  investment  banking  fees  incurred  related  to  potential
acquisitions.

     Directors  fees and expenses  decreased  from $77,000 in 1996 to $46,000 in
1997 due to a decrease in the number of meetings held by the board. In 1996, the
directors held several special  meetings to discuss  acquisition  candidates and
the corporate reorganization.

     Franchise tax expense for the year ended June 30, 1997 totaled  $65,000 and
represents  Delaware  and Texas  franchise  tax  expense  due as a result of the
reorganization  of the Trust  into the  Company.  The Trust was not  subject  to
franchise tax expense and no such expense was recorded for years prior to 1997.

     Compensation  and employee  benefits  decreased by $458,000  from  $593,000
during  the year  ended June 30,  1996 to  $135,000  for the year ended June 30,
1997.  The  decrease is due to the reduced  compensation  package for Robert Ted
Enloe III, the Chief Executive Officer,  during the last quarter of 1996 as well
as the resignation of the Company's employees, including Mr. Enloe, in August of
1996. Since the  reorganization in August of 1996, the Company has employed only
two full-time employees. Under the terms of the Stock Purchase Agreement between
the Company and Hunter's  Glen,  Mr. Ford, in his capacity as Chairman and Chief
Executive Officer, does not receive compensation

     General and  administrative  expense  increased  from $178,000 for the year
ended June 30, 1996 to $225,000 for the year ended June 30,  1997.  The increase
is attributed to an increase in stockholder  service  expenses for costs related
to the  August  1996  special  meeting  and  November  1996  annual  meeting  of
stockholders  and to the renewal of the  listing  privileges  for the  Company's
common stock on the New York Stock Exchange.

Liquidity and Capital Resources

     The  Company's  principal  funding  requirements  are  operating  expenses,
including legal,  audit and consulting  expenses incurred in connection with the
evaluation   of   potential   acquisition   candidates   and   other   strategic
opportunities.  The  Company  anticipates  that its  primary  sources of funding
operating  expenses  are  proceeds  from the  sale of  foreclosed  real  estate,
interest income on cash and cash equivalents, and cash on hand.

     As described in "Item 1. Business," the Trust entered into an agreement and
subsequently  consummated the sale of newly-issued  Shares to Hunter's Glen. The
proceeds  from  this sale  were  $23.1  million.  Management  believes  that the
additional  cash will assist the  Company in its efforts to expand its 


                                       12
<PAGE>

business through acquisitions.  Hunter's Glen is an affiliate of Gerald J. Ford,
who became the Chief Executive  Officer and Chairman of the Board of the Company
following the Trust's reorganization into the Company and the sale of the shares
to Hunter's Glen.

     Operating activities for the year ended June 30, 1998 provided $2.2 million
of cash compared to $1.4 million provided in 1997 and $0.2 million used in 1996.
The table below reflects cash flow from operating activities (in millions):

                                                       Year Ended June 30,
                                                  -----------------------------
                                                   1998        1997       1996 
                                                  -------    -------    -------
Total income                                      $   2.8    $   2.5    $   2.8
Operating expenses                                   (1.3)      (1.2)      (1.8)
Net change in other receivables,
  assets and liabilities                              0.7        0.1       (1.2)
                                                  -------    -------    -------
Net cash provided (used) by operating activities  $   2.2    $   1.4    $  (0.2)
                                                  =======    =======    =======

     Net cash used in investing  activities for the year ended June 30, 1998 was
$16,000  compared to net cash  provided of $1.4  million for the year ended June
30, 1997 and $6.8  million for the year ended June 30,  1996.  Net cash used for
1998 was  primarily for fixed asset  purchases,  while net cash provided in 1997
and  1996  was a result  of  collections  from  the  Company's  note  receivable
portfolio.  The table below  reflects cash flow from  investing  activities  (in
millions):

                                                        Year Ended June 30,
                                                   -----------------------------
                                                     1998       1997       1996 
                                                   -------    -------    -------
Collections on mortgage loans                      $    --    $   1.3    $   0.6
Collections on RPI note receivable                      --         --        5.3
Sales of foreclosed real estate                         --        0.1        0.9
                                                   -------    -------    -------
Net cash provided by investing activities          $    --    $   1.4    $   6.8
                                                   =======    =======    =======

     Net cash used in  financing  activities  totaled  $0.6 million for the year
ended  June 30,  1998 due to a cash  dividend  paid on June 30,  1998.  Net cash
provided by financing  activities  totaled $22.5 million for the year ended June
30, 1997  primarily  due to the  issuance of new stock to  Hunter's  Glen,  less
expenses of the new issue. Total cash and cash equivalents were $54.1 million at
June 30, 1998.

     The  Company  plans  to  finance   acquisitions  with  its  cash  and  cash
equivalents,  borrowings  and private or public debt and equity  financings.  To
avoid  restricting  the  use of its  NOL  carryforwards,  the  Company  will  be
effectively  precluded from issuing any additional  shares of common stock,  any
shares of any other  class of voting  stock or stock  that  participates  in the
earnings  or growth of the  Company,  or certain  options  with  respect to such
stock,  for three  years after the sale of the Common  Stock to  Hunter's  Glen.
During this period,  the Company will have to incur  indebtedness  to the extent
that it does not use its cash and cash equivalents to make acquisitions.

Year 2000

     The  Company  recognizes  that the  arrival of the Year 2000 poses a unique
challenge to the ability of computer  systems to recognize  the date change from
December 31, 1999 to January 1, 2000. The Company presently has a general ledger
account  system that is compliant  with Year 2000 issues.  An  assessment of the
readiness of external  entities is ongoing,  but the Company does not anticipate
any compliance problems.



                                       13
<PAGE>

Item 8.  Financial Statements and Supplementary Data

     See "Item 14. Exhibits,  Financial Statement Schedules, and Reports on Form
8-K" for a listing  of the  consolidated  financial  statements  filed with this
report.  The response to this item is  submitted  in a separate  section of this
report.


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

     On November  19, 1996 the Company  filed a report on Form 8-K to report the
change in independent  accountants of the Company from Ernst & Young LLP ("E&Y")
to KPMG Peat  Marwick  LLP.  This change was  approved  and  recommended  by the
Company's  Board of  Directors.  No  report  of E&Y on the  Company's  financial
statements for fiscal year 1996 contained an adverse  opinion or a disclaimer of
opinion,  or was  qualified  or  modified  as to  uncertainty,  audit  scope  or
accounting  principles.  Further,  there were no  disagreements  with E&Y on any
matter of accounting principles or practices,  financial statement disclosure or
auditing  scope  of  procedure,  which  disagreements,  if not  resolved  to the
satisfaction  of E&Y,  would have  caused it to make  reference  to the  subject
matter of the disagreements in its reports.



                                       14
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Company

     The  information  concerning  the directors  and executive  officers of the
Company is set forth in the Proxy Statement (the "Proxy  Statement") to be filed
with the Commission and sent to  stockholders  in connection  with the Company's
Annual  Meeting of  Stockholders  to be held November 5, 1998 under the headings
"DIRECTOR  NOMINEES  AND  EXECUTIVE  OFFICERS"  and  "SECTION  16(a)  BENEFICIAL
OWNERSHIP  REPORTING  COMPLIANCE,"  which information is incorporated  herein by
reference.

Item 11.  Executive Compensation

     The information concerning executive compensation is set forth in the Proxy
Statement under the headings "MANAGEMENT COMPENSATION,"  "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER  PARTICIPATION"  and  "COMPENSATION  COMMITTEE  REPORT ON
EXECUTIVE COMPENSATION," which information is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

            The information  concerning security ownership of certain beneficial
owners and  management  is set forth in the Proxy  Statement  under the  heading
"SECURITY   OWNERSHIP  OF  CERTAIN  BENEFICIAL  OWNERS  AND  MANAGEMENT,"  which
information is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

Not applicable.


                                       15
<PAGE>

                                     PART IV

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

     (a)  Documents filed as part of this Annual Report on Form 10-K.

          (1)  Consolidated  Financial  Statements:  See  Index to  Consolidated
               Financial Statements on Page F-1.

          (2)  Consolidated Financial Statements Schedule IV - Mortgage Loans on
               Real Estate on Page F-18.

          (3)  Exhibits:

               Exhibit
               Number
               ------

               2.1   Plan of Reorganization,  dated as of April 1, 1996, between
                     the Trust and the Company  (incorporated  by  reference  to
                     Exhibit 2.1 of Registration Statement No. 333-07439 on Form
                     S-4,  filed  by  the  Company,  which  the  Securities  and
                     Exchange Commission declared effective on July 3, 1996 (the
                     "Registration Statement").

               2.2   Stock  Purchase  Agreement,  dated as of January 16,  1996,
                     between  the  Trust  and  Hunter's  Glen/Ford,   Ltd.  (the
                     "Purchaser")  (incorporated  by reference to Exhibit 4.1 of
                     the  Trust's  Current  Report  on Form 8-K  filed  with the
                     Commission  on  January  24,  1996),   as  amended  by  the
                     Amendment  to the  Stock  Purchase  Agreement,  dated as of
                     February  27, 1996,  and the Second  Amendment to the Stock
                     Purchase   Agreement,   dated   as  of   March   28,   1996
                     (incorporated  by  reference  to Exhibit 2.1 of the Trust's
                     Quarterly  Report on Form 10-Q for the quarter  ended March
                     31, 1996).

               2.3   Letter  Agreement,  dated as of April 1,  1996,  among  the
                     Trust,  the Company,  and the  Purchaser  (incorporated  by
                     reference to Exhibit 2.3 of the Registration Statement).

               2.4   Confidentiality  and  Standstill  Agreement,  dated  as  of
                     January  16,  1996,  between  the Trust  and the  Purchaser
                     (incorporated  by  reference  to Exhibit 2.2 of the Trust's
                     Quarterly  Report on Form 10-Q for the quarter  ended March
                     31, 1996).

               2.5   Escrow  Agreement,  dated as of January 19, 1996, among the
                     Trust,  the  Purchaser,  and Texas  Commerce  Bank National
                     Association  (incorporated  by  reference to Exhibit 2.5 of
                     the Registration Statement).

               2.6  The Trust's  First  Amended  Plan of  Reorganization,  dated
                    December 14, 1993,  as modified by the  Modification  to the
                    First Amended Plan of Reorganization, dated January 19, 1994
                    (incorporated  by reference to the Trust's Current Report on
                    Form 8-K filed with the Commission on February 9, 1994).


                                       16
<PAGE>

               3.1   The Company's Charter (incorporated by reference to Exhibit
                     3.1 of the Registration Statement).

               3.2   The Company's Bylaws  (incorporated by reference to Exhibit
                     3.2 of the Registration Statement).

               4.1   Form of  Registration  Rights  Agreement  dated  August 16,
                     1996,  between the Company and the Purchaser  (incorporated
                     by reference to Exhibit 4.1 of the Registration Statement).

               4.2   Form of  Agreement  Clarifying  Registration  Rights  dated
                     August 16, 1996,  between the Company,  the Purchaser,  the
                     Enloe  Descendants'   Trust,  and  Robert  Ted  Enloe,  III
                     (incorporated   by   reference   to  Exhibit   4.3  of  the
                     Registration Statement).

               10.1  Form  of   Indemnification   Agreement  for  the  Company's
                     directors  and  officers  and  schedule  of   substantially
                     identical  documents  (incorporated by reference to Exhibit
                     10.2 of the Registration Statement).

               10.2  Retirement  Plan for Trustees of the Trust,  dated  October
                     11, 1988 (incorporated by reference to Exhibit 10.23 of the
                     Trust's  Annual Report on Form 10-K for the year ended June
                     30, 1993).

               10.3  Agreement Regarding Registration Rights, Amendment of Stock
                     Option  Agreement,  and  Ratification of Pledge  Agreement,
                     dated as of November 13, 1995, among the Trust,  Robert Ted
                     Enloe, III, and the Enloe Descendants' Trust  (incorporated
                     by   reference   to  Exhibit   10.6  of  the   Registration
                     Statement).

               10.4  Asset  Disposition  Agreement,  dated  February  28,  1995,
                     between the Trust and ST  Lending,  Inc.  (incorporated  by
                     reference to Exhibit 10.9 of the Trust's  Annual  Report on
                     Form 10-K for the year ended June 30, 1995),  as amended by
                     the Supplement to Asset  Disposition  Agreement dated April
                     24, 1996.

               16.1  Letter  dated  November  15,  1996  from  Ernst & Young LLP
                     regarding  Company's  change  in  independent   accountants
                     (incorporated by reference to Exhibit 16.1 of the Company's
                     Annual  Report  on Form  10-K for the year  ended  June 30,
                     1997).

               21.1  A list of the subsidiaries of the Company.

               27.1  Financial  Data  Schedule   (included  only  in  the  EDGAR
                     filing).

     (b)  Reports on Form 8-K.

     No  reports on Form 8-K were  filed  during the last  quarter of the period
covered by this annual report.



                                       17
<PAGE>

                                   SIGNATURES

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

DATED:  September 25, 1998            LIBERTE INVESTORS INC.


                                      /s/ GERALD J. FORD                  
                                      ------------------------------------
                                      Gerald J. Ford
                                      Chief Executive Officer and Chairman
                                      of the Board


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

<TABLE>
<CAPTION>
       Signatures                                                Title                                                 Date
       ----------                                                -----                                                 ----
<S>                                             <C>                                                               <C>
   /s/ GERALD J. FORD                           Chief Executive Officer and Chairman                              September 25, 1998
------------------------------------              of the Board (Principal Executive Officer)
     Gerald J. Ford                               


   /s/ SAMUEL C. PERRY                          Controller                                                        September 25, 1998
------------------------------------             (Principal Financial Officer and Principal
     Samuel C. Perry                             Accounting Officer)                       
                                                


   /s/ GENE H. BISHOP                           Director                                                          September 25, 1998
------------------------------------
     Gene H. Bishop


   /s/ HARVEY B. CASH                           Director                                                          September 25, 1998
------------------------------------
     Harvey B. Cash


/s/ ROBERT TED ENLOE, III                       Director                                                          September 25, 1998
------------------------------------
  Robert Ted Enloe, III


 /s/ EDWARD W. ROSE, III                        Director                                                          September 25, 1998
------------------------------------
   Edward W. Rose, III


     /s/ GARY SHULTZ                            Director                                                          September 25, 1998
------------------------------------
      Gary Shultz

</TABLE>

                                       18
<PAGE>

                             Liberte Investors Inc.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     The following  consolidated  financial statements of Liberte Investors Inc.
are included in response to Item 8 and Item 14 (a) (1) and 14 (a) (2):

                                                                           Page
                                                                           ----
Report of KPMG Peat Marwick LLP, Independent Auditors ..................    F-2

Report of Ernst & Young LLP, Independent Auditors ......................    F-3

Consolidated Statements of Financial Condition
      as of June 30, 1998 and June 30, 1997 ............................    F-4

Consolidated Statements of Operations for the
      years ended June 30, 1998, 1997 and 1996 .........................    F-5

Consolidated Statements of Stockholders' Equity for the years ended
      June 30, 1998, 1997 and 1996 .....................................    F-6

Consolidated Statements of Cash Flows for the years ended
      June 30, 1998, 1997 and 1996 .....................................    F-7

Notes to Consolidated Financial Statements .............................    F-8

Schedule IV - Mortgage Loans on Real Estate ............................    F-18


     Separate  financial  statements  relating to the Company's  subsidiary  are
omitted since it is wholly-owned and such separate financial  statements are not
material.

     All other  financial  statement  schedules  have been  omitted  because the
required  information  is not material to require  submission of the schedule or
because  the  information  required is  included  in the  financial  statements,
including the notes thereto.


                                      F-1
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Liberte Investors Inc.:

We have audited the accompanying  consolidated statements of financial condition
of Liberte  Investors  Inc. and subsidiary as of June 30, 1998 and 1997, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows  for  the  years  then  ended.  In  connection  with  our  audits  of  the
consolidated financial statements,  we have also audited the financial statement
schedule  as of and for the years  ended June 30, 1998 and 1997 as listed in the
accompanying  index.  These  consolidated  financial  statements  and  financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and financial statement schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Liberte Investors
Inc.  and  subsidiary  as of June 30,  1998 and 1997,  and the  results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally  accepted  accounting  principles.  Also, in our opinion,  the related
financial  statement  schedule  as of and for the years  ended June 30, 1998 and
1997, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.




                                                           KPMG Peat Marwick LLP


Dallas, Texas
July 23, 1998



                                      F-2
<PAGE>

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




Shareholders and Trustees
Liberte Investors

     We have audited the  accompanying  consolidated  statements of  operations,
shareholders'  equity,  and cash flows of Liberte  Investors  for the year ended
June 30,  1996.  Our  audits  also  included  the June 30,  1996  amounts in the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
amounts in the schedule based on our audits.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  Liberte  Investors'  consolidated
results  of their  operations  and their  cash flows for the year ended June 30,
1996, in conformity with generally accepted accounting principles.  Also, in our
opinion,  the June 30, 1996 amounts in the related financial statement schedule,
when considered in relation to the basic financial  statements taken as a whole,
present fairly, in all material respects, the information set forth therein.






                                                               Ernst & Young LLP


Dallas, Texas
July 26, 1998



                                      F-3
<PAGE>

                             LIBERTE INVESTORS INC.
                                 AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                                                     June 30,        June 30,
                                                       1998            1997 
                                                  -------------   -------------
Assets
Unrestricted cash                                 $  53,998,721   $  52,474,290
Restricted cash and cash equivalents                     64,310          61,237
                                                  -------------   -------------
      Total cash and cash equivalents                54,063,031      52,535,527


Foreclosed real estate held for sale                  3,028,273       3,435,621
Notes receivable, net                                        --           1,693
Accrued interest and other receivables                    4,343           4,507
Other assets                                            438,951         467,876
                                                  -------------   -------------
      Total assets                                $  57,534,598   $  56,445,224
                                                  =============   =============


Liabilities and Stockholders' Equity
Liabilities-accrued and other liabilities         $     507,356   $     239,545

Stockholders' Equity
Common stock, $.01 par value,
   50,000,000 shares authorized,
   20,256,097 shares issued and outstanding             202,561         202,561
Additional paid-in capital                          309,392,399     309,392,399
Accumulated deficit                                (252,567,718)   (253,389,281)
                                                  -------------   -------------

     Total stockholders' equity                      57,027,242      56,205,679
                                                  -------------   -------------

Commitments and contingencies

     Total liabilities and stockholders' equity   $  57,534,598   $  56,445,224
                                                  =============   =============






See notes to consolidated financial statements.



                                      F-4
<PAGE>


                             LIBERTE INVESTORS INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                           Year Ended June 30, 
                                                 ---------------------------------------
                                                    1998          1997          1996 
                                                 -----------   -----------   -----------
<S>                                              <C>           <C>           <C>        
Income
  Interest-bearing deposits in banks             $ 2,721,150   $ 2,364,381   $ 1,182,179
  Notes receivable interest                               41       111,776       525,290
  Gains on sales of foreclosed real estate                --        11,310       598,557
  Other                                               57,012        39,145       478,307
                                                 -----------   -----------   -----------
Total income                                       2,778,203     2,526,612     2,784,333
                                                 -----------   -----------   -----------

Expenses
  Insurance                                          151,197       307,292       216,089
  Foreclosed real estate operations                  193,140       257,017       118,456
  Loss on write-down of foreclosed real estate       407,348            --            --
  Legal, audit and consulting fees                    72,847       167,895       578,791
  Directors (trustees) fees and expenses              63,500        46,050        77,400
  Franchise tax                                       96,270        65,206            --
  Compensation and employee benefits                  89,584       134,803       593,104
  Provision for loan losses                               --            --       187,058
  General and administrative                         253,359       225,365       178,068
                                                 -----------   -----------   -----------
Total expenses                                     1,327,245     1,203,628     1,948,966
                                                 -----------   -----------   -----------

Income before income taxes                         1,450,958     1,322,984       835,367

Income tax expense                                     1,456        14,000            --
                                                 -----------   -----------   -----------

Net Income                                       $ 1,449,502   $ 1,308,984   $   835,367
                                                 ===========   ===========   ===========

Basic net income per share of common
  stock (beneficial interest in 1996)            $      0.07   $      0.07   $      0.07
                                                 ===========   ===========   ===========

Weighted average number of shares of
  common stock (beneficial interest in
  1996)                                           20,256,097    19,237,758    12,153,658
                                                 ===========   ===========   ===========
</TABLE>




See notes to consolidated financial statements.


                                      F-5
<PAGE>


                             LIBERTE INVESTORS INC.
                                 AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                             Additional
                           Number of     Beneficial    Number of    Common     Paid-In      Treasury   Accumulated
                             Shares       Interest      Shares      Stock      Capital       Stock        Deficit          Total
                           ----------  -------------  ----------   --------  ------------  ---------   -------------    -----------
<S>                        <C>         <C>            <C>          <C>       <C>           <C>         <C>              <C>        
Balance at June 30, 1995   12,153,658  $ 287,954,763          --   $     --  $         --  $(404,325)  $(255,930,624)   $31,619,814

  Repayment of executive
    stock option loan              --             --          --         --            --         --         396,992        396,992

  Net income                       --             --          --         --            --         --         835,367        835,367
                           ----------  -------------  ----------   --------  ------------  ---------   -------------    -----------

Balance at June 30, 1996   12,153,658    287,954,763          --         --            --   (404,325)   (254,698,265)   $32,852,173

  Exchange of shares
    pursuant to plan
    of reorganization      12,153,658)  (287,954,763) 12,153,658    121,537   287,428,901    404,325              --             --

  Issuance of
    common stock,
    net of stock
    issuance costs
    of $1,047,429                  --             --   8,102,439     81,024    21,963,498         --              --     22,044,522

  Net income                       --             --          --         --            --         --       1,308,984      1,308,984
                           ----------  -------------  ----------   --------  ------------  ---------   -------------    -----------

Balance at June 30, 1997           --             --  20,256,097    202,561   309,392,399         --    (253,389,281)    56,205,679

  Dividends paid
    ($0.031 per share)             --             --          --         --            --         --        (627,939)      (627,939)

  Net income                       --             --          --         --            --         --       1,449,502      1,449,502
                           ----------  -------------  ----------   --------  ------------  ---------   -------------    -----------

Balance at June 30, 1998           --  $          --  20,256,097   $202,561  $309,392,399  $      --   $(252,567,718)   $57,027,242
                           ==========  =============  ==========   ========  ============  =========   =============    ===========
</TABLE>




See notes to consolidated financial statements.


                                      F-6
<PAGE>


                             LIBERTE INVESTORS INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                Year Ended June 30,
                                                                               ----------------------------------------------------
                                                                                   1998                1997                1996 
                                                                               ------------        ------------        ------------
<S>                                                                            <C>                 <C>                 <C>         
Cash flows from operating activities:
  Net income                                                                   $  1,449,502        $  1,308,984        $    835,367
  Adjustments to reconcile net income
  to net cash provided by (used in) operating
  activities:
     Depreciation and amortization                                                   17,715              14,009              14,639
     Provision for loan losses                                                           --                  --             187,058
     Loss on write-down of foreclosed real estate                                   407,348                  --                  --
     Decrease in accrued interest and other receivables                                 164              59,368              40,012
     Decrease (increase) in other assets                                             25,842             277,208            (692,784)
     Increase (decrease) in accrued and other liabilities                           267,811            (262,533)             85,914
     Income from impaired loans                                                          --                (500)           (452,903)
     Gains from sales of foreclosed real estate                                          --             (11,310)           (598,557)
     Collection of executive stock option loan                                           --                  --             416,787
                                                                               ------------        ------------        ------------
          Net cash provided by (used in) operating
               activities                                                         2,168,382           1,385,226            (164,467)
                                                                               ------------        ------------        ------------

Cash flows from investing activities:
   Collections of notes receivable                                                    1,693           1,330,197           5,937,776
   Additions to fixed assets                                                        (14,632)                 --                  --
   Proceeds from sales and basis reductions of
        foreclosed real estate                                                           --              51,479             894,848
   (Increase) decrease in restricted cash investments                                (3,073)             (2,912)                920
                                                                               ------------        ------------        ------------
       Net cash (used in) provided by investing activities                          (16,012)          1,378,764           6,833,544
                                                                               ------------        ------------        ------------

Cash flows from financing activities:
   Issuance of newly issued shares of common
       stock                                                                             --          23,091,951                  --
  Stock issuance costs                                                                   --            (627,245)                 --
  Dividends paid                                                                   (627,939)                 --                  --
                                                                               ------------        ------------        ------------
       Net cash (used in) provided by financing activities                         (627,939)         22,464,706                  --
                                                                               ------------        ------------        ------------

Net increase in unrestricted cash and cash equivalents                            1,524,431          25,228,696           6,669,077
Unrestricted cash and cash equivalents at beginning
      of year                                                                    52,474,290          27,245,594          20,576,517
                                                                               ------------        ------------        ------------
Unrestricted cash and cash equivalents at end of year                          $ 53,998,721        $ 52,474,290        $ 27,245,594
                                                                               ============        ============        ============

Schedule of non-cash activities:
Charge-offs to allowance for loan losses, net                                  $         --                  --          10,498,922
  Sales of foreclosed real estate financed by
       mortgage loans                                                          $         --                  --           1,076,800
  Write-up of value of impaired note                                           $         --                  --              71,250
  Write-up of value of long-lived assets to be
        disposed                                                               $         --                  --              53,751
  Increase in note receivable from asset swap                                  $         --                  --              31,313

 See notes to consolidated financial statements.
</TABLE>


                                      F-7
<PAGE>

                      Liberte Investors Inc. and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          June 30, 1998, 1997, and 1996

(1)  Summary of significant accounting policies

     (a)  Organization - Liberte  Investors  Inc., a Delaware  corporation  (the
"Company"), was organized in April of 1996 in order to effect the reorganization
of Liberte Investors, a Massachusetts business trust (the "Trust"). At a special
meeting of the  shareholders of the Trust held on August 15, 1996, (the "Special
Meeting"),  the Trust's shareholders  approved a plan of reorganization  whereby
the  Trust  contributed  its  assets  to the  Company  and  received  all of the
Company's  outstanding  common  stock,  par value  $.01 per share  ("Shares"  or
"Common Stock"). The Trust then distributed to its shareholders in redemption of
all  outstanding  shares of  beneficial  interest in the Trust (the  "Beneficial
Shares")  the Shares of the  Company.  The  Company  assumed  all of the Trust's
assets and outstanding liabilities and obligations.

     Unless otherwise indicated,  the information  contained in the consolidated
financial  statements  which  relates  to periods  prior to August  16,  1996 is
information related to the Trust and information relating to periods on or after
August 16, 1996 is information relating to the Company.

     (b) Business - The principal  business  activity of the Trust was investing
in notes  receivable,  primarily  first  mortgage  construction  notes and first
mortgage  acquisition and development notes.  Beginning in fiscal 1988, however,
the Trust progressively curtailed its lending activities and reduced the size of
its portfolio of foreclosed real estate in an effort to repay indebtedness.

     On  October  25,   1993,   the  Trust  filed  a  voluntary   petition   for
reorganization  under Chapter 11 of the United States  Bankruptcy Code. On April
7, 1994, the Trust emerged from bankruptcy  pursuant to a plan of reorganization
whereby certain assets and liabilities, including remaining senior indebtedness,
were transferred to Resurgence  Properties Inc. ("RPI"),  and RPI's common stock
was  distributed  to  the  holders  of  the  Trust's  outstanding   subordinated
indebtedness in full satisfaction of such holders' claims against the Trust. The
Trust received shares of preferred stock of RPI and a note receivable  which was
subsequently paid. On June 30, 1997, the court issued an Administrative  Closing
Order and Final Decree with regard to the bankruptcy case.

     After the  reorganization  of the Trust into the  Delaware  corporation  in
August  1996,  management  has been  pursuing  the  acquisition  of an operating
company in order to utilize the net operating  loss  carryforwards  available to
offset future earnings.

     (c)  Consolidation  - The  accompanying  financial  statements  include the
accounts of the Company and LNC Holdings,  Inc., a wholly-owned subsidiary whose
sole asset is  approximately  40 acres of land located in Arlington,  Texas. All
intercompany balances have been eliminated.

     (d) Use of estimates - The preparation of consolidated financial statements
in conformity with generally accepted accounting  principles requires management
to make certain  estimates and  assumptions.  These  estimates  and  assumptions
affect the reported amounts of assets, liabilities,


                                      F-8
<PAGE>

                      Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


revenues  and  expenses at the date of the  consolidated  financial  statements.
Actual results could differ from those estimates.

     (e)  Recognition  of income -  Interest  income is  recorded  on an accrual
basis.   The  Company   discontinues   the  accrual  of  interest   income  when
circumstances  cause the  collection of such  interest to be doubtful.  Interest
income on impaired  loans is recognized on a cash basis only after all principal
has been  collected.  Collections  on impaired  loans with no carrying value are
recognized on a cash basis and are recorded as loan income.

     (f)  Foreclosed  real  estate -  Foreclosed  real estate is recorded at the
lower of cost or fair  value  less  estimated  costs  to sell.  Cost is the note
amount  at  the  time  of  foreclosure  net  of  any  allowances.   The  Company
periodically reviews its portfolio of foreclosed real estate held for sale using
current information including (i) independent appraisals,  (ii) general economic
factors  affecting  the area where the  property is located,  (iii) recent sales
activity  and asking  prices for  comparable  properties  and (iv) costs to sell
and/or develop that would serve to lower the expected proceeds from the disposal
of the real estate. Gains (losses) realized on liquidation are recorded directly
to income.

     (g) Income taxes - Income taxes are maintained in accordance  with SFAS No.
109,  "Accounting  for Income  Taxes,"  whereby  deferred  income tax assets and
liabilities  result  from  temporary  differences.   Temporary  differences  are
differences  between the tax bases of assets and  liabilities and operating loss
and tax credit  carryforwards  and their  reported  amounts in the  consolidated
financial statements that will result in taxable or deductible amounts in future
years.

     (h) Basic net income  (loss) per share - Basic net income  (loss) per share
is based on the weighted average number of shares outstanding during the year.

     (i) Cash and cash  equivalents - Cash and cash  equivalents  include highly
liquid investments with original maturities of three months or less.

     (j)   Reclassifications   -  Certain  amounts  in  prior  years'  financial
statements have been reclassified to conform to the current year's presentation.



                                      F-9
<PAGE>

                      Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(2)  Foreclosed Real Estate

     The  following is a summary of the Company's  activity in  foreclosed  real
estate for the years ended June 30, 1998, 1997, and 1996:

<TABLE>
<CAPTION>
                                              1998           1997            1996 
                                           -----------    -----------    ------------
<S>                                        <C>            <C>            <C>         
Balance at beginning of year               $ 3,435,621    $ 3,475,790    $ 15,385,214

Write-up in value                                   --             --         492,730
Reclassification of allowance for losses
  upon adoption of SFAS No. 121                     --             --     (10,331,733)
Write-down in value                           (407,348)            --        (204,600)
Cost of real estate sold                            --        (40,169)     (1,865,821)
                                           -----------    -----------    ------------
Balance at end of year                     $ 3,028,273    $ 3,435,621    $  3,475,790
                                           ===========    ===========    ============
</TABLE>

     The  following  table sets forth the Company's  portion of foreclosed  real
estate by type of property and geographic location:

                                                             June 30,
                                                  ------------------------------
                                                     1998                1997 
                                                  ----------          ----------
Type of Property:
Single-family lots                                $  213,052          $  620,400
Land                                               2,815,221           2,815,221
                                                  ----------          ----------
                                                  $3,028,273          $3,435,621
                                                  ==========          ==========
Geographic Location:
Texas                                             $2,815,221          $2,815,221
California                                           213,052             620,400
                                                  ----------          ----------
                                                  $3,028,273          $3,435,621
                                                  ==========          ==========

     The Company has substantively  repossessed or obtained control of a certain
property collateralizing a note receivable with an outstanding principal balance
of $2,188,583 at June 30, 1997. On January 20, 1998, foreclosure of the property
was completed,  and all right, title, and interest in the property were conveyed
to the Company.  The note was recorded as  foreclosed  real estate in October of
1993 and has subsequently  been written down to $213,052 and $620,400 as of June
30, 1998 and 1997, respectively.




                                      F-10
<PAGE>

                      Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(3)  Notes Receivable

     The following is a summary of notes receivable activity for the years ended
June 30, 1998, 1997 and 1996:

                                            1998         1997          1996 
                                          -------    -----------    -----------

Balance at beginning of year              $ 1,693    $ 1,331,390    $ 5,807,372

Advances and other additions to notes
  receivable                                   --             --        106,782
Sales of foreclosed real estate
  financed by notes receivable                 --             --      1,076,800
Principal collections                      (1,323)    (1,329,317)    (5,561,473)
Write-off of principal                       (370)          (380)       (98,091)
                                          -------    -----------    -----------
Balance at end of year                    $    --    $     1,693    $ 1,331,390
                                          =======    ===========    ===========



     At June 30, 1998,  1997 and 1996, the Company had impaired loans from prior
foreclosure  related deficiency notes and/or judgments,  with no carrying value.
During fiscal 1997, in addition to the collections shown in the table above, the
Company recognized $500 of loan income from impaired loans which had no carrying
value at the time of collection. No collections were made during fiscal 1998.



                                      F-11
<PAGE>

                      Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(4)  Allowance for Loan Losses

     A summary of transactions affecting the Company's allowance for loan losses
for the three-year period ended June 30, 1998, is as follows:

                                       Notes        Foreclosed
                                    Receivable      Real Estate       Total
                                   ------------    ------------    ------------
Balance at June 30, 1995           $    129,901    $ 10,369,021    $ 10,498,922

Reclassifications - SFAS No. 121             --     (10,331,733)    (10,331,733)
Provision for loan losses               (17,542)        204,600         187,058
Amounts charged off, net
  of recoveries                        (112,359)       (241,888)       (354,247)
                                   ------------    ------------    ------------
Balance at June 30, 1996                     --              --              --

Provision for loan losses                    --              --              --
Amounts charged off, net
  of recoveries                              --              --              --
                                   ------------    ------------    ------------
Balance at June 30, 1997           $         --              --              --
                                   ------------    ------------    ------------

Provision for loan losses                    --              --              --
Amounts charged off, net
of recoveries                                --              --              --
                                   ------------    ------------    ------------
Balance at June 30, 1998           $         --              --              --
                                   ============    ============    ============


(5)  Commitments and Contingencies

     The   Company's   wholly-owned   subsidiary,   LNC  Holdings   Inc.,   owns
approximately  40 acres of land located in Arlington,  Texas which is encumbered
by property tax liens totaling approximately  $1,090,000 including penalties and
interest.

     On April 16, 1997,  LNC Holdings Inc.  received a notice of final  judgment
from the City of Arlington with regard to the delinquent taxes. On May 27, 1997,
LNC Holdings  Inc.  notified the City of Arlington  that it would execute a deed
without  warranty to allow the taxing units to obtain title to the property.  No
response has been  received.  LNC Holdings Inc. has accrued  property  taxes for
calendar  year  1996,  1997 and for the six month  period  ended  June 30,  1998
totaling  $125,000.  Management  believes that  resolution of the delinquent tax
issue with the taxing  authorities  will not result in a material adverse impact
on the consolidated financial statements.

     Cash and cash  equivalents at June 30, 1998 and 1997,  included  restricted
cash of  approximately  $64,000  and  $61,000,  respectively,  for claims due to
bankruptcy.  On June 30, 1997, the court issued an Administrative  Closing Order
and Final Decree with regard to the bankruptcy case. The claims


                                      F-12
<PAGE>

                      Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


remaining  represent unclaimed dividend checks dated May 20, 1994. Any check not
claimed will be voided after five years.

     The Company  entered into an operating lease dated May 16, 1997 relating to
its principal executive offices. The lease expires December 31, 2000, contains a
renewal  option  and  requires  the  Company  to pay a  proportionate  share  of
operating expenses of the building. On May 19, 1997, the Company entered into an
operating lease for telephone equipment which also expires on December 31, 2000.
Rental  expense for fiscal 1998 and 1997 under  these  leases was  approximately
$72,000 and $26,000,  respectively.  Future  minimum lease  payments under these
leases are as follows:

                   Fiscal Year Ending
                         June 30,                        Amount
                         --------                        ------
                          1999                         $   77,856
                          2000                             77,856
                                                       ----------
               Total future minimum rentals            $  155,712
                                                       ==========

     The Company is involved in routine  litigation  incidental to its business,
which,  in the  opinion of  management,  will not  result in a material  adverse
impact on the Company's consolidated financial condition, results of operations,
or  cash  flows,   without   regard  to  possible   insurance   or  third  party
reimbursement.

(6)  Related Party Transactions

     Effective February 28, 1995, the Company entered into an "Asset Disposition
Agreement" with ST Lending,  Inc.  ("STL"),  a wholly-owned  subsidiary of Lomas
Financial  Corporation,  the original sponsor of the Trust,  whereby the Company
and STL exchanged their respective  ownership positions in a group of ten assets
in order to achieve a separate  and  distinct  ownership  position.  The Company
exchanged its 80% ownership in six assets, whose 80% interest had a net carrying
value of approximately $1.2 million (net of reserves) for STL's 20% ownership in
four assets,  whose 20% interest had a net carrying value of approximately  $1.2
million (net of  reserves).  No gain or loss was  recognized as a result of this
transaction. In addition, a group of approximately 14 receivables,  which had no
carrying value and related primarily to deficiency notes,  remained 80% owned by
the Company and 20% owned by STL.  The 14  receivables  had face  amounts  which
ranged  in size from  $9,875 to  $2,494,118.  The  Asset  Disposition  Agreement
stipulated that the Company would pay STL 10% of any gross proceeds  received in
addition to STL's 20%  ownership,  from this pool of  receivables  in return for
STL's asset  administration.  Effective  April 15, 1996,  STL's  interest in the
seven remaining deficiency notes and/or judgments,  which had no carrying value,
were transferred to the Company.

     On April 24, 1996, the Company entered into a Supplement (the "Supplement")
to the Asset Disposition Agreement.  The Supplement transferred ownership of LNC
Holdings,  Inc.,  whose sole asset is approximately 40 acres of undeveloped real
estate that is fully  encumbered by tax liens,  to the Company and set forth the
terms under  which STL would  continue to manage the  property.  The  Supplement
further



                                      F-13
<PAGE>

                     Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


described the method of  allocating  the funds to be paid to the Company and STL
with respect to a proposed settlement agreement for a deficiency note receivable
received by the Company in June 1996 in the amount of approximately  $8,000. The
Company also exchanged its 50% interest,  representing $212,000 of principal, in
a note the  Company  has  classified  as  non-earning,  for STL's 20%  interest,
representing $269,000 of principal, in a note the Company classified as earning.
The  exchange  of  these  notes  resulted  in  the  Company  owning  100%  of an
interest-bearing  note,  secured  by  72  lots  in  Murrieta,   California.  The
difference  in the  exchange  values  resulted  in the  recording  of $31,000 of
interest income.  The remaining  difference of $26,000 was applied as a discount
to the carrying  value of the note received and was  amortized  into income over
the life of the loan.

     In accordance with the Asset Disposition  Agreement and the Supplement,  in
fiscal 1996, STL received compensation of $69,237 from the Company for its asset
administration and collection  services.  There was no such compensation paid to
STL in fiscal 1997 or 1998.

     At June  30,  1996,  the  Company  had a  collateral  assignment  of a life
insurance  policy on Robert Ted Enloe,  III which was  recorded as a  receivable
under a split-dollar  agreement.  On December 13, 1996, Mr. Enloe  purchased the
policy from the Company for $126,727, the amount of the receivable.

(7)  Federal Income Taxes

     Income tax expense attributable to income before income taxes consists of:

                                                     June 30,
                                   ---------------------------------------------
                                    1998              1997              1996 
                                   -------        ------------      ------------
Federal
     Current                       $ 1,456        $     14,000      $         --
     Deferred                           --                  --                --
                                   -------        ------------      ------------
                                   $ 1,456        $     14,000      $         --
                                   =======        ============      ============

     The income tax  expense for the years  ended June 30,  1998,  1997 and 1996
differs from the amounts  computed by applying the U.S.  Federal  corporate  tax
rate of 34% to income before income taxes as follows:

<TABLE>
<CAPTION>
                                                             June 30,
                                               -----------------------------------
                                                  1998         1997         1996 
                                               ---------    ---------    ---------
<S>                                            <C>          <C>          <C>      
Computed "expected" income tax expense         $ 493,326    $ 449,815    $ 284,025
Increase (decrease) in taxes resulting from:
     Adjustment to deferred tax asset           (231,233)    (466,250)          --
     Other                                            --           --      (26,025)
     Change in the beginning of the year
          balance of the valuation allowance
          for deferred tax assets allocated
          to income taxes                       (260,637)      30,435     (258,000)
                                               ---------    ---------    ---------
                                               $   1,456    $  14,000    $      --
                                               =========    =========    =========
</TABLE>


                                      F-14
<PAGE>

                      Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     The tax  effects of  temporary  differences  that give rise to  significant
portions  of the  deferred  tax assets at June 30,  1998 and 1997 are  presented
below:

                                                              June 30,
                                                   ----------------------------
                                                       1998            1997 
                                                   ------------    ------------
Deferred tax assets:
  Net operating loss carryforwards                 $ 77,056,215    $ 77,196,311
  Basis differences of foreclosed real estate         2,331,370       2,454,676
  Capital loss carryforward                           1,630,006       1,630,006
  Other                                               1,911,207       1,908,442
                                                   ------------    ------------
    Total gross deferred tax assets                  82,928,798      83,189,435
    Less:  valuation allowance                      (82,928,798)    (83,189,435)
                                                   ------------    ------------
         Net deferred tax assets                   $         --    $         --
                                                   ============    ============

     The net change in the valuation allowance for the years ended June 30, 1998
and 1997 was a decrease  of $260,637  and an increase of $30,435,  respectively.
Based on current business activity,  management  believes it is more likely than
not that the Company  will not realize the  benefits of the loss  carryforwards.
Therefore,  a full valuation  allowance has been  established.  In the event the
Company expands its business  operations through an acquisition,  the ability to
use the loss carryforwards may change.

     At June 30, 1998,  the Company had net  operating  loss  carryforwards  for
federal  income tax  purposes of  $226,636,000,  which are  available  to offset
future federal taxable  income.  The  carryforwards  will expire in 2005 through
2011. The Company also has capital loss  carryforwards  of $4,794,000  which are
available to offset future capital gains, if any, through 2001. In addition, the
Company has alternative  minimum tax credit  carryforwards  of $15,100 which are
available to reduce  future  federal  income  taxes,  if any, over an indefinite
period.

(8)  Fair Value of Financial Instruments

     SFAS No.  107,  "Disclosures  about  Fair Value of  Financial  Instruments"
requires  disclosure  of fair value  information  about  financial  instruments,
whether or not recognized in the statement of financial condition,  for which it
is practicable  to estimate that value.  In cases where quoted market prices are
not available,  fair values are based on estimates  using present value or other
valuation  techniques.  Those  techniques  are  significantly  affected  by  the
assumptions  used,  including  the  discount  rate and  estimates of future cash
flows. In that regard,  the derived fair value estimates cannot be substantiated
by comparison to independent  markets and, in many cases,  could not be realized
in  immediate  settlement  of the  instrument.  SFAS No.  107  excludes  certain
financial  instruments  and all  nonfinancial  instruments  from its  disclosure
requirements.  Accordingly,  the aggregate  fair value amounts  presented do not
represent the underlying value of the Company.

     The fair value of cash and cash  equivalents  approximates  their  carrying
value because of the liquidity and short-term  maturities of these  instruments.
The fair value of notes  receivable - mortgage loans is estimated by discounting
cash flows at interest  rates  currently  being  offered for notes with  similar
terms to borrowers of similar  credit  quality.  The Company  believes  that its
deficiency notes


                                      F-15
<PAGE>

                      Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


receivable,  which have no carrying  value at June 30, 1998,  may have some fair
value, but such value cannot be estimated and any potential  collections are not
measurable  as to timing or amount.  The  Company  does not  believe  that it is
exposed to any significant credit risk on its cash and cash equivalents.

     The estimated  fair values of the Company's  financial  instruments at June
30, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>
                                                June 30, 1998              June 30, 1997        
                                         -------------------------   -------------------------
                                           Carrying       Fair         Carrying        Fair
                                            Amount        Value         Amount         Value 
                                         -----------    ----------   -----------    ----------
<S>                                      <C>            <C>          <C>            <C>       
Financial Assets:
     Cash and cash equivalents           $54,063,031    54,063,031   $52,535,527    52,535,527
     Notes receivable - mortgage loans            --            --         1,693         1,693
</TABLE>


(9)  Certain Customers

     In  1994,  the  Company  received  a  note  receivable  (the  "Note")  from
Resurgence Properties,  Inc. ("RPI") in the original amount of $6.0 million upon
emerging from bankruptcy  pursuant to the plan of  reorganization.  The Note was
collateralized  by a pool of  first  mortgage  loans  and by  deeds  of trust on
various  real estate  assets  owned by RPI.  RPI  repurchased  the Note from the
Company  on June 27,  1996 for  $4.09  million  representing  98.75% of the then
outstanding balance in a negotiated transaction.  The Company charged $51,740 to
the allowance for possible losses on notes receivable related to this sale.

     Revenue  from RPI for the  years  ended  June 30,  1998 and 1997  consisted
solely of dividend income totaling  $40,100 and $33,500,  respectively.  Revenue
from RPI provided greater than 10% of the Company's total revenue for the fiscal
year  ended June 30,  1996,  and  consisted  of: (i)  interest  income  totaling
$389,958 on the RPI note receivable and (ii) dividend income totaling $21,375 on
RPI preferred stock.

(10) Concentrations of Credit Risk

     At June 30,  1998,  the Company had certain  concentrations  of credit risk
with  three  financial  institutions  in the  form of  cash  which  amounted  to
approximately $54 million. For purposes of evaluating credit risk, the stability
of financial  institutions  conducting business with the Company is periodically
reviewed.  If the financial  institutions failed to completely perform under the
terms of the  financial  instruments,  the exposure for credit loss would be the
amount  of  the  financial   instruments  less  amounts  covered  by  regulatory
insurance. 



                                      F-16
<PAGE>

                     Liberte Investors Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(11) Stockholders' Equity

     On August 15,  1996,  the Trust,  pursuant  to the plan of  reorganization,
exchanged  all  Beneficial  Shares  for shares of Common  Stock of the  Company.
Further,  8,102,439  of  newly-issued  shares of the Company  were  purchased by
Hunter's  Glen/Ford,  Ltd., a Texas limited  partnership  ("Hunter's Glen"), for
$23,091,951  ($2.85 per share).  Gerald J. Ford,  partner of Hunter's  Glen,  is
Chief Executive Officer and Chairman of the Board of Directors of the Company.

     In fiscal  year  ended  June 30,  1996,  Stockholders'  Equity  included  a
deduction  for a  promissory  note payable to the Company from Robert Ted Enloe,
III in the amount of $365,625 plus deferred interest  thereon.  On June 18, 1996
Mr. Enloe repaid the outstanding principal and interest balance on this note. At
the time of repayment,  the principal and accrued but unpaid  interest due under
the note was $416,787, net of deferred interest of $19,795.

(12) Subsequent Events

     In August  1998 the  Company  received  $303,514  from the  liquidation  of
300,000 shares of RPI preferred stock and accrued dividends.

     In August 1998 the Company  sold 56.6 acres of land in San  Antonio,  Texas
for a price of  $339,600.  A gain of  approximately  $200,000  was recorded as a
result of this transaction subsequent to June 30, 1998.

     In  September  1998 the Company sold 55 lots in Fontana,  California  for a
price  of  $229,002.  A loss  of  $407,348  was  recorded  as a  result  of this
transaction.  The related assets were written down at June 30, 1998 to estimated
sales proceeds less selling costs.



                                      F-17
<PAGE>

                      Liberte Investors Inc. and Subsidiary

                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

                                  June 30, 1998

<TABLE>
<CAPTION>
                                               Periodic        Face       Carrying          Principal
                 Interest        Maturity      Payment        Amount        Amount            Amount
Description       Rate            Date          Terms         of Note      of Note          Delinquent
------------------------------------------------------------------------------------------------------
<S>                                                   <C>
                                                      NONE
</TABLE>


(1)  Reconciliation of "Mortgage Loans on Real Estate" (in thousands):


                                                        Year Ended June 30,
                                                  ------------------------------
                                                   1998        1997        1996 
                                                  ------      ------      ------
Balance at beginning of year                      $    2      $1,331      $5,807
Additions during year:
  Write-up in value of impaired loans                 --          --          71
  Net addition from asset swap                        --          --          35
  New mortgage loans and advances
     on existing loans and other                      --          --       1,077
                                                  ------      ------      ------
                                                       2       1,331       6,990
Deductions during year:
  Collections of principal                             2       1,329       5,561
  Foreclosures                                        --          --          --
  Write-off of principal                              --          --          98
                                                  ------      ------      ------
Balance at end of year                            $   --      $    2      $1,331
                                                  ======      ======      ======


                                      F-18