<PAGE>   1


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                                 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 December 31, 1996

                                       OR

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


                           Commission File No. 0-8630


                                 AMRESCO, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
        <S>                                                                <C>
                          DELAWARE                                                      59-1781257
              (State or other jurisdiction of                              (I.R.S. Employer Identification No.)
               incorporation or organization)

        700 N. PEARL ST. STE 2400 LB 342 DALLAS, TX.                                    75201-7424
          (Address of principal executive offices)                                      (zip code)
</TABLE>
       Registrant's telephone number, including area code: (214) 953-7700

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

<TABLE>
<CAPTION>
                                                                                 NAME OF EACH EXCHANGE
                                TITLE OF EACH CLASS                               ON WHICH REGISTERED
                                -------------------                               -------------------
                   <S>                                                          <C>
                    10% Senior Subordinated Notes due 2003                      New York Stock Exchange
                    8.75% Senior Notes due 1999                                 New York Stock Exchange
                    10% Senior Subordinated Notes due 2004                      New York Stock Exchange
</TABLE>

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

               Shares of common Stock, par value $0.05 per share

         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.  [X] Yes [ ] 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 to this Form 10-K [ ]

         As of March 21, 1997, 33,876,591 shares of the registrants common
stock were outstanding.  The aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the closing price of
such stock as of March 21, 1997, was approximately $502,000,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Registrant's Proxy Statement to be filed for the
Annual Meeting of Shareholders to be held on May 28, 1997, are incorporated by
reference in Part III hereof.

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<PAGE>   2
                                     PART I

ITEM 1.  BUSINESS

General

         AMRESCO, INC. (the "Company") is a leading specialty financial
services company engaged in residential mortgage banking, commercial mortgage
banking, asset management, institutional real estate investment advisory
services and commercial finance.  The residential mortgage banking business
involves originating, acquiring, warehousing and securitizing Sub-prime Loans
(see "Certain Definitions" for a listing of the defined terms used herein).
The commercial mortgage banking business involves the origination,
underwriting, placement, sale, securitization and servicing of commercial real
estate mortgages.  The asset management business involves acquiring at a
substantial discount to Face Value and managing and resolving Asset Portfolios
to maximize cash recoveries.  The Company manages and resolves Asset Portfolios
acquired by the Company alone, acquired by the Company with co-investors and
owned by third parties.  The Company's institutional real estate investment
advisory subsidiary provides real estate investment advice to various
institutional investors (primarily pension funds).  The commercial finance
business involves providing high yield debt financing for businesses and
projects which are unable to access traditional lending sources and providing
construction loans for builders of single family residences.  Financial
information regarding the Company is presented in "Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data."

Background

         History.  The Company, a Delaware corporation organized in 1977, is
the product of the December 1993 merger of two Asset Portfolio management and
resolution service companies: BEI and the former Asset Portfolio management and
resolution unit of NationsBank of Texas.  BEI was a publicly held company that
was engaged in the real estate and asset management services businesses.  The
BEI Merger created one of the largest Asset Portfolio management and resolution
service companies in the United States.  Since 1987, the Company and its
predecessors have managed over $35.0 billion (Face Value) of Asset Portfolios.
Since the BEI Merger, the Company has expanded its operations into the
residential and commercial mortgage banking, institutional real estate
investment advisory and commercial finance businesses.

         Business Strategy.  The Company's original business of managing and
resolving Asset Portfolios for third parties developed as a result of the
takeover of failed thrifts and banks by the federal government's deposit
insurance agencies in the late 1980s.  In 1994, the Company implemented a
growth strategy to expand its business lines and to leverage upon business
opportunities in those specialty finance markets that capitalize on the
Company's competitive strengths and reputation.  The key elements of the
Company's business strategy now include:

#   growing its participation in the origination, acquisition and
    securitization of  residential mortgage Sup-prime Loans;

#   expanding its presence in the commercial mortgage banking market through
    greater market penetration and by increasing its participation in the
    market for securitization of commercial mortgages;

#   investing for its own account in Asset Portfolios and continuing to provide
    high quality management and resolution services to co-investors and other
    third-party owners of Asset Portfolios;

#   expanding its institutional real estate investment advisory business to
    complement the Company's existing business lines; and

#   developing and acquiring additional businesses which complement the
    Company's existing core capabilities in specialty financial services.

         The Company will continue to identify, develop and market specialized
financial products that combine and leverage upon the various complementary
skills existing within the Company's business groups as well as expand its
cross-marketing of products and services among its business lines.





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Recent Developments

         On March 21, 1997, the Company entered into a definitive stock and
asset purchase agreement among Commercial Lending Corporation and certain of
its affiliates ("CLC") pursuant to which the Company would acquire the
operations and certain assets of CLC.  CLC's primary line of business is
originating, securitizing and servicing franchise loans.  The acquisition
should enhance and complement the Company's commercial finance group.  The
purchase price consists of (i) approximately 1.9 million shares of the
Company's common stock, (ii) the assumption of certain liabilities estimated at
$14,000,000 and (iii) contingent earnout payments of additional shares of the
Company's common stock based upon the operating performance of the acquired
entities through March 31, 2000.  The consumation of the transaction is subject
to satisfaction of certain conditions.  The transaction is expected to close in
late March 1997.

Residential Mortgage Banking Business

         General.  Through AMRESCO Residential, the Company originates,
acquires, warehouses and securitizes Sub-prime Loans.  Borrowers under such
loans may not satisfy the more rigid underwriting standards of the traditional
residential mortgage lending market for a number of reasons, such as blemished
credit histories (from past loan delinquencies or bankruptcy), inability to
provide income verification data or lack of established credit history.  The
Company believes that this market is large and is underserved by traditional
lenders.  Therefore, there is less competition in this market and interest
rates are higher than on mortgage loans for more creditworthy borrowers.  The
Company believes that the higher interest rates offered by the Sub-prime Loan
market are attractive even after taking into account the potentially greater
credit risk associated with such borrowers.  For the year ended December 31,
1996 and 1995, $27.8 million (32.3%) and $0.6 million (1.2%), respectively, of
the Company's operating profits (before corporate and other's operating loss)
were attributable to the Company's residential mortgage banking business.

         Sub-prime Loan Origination.  The Company recently entered the
Sub-prime loan origination business through its acquisition of Quality, which
originated over $5.0 billion of residential loans since the commencement of
that business in 1992.  The Company originates Sub-prime Loans through a
nationwide network of approximately 50 branch offices in 32 states, which
enables the Company to maintain local relationships with over 4,500
Company-approved mortgage brokers.  This branch structure and large independent
broker network allow the Company to obtain economic efficiencies associated
with a wholesale mortgage origination business without paying premium prices
for closed loans.  The Company augments its branch office structure with a
complementary telemarketing division, which works with mortgage brokers in
locations where the Company does not maintain a geographic presence through its
existing branch network and markets loan programs to homeowners through
direct-response marketing.  This telemarketing approach permits the Company to
expand its geographic penetration without incurring the cost of establishing
new offices.

         The Company underwrites and funds substantially all mortgage loans on
its own behalf.  The Company employs appraisers who conduct a majority of all
appraisal reviews.  Other appraisal reviews are performed by independent
appraisers approved by the Company, and are subsequently reviewed by the
Company.  Substantially all of the loans that are originated by the Company are
secured by first mortgages on residential properties.

         Wholesale Loan Acquisition.  Before the Quality Acquisition, the
Company exclusively acquired Sub-prime Loan portfolios from third-party
originators in large wholesale transactions.  While the Company currently
expects to continue to obtain a majority of its Sub-prime Loans in this manner,
the Company has expanded and diversified its sources of Sub-prime Loans.  In
addition to its recent entry into the Sub-prime Loan origination business, the
Company has formed a wholesale conduit division through which it acquires
individual or small portfolios of closed loans directly from loan originators.

         Securitization.  The Company warehouses the loans it originates and
purchases for securitization.  During 1996, the Company securitized
approximately $1.8 billion in residential mortgages (including pre-funded loans
of $142.0 million) in five public offerings of asset-backed securities.  Loan
originations and acquisitions are funded through warehouse credit facilities
arranged by the Company until the Company accumulates loans of an aggregate
principal amount sufficient to permit efficient securitization of the loan pool
(generally, in excess of $250.0 million).  The loans are then conveyed to a
special purpose trust that sells into the secondary market various tranches of
rated collateralized mortgage-backed securities representing undivided
interests in the revenue streams generated by the loans.  Subordinated
Certificates issued by the trust are purchased by the Company.  The Company
either retains these Subordinated Certificates or pools and sells them in
private sales.  The Company also acquires Subordinated Certificates from Sub-
prime, jumbo and non-standard residential mortgage securitizations organized by
third parties.  The mortgage-backed securities publicly sold to date by the
Company have been rated "AAA" by Standard & Poor's and "Aaa" by Moody's





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Investors Service, Inc.  To achieve these ratings the Company has used a
combination of over-collateralization techniques and financial guaranty
insurance.

         The Company pools the loans it purchases to create asset-backed
securities which it sells on a quarterly or more frequent basis, depending on
the availability of loans, profitability and other relevant factors.
Securitization is used by companies as a cost-competitive source of capital
compared to traditional corporate debt financing alternatives.  The Company
seeks to utilize securitization structures that minimize the Company's capital
requirements, while still providing income to the Company.  For example, the
Company may sell certificates for senior interests in a securitization, but
retain Subordinated Certificates, some of which it may later elect to sell.
The Company then would have limited capital at risk, but would retain a portion
of the cash flow from the securitization.  The Company also may seek to place
bundled residential mortgages through private securitization transactions such
as joint ventures with insurance companies and pension funds.  The Company
utilizes the net proceeds from securitizations to purchase additional
residential mortgages and to pay down outstanding warehouse facilities.  The
Company, through AMRESCO Residential, uses warehouse facilities with financial
institutions to finance its purchase of loans on a short-term basis pending
securitization.  At December 31, 1996, AMRESCO Residential had an aggregate
borrowing capacity of $1.2 billion under three warehouse facilities of which
$912.8 million was available.

         In its securitizations, the Company transfers residential mortgages to
newly-formed securitization trusts, which issue one or more classes of
asset-backed securities.  The asset-backed securities are simultaneously sold
to investors (except for certain Subordinated Certificates which are purchased
by the Company and which are included in "Retained Interests in
Securitizations-trading" in the Company's Consolidated Balance Sheet).  Each
month, collections of principal and interest on the residential mortgages are
used by the trustee of the securitization trusts to pay the holders of the
related asset-backed securities, to build over-collateralization by using
excess interest to pay down principal on such securities and to pay expenses,
with any remaining cash flows paid to the holders of the related Subordinated
Certificates.  The remaining cash flows on Subordinated Certificates purchased
by the Company represent a substantial portion of the Company's revenues.

         The Company arranges for credit enhancement to achieve a desired
credit rating on the asset-backed securities issued.  The credit enhancement
generally involves four primary components: (i) a financial guaranty insurance
policy; (ii) servicer advances of scheduled interest and principal on
delinquent loans; (iii) over-collateralization of the securities; and (iv) use
of Subordinated Certificates to absorb losses.

         The financial guarantee insurance policies used to date have been
issued by Financial Security Assurance, Inc.  ("FSA") and MBIA Insurance
Corporation ("MBIA"), which insure payments of principal and interest due on
rated asset- backed securities.  Both FSA and MBIA and their respective
subsidiaries principally insure publicly and privately offered, asset-backed,
collateralized and municipal securities.

         A significant portion of the credit enhancement for the securities
results from the use of interest collected on the loans that exceeds the sum of
the interest payable to the holders of the senior asset-backed securities, the
monthly servicing fees and other amounts to pay down the principal on the
asset-backed securities.  The application of cash collections in this manner
causes the security principal balance to decline more quickly than the
principal balance of the underlying collateral, thus causing
over-collateralization.  This over-collateralization provides not only
additional principal protection to the security holders, but also a higher
level of assets earning interest relative to the level of senior securities on
which interest must be paid.  Initial and ongoing target levels of over-
collateralization must be achieved and maintained on each securitization.

         Once target levels of over-collateralization are achieved,
distributions otherwise payable to Subordinated Certificates are used on a
monthly basis to absorb any losses and maintain ongoing target
over-collateralization levels.  If such cash flow is insufficient to absorb
losses in a given period, a draw is required under the financial guarantee
insurance policy.  In future periods, this cash flow must be used to repay any
such draws.  Each insured securitization trust has certain portfolio
performance tests relating to levels of delinquency, defaults and net losses on
the loans in such trust.  If any of these levels are exceeded, the amount
required to be used for additional over-collateralization and not passed
through to the Subordinated Certificates may be increased.

         The Company initially retains the Subordinated Certificates.  In 1996,
the Company completed the private sale of certain Subordinated Certificates for
net proceeds of approximately $44.0 million.  Although the Company intends,
from time to time, to continue to pursue opportunities to sell other
Subordinated Certificates to generate additional borrowing capacity under the
Revolving Loan Agreement and reduce the Company's capital exposure with respect
to such retained certificates, no assurance can be given that such
opportunities will be available in the future.





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<PAGE>   5
         Servicing.  The Company does not currently service the loans
originated, acquired or securitized by it.  When the originator does not retain
servicing rights, the Company selects third-party servicers experienced in
servicing Sub- prime Loans.  The Company closely monitors the performance of
its loan servicers.  Servicers are required to advance to the securitization
trust each month scheduled principal and interest due on delinquent loans.  The
Company limits its servicer selection to those companies it believes are
sufficiently capitalized to meet these advance obligations.  The advancement of
scheduled principal and interest contributes to the timely payment of principal
and interest on the securities.

Commercial Mortgage Banking Business

         General.  The Company performs a wide range of commercial mortgage
banking services, including originating, underwriting, placing, selling and
servicing commercial real estate loans through its Holliday Fenoglio, ACC and
AMRESCO Services commercial mortgage banking units.  For the year ended
December 31, 1996 and 1995, $14.5 million (16.9%) and $6.0 million (12.0%),
respectively, of the Company's operating profits (before corporate and other's
operating loss) were attributable to the Company's commercial mortgage banking
business.

         The Company believes that the commercial real estate mortgage banking
business offers significant growth opportunities.  There are an estimated $1.0
trillion of commercial real estate mortgages outstanding within the United
States and the Company estimates that $125.0 billion to $150.0 billion in
commercial real estate mortgages are refinanced each year in addition to
mortgage financing of new construction.  Originations of loans for new
construction projects are cyclical and are influenced by various factors
including interest rates, general economic conditions and demand patterns in
individual real estate markets.  The commercial mortgage banking industry is
fragmented, composed primarily of small local or regional firms.  The Company
anticipates that expensive technological demands, increasingly standardized
underwriting requirements, more demanding borrowers and lenders and the
emergence of a market for securitized commercial real estate mortgage pools
will likely push the commercial mortgage banking industry toward greater
consolidation.  The Company believes that well-capitalized, full service,
nationwide mortgage banking firms offering a variety of mortgage banking and
loan management services will emerge from this consolidation.  The Company's
objective is to improve its position as a major nationwide full service
mortgage banker to the commercial real estate industry.  The Company intends to
achieve this goal through the internal development of its commercial mortgage
banking group and through strategic acquisitions of commercial mortgage bankers
which either serve key real estate markets in the United States or provide
niche or specialized services that enhance the Company's product line.

         Commercial Mortgage Banking Business.  As a leading full service
commercial mortgage broker and banker with offices in key markets throughout
the United States, the Company provides a wide range of real estate capital
markets services to owners and developers of the full range of commercial real
estate properties.  The typical consumers of commercial real estate mortgage
banking services are both real estate developers and owners (as borrowers) and
investor/lenders (as funding sources).  Due to the more specialized nature of
commercial mortgage lending and the smaller universe of lenders serving this
market (in each case relative to the residential mortgage market), borrowers
rely on commercial mortgage brokers and bankers to find competitive lenders,
and these lenders (particularly insurance companies and pension plans, which do
not generally have origination staffs located in multiple branches) rely on
mortgage brokers and bankers to source potential borrowers.  Lenders generally
include banks, pension funds and insurance companies.  In originating loans,
Holliday Fenoglio and ACC each work closely with both the borrower and
potential lenders from the time a loan prospect is first contacted, through the
application and proposal process and throughout the documentation of the loan
to final funding.  Holliday Fenoglio and ACC each typically perform extensive
due diligence and market analysis for the lenders in this process.

         Holliday Fenoglio was one of the largest commercial mortgage bankers
in the United States in 1995 (based on origination volume) and primarily serves
commercial real estate developers and owners by originating commercial real
estate loans and acting as a broker on commercial real estate sales.  Holliday
Fenoglio originated approximately $2.7 billion and $2.0 billion of commercial
real estate loans during 1996 and 1995, respectively.  Holliday Fenoglio
principally targets developers and owners of higher-quality commercial and
multifamily real estate properties.  Holliday Fenoglio services prospective
borrowers through its own commission-based mortgage bankers in its offices
located in Atlanta, Boca Raton, Buffalo, Dallas, Houston, New York City, Orange
County (California), Orlando, Portland (Oregon) and San Diego.  The loans
originated by Holliday Fenoglio generally are funded by institutional lenders,
primarily insurance companies, and by Conduit Purchasers.  The Company
estimates that Holliday Fenoglio has retained the Primary Servicer rights on
approximately 36% of such loans over the last three years.  The Company acted
as a broker on commercial real estate sales of approximately $393 million and
$194 million during 1996 and 1995, respectively.  The Company believes that
Holliday Fenoglio's relationship and credibility with its institutional lender
network provide the Company a competitive advantage in the commercial mortgage
banking industry.





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         ACC, which originated and underwrote approximately $632.0 million and
$447.1 million of commercial real estate mortgages during 1996 and 1995,
repectively is a mortgage banker that originates and underwrites commercial
real estate loans that are funded primarily by Conduit Purchasers and Fannie
Mae.  Unlike Holliday Fenoglio, ACC makes certain representations and
warranties concerning the loans it originates.  These representations cover
title to the property, lien priority, environmental reviews and certain other
matters.  ACC targets mortgage loans for commercial real estate properties
suitable for sale to Conduit Purchasers that accumulate loans for
securitization programs.  ACC has established a financing and advisory
relationship with a major Wall Street investment bank whereby ACC originates
commercial mortgages, that are funded and securitized by a limited partnership
in which ACC is a 50% owner.  Through this relationship, ACC shares equally in
both the risk and the profit opportunities of a Conduit Purchaser.  By aligning
its economic interest with the Conduit Purchaser and jointly underwriting all
loans purchased, the Company believes it can significantly reduce the amount of
time necessary to commit to a loan (by avoiding duplicate underwriting
evaluations) thereby enhancing its competitiveness in this market.  The Company
accounts for the limited partnership on the equity basis of accounting.  ACC
serves its market directly through ACC's offices located in Dallas, Miami,
Washington, D.C.  and Winston-Salem, as well as through a network of
approximately 40 independent mortgage brokers located throughout the United
States.  Through December 31, 1996, approximately 55% of the loans underwritten
by ACC were originated by Holliday Fenoglio, with Holliday Fenoglio and ACC
each receiving fees for their respective services.

         The Company believes that it has certain additional significant
advantages in the commercial mortgage banking marketplace.  First, through its
relationships with certain institutional investors, the Company is able to
underwrite and sell commercial mortgage loans, particularly in instances where
the borrower needs relatively quick access to funding for a particular project.
Through a warehouse credit facility arranged in early 1995, the Company is able
to underwrite and fund a loan and hold that loan for resale to a buyer.
Second, because of the Company's extensive experience in real estate markets,
the Company believes it can carefully evaluate the risks of such underwriting
transactions in order to minimize financial exposure to the Company in
underwriting and/or warehousing a loan.

         ACC is approved by Fannie Mae to participate in its DUS program.  An
approved DUS lender is delegated the authority to approve, commit and close
loans for multifamily mortgages on a national basis with the assurance that
Fannie Mae will purchase the loans.  In contrast to a "prior approval" lender,
DUS lenders do not need to obtain the approval of Fannie Mae prior to making
the loan.  In return for the delegated authority to make loans and the
subsequent purchase of such loans by Fannie Mae, DUS lenders must maintain a
significant capital base, and retain a certain level of credit risk on the
loans they make.  The DUS lender takes first loss risk up to 5% of the loan
amount, and above 5% Fannie Mae and the DUS lender share the loss, with the DUS
lender's maximum loss capped at 20% of the loan amount.

         ACC is one of only 28 currently approved DUS lenders.  While all DUS
lenders operate on a national basis, the Company believes that ten such lenders
account for the majority of DUS volume.  The Company believes that ACC, as one
of the few DUS lenders, has certain competitive advantages in the multifamily
mortgage origination business.  These advantages include the competitive
pricing afforded by Fannie Mae's position as the largest purchaser of housing
related mortgages in the nation and the ability to commit and close mortgages
without the delay and the accompanying market risks of such delay for an
approval process by the mortgage purchaser.  For these reasons, the Company
expects Fannie Mae loan originations to become a significant part of its
commercial mortgage banking activities.  Holliday Fenoglio is expected to be a
significant source of such loan originations.

         ACC is also a member of the Freddie Mac multifamily seller/servicer
program in Florida, North Carolina and South Carolina and intends to expand
into other states.  Through this program, the Company sells to Freddie Mac and
services multifamily apartment mortgages in these states.

         The Company generally earns a fee of between 50 and 100 basis points
of the loan amount for originated or underwritten loans, plus certain
additional processing fees.  From time to time, the Company also originates
nontraditional financing involving hybrid forms of debt, equity participations
and other creative financing structures.  Fees for equity or joint venture
structures are typically higher.

         The Company has established relationships with over 200 institutional
lenders that include insurance companies, pension plans and Conduit Purchasers.
In 1996 and 1995, the Company placed 561 and 427 loans with approximately 109
and 82 different lenders, respectively.  Forty-four institutional lenders have
retained the Company as their respective exclusive or semi-exclusive loan
originator in selected cities and regions.

         Commercial Loan Servicing Business.  The Company serves as a Primary
Servicer for whole loans and as a Master/Full Servicer for securitized pools of
commercial mortgages through AMRESCO Services.  In October 1996, the





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Company received the first public "above average" commercial Master Servicer
rating ever awarded by Standard & Poors.  At December 31, 1996, the Company
acted as servicer with respect to approximately $14.1 billion of loans. The
dominant users of commercial loan servicers are commercial mortgage-backed bond
trusts and similar securitized commercial asset- backed loan portfolios held by
numerous passive investors.  Other lenders often contract with the originating
mortgage banker or other third-party servicer to manage collection, accounting
and other activities with respect to the loan.  The revenue stream from
servicing contracts on commercial mortgages is relatively predictable as
prepayment penalties in commercial mortgages discourage early loan payoffs, a
risk that is more significant to servicers of residential mortgage portfolios.

         Primary Servicing involves collecting monthly mortgage payments,
maintaining escrow accounts for the payment of ad valorem taxes and insurance
premiums on behalf of borrowers, remitting payments of principal and interest
promptly to investors in the underlying mortgages, reporting to those investors
on financial transactions related to such mortgages and generally administering
the loans.  The Primary Servicer also must cause properties to be inspected
periodically, determine the adequacy of insurance coverage on each property,
monitor delinquent accounts for payment and, in cases of extreme delinquency,
institute and complete either appropriate forbearance arrangements or
foreclosure proceedings on behalf of investors.  Primary Servicer rates are
determined by a bidding and negotiating process.  At December 31, 1996, the
Face Value of the Company's Primary Servicing portfolio totaled approximately
$3.3 billion.

         Master Servicing involves providing administrative and reporting
services to securitized pools of mortgage- backed securities.  Typically,
mortgages underlying mortgage-backed securities are serviced by a number of
Primary Servicers.  Under most master servicing arrangements, the Primary
Servicers retain principal responsibility for administering the mortgage loans
and the Master Servicer acts as an intermediary in overseeing the work of the
Primary Servicers, monitoring their compliance with the issuer's standards and
consolidating their respective periodic accounting reports for transmission to
the issuer of the related securities.  The Company occasionally is designated
as the Full Servicer for a pool of mortgages, in which case the Company acts as
Master, Primary and Special Servicer for the pool.  Master/Full Servicers are
typically paid fees based on the Face Value of loans under management, and the
compensation is determined by a bidding and negotiating process.  At December
31, 1996, the Face Value of the Company's Master/Full Servicing portfolio
totaled approximately $10.8 billion.  The average life of these securitized
pools is expected to be approximately eight years.

         The market for servicing performing loan pools constitutes a much
larger potential market than the market for servicing nonperforming and
underperforming assets.  The Company believes that by gaining access to these
pools in a servicer capacity, opportunities exist for the Company to originate
loan refinancings as outstanding loans mature.  In addition, the Company's
ability to also act as Special Servicer is a competitive advantage.  The
Company, therefore, has targeted the market for performing loan management
services as a growth area for the Company.  The Company has previously
participated in this market as a Primary Servicer of commercial real estate
loans for loans originated by the Company's mortgage banking unit and for loans
owned by investor clients.

Asset Management Business

         General.  The Company manages and resolves Asset Portfolios acquired
at a discount to Face Value by the Company alone and by the Company with
co-investors.  The Company also manages and resolves Asset Portfolios owned by
third parties.  For the year ended December 31, 1996 and 1995, $42.4 million
(49.3%) and $43.5 million (86.7%), respectively, of the Company's operating
profits (before corporate and other's operating loss) were attributable to the
Company's asset management business.

         Management of Asset Portfolios includes resolving loans and providing
routine accounting services, monitoring collections of interest and principal
(if any), confirming (or advancing) insurance premiums and tax payments due on
collateral and generally overseeing and managing, if necessary, collateral
condition and performance.  Asset Portfolios generally include secured loans of
varying qualities and collateral types.  The majority of the loans in the Asset
Portfolios in which the Company invests are in payment default at the time of
acquisition.  Asset Portfolios purchased by the Company are currently comprised
primarily of collateralized business loans, the resolution of which may be
based either on cash flow of a business or on real estate and other collateral
securing the loan.  The Company does not invest in Asset Portfolios with known
environmental liabilities, unless an Asset Portfolio contains identifiable
environmental risks that can be quantified and discounted appropriately.

         The Company obtains information on available Asset Portfolios from
many sources.  Repeat business and referrals from Asset Portfolio sellers with
whom the Company previously has transacted business are an important and
frequent source of Asset Portfolios.  The Company has developed relationships
in which it is a preferred Asset Portfolio





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<PAGE>   8
purchaser from certain sellers.  The Company believes that it receives many
Asset Portfolio solicitations that result primarily from the Company's
reputation as an active portfolio purchaser.  Other important sources of
business include referrals from co-investors who seek the Company's
participation in Asset Portfolio purchases, focused contacts initiated by
senior management, public advertising of Asset Portfolios for sale and the
Company's nationwide presence.

         Although the need for asset management and resolution services by
governmental agencies has substantially declined in recent years, the Company
believes that an active market for Asset Portfolio acquisition, management and
resolution services has emerged within the private sector.  The Company
believes that many financial institutions now recognize that it is advantageous
to use outside contractors to manage and resolve Asset Portfolios for a variety
of reasons, including a desire to reduce overhead costs, inadequate staffing to
handle large volumes of Asset Portfolios or a need to avoid management and
personnel distractions with the intensive and time-consuming job of resolving
Asset Portfolios.  These financial institutions include multinational, money
center, super regional and regional banking institutions in the United States,
Canada and Europe, as well as insurance companies in the United States.
Moreover, financial institutions have embraced the concept of packaging and
selling Asset Portfolios to investors as a means of disposing of nonperforming
and underperforming loans and improving the financial institution's balance
sheet.  Consolidations within the banking industry have reinforced this trend.
Insurance companies, which historically have avoided outsourcing Asset
Portfolio management or selling Asset Portfolios, also are emerging as sellers
of Asset Portfolios due in part to the implementation of risk-based capital
rules for insurance companies.  Additionally, there is a market for management
and resolution services for delinquent or nonperforming loans within performing
securitized loan pools.  The Company believes that the significant volume of
annual performing loan securitizations makes this an attractive market in which
to participate.

         The Company believes that opportunities for the acquisition,
management and resolution of Asset Portfolios are becoming increasingly evident
in certain international markets and that lenders in these markets are adopting
many of the Asset Portfolio management and resolution outsourcing techniques
currently utilized in the United States.  Accordingly, the Company has opened
offices in Toronto (August 1994) employing 16 persons and London (October 1995)
employing 6 persons, each at December 31, 1996, in order to take advantage of
both investment and servicing opportunities in Canada, the United Kingdom and
certain other Western European nations.  The Company believes that the
international markets are less competitive and, as a result, provide more
attractive investments and greater profit margins.  The Company may open other
offices and seek strategic alliances in other international markets.  The
Company had $256.4 million (Face Value) in Canadian Asset Portfolios and $350.6
million (Face Value) in United Kingdom Asset Portfolios under management as of
December 31, 1996.

         Because of the significant decline in Asset Portfolio management and
resolution services required by governmental agencies and the trend toward
outright sales of Asset Portfolios, the Company shifted its strategic focus to
becoming an active Asset Portfolio investor for its own account and a
co-investor with other Asset Portfolio buyers.  The Company believes that as a
direct investor in Asset Portfolios it has a significant competitive advantage
relative to the Company's competitors in the management and resolution
business.  Moreover, the Company believes that direct investment permits the
Company to take advantage of the profit opportunities of Asset Portfolio
investing.  The Company believes that it can gain market share in the Asset
Portfolio acquisition, management and resolution business due to its financial
strength, experience in managing and resolving Asset Portfolios, national
reputation and strategic relationships with sellers and purchasers of Asset
Portfolios, including financial institutions, large corporate buyers,
investment banking firms and sophisticated private investors.

         Asset Portfolio Investment.  The Company invests in Asset Portfolios
by purchasing them alone or with co- investors.  As of December 31, 1996, the
Company's weighted average investment in all Asset Portfolios in which it was a
co-investor was 5.9% of the aggregate purchase price of such Asset Portfolios.
The Company generally funds its share of any investment with a combination of
borrowings under its then existing credit line and internal cash flow.  Future
Asset Portfolio purchases will depend on the availability of Asset Portfolios
offered for sale, the availability of capital and the Company's ability to
submit successful offers to purchase Asset Portfolios.  As a result, Asset
Portfolio purchases may vary significantly from quarter to quarter

         Prior to making an offer to purchase an Asset Portfolio, the Company
conducts an extensive investigation and evaluation of the individual loans
generally comprising 100% of the aggregate Face Value of all the loans therein,
except in rare instances where an unusually large number of smaller assets are
being purchased.  This examination typically consists of analyzing the
information made available by the Asset Portfolio seller (generally, the
respective credit and collateral files for the loans), reviewing other relevant
material that may be available (including tax and judgment records), and
analyzing the underlying collateral (including conducting site inspections,
obtaining value opinions from third parties and consulting with any of the
Company's asset managers who have experience with the local market





                                       7
<PAGE>   9
for such assets).  The Company also reviews information on the local economy
and real estate markets in the area in which the loan collateral is located.
Because of its broad, nationwide experience in managing assets, the Company
often is able to draw on its asset management experience in the specific market
in which an asset is located.  Unlike the original lender, the Company values
Asset Portfolio loans based on the present value of estimated total cash flow
from resolution, with the expectation that the loans will be resolved prior to
scheduled maturity.  Generally, the Company does not refinance or renew
purchased loans or grant new credit.

         Asset Portfolio evaluations are conducted almost exclusively by the
Company's employees who specialize in analysis of nonperforming and
underperforming loans, often with further specialization based on geographic or
collateral-specific factors.  Most of these employees have previously served
the Company (and some continue to serve) as asset managers with responsibility
for resolving such loans.  Their asset management experience aids these
individuals, working together in teams, in making informed judgments about the
status of each loan and the underlying collateral, the probable cash flows from
the loan, the likely resolution of the loan and the time and expense required
for such resolution.  The Company's personnel document these evaluations in
standardized Company formats.

         Upon completion of evaluation forms, the Company compiles a database
of information about the loans in the Asset Portfolio.  The primary focus of
the database is the anticipated recovery amount, timing and cost of the
resolution of the Asset Portfolio.  Using its proprietary modeling system and
loan information database, the Company then determines the amount it will
offer.  The offer is structured to achieve certain minimum rates of return.  As
of December 31, 1996, the Company had paid an average purchase price of 54.2%
of the aggregate Face Value on all of its Asset Portfolios.

         When an Asset Portfolio is acquired (whether for the Company's own
account or with co-investors), the Company assumes the management of the loans
in that portfolio.  Management includes responsibility both for servicing and
for resolving such loans.  The Company's asset managers are given the
supporting due diligence information and projections relating to each newly
acquired loan for which the manager assumes management responsibility.  Because
asset managers are actively involved in the Asset Portfolio evaluation process,
it is not unusual for an asset manager to be given management responsibility
for the specific loans that the asset manager assisted in evaluating in the due
diligence or pricing processes.  The Company believes that by combining the
resolution and evaluation activities it achieves efficiency in loan resolution
and accuracy in loan evaluations.

         Asset resolutions are typically accomplished through (i) negotiating
with debtors a discounted payoff, which may be accomplished through a
refinancing by the obligor with a lender other than the Company, or (ii)
foreclosure and sale of the collateral.  The Company generally seeks consensual
resolution of each loan, having found that a negotiated resolution usually
maximizes the Company's or investor's rate of return.  Historically, the
Company has resolved the majority of the assets in an Asset Portfolio within 18
months of acquisition.  The goal of the Company's asset resolution process is
to maximize in a timely manner the cash recovery on each loan in an Asset
Portfolio.

         In evaluating Asset Portfolios, the Company takes into account
concentrations of collateral located in specific regions of the United States,
Canada and the United Kingdom.  As of December 31, 1996, the geographic
dispersion of each primary asset securing the loans in the Asset Portfolios in
which the Company had invested (whether for its own account or with
co-investors) was as follows:

<TABLE>
<CAPTION>

                                                     Face Value
                                                      (in millions)       % of Total    Number of Assets       % of Total
                                                      -------------       ----------    ----------------      -----------
      <S>                                               <C>                 <C>              <C>                <C>
      Northeast ......................................  $   379.7            26.9%             926               43.1%
      West ...........................................      469.9            33.4              422               19.0
      Southwest ......................................      165.2            11.7              386               17.4
      Midwest ........................................       60.2             4.3               44                2.0
      Southeast ......................................      227.7            16.2              309               14.0
                                                      -------------       ----------    ----------------      -----------
         United States Subtotal ......................    1,302.7            92.5            2,087               95.5
      Canada .........................................       22.5             1.6               58                2.6
      UK .............................................       83.0             5.9               41                1.9
                                                      -------------       ----------    ----------------      -----------
         Total .......................................  $ 1,408.2           100.0%           2,186              100.0%
                                                       ============       ==========     ===============      ===========
</TABLE>




         The Company invests in both Asset Portfolios composed of
collateralized business loans and in Asset Portfolios composed of real estate
collateralized loans.  Asset Portfolios purchased by the Company alone have
tended to be primarily composed of collateralized business loans, because many
such Asset Portfolios are within the size range





                                       8
<PAGE>   10
generally sought by the Company.  Asset Portfolios composed primarily of real
estate loans typically are larger and the Company's investments in such
portfolios usually are made with co-investors.  At December 31, 1996, the Face
Value of the Company's total investment in wholly-owned Asset Portfolios
aggregated approximately $572.2 million, which was composed of approximately
$423.0 million (73.9%) of collateralized business loans, approximately $122.8
million (21.5%) of asset-backed securities, approximately $8.1 million (1.4%)
of real estate owned and approximately $18.3 million (3.2%) of real estate
loans.

         In addition, as of December 31, 1996, the Asset Portfolios in which
the Company had invested (whether for its own account or with co-investors)
included approximately 2,186 individual assets.  The Company has found that the
market for smaller portfolios is less competitive, because larger Asset
Portfolio buyers often elect not to consider these portfolios.  In a recent
industry trend, some Asset Portfolio sellers are soliciting bids on portfolios
consisting of small groups of loans.

         The Company also purchases Subordinated Certificates (typically
composed of problem loans to which the Company can apply its resolution
expertise).  The Company believes that acceptance of this risk is similar to
its Asset Portfolio acquisition business, and that the risk is acceptable
because the Company has significant expertise in understanding loan valuations
and will manage the loan resolutions.

         Third Party Asset Management and Resolution Services.  The Company
acts as a Special Servicer to third parties pursuant to contracts with owners
of Asset Portfolios (including partnerships, joint ventures and other groups in
which the Company is a co-investor).  Management of Asset Portfolios includes
developing loan resolution strategies and resolving loans, overseeing and
managing collateral condition and performance, and providing routine accounting
services.

         Asset management and resolution contracts relating to Asset Portfolios
managed by the Company for third parties have a finite duration, typically
three to five years, and, at December 31, 1996, covered Asset Portfolios with
an aggregate Face Value of approximately $1.4 billion.  These contracts
generally provide for the payment of all or a combination of (i) a fixed annual
management fee (generally between 50 and 75 basis points based on the Face
Value or original purchase price of the loans) with revenues declining as
assets under management decrease, (ii) a resolution fee (generally between 50
and 150 basis points based on the net cash collections on loans and assets) and
(iii) a negotiated incentive fee for the successful resolution of loans or
assets which is earned after a predetermined rate of return for the portfolio
owner or co-investor is achieved.  Older Asset Portfolios serviced by the
Company are composed primarily of assets which were sold by the RTC and the
FDIC and generally contain relatively small loan balances.  As these portfolios
are resolved, they are being replaced by Asset Portfolios with relatively
larger loan balances.  This permits the Company to achieve increased servicing
efficiencies.

         As part of its third-party asset management and resolution business,
the Company aggressively pursues contracts to serve as the designated Special
Servicer for pools of securitized commercial mortgages.  After a loan within a
securitized pool of performing loans becomes delinquent or nonperforming, the
Master Servicer or Primary Servicer of the pool will contractually transfer
responsibility for resolution of that loan to the pool's designated Special
Servicer.  Special Servicers earn an annual fee (typically approximately 50
basis points of the Face Value of the delinquent or nonperforming loans subject
to Special Servicing), plus a 75 to 100 basis points resolution fee based on
the total cash flow from resolution of each such loan as it is received.  As of
December 31, 1996, the Company was the designated Special Servicer for
securitized pools holding approximately $10.0 billion (Face Value) of loans,
$618.0 million (Face Value) of which had been assigned to the Company for
resolution in its capacity as Special Servicer.  The Company believes that its
willingness to purchase participating interests in the delinquent or
nonperforming portion of a securitized portfolio provides the Company a
significant competitive advantage in pursuing Master/Full and Special Servicer
contracts.

Institutional Real Estate Investment Advisory Services Business

         General.  The Company believes that a market exists for quality real
estate advisory services to pension plans and other institutional investors in
commercial real estate.  The Company believes that through the targeted hiring
of high quality personnel with proven track records and the purchase of
advisory contracts from other advisors, the Company can become a major provider
of real estate advisory services to institutional real estate investors, such
as pension plans.  The Company's acquisition of substantially all of the
advisory contracts and the hiring of pension advisory personnel of Acacia was
the first step in the implementation of this strategy.  The Company principally
provides investment advice to various institutional investors (primarily
pension funds) seeking to invest a portion of their funds in real estate and
related investments.  The investors establish certain investment parameters
with the Company (e.g., amount of funds available for investment, type of
property, geographic mix, form of investment (loan, partnership, direct
ownership), target rate of





                                       9
<PAGE>   11
return and investment term).  The Company then seeks investment opportunities
it believes meet the investors' parameters.  The investors exercise varying
degrees of control over the Company's investment decisions.  Depending on the
amount of discretion granted by the client, the Company also will make a
recommendation, or the final decision, concerning whether to sell a particular
property and will direct the work necessary to complete the sale.  Although the
Company is paid acquisition and disposition fees by some of its clients, its
principal source of revenue is asset management fees, which are based on the
cash flow of the investments under management or are negotiated at the time of
the client's investment in a property.  For the year ended December 31, 1996,
$0.6 million (0.7%) of the Company's operating profits (before corporate and
other's operating loss) were attributable to the Company's institutional real
estate investment advisory services business.  As a result of the commencement
of this unit in late 1995, its operating profits in 1995 were insignificant.

         Investment Funds.  The Company is marketing to institutional investors
the opportunity to invest in Subordinated Certificates issued in commercial and
residential mortgage securitizations through investment funds being organized
by the Company.  The Company anticipates that its equity investment would range
between 10.0% and 20.0% of the total funds invested.  The Company believes that
it can apply to the underlying collateral the valuation and underwriting
expertise available in its asset management, commercial mortgage banking and
residential mortgage banking business groups, and thus take advantage of
investment opportunities that are presented by such Subordinated Certificates.
The Company also believes that acquiring Subordinated Certificates will
generate opportunities for the Company's asset management and servicing group.
The Company expects that a majority of its investments in these Subordinated
Certificates in the future will be through these funds.  As a policy, the
Company will not sell to these funds Subordinated Certificates created in
securitizations organized by the Company.  The funds will be marketed through
the Company's institutional real estate investment advisory group.

Commercial Finance Business

         General.  The Company's commercial finance business was formally
commenced in 1996 and has not contributed materially to the Company's revenues
or net income to date.  However, the Company intends to expand its commercial
finance business through acquisitions of targeted niche finance companies and
internal start-ups.  For the year ended December 31, 1996, $0.7 million (0.8%)
of the Company's operating profits were attributable to the Company's
commercial finance business.

         Special Situation Lending.  The Company currently provides high yield
debt financing for businesses and projects which are unable to access
traditional lending sources.  In such transactions, the Company funds senior
and subordinated indebtedness on a relatively short term basis for borrowers
with an established management record.  The Company funds only those loans with
defined exit strategies, such as bridge loans, mezzanine debt financing or
construction loans.  Loans are often extended for the purpose of turning around
or repositioning assets the value of which has not been maximized by the prior
owners.  Borrowers targeted by the Company typically have a reputation for
enhancing value, but may lack the financial capacity to qualify for bank
financing beyond a certain level.  High yield lenders such as the Company fill
this gap, earning equity-type returns through a combination of high interest
yields, fees and equity participations.  The Company has teamed with a Wall
Street investment bank as one means of providing such high yield debt
financing.

         Construction Finance.  In the first quarter of 1997, the Company hired
an experienced team formerly with a Texas-based financial institution to form
its construction finance unit.  Through this unit, the Company provides
construction financing for builders of single family residences.  Before
providing such financing, the Company analyzes the builder, the specific
subdivision and the specific home to be built.  In following this process, the
Company intends to target strong and growing markets and reputable builders of
basic single family residences who are successful and active in such markets.

Competition

         The Company's competition varies by business line and geographic
market.  Generally, competition within each of the business lines within which
the Company competes is fragmented, with national, local and regional
competitors, none of which dominates a particular business line.  Certain of
the Company's competitors within each of its business lines are larger and have
greater financial resources than the Company.

         The Company recently has encountered increased competition in the
market for Sub-prime Loans as more originators and Conduit Purchasers enter
this market.  This could impact origination and acquisition volume and profit
margins.  Certain of the Company's larger, national competitors have access to
greater financial resources and lower costs





                                       10
<PAGE>   12
of capital.  In addition, the Company believes that its ability to acquire
Asset Portfolios for its own account will be important to its future growth.
Recently, the Company has encountered increased competition in the market for
Asset Portfolios which could cause the Company to experience decreasing profit
margins in this business line in order to remain a competitive bidder for Asset
Portfolios.  In addition, declining profit margins presented by current bidding
opportunities has caused the Company to redeploy its capital in more profitable
product lines.  Asset Portfolio acquisitions also require significant capital.

         The Company also encounters significant competition in its other
business lines.  The commercial mortgage banking business is highly fragmented
with certain large national competitors and significant localized competition.
In addition, within the commercial loan origination and residential mortgage
securitization business access to, and the cost of, capital is critical to the
Company's ability to compete.  The Company must compete with numerous
competitors, many of which have superior access to capital sources and can
arrange or obtain lower cost capital for customers.

Employees

         At December 31, 1996, the Company and its subsidiaries employed 1,275
persons.  Of that total, 530 persons were employed in the Company's residential
mortgage banking group, 349 in the Company's commercial mortgage banking group,
210 in its asset management group, 32 in its institutional real estate
investment advisory business, 15 in its commercial finance business and 139 in
general administration.  The Company believes that its employee relations are
generally good.

Certain Definitions

         The following are certain defined terms used herein:

         "ACACIA" means Acacia Realty Advisors, Inc.

         "ACC" means AMRESCO Capital Corporation, a subsidiary of the Company.

         "AMRESCO RESIDENTIAL" means, collectively, ARCMI, ARMC and AMRESCO
Residential Credit Corporation, subsidiaries of the Company.

         "AMRESCO SERVICES"  means a division of AMRESCO Management, Inc., a
subsidiary of the Company.

         "ARCMI" means, AMRESCO Residential Capital Markets, Inc., a subsidiary
of the Company.

         "ARMC" means, AMRESCO Residential Mortgage Corporation, an indirect
subsidiary of the Company through which the Company acquired substantially all
the operating assets of Quality.

         "ASSET PORTFOLIO" means a pool or portfolio of performing,
non-performing or underperforming commercial, industrial, agricultural and/or
real estate loans.

         "BEI" means BEI Holdings, Ltd.

         "BEI MERGER" means the merger of Holdings with and into a subsidiary
of BEI on December 31, 1993.

         "CGW" means, collectively, CGW Southwest Partners I, L.P.  and CGW
Southeast Partners II, L.P.

         "COMPANY" means, unless otherwise stated herein or unless the context
otherwise requires, the Company and each of its subsidiaries.

         "CONDUIT PURCHASERS" means investment bankers and other financial
intermediaries who purchase or otherwise accumulate pools or portfolios of
loans having common features (e.g., real estate mortgages, etc.), with the
intent of securitizing such loan assets and selling them to a trust that
secures its funds by selling ownership interests in the trust to public or
private investors.





                                       11
<PAGE>   13
         "DUS"  means the Delegated Underwriting and Servicing program
established by Fannie Mae that permits a DUS approved lender to commit and
close loans for multifamily mortgages for resale to Fannie Mae without Fannie
Mae's prior approval of such loans.

         "EQS" means, collectively, EQ Services, Inc.  and Equitable Real
Estate Investment Management, Inc.

         "FACE VALUE" means, with respect to any loan or Asset Portfolio, the
aggregate unpaid principal balance of a loan or loans.

         "FANNIE MAE" means the Federal National Mortgage Association.

         "FDIC" means the Federal Deposit Insurance Corporation.

         "FREDDIE MAC" means the Federal Home Loan Mortgage Corporation.

         "HOLDINGS" means AMRESCO Holdings, Inc.

         "HOLLIDAY FENOGLIO" means Holliday Fenoglio, Inc., a subsidiary of the
Company.

         "MASTER SERVICER" means an entity which provides administrative
services to securitized pools of mortgage-backed securities.

         "NATIONSBANK OF TEXAS"  means NationsBank of Texas, N.A.

         "PRIMARY SERVICER" means an entity which provides various
administrative services for loans such as collecting monthly mortgage payments,
maintaining escrow accounts for the payment of ad valorem taxes and insurance
premiums on behalf of borrowers, remitting payments of principal and interest
promptly to investors in mortgages or the Master Servicer of a pool and
reporting to those investors or the Master Servicer on financial transactions
related to such mortgages.

         "QUALITY"  means Quality Mortgage USA, Inc., a California corporation.

         "QUALITY ACQUISITION"  means the Company's purchase of substantially
all the operating assets, and the assumption of certain liabilities, of Quality
Mortgage USA, Inc.

         "REVOLVING LOAN AGREEMENT"  means the Second Amended and Restated
Revolving Loan Agreement dated as of February 7, 1997 and as subsequently
amended, among the Company, NationsBank of Texas, as Agent, and the lenders
which are parties thereto from time to time

         "RTC" means the Resolution Trust Corporation.

         "SECURITIZATION" and "SECURITIZED" mean a transaction in which loans
originated or purchased by an entity are sold to special purpose entities
organized for the purpose of issuing asset-backed securities.

         "SUBORDINATED CERTIFICATES"  means the unrated and uninsured tranches
of collateralized residential or commercial mortgage-backed securities which
are included under the caption "Retained Interests in Securitizations- trading"
in the Company's consolidated balance sheet.

         "SUB-PRIME LOAN"  means a residential mortgage loan to borrowers who
do not qualify for conventional loans or whose borrowing needs are not met by
traditional residential mortgage lenders.  Such borrowers may not satisfy the
more rigid underwriting standards of the traditional residential mortgage
lending market for a number of reasons, such as blemished credit histories
(from past loan delinquencies or bankruptcy), inability to provide income
verification data or lack of established credit history

         "SPECIAL SERVICER" means an entity which provides asset management and
resolution services for non-performing or under-performing loans within a pool
of performing loans and/or mortgages.





                                       12
<PAGE>   14

ITEM 2.   PROPERTIES

         The Company leases approximately 130,000 square feet in the North
Tower of the Plaza of the Americas in Dallas, Texas for its centralized
corporate functions including executive, business development and marketing,
accounting, legal, human resources and support.  This lease has an initial
termination date of October 31, 2006 and has an initial annual base rent of
approximately $1.5 million.  The Company also leases space for branch offices
pursuant to leases with varying terms.

         The Company owns two buildings in Irvine, California aggregating
approximately 110,000 square feet of space which serve as the headquarters of
ARMC's operations.  The Company also owns another building in Irvine containing
approximately 40,000 square feet of space which is primarily used for servicing
and administrative functions of ARMC.  The Company is exploring its options
with respect to this building.

         The Company believes that its facilities are adequate for its
immediate needs and that additional or substitute space is available, if
needed, to accommodate expansion.

ITEM 3.   LEGAL PROCEEDINGS

         The Company is involved from time to time in various legal proceedings
arising in the ordinary course of business.  In connection with the Company's
loan servicing, asset management and resolution activities, the Company is
indemnified to varying degrees by the party on whose behalf the Company is
acting.  The Company also maintains insurance that management believes is
adequate for the Company's operations.  None of the legal proceedings in which
the Company is currently involved, either individually or in the aggregate (and
after consideration of available indemnities and insurance), is expected to
have a material adverse effect on the Company's business or financial
condition.

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

         No matters were submitted to a vote of the Company's security holders
during the fiscal quarter ended December 31, 1996.

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock (Symbol: AMMB) is listed on the Nasdaq
Stock Market.  At March 21, 1997, there were approximately 2,800 stockholders
of record of the Company's common stock.  Presented below are the high and low
quarterly bid prices for 1996 and 1995, as reported by NASDAQ, together with
quarterly dividends declared.  Quarterly dividends were discontinued beginning
with the fourth quarter of 1995 and the Company does not expect to declare
dividends on its common stock in the foreseeable future.

<TABLE>
<CAPTION>
                                  First          Second           Third           Fourth
                                 Quarter         Quarter         Quarter          Quarter
                              -------------   -------------   -------------   --------------
        <S>                         <C>             <C>             <C>              <C>
        1996 High                   $14.375         $18.875         $23.625          $26.750
        1996 Low                     11.750          14.500          17.000           20.750

        1995 High                    $6.875          $8.750         $13.250          $13.125
        1995 Low                      5.875           6.750           8.750            9.750
        1995 Dividends                0.050           0.050           0.050
</TABLE>

ITEM 6.  SELECTED FINANCIAL DATA

         The selected financial data set forth below for the five years ended
December 31, 1996 has been derived from the Company's audited consolidated
financial statements (in thousands of dollars, except per share amounts).  This
information should be read in conjunction with "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as the audited consolidated financial statements and notes
thereto included in "Item 8. Financial Statements and Supplementary Data."





                                       13
<PAGE>   15

<TABLE>
<CAPTION>
                                                                                                   PREDECESSOR
                                                          AMRESCO, INC. (1)                         BUSINESSES (2)
                                   --------------------------------------------------------------   -------------
                                                                                          TWO MONTHS     TEN MONTHS
                                   YEAR ENDED    YEAR ENDED    YEAR ENDED    YEAR ENDED      ENDED         ENDED
                                  DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  DECEMBER 31,   OCTOBER 31,
                                      1996         1995          1994          1993          1992           1992
                                  ------------  ------------  ------------  ------------   -----------   -----------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
 <S>                              <C>             <C>           <C>          <C>           <C>            <C>
 Operating Results:
 Revenues                         $   200,067     $110,486      $129,791      $122,401      $22,809        $87,538
  Income from continuing               31,332
 operations                                         18,665        20,933        26,306        3,883            (2)
 Net income                            31,332       21,090        18,748        24,218        3,735         23,307
 Earnings per share for income
   from continuing operations:
   Primary
                                         1.12         0.76          0.88          2.33         0.34            (3)
    Fully-diluted
                                         1.05         0.75          0.88          2.33         0.34            (3)
 Earnings per share:
   Primary                               1.12         0.86          0.79          2.15         0.33            (3)
 Fully-diluted                           1.05         0.85          0.79          2.15         0.33            (3)
 Dividends per share (4)                              0.15          0.20          0.35                         (3)
 Balance Sheet Data:
 Total assets                       1,075,941      521,713       172,340       163,653       44,238         59,049
 Long-term obligations                293,956      112,500                       6,000
 Total liabilities                    774,426      360,919        58,754        71,954       25,503         46,501
 Total shareholders' equity           301,515      160,794       113,586        91,699       18,735         12,548
---------------------------
</TABLE>

(1)      On December 31, 1993, AMRESCO, INC., formerly BEI, merged with
Holdings.  The merger was accounted for as a "reverse acquisition" whereby
Holdings was deemed to have acquired BEI for financial reporting purposes.
However, BEI, renamed AMRESCO, INC., remains the continuing legal entity and
registrant for Securities and Exchange Commission filing purposes.  Consistent
with the reverse acquisition accounting treatment, the historical financial
statements of AMRESCO, INC.  presented for the year ended December 31, 1993 are
the consolidated financial statements of Holdings and differ from the
consolidated financial statements of BEI as previously reported.  The results
of operations of BEI have been included in the Company's financial statements
from the date of acquisition.

(2)      The information for predecessor businesses represents the combined
financial and operating information for the businesses acquired effective
October 31, 1992.  Predecessor financial statements have not been restated for
the effect of discontinued operations.

(3)      Per share data for predecessor businesses are not presented as such
data are not comparable, due to changes in ownership and capital structure of
Holdings as a result of its acquisition by CGW.

(4)      In 1993 dividends of $0.35 were paid by Holdings to its shareholders
prior to the merger with BEI.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

         The Company is a leading specialty financial services company engaged
in residential mortgage banking, commercial mortgage banking, asset management,
institutional real estate investment advisory services and commercial finance.
The residential mortgage banking business involves originating, acquiring,
warehousing and securitizing non- conforming (sub-prime grade) loans.  The
commercial mortgage banking business involves the origination, underwriting,
placement and servicing of commercial real estate mortgages.  The asset
management business involves acquiring asset portfolios at a substantial
discount to face value and managing and resolving such asset portfolios to
maximize cash recoveries.  The Company's institutional real estate investment
advisory subsidiary provides real estate investment advice to various
institutional investors (primarily pension funds).  The commercial finance
business involves providing high yield debt financing for businesses and
projects which are unable to access traditional lending sources.





                                       14
<PAGE>   16
Results of Operations

         The following discussion and analysis presents the significant changes
in financial condition and results of continuing operations of the Company by
primary business line for the years ended December 31, 1996, 1995 and 1994.
The results of operations of acquired businesses are included in the
consolidated financial statements from the date of acquisition.  This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto (in thousands, except per share data).

<TABLE>
<CAPTION>
                                                    1996         1995         1994
                                                 ---------    ---------    ---------
<S>                                              <C>          <C>          <C>
Revenues:
    Residential mortgage banking .............   $  56,864    $   2,307
    Commercial mortgage banking ..............      54,625       26,573    $   6,460
    Asset management .........................      84,062       81,144      110,637
    Institutional real estate investment
        advisory .............................       4,693          452
    Commercial finance .......................       2,947
    Corporate and other ......................      (3,124)          10       12,694
                                                 ---------    ---------    ---------
        Total revenues .......................     200,067      110,486      129,791
                                                 ---------    ---------    ---------

Operating expenses:
    Residential mortgage banking .............      29,052        1,694
    Commercial mortgage banking ..............      40,131       20,550        6,237
    Asset management .........................      41,669       37,691       52,741
    Institutional real estate investment
       advisory ..............................       4,087          444
    Commercial finance .......................       2,252
    Corporate and other ......................      32,410       19,849       35,127
                                                 ---------    ---------    ---------
       Total operating expenses ..............     149,601       80,228       94,105
                                                 ---------    ---------    ---------

Operating profit:
    Residential mortgage banking .............      27,812          613
    Commercial mortgage banking ..............      14,494        6,023          223
    Asset management .........................      42,393       43,453       57,896
    Institutional real estate investment
       advisory ..............................         606            8
    Commercial finance .......................         695
    Corporate and other ......................     (35,534)     (19,839)     (22,433)
                                                 ---------    ---------    ---------
       Total operating profit ................      50,466       30,258       35,686

Income tax expense ...........................      19,134       11,593       14,753
                                                 ---------    ---------    ---------

Income from continuing operations ............      31,332       18,665       20,933
Gain (loss) from discontinued operations .....                    2,425       (2,185)
                                                 ---------    ---------    ---------


Net income ...................................   $  31,332    $  21,090    $  18,748
                                                 =========    =========    =========

Earnings per share from continuing operations:
   Primary ...................................   $    1.12    $    0.76    $    0.88
   Fully-diluted .............................        1.05         0.75         0.88

Earnings per share:
   Primary ...................................   $    1.12    $    0.86    $    0.79
   Fully-diluted .............................        1.05         0.85         0.79

Weighted average number of common shares
 outstanding and common share equivalents ....      28,099       24,654       23,679

</TABLE>

         In 1994, the Company concluded substantially all of its asset
management relationships with government agencies and financial institutions
and also began to shift its focus toward direct investment in asset portfolios
and the development of new lines of financial service businesses.  The Company
has extended its business lines to offer a full range of mortgage banking
services, increased the amount it invests in asset portfolios, developed its
institutional real estate investment advisory business, began its commercial
finance business and disposed of certain non-core business lines.  These
significant changes in the composition of the Company's business are





                                       15
<PAGE>   17
reflected in the Company's results of operations and may limit the
comparability of the Company's results from period to period.

         Residential mortgage banking activities represented approximately 28%
of revenues and 32% of operating profit (before corporate and other) of the
Company for the year ended December 31, 1996.  The Company believes that there
are significant opportunities in the non-conforming residential loan market and
consequently expects residential mortgage banking activities to represent an
increasing proportion of revenues and operating profits of the Company in the
future.

         Revenues from the Company's residential mortgage banking activities
consist of fees from originating residential mortgage loans, interest earned on
residential mortgage loans originated and purchased, gains on the
securitization and sale of such loans and other related securities and accrued
earnings on retained interests in securitizations.  The gains on securitization
and sale of mortgage loans and other related securities represent the amount by
which the proceeds received (including the estimated value of retained
interests) exceed the basis of the assets sold and the cost of securitization.
When loans are securitized and sold, the retained interests are valued at the
discounted present value of the cash flows expected to be realized over the
anticipated average life of the assets sold after future estimated credit
losses, estimated prepayments and normal servicing and other fees related to
assets sold.  Cash flows from retained interests in securitizations are
generally subordinated to other security holders in a securitization trust.
The discounted present value of such retained interests is computed using
management's assumptions of market discount rates, prepayment rates, default
rates, credit losses and other costs.

         Revenues from the Company's commercial mortgage banking activities are
earned from the origination and underwriting of commercial real estate mortgage
loans, the placement of such loans with permanent investors and the servicing
of loans.  Loan placement and servicing fees, commitment fees and real estate
brokerage commissions are recognized as earned.  Placement and servicing
expenses are charged to expense as incurred.

         Revenues from the Company's asset management activities primarily
consist of earnings on wholly-owned portfolios and fees charged for the
management of asset portfolios comprised of performing, non-performing or
under- performing real estate, commercial, industrial and agricultural loans
and for the successful resolution of the assets within such asset portfolios.
The original cost of an investment in an asset portfolio is allocated to
individual assets within that asset portfolio based on their relative fair
value to the total purchase price.  The difference between gross estimated cash
flows from loans and asset-backed and other securities and its present value is
accrued using the level yield method.  The level yield method recognizes income
as the product of the recorded investment and the expected rate of return.  The
expected rate of return is based upon estimated cash flows of the investments.
The recorded investment is reduced based on cash collections allocated to
principal.  The Company periodically evaluates the recoverability of the
recorded investments by reviewing the estimated remaining amount and timing of
cash flows and adjusts, if necessary, investments or expected rates of return.
The Company accounts for its investments in partnerships and joint ventures
using the equity method which generally results in the pass-through of its pro
rata share of earnings as if it had a direct investment in the underlying
loans.  Loans, partnerships and joint ventures, and real estate are carried at
the lower of cost or estimated fair value.  The Company's investments in
asset-backed and other securities are classified as available for sale and are
carried at estimated fair value determined by discounting estimated cash flows
at current market rates.  Any unrealized gains (losses) on asset-backed and
other securities are excluded from earnings and reported as a separate
component of shareholders' equity, net of tax effects.  The asset base of each
asset portfolio declines over the life of the asset portfolio, thus reducing
asset management fees as assets within the asset portfolio are resolved.  In
addition, management and resolution fees are earned from partnership and joint
ventures.  These fees are subject to fluctuation based on the consideration
received, timing of the sale or collection of the partnership and joint venture
assets and the attainment of specified earnings levels on behalf of investors
or investment partners.  Certain direct costs incurred, primarily through 1994,
in the management of assets for the Federal Deposit Insurance Corporation
("FDIC") were paid by the Company and billed to the FDIC.  With the U.S.
economy entering its approximate seventh year of an economic recovery, the
Company expects the asset management business to represent a smaller percentage
of consolidated revenues and operating profits in the future.

         Revenues from the Company's institutional real estate investment
advisory business are earned from providing real estate investment advisory
services, including acquisition, portfolio/asset management and disposition
services, to institutional and corporate investors.

         Revenues from the Company's commercial finance business are earned
from the origination and underwriting of commercial loans and interest earned
on such loans.





                                       16
<PAGE>   18
         Corporate and other revenues consist of consulting revenues earned on
due diligence, gains on sales of other assets, other miscellaneous income and
intercompany eliminations.  Corporate and other expenses include unallocated
interest expense, amortization of intangibles, corporate personnel and overhead
and certain incentive compensation.  Additionally, 1994 included a $10.0
million conclusion fee on a management contract with a financial institution.

         In December 1994, the Company elected to dispose of the operations of
its data processing and home banking subsidiary.  The loss from such
discontinued operations totaled approximately $2.2 million for the year ended
December 31, 1994.  The subsidiary was sold on June 16, 1995 for a net gain of
$2.4 million, or $0.10 per share.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

         The Company reported 1996 revenues of $200.1 million, an increase of
81% over 1995, and operating profit of $50.5 million, an increase of 67% over
1995.  The increases in both revenues and operating profit were primarily
related to growth in the residential and commercial mortgage banking segments.
Fully diluted earnings per share from continuing operations increased 40% over
1995 primarily due a 68% increase in income from continuing operations offset
by an increase in weighted average shares outstanding and equivalents used to
compute fully diluted per share amounts.  The increase in weighted average
shares outstanding and equivalents was primarily due to the issuance of 2.3
million shares of common stock in late 1995, the issuance of 3.0 million shares
of common stock in late 1996 and the impact of an increase in the Company's
common stock price on the computation of common stock equivalents.

         Residential Mortgage Banking -- The Company initiated the operation of
the residential mortgage banking business in September 1995.  Revenues for 1996
consisted of $39.8 million of interest and investment income, $16.9 million
from gain on sales of loans and investments and other revenues of $0.2 million.
Interest and investment income was earned primarily on residential mortgage
loans accumulated and held for securitization and sale, while $16.9 million in
gains were recorded from five securitizations of approximately $1.8 billion
(including $142.0 million in pre-funded loans) in residential mortgage loans.
Revenues for 1996 include $2.8 million in interest and other investment income,
$2.4 million in gain on sales of loans and investments and $0.5 million in
other revenues related to substantially all of the assets of Quality Mortgage
USA, Inc. ("Quality"), which were purchased by the Company effective October
25, 1996.  The Company originates non-conforming (sub-prime grade) residential
mortgage loans through a network which consisted of 50 offices in 32 states at
December 31, 1996.

         Operating expenses for the year ended 1996 consisted of $6.4 million
in personnel costs, $18.5 million in interest expense and $4.2 million in other
general and administrative expenses.  The $18.5 million in interest expense
primarily relates to borrowings under warehouse loans payable which funded the
origination, acquisition and holding of mortgage loans held for sale.  Expenses
for 1996 include $4.6 million in personnel costs, $1.1 million in interest
expense and $2.8 million in other general and administrative expenses related
to the operations acquired from Quality since October 25, 1996.

         Commercial Mortgage Banking --  Revenues for 1996 consisted of $14.3
million in interest and investment income, $40.0 million in mortgage banking
and servicing fees and $0.3 million in other revenues.  Interest and other
investment income increased $12.2 million and mortgage banking and servicing
fees increased $15.6 million due to the inclusion of the operations of the
commercial loan servicing business acquired in October 1995 and increases in
the loan origination and servicing volumes of the Company's previously existing
mortgage banking operations.

         Operating expenses for the year ended December 31, 1996 consisted of
$29.3 million in personnel expenses, $2.3 million in interest expense and $8.5
million in other general and administrative expenses.  The $19.7 million, or
97%, increase in expenses was primarily due to a $13.2 million increase in
personnel expenses, a $1.9 million increase in interest expense and a $4.6
million increase in other general and administrative expenses. The increase in
expenses was due to the inclusion of operations of the commercial loan
servicing business acquired in October 1995 and the growth in commercial
mortgage banking operations which were initiated in late 1994.

         Asset Management -- Revenues for 1996 consisted of $29.8 million in
management and resolution fees, $50.8 million in interest and other investment
income and $3.5 million in other revenues.  Management and





                                       17
<PAGE>   19
resolution fees decreased $10.4 million, or 26%, and interest and other
investment income increased $13.9 million, or 38%, over 1995 primarily due to a
shift from primarily managing and investing in partnerships and joint ventures
to investing in wholly-owned portfolios.  Aggregate investments of the asset
management business increased 49% from $203.0 million as of December 31, 1995
to $302.6 million at December 31, 1996.

         Operating expenses for the year ended December 31, 1996 consisted of
$18.2 million in personnel expenses, $15.3 million in interest expense and $8.2
million in other general and administrative expenses.  The $4.3 million, or
12%, increase in expenses over 1995 was primarily related to a $5.8 million, or
61%, increase in interest expense offset by a $1.7 million, or 9%, decrease in
personnel expenses.  Interest expense increased due to financing incurred on
the $99.6 million increase in aggregate investments, while personnel expenses
decreased in relation to the decrease in management and resolution fees due to
the shift in the revenue mix.

         Institutional Real Estate Investment Advisory -- The Company acquired
substantially all of the assets of Acacia Realty Advisors, Inc. ("Acacia") in
November 1995.  Revenues for 1996 totaled $4.7 million and were earned in
conjunction with providing real estate investment advisory services to
institutional and corporate investors, including acquisition, portfolio/asset
management and disposition services.  Expenses of $4.1 million were incurred in
1996, including $2.7 million in personnel expense, $0.1 million in interest
expense and $1.3 million in other general and administrative expenses.

         Commercial Finance --  The Company began operations of its commercial
finance business in 1996.  Revenues for 1996 totaled $2.9 million and were
earned in conjunction with providing high yield debt financing for businesses
and projects which were unable to access traditional lending sources.  Expenses
of $2.3 million were incurred in 1996, including $0.3 million in personnel
expenses, $1.0 million in interest expense and $1.0 million in other general
and administrative expenses.  In 1997, the Company also began providing
construction financing for builders of single family residences.

         Corporate and Other -- Corporate and other for 1996 increased $15.7
million, or 79%, over 1995.  The increase is primarily due to increases in
personnel costs and other overhead and interest expense related to expanded
operations.

         Income Taxes -- The Company must have future taxable income to realize
recorded deferred tax assets.  Certain of these benefits expire beginning in
2001 and are subject to annual utilization limitations.  Management believes
that recorded net deferred tax assets will be realized in the normal course of
business.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

         The Company reported 1995 revenues of $110.5 million, a 15% decrease
from 1994.  Operating profit also decreased 15% over the same period.  Revenues
and operating profits for 1994 included $10.0 million and $6.0 million,
respectively, related to the conclusion of an asset management contract.  After
adjustment for this one-time conclusion fee, 1995 revenues decreased 8% while
operating profits increased 2%.  Commercial mortgage banking posted a
significant increase in operating profit, while asset management operating
profit fell 25%.  Also, residential mortgage banking began its operations late
in 1995.  Fully-diluted earnings per share from continuing operations for 1995
were $0.75 compared to $0.73 for 1994, after elimination of the one-time
contract conclusion fee in 1994, a 3% increase.

         Residential Mortgage Banking -- The Company initiated the operation of
the residential mortgage banking business in September 1995.  Revenues for the
year ended December 31, 1995 consisted of $2.3 million in interest and other
investment income earned on mortgage loans held for sale, which totaled $142.7
million at December 31, 1995.

         Expenses for the year ended December 31, 1995 consisted of $0.4
million in personnel expense, $1.1 million in interest expense and $0.2 million
in other general and administrative expense.  Interest expense primarily
relates to borrowings under warehouse loans payable which funded the
acquisition and holding of mortgage loans held for sale.

         Commercial Mortgage Banking -- Revenues for the year ended December
31, 1995 consisted of $24.4 million in mortgage banking and servicing fees,
$2.1 million in interest and other investment income and $0.1 million in other
income.  Mortgage banking revenues increased $18.2 million primarily due to the
inclusion for an entire year of the operations of Holliday Fenoglio, Inc.
("Holliday Fenoglio") which was purchased in





                                       18
<PAGE>   20
August 1994, AMRESCO Capital Corporation's ("ACC") underwriting activities
commencing in the fourth quarter of 1994 and the securitized commercial loan
servicing contracts acquired in the fourth quarter of 1995.

         Expenses for the year ended December 31, 1995 were comprised of $16.1
million in personnel expense, $4.0 million in other general and administrative
expense and $0.3 million in interest expense.  The $14.2 million increase in
expenses from the prior year was primarily due to an $11.2 million increase in
personnel expenses, a $2.7 million increase in other general and administrative
expense and a $0.3 million increase in interest expense.  Expenses increased
due to the inclusion of operations of Holliday Fenoglio, ACC and the commercial
loan servicing business acquired.

         Asset Management  -- Revenues for 1995 were comprised of $40.1 million
in asset management and resolution fees, $36.9 million in interest and other
investment income and $4.1 million in other revenues, primarily consulting
revenues and gains on sales of investments.  The $29.5 million, or 27%,
decrease in revenues from 1994 was comprised of a $53.6 million decrease in
management and resolution fees due to the conclusion of significant
institutional and government contracts during 1994 and early 1995.  These
declines were partially offset by a $23.0 million increase in interest and
other investment income, which related to an increase in aggregate investments
of $138.6 million from December 31, 1994, and a $1.1 million increase in other
revenues.

         Expenses for the year ended December 31, 1995 were comprised of $21.1
million in personnel costs, $7.1 million in other general and administrative
expenses and $9.5 million in interest expense.  The $15.1 million, or 29%,
decrease in expenses was primarily due to an $18.5 million decrease in
personnel expenses and a $3.8 million decrease in other general and
administrative expenses, which decreases were partially offset by a $7.2
million increase in interest expense.  Personnel and other general
administrative expenses decreased as significant institutional and government
contracts concluded during 1994, including a related $3.7 million reduction in
estimate of an accounts receivable bad debt reserve and other accrued expenses
related to certain concluded asset management contracts, partially offset by
$4.0 million received related to certain expired RTC contracts, approximately
40% of which was due to a joint venture partner.  The increase in interest
expense was due to the financing incurred for a $138.6 million increase in
aggregate investments.

         Institutional Real Estate Investment Advisory -- After the acquisition
of the assets of Acacia in November 1995, revenues of $0.5 million were earned
as the result of providing real estate investment advisory services to
institutional and corporate investors. Expenses of $0.4 million were incurred
in 1995, including $0.2 million in personnel expense and $0.2 million in other
general and administrative expenses.

         Corporate and Other -- Revenues for the year ended December 31, 1995
were nominal, compared to $12.7 million in 1994.  The $12.7 million decrease in
revenues was primarily due to a $10.0 million conclusion fee on a significant
institutional asset management contract and $3.8 million relating to the
inclusion in 1994 of operations and sale of a subsidiary for the period prior
to its sale in the first quarter of 1994.

         Expenses for the year ended December 31, 1995 were $19.8 million,
compared to $35.1 million during 1994, a 44% decrease.  The $15.3 million
decrease was primarily due to the inclusion of $6.0 million of expenses in 1994
related to the conclusion of a significant institutional asset management
contract as well as reduced incentive compensation costs and severance costs.

         Income Taxes -- The decrease in the effective income tax rate for the
year ended December 31, 1995 was primarily due to permanent tax differences
related to mortgages sold by a partnership in which the Company owns an
interest for which the acquired tax basis exceeded the book basis.

Liquidity and Capital Resources

         Cash and cash equivalents totaled $29.0 million at December 31, 1996,
compared to $16.1 million at December 31, 1995.  Cash flows from operating
activities plus, principal cash collections on investments in asset portfolios
and proceeds from the sale of and collections on trading and available for sale
investments, totaled $56.6 million for 1996, compared to $77.9 million for
1995.  The decrease in cash flows from these activities resulted primarily from
an increase in mortgage loans held for sale in 1996.  Cash for investing,
originating and underwriting loans, acquiring loans for securitization, general
operating expenses and business acquisitions is primarily obtained through cash
flow from operations and credit facilities, including advances on the corporate
and portfolio credit lines, mortgage warehouse lines, nonrecourse debt,
subordinated debt, retained earnings and cash flow from owned investments.





                                       19
<PAGE>   21
<TABLE>
<CAPTION>
                                                                                                                   1996       1995
                                                                                                                  ------     ------
                                                                                                              (DOLLARS IN MILLIONS)
<S>                                                                                                                 <C>     <C>
   Cash flows from operations, collections on investments, and proceeds from and
     collections on trading and available for sale investments ..................................................   $56.6  $  77.9
   Cash flows from operations ...................................................................................   (98.6)     7.7
   Cash provided by new capital and borrowings, net (excluding warehouse loans payable) ........................    283.6    181.4
   Cash used for purchase of investments .......................................................................   (240.8)  (221.8)
   Cash used for purchase of subsidiaries .......................................................................   (57.4)   (22.3)
   Ratio of total debt to equity (excluding investment line) ...................................................    2.3:1    1.9:1
   Ratio of core debt to equity (excluding warehouse debt and investment line) ..................................   1.1:1    0.9:1
   Interest coverage ratio * ....................................................................................    2.6x     6.0x
</TABLE>

*        Interest coverage ratio means the ratio of earnings before interest,
         taxes, depreciation and amortization to cash interest expense.

         The following table shows the components of the Company's capital
structure, including certain short-term debt, at December 31, 1996 and 1995
(dollars in millions):

<TABLE>
<CAPTION>

                                                                         1996   % OF TOTAL       1995    % OF TOTAL
                                                                        ------     ---           ------     ---
<S>                                                                     <C>         <C>          <C>         <C>
      Shareholders' equity  . . . . . . . . . . . . . . . . . .         $301.5      30%          $160.8      35%
      Senior notes  . . . . . . . . . . . . . . . . . . . . . .           57.5       6
      Senior subordinated notes . . . . . . . . . . . . . . . .           57.5       6
      Convertible debt  . . . . . . . . . . . . . . . . . . . .                                    45.0      10
      Mortgage warehouse loans  . . . . . . . . . . . . . . . .          354.6      36            153.2      33
      Notes payable (excluding investment line) . . . . . . . .          225.9      22            105.9      22
                                                                        ------     ---           ------     ---
                                                                        $997.0     100%          $464.9     100%
                                                                        ======     ===           ======     ===
</TABLE>

         Total assets have more than doubled from $521.7 million at December
31, 1995 to $1,075.9 million at December 31, 1996.  The increase is primarily
due to increases in mortgage loans held for sale, retained interests in
securitizations resulting from 1996 securitizations, an increase in investments
in asset portfolios and an increase in intangible assets, primarily related to
the acquisition of the assets of Quality.  These increases were financed by
increased net borrowings and an increase in shareholders' equity primarily
related to a common stock offering of 3.0 million shares in late 1996 and the
earnings of the Company in 1996.

         On February 7, 1997, the Company and certain of its subsidiaries
amended its revolving loan agreement with NationsBank of Texas and other
lenders ("Revolving Loan Agreement").  The Revolving Loan Agreement provides
for a $350.0 million credit facility consisting of a $275.0 million revolving
credit facility and a $75.0 million term facility.  This replaced a revolving
loan agreement which previously provided a $200.0 million revolving credit
facility. The interest rate may be selected by the Company and tied to either
NationsBank of Texas' variable rate (8.3% at December 31, 1996) or, for
advances on a term basis up to approximately 180 days, a rate equal to an
adjusted LIBOR rate (7.0% at December 31, 1996 for a term of 30 days) or, on
borrowings funded in foreign currency, an adjusted currency rate (7.7% at
December 31, 1996).  At December 31, 1996, there was a total of $179.0 million
outstanding under the Revolving Loan Agreement.  The Revolving Loan Agreement
continues to be secured by substantially all of the assets of the Company not
pledged under other credit facilities, including stock of a majority of the
Company's subsidiaries.  The revolving credit facility portion of the Revolving
Loan Agreement matures on May 31, 1998 and the term facility portion of the
Revolving Loan Agreement matures on May 31, 2000.





                                       20
<PAGE>   22
         In 1996, the Company completed two offerings of debt instruments: (i)
$57.5 million principal amount of Senior Subordinated Notes, bearing interest
at 10% per annum and due 2003 and (ii) $57.5 million principal amount of Senior
Notes bearing interest at 8.75% per annum and due 1999.  The net proceeds of
this indebtedness were used to repay indebtedness incurred under the Revolving
Loan Agreement (or its predecessor).  In addition, the Company sold an
aggregate of 3.0 million shares of its common stock in November and December
1996.  The net proceeds (approximately $60.4 million) were used to repay
indebtedness under the Revolving Loan Agreement (or its predecessor).  All the
holders of the $45.0 million aggregate principal amount of Convertible
Subordinated Debentures converted their debentures into an aggregate of 3.6
million shares of the Company's common stock in December 1996.

         In June 1996, the Company filed a shelf registration statement (the
"Shelf Registration") to register up to an aggregate of $250.0 million in debt
or equity securities of the Company.  An aggregate of $57.5 million in Senior
Notes were issued in 1996 and in March 1997 an aggregate of $192.5 million in
Senior Subordinated Notes were issued pursuant to the Shelf Registration.  See
Note 14 to the Company's consolidated financial statements.

         On February 7, 1997, the Company and certain of its subsidiaries
entered into a bridge loan facility with NationsBank of Texas ("Bridge Loan
Facility"), which provides the Company a $25.0 million line of credit.
Indebtedness under the Bridge Loan Facility is secured with the same collateral
securing the Revolving Loan Agreement and generally bears interest at a rate
based upon the adjusted LIBOR Rate (as defined in the note evidencing the
Bridge Loan Facility) plus 200 basis points.  Under certain circumstances,
interest under the Bridge Loan Facility will accrue at NationsBank of Texas'
prime rate.  The Bridge Loan Facility matures on April 30, 1997, subject to the
Company's one-time qualified right to renew the facility for a 1 year period.

         A wholly-owned subsidiary of the Company has entered into a warehouse
facility (the "Prudential Warehouse Facility") with Prudential Securities
Credit Corporation.  The Prudential Warehouse Facility is currently a $500.0
million credit facility used to finance the acquisition and warehousing of
certain residential mortgage loans.  At December 31, 1996, a total of $171.2
million was outstanding under the Prudential Warehouse Facility bearing
interest at 6.8% per annum.  The Prudential Warehouse Facility is secured by
all residential mortgage loans acquired using funds obtained under this
facility.

         A wholly-owned subsidiary of the Company has entered into a warehouse
credit facility with Morgan Stanley Mortgage Capital Inc., (the "Morgan Stanley
Warehouse Facility").  The Morgan Stanley Warehouse Facility provides for a
maximum borrowing capacity of $200.0 million to finance the origination or
acquisition, and/or the funding of the origination or acquisition, of certain
mortgage loans.  As of December 31, 1996, $116.0 million was outstanding under
the Morgan Stanley Warehouse Facility bearing interest at 6.2% per annum. This
facility is secured by the mortgages originated or acquired using funds
obtained under the facility.

         CS First Boston Mortgage Capital Corp. has agreed to provide a
wholly-owned subsidiary of the Company with a warehouse facility in an amount
not to exceed $500.0 million (the "CSFB Warehouse Facility"), to finance the
acquisition and warehousing of certain residential mortgage loans.  As of
December 31, 1996, no indebtedness was outstanding under this facility.  This
facility will be secured by the mortgages acquired using funds obtained under
the facility.

         In 1996, the Company received approximately $44.0 million of net
proceeds from the sale of certain retained interests in securitizations held by
the Company.  The proceeds from this sale were used to reduce outstanding
borrowings under the predecessor to the Revolving Loan Agreement.  Although the
Company intends, from time to time, to continue to pursue opportunities to sell
other retained interests in securitizations to generate additional borrowing
capacity under its Revolving Loan Agreement and reduce the Company's capital
exposure with respect to retained interests in securitizations, no assurance
can be given that such opportunities will be available in the future.

         On October 17, 1996, a wholly-owned subsidiary of the Company entered
into a master repurchase agreement (the "DLJ Master Repurchase Agreement") with
DLJ Mortgage Capital, Inc.  to support the purchase of retained interests in
securitizations and warehouse loans acquired from Quality.  As of December 31,
1996, $20.3 million was outstanding under the DLJ Master Repurchase Agreement
bearing interest at 6.3% to 6.8% per annum.





                                       21
<PAGE>   23
         During the next twelve months, the Company intends to pursue (i)
expansion of current businesses, (ii) additional asset management investments,
both for its own account and as an investor with various capital partners who
acquire such investments, (iii) additional loans by the commercial finance
business and (iv) acquisitions of new businesses.  The funds for such
expansion, investments and acquisitions are anticipated to be provided by cash
flows, borrowings under the Revolving Loan Agreement and debt and equity
offerings.  As a result, interest expense for 1997 is expected to be higher
than interest expense for 1996.

         The Company believes its funds on hand of $29.0 million at December
31, 1996, cash flow from operations, its unused borrowing capacity under its
credit lines and its continuing ability to obtain financing should be
sufficient to meet its anticipated operating needs and capital expenditures, as
well as planned new acquisitions and investments, for at least the next twelve
months.  The magnitude of the Company's acquisition and investment program will
be governed by the availability of capital.

OTHER MATTERS

         On March 21, 1997, the Company entered into a definitive stock and
asset purchase agreement among Commercial Lending Corporation and certain of
its affiliates ("CLC") pursuant to which the Company would acquire the
operations and certain assets of CLC.  CLC's primary line of business is
originating, securitizing and servicing franchise loans.  The acquisition
should enhance and complement the Company's commercial finance group.  The
purchase price consists of (i) approximately 1.9 million shares of the
Company's common stock, (ii) the assumption of certain liabilities estimated at
$14,000,000 and (iii) contingent earnout payments of additional shares of the
Company's common stock based upon the operating performance of the acquired
entities through March 31, 2000.  The consumation of the transaction is subject
to satisfaction of certain conditions.  The transaction is expected to close in
late March 1997.

         In 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No.  121, "Accounting for the Impairment of Long-Lived
Assets and for Long Lived Assets to be Disposed of," which did not have a
significant impact upon the Company's financial position or results of
operations.  The Company also adopted SFAS No.  123, "Accounting for
Stock-Based Compensation," which requires financial statements to include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them.  The Company continues to
measure compensation costs using APB Opinion No.  25, "Accounting for Stock
Issued to Employees," and therefore has included pro forma disclosures in the
notes to the financial statements for all awards granted after December 31,
1994.  The Company has disclosed the pro forma net income and pro forma
earnings per share as if the fair value based accounting method in SFAS No.
123 had been used to account for stock-based compensation cost.

         SFAS No.  125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," is effective for transfers of
financial assets and extinguishment of liabilities occurring after December 31,
1996 and is to be applied prospectively.  The Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities.  The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings.  Management does not believe the impact of the adoption
of this Statement will have a material impact on its financial position or
results of operations.  SFAS No. 128, "Earnings Per Share," is effective for
earnings per share calculations and disclosures for periods ending after
December 15, 1997, including interim periods, and requires restatement of all
prior period earnings per share date that is presented.  The statement
supersedes APB Opinion No. 15, "Earnings Per Share," and provides reporting
standards for calculating "Basic" and "Diluted" earnings per share.  Management
does not believe the impact of the adoption of this statement will have a
material impact on its earnings per share computations.

PRIVATE LITIGATION SECURITIES REFORM ACT OF 1995

         This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties.  The
forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.  The factors that could cause
actual results to differ materially include the following: industry conditions
and competition, interest rates, business mix, availability of additional
financing, and the risks described from time to time in the Company's reports
to the Securities and Exchange Commission.





                                       22
<PAGE>   24
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Index to Financial Statements on Page F-1 of this Annual Report on
Form 10-K.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this Item is set forth under the caption
"Management" in the Company's definitive Proxy Statement (the "Proxy
Statement"), which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is
incorporated by reference.

ITEM 11.   EXECUTIVE COMPENSATION

         The information required by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is incorporated herein by reference.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is
incorporated herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item is set forth under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which
will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934 and is incorporated
herein by reference.

                                    PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(1)  Financial Statements

         See Index to Financial Statements on page F-1 of this Annual Report on
Form 10-K.

(2)  Financial Statement Schedules

         Financial statement schedules under the applicable rules and
regulations of  the Securities and Exchange Commission have been omitted as the
schedules are not applicable or the information required thereby is included in
the Company's consolidated financial statements or notes thereto.

(3)  Exhibits

         The following instruments are included as exhibits to the report.
Exhibits incorporated by reference are so indicated.





                                       23
<PAGE>   25
<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER    DESCRIPTION OF EXHIBIT
        ------    ----------------------
<S>         <C>
            2.(a) Agreement for Purchase  and Sale of  Assets, dated as of  July 28, 1994, among  Holliday Fenoglio
                  Dockerty &  Gibson,  Inc.,  Holliday  Fenoglio  Dockerty &  Gibson  of  Dallas,  Inc.,   Holliday
                  Fenoglio & Monte, Inc.  and 3003,  Inc.  and Holliday Acquisition Corp., filed as Exhibit 2.1  to
                  Registrant's Current  Report on  Form 8-K dated August 15,  1994, which  exhibit is  incorporated
                  herein by reference.
            3.(a) Restated  Certificate of Incorporation,  filed as Exhibit 3(i) to the  Registrant's Form 10-Q for
                  the quarter ended September 30, 1995, which exhibit is incorporated herein by reference.
              (b) Amended and Restated Bylaws effective as of February 25, 1997.(1)
            4.(a) See Exhibits 3(a) and (b).
              (b) Indenture, dated as  of November 27, 1995,  between the Registrant  and First Interstate  Bank of
                  Texas,  National  Association  in  respect  of  the  Registrant's  8%  Convertible   Subordinated
                  Debentures  due 2005, filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-3
                  (No.  33-63683), which exhibit is incorporated herein by reference.
              (c) Indenture, dated as of January 15, 1996, between the Registrant and  Bank One, Columbus, N.A., as
                  trustee,  filed as Exhibit 4.1 to the Registrant's Form 8-K dated February 2, 1996, which exhibit
                  is incorporated herein by reference.
              (d) Indenture, dated as of March 1, 1997, between the Company and Bank One, Columbus, N.A., as
                  trustee, filed as Exhibit 4.1 to the Registrant's Form 8-K dated March 12, 1997, which exhibit is
                  incorporated herein by reference.
              (e) Officers' Certificate and Company Order dated as of March 12, 1997, establishing the terms of the
                  Company's Senior Subordinated Notes, Series 1997-A due 2004, filed as Exhibit 4.2 to the
                  Registrant's Form 8-K dated March 12, 1997, which exhibit is incorporated herein by reference.
              (f) Specimen Common Stock  Certificate, filed as exhibit 4.4  to the Company's Registration Statement
                  on Form S-3 (No. 33-63683), which exhibit is incorporated herein by reference.
           10.(a) Form  of Indemnification Agreement together  with a list  of all officers and  directors who have
                  signed such agreement, filed as  Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for
                  the year ended October 31, 1987, which exhibit is incorporated herein by reference.
              (b) Form  of Indemnification  Agreement dated  as of  August 24, 1993,  together with  a list  of all
                  officers  and  directors  who  have   signed  such  agreement,  filed  as  Exhibit 10(g)  to  the
                  Registrant's Quarterly  Report on  Form 10-Q  for the  quarter  ended September 31,  1993,  which
                  exhibit is incorporated herein by reference.
              (c) Fifth Amended and  Restated Incentive Stock Option  Plan dated as of November 20, 1990,  filed as
                  Exhibit 10(h) to  the Registrant's  Annual Report on  Form 10-K for the  year ended  December 31,
                  1991, which exhibit is incorporated herein by references.(2)
              (d) Fourth  Amended and  Restated  Stock  Option  Plan  dated  as  of  November 20,  1991,  filed  as
                  Exhibit 10(i)  to the  Registrants Annual  Report on  Form 10-K for  the year  ended December 31,
                  1991, which exhibit is incorporated herein by reference.(2)
              (e) Stock  Option  Agreement,  dated as  of  April 17,  1990,  between  the  Registrant and  Bruce W.
                  Schnitzer,  and Termination  of  Warrant between  Mr.   Schnitzer  and the  Registrant,  filed as
                  Exhibit 10(s)  to the  Registrant's Annual  Report on  Form 10-K for  the year  ended October 31,
                  1990, which exhibit is incorporated herein by reference.(2)
              (f) Promissory Note dated October 31, 1990 issued by James P.  Cotton, Jr.  to the Registrant,  filed
                  as Exhibit 10(s) to  the Registrant's Annual Report on  Form 10-K for the year  ended October 31,
                  1990, which exhibit is incorporated herein by reference.
              (g) Promissory Note dated October 31, 1990 issued by Gerald E.  Eickhoff to the  Registrant, filed as
                  Exhibit 10(w) to  the Registrant's Annual Report  Form 10-K for the year  ended October 31, 1990,
                  which exhibit is incorporated herein by reference.
              (h) Registrant's  1993 Key  Individual Stock Option  Plan filed as Exhibit 10(z)  to the Registration
                  Statement of Registrant on Form S-4 under the  Securities Act of 1993 (File No.  33-72732), which
                  exhibit is incorporated herein by reference.(2)
              (i) Indemnification Agreement, dated  March 30, 1993, between AMRESCO Holdings,  Inc.  and Richard L.
                  Cravey, filed  as Exhibit 10(ab)  to the  Registrant's Annual  Report on  Form 10-K for  the year
                  ended December 31, 1993, which exhibit is incorporated herein by reference.
              (j) Indemnification  Agreement,  dated  March 30,  1993,  between  AMRESCO  Holdings,  and William S.
                  Green, filed as Exhibit 10(ac) to the Registrant's Annual Report on  Form 10-K for the year ended
                  December 31, 1993, which exhibit is incorporated herein by reference.
              (k) The Registrant's Retirement  Savings and Profit Sharing Plan and Trust filed as Exhibit 10(ag) to
                  the Registrant's Annual Report on Form 10-K  for the year ended December 31, 1993,  which exhibit
                  is incorporated herein by reference.(2)
              (l) The Registrant's  Retention Bonus Plan, as  amended, filed as Exhibit 10(ah)  to the Registrant's
                  Annual Report  on Form 10-K  for the  year ended  December 31, 1993  and as Exhibit 10(y)  to the
                  Registration Statement of the Registrant on Form S-4 under  the Securities Act of 1993 (File  No.
                  33-72321), which exhibits are incorporated herein by reference.(2)
</TABLE>





                                       24
<PAGE>   26
<TABLE>
<S>               <C>                                                     <C>
              (m) The Registrant's Severance Pay Plan filed as Exhibit 10(ai) to the Registrant's  Annual Report on
                  Form 10-K  for  the  year ended  December 31,  1993,  which  exhibit  is  incorporated herein  by
                  reference.(2)
              (n) The  Registrant's Thrift  Restoration Plan  filed as  Exhibit 10(ak)  to the  Registrant's Annual
                  Report on  Form 10-K for the year  ended December 31, 1993, which  exhibit is incorporated herein
                  by reference.(2)
              (o) Employment Agreement, dated  as of May 31,  1994, between  Registrant and  Robert H.   Lutz, Jr.,
                  filed  as Exhibit 10(y)  to the  Registrant's Form 10-K  for the  fiscal year  ended December 31,
                  1994, which exhibit is incorporated herein by reference.(2)
              (p) Warehousing Credit and Security Agreement, dated as  of August 15, 1995, between AMRESCO  Capital
                  Corporation and  Residential Funding  Corporation,  filed as  Exhibit 10(a) to  the  Registrant's
                  Form 10-Q/A No.   1  dated  October 25, 1995  for  the quarter  ended September 30,  1995,  which
                  exhibit is incorporated herein by reference.
              (q) Second Amendment to  Agreement for Purchase and Sale of  Assets, dated November 21, 1995,  by and
                  among the  Registrant,  Holliday  Fenoglio, Inc.    and certain  sellers and  shareholders  named
                  therein  filed  as Exhibit 10(am)  to  the  Registrant's  Form 10-K for  the  fiscal  year  ended
                  December 31, 1995, which exhibit is incorporated herein by reference.
              (r) Amendment  to Stock  Option Agreement,  dated as  of  April 1, 1995,  between the  Registrant and
                  Bruce W.  Schnitzer  filed as Exhibit 10(an) to  the Registrant's Form 10-K  for the fiscal  year
                  ended December 31, 1995, which exhibit is incorporated herein by reference.(2)
              (s) Lease Agreement, dated as  of February 9,  1996, between K-P  Plaza Limited  Partnership and  the
                  Registrant filed  as  Exhibit 10(ao) to  the Registrant's  Form 10-K for  the  fiscal year  ended
                  December 31, 1995, which exhibit is incorporated herein by reference.
              (t) Interim  Warehouse and  Security  Agreement,  dated as  of  February 23, 1996,  among  Prudential
                  Securities Realty  Funding Corporation  and  AMRESCO Residential  Mortgage Corporation  filed  as
                  Exhibit 10(ap) to the  Registrant's Form 10-K for the fiscal  year ended December 31, 1995, which
                  exhibit is incorporated herein by reference.
              (u) Second Amended and  Restated Loan Agreement dated  as of February  7, 1997 by and  among AMRESCO,
                  INC.  and certain of its  subsidiaries and NationsBank  of Texas, N.A. and  certain other lenders
                  designated therein filed  as Exhibit 10.1 to  the Registrant's Form 8-K  dated February 20, 1997,
                  which exhibit is incorporated herein by reference.
              (v) Letter Agreement related  to the Bridge Loan, dated February  7, 1997 by and  among AMRESCO, INC.
                  and certain  of its subsidiaries  and NationsBank  of Texas, N.A.  filed as Exhibit  10.2 to  the
                  Registrant's Form  8-K  dated  February  20,  1997,  which  exhibit  is  incorporated  herein  by
                  reference.
              (w) Promissory Note related  to the Letter  Agreement dated  February 7, 1997 by  and among  AMRESCO,
                  INC. and certain of its subsidiaries and NationsBank of Texas, N.A. filed as Exhibit 10.3  to the
                  Registrant's  Form  8-K  dated  February  20,  1997,  which  exhibit is  incorporated  herein  by
                  reference.
              (x) Form of Severance Agreement,  dated as of May 29, 1996, with Robert H Lutz, Jr., Robert L. Adair,
                  Barry L. Edwards, L. Keith Blackwell, Ronald B. Kirkland and Ronald Castleman. (1) (2)
              (y) Form of Letter Agreement, dated as of March 20, 1997,  with Harold E. Holliday, Jr. and Scott  J.
                  Reading. (1) (2)
              (z) Incentive  Compensation  Program,  dated  August  15,  1996,  for  certain  employees  of AMRESCO
                  Residential Credit Corporation. (1) (2)
             (aa) AMRESCO Deferred Compensation Program, Dated as of January 1, 1996. (1) (2)
             (ab) Amendment No. 1 to AMRESCO Deferred Compensation Program, dated December 31, 1996. (1) (2)
             (ac) AMRESCO, INC. 1997 Stock Option Plan. (1) (2)
             (ad) AMRESCO, INC. 1995 Stock Option and Award Plan, as amended and restated. (1) (2)
              11. Statement re: Computation of Per Share Earnings.(1)
              21. Subsidiaries of the Registrant.(1)
           23.(a) Consent of Independent Auditors-Deloitte and Touche L.L.P.(1)
              (b) Consent of Independent Auditors-Coopers and Lybrand L.L.P.(1)
              24. Power of Attorney of the Directors and certain officers of the Registrant.(1)
              27. Financial Data Schedule.(1)
</TABLE>





                                       25
<PAGE>   27

(1)      Filed herewith.

(2)      Management contract or compensatory plan or arrangement required to be
         filed as an exhibit pursuant to Item 14(c) of this Report.

Reports on Form 8-K

         During the fiscal quarter ended December 31, 1996, the Company filed
one Current Report on Form 8-K, which reported information under Item 2
(Acquisition of Assets) dated November 6, 1996 and subsequently amended on Form
8-K/A dated October 25, 1996.





                                       26
<PAGE>   28


                         INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                ----
    <S>                                                                                                          <C>
     I.  Financial Statements of AMRESCO, INC. and Subsidiaries

      Consolidated Balance Sheets, December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . .       F-2
      Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994  . . . . . . .       F-3
      Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994        F-4
      Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994  . . . . .       F-5
      Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       F-6
      Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      F-22

    II. Financial Statements of Quality Mortgage USA, Inc. and Subsidiaries

       Report of Independent Accountants  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      F-23
       Consolidated Balance Sheets, September 30, 1996 and 1995   . . . . . . . . . . . . . . . . . . . . .      F-24
       Consolidated Statements of Income for the Years Ended September 30, 1996 and 1995  . . . . . . . . .      F-25
       Consolidated Statement of Stockholders' Equity for the Years Ended September 30, 1996 and 1995   . .      F-26
       Consolidated Statements of Cash Flows for the Years Ended September 30, 1996 and 1995  . . . . . . .      F-27
       Notes to Consolidated Financial Statements   . . . . . . . . . . . . . . . . . . . . . . . . . . . .      F-28
</TABLE>





                                      F-1
<PAGE>   29
                        AMRESCO, INC.  AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
                    (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                                                                 1996           1995
                                                                                               ----------       --------
 <S>                                                                                        <C>            <C>
                                           ASSETS
 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $ 29,046        $16,139
 Temporary investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         34,190         21,942
 Accounts receivable, net of reserves of $1,611 and $1,737, respectively . . . . . . . . .         12,243         18,576
 Mortgage loans held for sale, net  (Note 3) . . . . . . . . . . . . . . . . . . . . . . .        374,536        160,843
 Loans, net (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         42,188          3,389
 Investments in purchased loan and other asset portfolios  (Note 3)  . . . . . . . . . . .        251,060        176,753
 Asset backed securities - available for sale  (Note 4)  . . . . . . . . . . . . . . . . .         55,678         34,038
 Retained interests in securitizations - trading (Note 4)  . . . . . . . . . . . . . . . .        130,328         12,149
 Deferred income taxes  (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         13,285         12,184
 Premises and equipment, net of accumulated depreciation of $5,285 and $2,335,
   respectively  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         18,228          5,904
 Intangible assets, net of accumulated amortization of $11,110 and $4,136, respectively            87,219         49,863
   (Note 2)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 Other assets (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         27,940          9,933
                                                                                               ----------       --------


 TOTAL ASSETS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $1,075,941       $521,713
                                                                                               ==========       ========




                            LIABILITIES AND SHAREHOLDERS' EQUITY
 LIABILITIES:
   Accounts payable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $      15,988  $      14,124
   Accrued employee compensation and benefits (Note 11)  . . . . . . . . . . . . . . . . .         14,521         10,487
   Notes payable  (Note 7)   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        260,092        127,796
   Warehouse loans payable  (Note 7)   . . . . . . . . . . . . . . . . . . . . . . . . . .        354,562        153,158
     Senior notes  (Note 7)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         57,500
     Senior subordinated notes  (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . .         57,500
   Convertible debt  (Note 7)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        45,000
   Income taxes payable  (Note 8)  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          3,742          2,897
   Other liabilities   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         10,521          7,457
                                                                                               ----------       --------
      TOTAL LIABILITIES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        774,426        360,919
                                                                                               ----------       --------

 COMMITMENTS AND CONTINGENCIES  (Notes 12 and 13)
 SHAREHOLDERS' EQUITY (Note 10):
   Common stock, $0.05 par value, authorized 50,000,000 shares; 33,796,145 and 26,689,331
      shares issued and outstanding, respectively  . . . . . . . . . . . . . . . . . . . .          1,690          1,334
   Capital in excess of par  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        213,843        106,054
   Reductions for employee stock   . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (1,129)        (2,238)
   Treasury stock, $0.05 par value, 24,339 shares in 1996 and 1995   . . . . . . . . . . .           (160)          (160)
   Net unrealized gains  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            249            114
   Retained earnings   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         87,022         55,690
                                                                                               ----------       --------
      TOTAL SHAREHOLDERS' EQUITY   . . . . . . . . . . . . . . . . . . . . . . . . . . . .        301,515        160,794
                                                                                               ----------       --------


 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  . . . . . . . . . . . . . . . . . . . . . . .    $ 1,075,941   $    521,713
                                                                                               ==========       ========
</TABLE>




                See notes to consolidated financial statements.





                                      F-2
<PAGE>   30
                        AMRESCO, INC.  AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                                        1996            1995            1994
                                                                                     ----------       ---------       ---------
 <S>                                                                                 <C>             <C>            <C>
 REVENUES:
   Interest and other investment income  . . . . . . . . . . . . . . . . . . .        $ 103,639       $  40,105       $  14,215
   Mortgage banking and servicing fees   . . . . . . . . . . . . . . . . . . .           40,697          24,382           6,176
   Asset management and resolution fees  . . . . . . . . . . . . . . . . . . .           34,300          41,295          93,764
   Gain on sale of loans and investments, net  . . . . . . . . . . . . . . . .           18,394           1,382
   Other revenues  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            3,037           3,322          15,636
                                                                                     ----------       ---------       ---------
      Total revenues   . . . . . . . . . . . . . . . . . . . . . . . . . . . .          200,067         110,486         129,791
                                                                                     ----------       ---------       ---------

 EXPENSES:
   Personnel   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           78,864          52,852          68,143
   Interest . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           36,763           6,921           1,768
   Other general and administrative  . . . . . . . . . . . . . . . . . . . . .           25,098          16,121          21,166
   Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .            8,876           4,334           3,028
                                                                                     ----------       ---------       ---------
         Total expenses  . . . . . . . . . . . . . . . . . . . . . . . . . . .          149,601          80,228          94,105
                                                                                     ----------       ---------       ---------
 Income from continuing operations before income taxes . . . . . . . . . . . .           50,466          30,258          35,686
 Income tax expense  (Note 8)  . . . . . . . . . . . . . . . . . . . . . . . .           19,134          11,593          14,753
                                                                                     ----------       ---------       ---------
 INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . .           31,332          18,665          20,933
 Gain (loss) from discontinued operations, net of income taxes  (Note 9) . . .                            2,425          (2,185)
                                                                                     ----------       ---------       ---------
 NET INCOME  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $   31,332       $  21,090       $  18,748
                                                                                     ==========       =========       =========





 Earnings per share from continuing operations:
    Primary  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $     1.12      $     0.76     $      0.88
    Fully-diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             1.05            0.75            0.88
 Earnings per share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
    Primary  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $     1.12      $     0.86     $      0.79
    Fully-diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             1.05            0.85            0.79
 Weighted average number of common shares outstanding and common share
 equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           28,099          24,654          23,679
</TABLE>



                See notes to consolidated financial statements.





                                      F-3
<PAGE>   31
                        AMRESCO, INC.  AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                             COMMON STOCK
                                            $0.05 PAR VALUE
                                          -------------------
                                                                           REDUCTION            NET
                                                               CAPITAL IN    FOR             UNREALIZED                TOTAL
                                           NUMBER OF           EXCESS OF  EMPLOYEE  TREASURY   GAINS     RETAINED   SHAREHOLDERS'
                                            SHARES     AMOUNT    PAR       STOCK     STOCK    (LOSSES)   EARNINGS     EQUITY
                                          ----------   ------  --------   -------    -----     -----     -------     --------
<S>                                       <C>          <C>      <C>        <C>       <C>       <C>       <C>         <C>
JANUARY 1, 1994                           22,309,817   $1,116   $67,112     $ (607)                       $24,078     $91,699
Exercise of stock options (Note 10)          711,590       35     1,560                                                 1,595
Issuance of common stock for
   acquisition (Note 2)                      571,240       29     4,291                                                 4,320
Tax benefits from employee stock
   compensation                                                   1,728                                                 1,728
Repayments of notes receivable for
   officer's shares (Note 10)                                                 178                                         178
Dividends paid ($0.20 per share)                                                                           (4,620)     (4,620)
Foreign currency translation
   adjustments                                                                                $  (62)                     (62)
Net income                                                                                                 18,748      18,748
                                          ----------   ------  --------   -------    -----     -----     --------    --------
DECEMBER 31, 1994                         23,592,647    1,180    74,691      (429)               (62)      38,206     113,586
Common stock offering (Note 10)            2,300,000      115    24,995                                                25,110
Exercise of stock options (Note 10)          434,480       22     1,234                                                 1,256
Issuance of common stock for earnout
   (Note 2)                                  112,002        5       772                                                   777
Issuance of common stock for unearned
   stock compensation (Note 10)              250,202       12     2,385    (2,397)
Amortization of unearned stock
   compensation     (Note 10)                                                 279                                         279
Tax benefits from employee stock
   compensation                                                   1,977                                                 1,977
Repayment of notes receivable for
   officers' shares (Note 10)                                                 220                                         220
Settlement of notes receivable for
   officers' shares with common stock
   (14,339 shares)                                                             89     $(89)
Acquisition of treasury stock
   (10,000 shares)                                                                     (71)                               (71)
Dividends paid ($0.15 per share)                                                                           (3,606)     (3,606)
Foreign currency translation
   adjustments                                                                                   111                      111
Unrealized gain on investments
   available for sale, net (Note 4)                                                               65                       65
Net income                                                                                                21,090       21,090
                                          ----------   ------  --------   -------    -----     -----     -------     --------
DECEMBER 31, 1995                         26,689,331    1,334   106,054    (2,238)    (160)      114      55,690      160,794
Exercise of stock options (Note 10)          466,760       23     1,975                                                 1,998
Issuance of common stock for earnout
   (Note 2)                                   57,186        3       774                                                   777
Common stock offering (Note 10)            2,992,148      150    60,740                                                60,890
Tax benefits from employee stock
   compensation                                                   1,500                                                 1,500
Cancellation of restricted common stock       (9,280)               (79)       79
Debt conversion to common stock (Note 10)  3,600,000      180    42,879                                                43,059
Amortization of unearned stock
   compensation     (Note 10)                                               1,015                                       1,015
Repayment of notes receivable for
   officers' shares (Note 10)                                                  15                                          15
Foreign currency translation adjustments                                                        (344)                    (344)
Unrealized gain on investments available
   for sale, net (Note 4)                                                                        479                      479
Net income                                                                                                31,332       31,332
                                          ----------   ------  --------   -------    -----     -----     -------     --------
DECEMBER 31, 1996                         33,796,145   $1,690  $213,843   $(1,129)   $(160)    $ 249     $87,022     $301,515
                                          ==========   ======  ========   =======    =====     =====     =======     ========
</TABLE>


                See notes to consolidated financial statements.





                                      F-4
<PAGE>   32
                        AMRESCO, INC.  AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                        1996            1995            1994
                                                                                    -----------      ----------      ----------
<S>                                                                                 <C>             <C>              <C>
 OPERATING ACTIVITIES:
Net income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $  31,332     $   21,090       $   18,748
    Adjustments to reconcile net income to net cash provided by (used in)
    operating activities:
        Gain on sale of mortgage loans and other securities . . . . . . . . . .         (18,394)
        Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .           8,876           4,334           3,028
        Accretion of interest income  . . . . . . . . . . . . . . . . . . . . .         (12,745)
        Provision for loss (gain) on sale of discontinued operation . . . . . .                          (2,425)          1,645
        Write-off of intangible related to contract conclusion  . . . . . . . .                                           2,827
        Deferred tax provision (benefit). . . . . . . . . . . . . . . . . . . .          (1,101)          5,023             966
        Loss from disposition of property and equipment . . . . . . . . . . . .                              67             198
        Employee stock compensation . . . . . . . . . . . . . . . . . . . . . .           1,015             279
        Increase (decrease) in cash for changes in (exclusive of assets and
          liabilities acquired in business combinations):
            Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . .           6,369           4,757          17,855
            Mortgage loans held for sale, net . . . . . . . . . . . . . . . . .        (232,935)       (160,843)
            Warehouse loans payable . . . . . . . . . . . . . . . . . . . . . .         116,962         153,158
            Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . .          (6,441)         (3,990)          1,908
            Accounts payable and accrued compensation and benefits. . . . . . .           1,393          (2,272)         (4,768)
            Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . .             845              61             678
            Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . .           6,222         (11,577)         (4,137)
                                                                                    -----------      ----------      ----------
          Net cash provided by (used in) operating activities   . . . . . . . .         (98,602)          7,662          38,948
                                                                                    -----------      ----------      ----------
 INVESTING ACTIVITIES:
   Purchase of temporary investments, net . . . . . . . . . . . . . . . . . . .         (12,248)        (21,942)
   Purchase of purchased loan and other  asset portfolios . . . . . . . . . . .        (218,879)       (166,180)        (59,099)
   Collections on purchased loan and other asset portfolios . . . . . . . . . .         108,272          57,208          30,815
   Purchase of asset backed securities  . . . . . . . . . . . . . . . . . . . .         (21,877)        (43,516)         (3,481)
   Proceeds from sale of and collections on asset backed securities . . . . . .             237          13,067
   Purchase of retained interests in securitizations  . . . . . . . . . . . . .                         (12,149)
   Proceeds from sale of and collections on retained interests in
     securitizations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          46,739
   Cash used for purchase of subsidiaries . . . . . . . . . . . . . . . . . . .         (57,437)        (22,323)        (17,830)
   Investment in joint venture  . . . . . . . . . . . . . . . . . . . . . . . .         (13,905)
   Proceeds from sales of subsidiaries  . . . . . . . . . . . . . . . . . . . .                           6,250           1,385
   Purchase of premises and equipment . . . . . . . . . . . . . . . . . . . . .          (6,480)         (2,384)         (2,141)
                                                                                    -----------      ----------      ----------
          Net cash used in investing activities   . . . . . . . . . . . . . . .        (175,578)       (191,969)        (50,351)
                                                                                    -----------      ----------      ----------
 FINANCING ACTIVITIES:
   Net proceeds from notes payable and other debt . . . . . . . . . . . . . . .       1,108,720         565,311          19,894
   Repayment of notes payable and other debt  . . . . . . . . . . . . . . . . .        (886,036)       (408,974)        (31,547)
   Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          (4,785)         (3,441)
   Proceeds from common stock offering  . . . . . . . . . . . . . . . . . . . .          60,890          25,110
   Stock options exercised  . . . . . . . . . . . . . . . . . . . . . . . . . .           1,998           1,256           1,595
   Tax benefit of employee stock compensation . . . . . . . . . . . . . . . . .           1,500           1,977           1,728
   Tax effect of unrealized gains and losses  . . . . . . . . . . . . . . . . .                             (44)
   Acquisition of treasury stock  . . . . . . . . . . . . . . . . . . . . . . .                             (71)
   Repayment of notes receivable for officers' shares . . . . . . . . . . . . .              15             220             178
                                                                                    -----------      ----------      ----------
          Net cash provided by (used in) financing activities   . . . . . . . .         287,087         180,000         (11,593)
                                                                                    -----------      ----------      ----------
Net increase (decrease) in cash and cash equivalents  . . . . . . . . . . . . .          12,907          (4,307)        (22,996)
Cash and cash equivalents, beginning of period  . . . . . . . . . . . . . . . .          16,139          20,446          43,442
                                                                                    -----------      ----------      ----------
Cash and cash equivalents, end of period  . . . . . . . . . . . . . . . . . . .     $    29,046      $   16,139      $   20,446
                                                                                    ===========      ==========      ==========




 SUPPLEMENTAL DISCLOSURES:
   Interest paid  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $ 35,667          $5,494          $1,533
   Income taxes paid  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          18,289           4,813           8,507
   Common stock issued for purchase of mortgage banking subsidiary and related
     earnout  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             777             777           4,320
   Accrued earnout payment for purchase of mortgage banking subsidiary  . . . .           3,883           3,883           3,883
   Common stock issued for unearned stock compensation  . . . . . . . . . . . .                           2,397
   Notes receivable received in connection with sales of subsidiaries . . . . .                                             818
   Exchange of loans held for sale for retained interests in securitizations  .         105,612
   Conversion of convertible debt to common stock . . . . . . . . . . . . . . .          45,000
</TABLE>

                See notes to consolidated financial statements.





                                      F-5
<PAGE>   33
                        AMRESCO, INC.  AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         AMRESCO, INC.  (the "Company") is engaged primarily in the business of
residential mortgage banking, commercial mortgage banking, asset management,
institutional real estate investment advisory services and commercial finance.
The Company's business may be affected by many factors, including real estate
and other asset values, the level of and fluctuations in interest rates,
changes in the securitization market and competition.  In addition, the
Company's operations require continued access to short and long term sources of
financing.

         Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its subsidiaries.  Significant
intercompany accounts and transactions have been eliminated in consolidation.

         Revenue and Expense Recognition  -- Revenues from the Company's
residential mortgage banking activities consist of fees from originations of
loans, interest earned on residential mortgage loans originated and purchased,
gains on the securitization and sale of such loans and other related securities
and accrued earnings on certificates purchased or retained from securitization
trusts.  The gains on the securitization and sale of mortgage loans and other
related securities represent the amount by which the proceeds received
(including the estimated value of any certificates retained) exceed the sum of
the basis of the assets sold and the cost of securitization.  When assets are
securitized and sold, the retained interest is valued at the discounted present
value of the cash flow expected to be realized over the anticipated average
life of the assets sold after future estimated credit losses and normal
servicing and other fees relating to the assets sold.  The discounted present
value of such retained interest is computed using management's assumptions of
market discount rates, prepayment rates, default rates and other costs.
Interest income on mortgage loans held for sale and retained interests in
securitizations is recorded as earned.  Interest income represents the interest
earned on the loans during the warehousing period (the period prior to their
securitization) and the recognition of interest income on the securities
retained after securitization.

         Loan placement fees, commitment fees, loan servicing fees and real
estate brokerage commissions are recognized as earned.  Placement and servicing
expenses are charged to expense as incurred.

         Asset management and resolution fees from management contracts are
based on the amount of assets under management and the net proceeds from the
resolution of such assets, respectively, and are recognized as earned.
Expenses incurred in managing and administering the assets subject to
management contracts are charged to expense as incurred.

         Revenues from the Company's institutional real estate investment
advisory business are earned from providing real estate investment advisory
services to institutional and corporate investors, including acquisition,
portfolio/asset management and disposition services.

         Cash Equivalents -- Cash equivalents include all highly liquid
investments with a maturity of three months or less when purchased.

         Temporary Investments -- Temporary investments consist of short-term
investments such as Treasury bills, federal agency securities and commercial
paper with a maturity of three months or less when purchased.  The Company has
the intent and ability to hold these investments to maturity and are carried at
amortized cost.  Because of the short maturities, cost approximates fair value.
All temporary investments are pledged as collateral under an investment loan
agreement.  See Note 7.

         Receivables -- Receivables are recognized as earned according to the
respective management contracts.  The Company's exposure to credit loss in the
event that payment is not received for revenue recognized equals the balance of
accounts receivable on the balance sheet.

         Mortgage Loans Held for Sale, net  -- Mortgage loans held for sale are
carried at the lower of cost or market, net of deferred loan origination fees
and associated direct costs.  Loan origination fees and associated direct costs
are deferred and recognized upon sale.  Market is determined on an individual
loan basis based upon the estimated fair value of similar loans for the month
of expected delivery.





                                      F-6
<PAGE>   34
         Loans, net -- Loans are stated at face value, net of deferred loan
origination fees and associated direct costs and net of an allowance for loan
losses.  Loan origination fees and incremental direct costs are deferred and
recognized over the life of the loan as an adjustment to yield, using the
interest method.  The Company provides for estimated loan losses by
establishing an allowance for loan losses through a charge to earnings.
Management's periodic evaluation of the allowance for estimated losses is based
upon an analysis of the portfolio, historical loss experience, economic
conditions and trends, collateral values and other relevant factors.

         Investments in Purchased Loan and Other Asset Portfolios -- The
Company classifies its investments in purchased loan and other asset portfolios
as: loan portfolios, partnerships and joint ventures and real estate.  The
original cost of an investment portfolio is allocated to individual assets
within that portfolio based on their relative fair value to the total purchase
price.  The difference between gross estimated cash flows from loans and its
cost is accrued using the level yield method.  The Company accounts for its
investments in partnerships and joint ventures using the equity method which
generally results in the pass-through of the Company's pro rata share of
earnings as if the Company had a direct investment in the underlying loans.
Loan portfolios, partnerships and joint ventures, and real estate are carried
at the lower of cost or estimated fair value.

         Asset Backed Securities -- The Company's investments in asset-backed
securities are classified as available for sale and are carried at estimated
fair value determined by discounting estimated cash flows at current market
rates.  Any unrealized gains or losses on asset-backed securities are excluded
from earnings and reported as a separate component of shareholders' equity, net
of tax effects.  Any impairment, other then temporary, in the value of a
security will be included in earnings.

         Retained Interests in Securitizations -- Retained interests in
securitizations are classified as trading and are carried at market value.  The
carrying value of the retained interests in securitizations is analyzed by the
Company on a disaggregated basis to determine whether historical loss
experience, economic conditions and trends, collateral values and other
relevant factors have had an impact on the carrying value.  Changes in market
value are included in earnings.  Cash flows for retained interests in
securitizations are generally subordinated to other security holders in a
securitization trust.

         Premises and Equipment -- Premises and equipment, primarily building
and improvements, are stated at cost less accumulated depreciation.  The
related assets are depreciated using the straight-line method over their
estimated service lives, which range from one to thirty years.  Improvements to
leased property are amortized over the life of the lease or the life of the
improvement, whichever is shorter.

         Intangible Assets -- Intangible assets represent the excess of
purchase price over the fair market value of net assets acquired in connection
with the purchases of other businesses.  These intangible assets, principally
goodwill, servicing rights and contracts acquired, are amortized using the
straight-line method over periods ranging from one to thirty years.  The
Company periodically assesses the recoverability of intangible assets and
estimates the remaining useful life by reviewing projected results of acquired
operations, servicing rights and contracts.

         Income Taxes -- Deferred income taxes are recorded for temporary
differences between the bases of assets and liabilities as recognized by tax
laws and their carrying value as reported in the financial statements.

         Earnings per Share -- Primary earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
adjusted for incremental shares attributed to the exercise of outstanding
options to purchase common stock using the treasury stock method.
Fully-diluted earnings per share is computed by dividing net income plus
interest on convertible debt (net of income taxes) by the weighted average
number of common shares outstanding adjusted for incremental shares attributed
to the exercise of outstanding options to purchase common stock using the
treasury stock method and additional shares issued assuming conversion of
convertible debt.

         Foreign Currency Translation -- Assets and liabilities of the foreign
subsidiaries are translated into United States dollars at the prevailing
exchange rate on the balance sheet date.  Revenue and expense accounts for
these subsidiaries are translated using the weighted average exchange rate
during the period.  These translation methods give rise to cumulative foreign
currency translation adjustments which are reported as a component of equity.





                                      F-7
<PAGE>   35
         Derivative Financial Instruments -- Derivative financial instruments
are utilized by the Company to reduce interest rate and foreign exchange risks.
The Company has established a control environment which includes policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instruments activities.  The Company does not hold or
issue derivative financial instruments for speculative or trading purposes.
The net interest received or paid on derivative financial investment activities
is reflected as interest income or expense of the related hedged position.
Gains and losses resulting from the termination of derivative financial
instruments are recognized over the shorter of the remaining contract lives of
the derivative financial instruments or the lives of the related hedged
positions or, if the hedged positions are sold, are recognized in the current
period as gain or loss on sale.  Gains and losses on futures contracts are
deferred and amortized over the terms of the related assets or liabilities and
reflected as interest income or expense of the related hedged positions.  If
the hedged positions are sold, any unamortized deferred gains or losses on
futures contracts are recognized in the current period as gain or loss on sale.

         New Accounting Standards -- In 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No.  121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which did not have a significant impact on the Company's results of operations
or financial position. SFAS No.  125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," requires an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered.  The Company will apply the new rules of SFAS 125 prospectively to
transactions beginning January 1, 1997.  Based on current activities, the
Company believes the adoption of SFAS 125 will not have a material impact on
the Company's results of operations or financial position.

         Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of certain assets,
liabilities, revenues and expenses as of and for the years ended December 31,
1996, 1995 and 1994.  Actual results may differ from such estimates.

         Reclassifications -- Certain reclassifications of prior year amounts
have been made to conform to the current year presentation.

2.        ACQUISITIONS

         On October 25, 1996, the Company purchased substantially all of the
operating assets of Quality Mortgage USA, Inc.  ("Quality") for $65,000,000 in
cash and the assumption of warehouse indebtedness and certain other
liabilities.  Quality was an originator of non-conforming (sub-prime grade)
residential mortgages.  The acquisition was accounted for under the purchase
method of accounting and the purchase price was allocated as follows (in
thousands):

<TABLE>
          <S>                                                <C>
          Cash and cash equivalents . . . . . . . . . . .    $ 10,667
          Retained interests in securitizations . . . . .      29,628
          Mortgage loans held for sale  . . . . . . . . .      86,371
          Intangible assets . . . . . . . . . . . . . . .      38,651
          Premises and equipment  . . . . . . . . . . . .       9,028
          Accounts payable and accrued liabilities  . . .      (4,591)
          Warehouse loans payable . . . . . . . . . . . .     (84,442)
          Notes payable . . . . . . . . . . . . . . . . .     (20,312)
                                                             --------
               Net assets acquired  . . . . . . . . . . .    $ 65,000
                                                             ========
</TABLE>


         The allocation of the purchase price was based upon preliminary
estimates and is subject to adjustment.  The intangible assets are being
amortized using  the straight line method over 15 years.





                                      F-8
<PAGE>   36
         The following pro forma financial information for the twelve months
ended December 31, 1996 and 1995 is presented as if the acquisition of the
assets of Quality occurred at the beginning of the periods presented and is not
necessarily indicative of the results of operations that would have occurred if
Quality would have been purchased on these dates or of results that may occur
in the future (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                                  -------------------------------
                                                                                     1996                 1995
                                                                                  -----------          ----------
<S>                                                                             <C>                  <C>
Total revenues  . . . . . . . . . . . . . . . . . . . . . . . . . . . .           $   241,170          $  194,246
Income from continuing operations . . . . . . . . . . . . . . . . . . .                21,395              24,042
Net income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                21,395              26,467

Earnings per share:
  Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           $      0.76          $     0.96
  Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  0.67                0.94
</TABLE>

         On October 27, 1995, the Company completed the acquisition of the
third-party securitized, commercial mortgage loan Master Servicer and Special
Servicer operating assets of EQ Services, Inc. and Equitable Real Estate
Investment Management, Inc.  (collectively "EQS") for $16,864,000, primarily
consisting of servicing contracts and other intangibles.  Effective November
20, 1995, the Company completed the purchase of substantially all of the
pension fund advisory contracts and certain other assets of Acacia Realty
Advisors, Inc. ("Acacia") for $4,180,000, primarily consisting of servicing
contracts and other intangibles.  Effective June 30, 1995, the Company acquired
substantially all of the assets of CKSRS Housing Group, Ltd., ("CKSRS") a
Miami, Florida-based commercial mortgage banking company specializing in the
origination, sale and servicing of multifamily mortgages in Florida for
$1,278,000.

         Effective August 1, 1994, the Company acquired substantially all of
the assets of Holliday Fenoglio Dockerty & Gibson, Inc.  and certain of its
affiliates ("Holliday Fenoglio"), which were originators and servicers of
commercial mortgages, for approximately $33,000,000, based upon an initial
payment of $17,280,000 in cash and $4,320,000 in stock, and three additional
annual earnout payments if targeted earnings are met or exceeded in 1994, 1995
and 1996.  For each of the periods ended December 31, 1996, 1995 and 1994,
$3,883,000 was accrued for the respective year's earnout payment.  The
transaction has been accounted for as an asset purchase.  The purchase price,
determined based on the cash paid, the fair market value of the Company stock
issued and direct acquisition costs, was allocated to the Holliday Fenoglio
assets acquired based on the fair market value at the date of acquisition.

3.       LOANS AND ASSET PORTFOLIOS

         Investments in purchased loan and other asset portfolios at December
31, 1996 and 1995 consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                            1996           1995
                                                           --------      --------
<S>                                                        <C>           <C>
Loan portfolios . . . . . . . . . . . . . . . . . .        $199,475      $136,373
Partnerships and joint ventures . . . . . . . . . .          27,723        34,694
Real estate . . . . . . . . . . . . . . . . . . . .          23,862         5,686
                                                           --------      --------
                                                           $251,060      $176,753
                                                           ========      ========
</TABLE>

         The Company's asset portfolio's consist primarily of loans purchased
at a substantial discount from their principal amount.  Substantially all of
the Company's investments in asset portfolios are backed by commercial mortgage
real estate.  All of the Company's investments in loan portfolios are
collateral under the Company's notes payable and other debt.  The Company
investment in asset portfolios are disbursed throughout the United States, with
a heavier concentration in the Northeast and West, in addition to Canada and
the United Kingdom.  The Company does not believe it has significant
concentration risk in any geographic area that could have a detrimental effect
upon the Company.





                                      F-9
<PAGE>   37
         Mortgage loans held for sale at December 31, 1996 and 1995 consisted
of the following (net of an allowance for loan losses on residential mortgage
loans of $1,390,000 at December 31, 1996) (in thousands):

<TABLE>
<CAPTION>
                                                                                            1996        1995
                                                                                          --------    --------
<S>                                                                                       <C>         <C>
Residential mortgage loans  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $307,752    $160,843
Commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       66,784
                                                                                          --------    --------
   Total  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $374,536    $160,843
                                                                                          ========    ========
</TABLE>

         At December 31, 1996, the Company was committed to sell, as part of a
December 1996 securitization, approximately $142,000,000 of residential
mortgage loans held for sale.  Such loans were sold in early 1997.

         Loans at December 31, 1996 of $42,188,000 (net of an allowance for
loan losses of $840,000) consisted primarily of high yield loans to businesses
and projects which were unable to access traditional lending sources.  Included
in loans at December 31, 1996 were deferred loan origination fees and costs
which aggregated approximately $860,000.

4.       INVESTMENTS

         Securities available for sale, carried at estimated fair value, at
December 31, 1996 and 1995, were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                           GROSS          GROSS
                                                         AMORTIZED       UNREALIZED     UNREALIZED     ESTIMATED
                                                            COST            GAIN           LOSS        FAIR VALUE
                                                        -------------   -------------   -----------  -------------
 <S>                                                       <C>               <C>             <C>         <C>
 1996:
   Asset-backed securities  . . . . . . . . . . .          $54,902           $1,580          $(804)      $55,678
 1995:
   Asset-backed securities  . . . . . . . . . . .          $33,930             $325          $(217)      $34,038
</TABLE>



         Maturities of securities available for sale are not presented because
the loans underlying such securities are subject to prepayment.  All of the
Company's asset-backed securities are collateral under the Company's notes
payable and other debt.

         Net proceeds from sale of retained interests in securitizations in
1996 were $44,000,000 and no gain or loss was recognized on the transaction.

5.       INVESTMENT IN COMMERCIAL MORTGAGE BANKING JOINT VENTURE

         In November 1996, the Company entered into a joint venture agreement
with a large investment banking firm to fund and securitize commercial mortgage
loans.  The Company owns a 50% interest in AMRESCO Commercial Mortgage Funding
L.P. ("ACC Joint Venture"), and accounts for its investment using the equity
method.  The Company's investment at December 31, 1996 was $13,641,000 and was
included in other assets.  The following is a summary of the financial position
and results of operations of the ACC Joint Venture at December 31, 1996 and
from inception through December 31, 1996 (in thousands):

<TABLE>
<CAPTION>
                                                            1996
                                                        -----------
<S>                                                     <C>
Mortgage loans held for sale  . . . . . . . . . . .      $  257,369
Total assets  . . . . . . . . . . . . . . . . . . .         265,146
Nonrecourse debt  . . . . . . . . . . . . . . . . .         235,586
Partners equity . . . . . . . . . . . . . . . . . .          27,198

Revenues  . . . . . . . . . . . . . . . . . . . . .      $    3,721
Operating expenses  . . . . . . . . . . . . . . . .           2,929
                                                        -----------
Net income  . . . . . . . . . . . . . . . . . . . .     $       792
                                                        ===========
</TABLE>





                                      F-10
<PAGE>   38
6.        ASSET MANAGEMENT CONTRACTS

         The Company provides asset management and resolution services for
private investors, financial institutions and government agencies.  Generally,
the contracts provide for the payment of a fixed management fee which is
reduced proportionately as managed assets decrease, a resolution fee using
specified percentage rates based on net cash collections and an incentive fee
for resolution of certain assets.  Asset management and resolution contracts
are of a finite duration, typically 3-5 years.  Unless new assets are added to
these contracts during their terms, the amount of total assets under management
decreases over the terms of these contracts.

         On August 31, 1994, the Company and NationsBank Corporation concluded
their asset management contract ("NationsBank Contract").  The NationsBank
Contract had an original term expiring in June 1997 and, as provided, the
Company received an early conclusion fee of $10,000,000 which was included in
1994 other revenues.  One-time expenses related to the NationsBank Contract
conclusion included incentive compensation of $1,200,000 and $2,800,000 for
related intangible write-offs.  A significant management contract with the FDIC
expired on January 31, 1995.  During 1994, all the existing asset management
contracts with the Resolution Trust Corporation ("RTC") expired, and in
December 1995 the Company received a $4,000,000 final settlement from the RTC
for certain contracts.

7.       NOTES PAYABLE AND OTHER DEBT:

         The Company's notes payable and other debt at December 31, 1996 and
1995, consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                           1996          1995
                                                                                         --------      --------
<S>                                                                                      <C>           <C>
 Notes payable:
   Revolving loan agreements  . . . . . . . . . . . . . . . . . . . . . . . . . . .      $178,956       $67,500
   Revolving investment loan agreement  . . . . . . . . . . . . . . . . . . . . . .        34,190        21,942
   Nonrecourse debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        46,823        38,354
   Other  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           123
                                                                                         --------      --------
         Total notes payable  . . . . . . . . . . . . . . . . . . . . . . . . . . .      $260,092      $127,796
                                                                                         ========      ========

Warehouse loans payable:
   Residential debt facilities  . . . . . . . . . . . . . . . . . . . . . . . . . .      $289,136      $135,601
   Commercial debt facilities . . . . . . . . . . . . . . . . . . . . . . . . . . .        65,426        17,557
                                                                                         --------      --------
         Total warehouse loans payable  . . . . . . . . . . . . . . . . . . . . . .      $354,562      $153,158
                                                                                         ========      ========

8.75% senior notes due July 1, 1999 . . . . . . . . . . . . . . . . . . . . . . . .       $57,500
                                                                                          =======
10.0% senior subordinate notes due January 15, 2003 . . . . . . . . . . . . . . . .       $57,500
                                                                                          =======
8.0% convertible subordinated debentures due December 15, 2005  . . . . . . . . . .                     $45,000
                                                                                                        =======
</TABLE>

         Revolving Loan Agreements -- Effective June 13, 1996, the Company
amended its revolving loan agreement ("Revolving Loan Agreement") with a
syndicate of lenders, led by NationsBank of Texas, N.A. ("Bank").  This
$200,000,000 Revolving Loan Agreement matures May 31, 1998 and replaced the
Company's $150,000,000 revolving loan agreement.  The borrowing terms,
including interest, may be selected by the Company and tied to either the
Bank's variable rate (8.25% at December 31, 1996) or, for advances on a term
basis up to approximately 180 days, a rate equal to an adjusted LIBOR rate
(7.0% at December 31, 1996).  Interest is payable quarterly and at the end of
each advance period. The Revolving Loan Agreement is secured by substantially
all of the assets of the Company not pledged under other credit facilities,
including stock of a majority of the Company's subsidiaries.  The Company has
outstanding letters of credit totaling $3,271,000 at December 31, 1996, which
reduce the available revolving line.  The available borrowing capacity under
this facility at December 31, 1996 was $17,773,000.  At December 31, 1996,
$178,956,000 was outstanding under the Revolving Loan Agreement.  On February
7, 1997, the Revolving Loan Agreement was amended to provide for a $350,000,000
credit facility consisting of a $275,000,000 revolving credit facility and a
$75,000,000 term facility.  The revolving credit facility matures on May 31,
1998 and the term facility matures on May 31, 2000.

         On February 7, 1997, the Company and certain of its subsidiaries
entered into a $25,000,000 bridge loan facility with the Bank secured with the
same collateral securing the Revolving Loan Agreement, and generally





                                      F-11
<PAGE>   39
bears interest at a rate based upon the adjusted LIBOR Rate (as defined in the
note evidencing the bridge loan facility) plus 200 basis points.  Under certain
circumstances interest under the bridge loan facility shall accrue at the
Bank's prime rate.  The bridge loan facility will mature on April 30, 1997,
subject to the Company's one-time qualified right to renew the facility for a 1
year period.  The obligation of the Bank to extend credit under the bridge loan
facility shall be waived in the case of any default or event of default.  Under
the bridge loan facility, the covenants and events of defaults are the same as
those under the Revolving Loan Agreement.

         Revolving Investment Loan Agreement -- On January 20, 1995, the
Company entered into a $35,000,000 revolving investment loan agreement with the
Bank, amended as of March 5, 1996 and increased to $80,000,000.  Proceeds of
the loan are used to acquire short-term investments which secure the loan.
Interest is computed based on market rates adjusted for the Company's credited
funds at the Bank.  At December 31, 1996, $34,190,000 was outstanding under
this facility. In January 1997, the Company discontinued its revolving
investment loan agreement and related temporary investment activities.

         Nonrecourse Debt -- On October 17, 1996, a wholly-owned subsidiary of
the Company entered into a Master Repurchase Agreement ("Repurchase Agreement")
with a financial services company to fund retained interests in securitizations
and warehouse loans acquired from Quality.  Indebtedness under the Repurchase
Agreement is secured only by the specific assets sold (aggregating $29,210,000
at December 31, 1996) under an obligation to repurchase and mature at various
dates in 1997.  Interest rates and repurchase dates vary for each repurchase
transaction undertaken pursuant to the Repurchase Agreement. At December 31,
1996, $20,296,000 was outstanding under this facility bearing interest at 6.3%
to 6.8%.

         On December 19, 1995, a wholly-owned subsidiary of the Company entered
into a non-recourse Global Master Repurchase Agreement ("AMBS Global
Agreement") to support the purchase of certain commercial mortgage pass-through
certificates.  At December 31, 1996, there was $26,527,000 outstanding at an
interest rate of 30-day LIBOR plus 1.4% (7.0% at December 31, 1996).  The
repurchase transactions mature from June 18, 1997 through January 23, 1998.
The facility is secured only by the Company's investments in certain
asset-backed securities.

         Residential Warehouse Debt Facilities -- On October 25, 1996, a
wholly-owned subsidiary of the Company entered into a $500,000,000 warehouse
line of credit with Prudential Securities Credit Corporation ("Prudential") to
finance the acquisition and warehousing of residential mortgage loans.  The
facility is secured by the loans held for sale purchased through borrowings
under this facility and bears interest at LIBOR plus an applicable margin which
ranges from 0.70% to 2.00%.  The stated maturity date for the Prudential
warehouse facility is the earlier of (i) March 31, 1997 or (ii) the date on
which the loans collateralizing the Prudential warehouse facility are
securitized.  At December 31, 1996, $171,212,000 was outstanding under this
facility bearing interest at 6.8% per annum.

         A wholly-owned subsidiary of the Company entered into a $200,000,000
warehouse credit facility with Morgan Stanley Mortgage Capital Inc., which was
amended and restated as of October 25, 1996, to finance the origination or
acquisition of certain residential mortgage loans.  This facility is secured by
the mortgages originated or acquired under the facility.  At December 31, 1996,
$115,982,000 was outstanding under this facility bearing interest at LIBOR plus
0.7% (6.2%) per annum.

         On December 23, 1996, a wholly-owned subsidiary of the Company entered
into a $500,000,000 warehouse credit facility with CS First Boston Mortgage
Capital Corp. to finance the acquisition and warehousing of certain residential
mortgage loans.  This facility is secured by the mortgages acquired under the
facility and bears interest at a rate of LIBOR plus 0.60% to 1.40% based upon
the amount of the advance and the collateral value and unpaid principal amount
of the mortgage loans related to each advance.  At December 31, 1996, no
indebtedness was outstanding under this facility.

        The Company anticipates that it will incur additional borrowings under
these facilities in connection with the origination and purchase of loans for
securitizations in the future.  At December 31, 1996, $289,136,000 was
outstanding under residential warehouse debt facilities secured by assets
totaling $307,752,000.

         Commercial Warehouse Debt Facilities -- On August 15, 1995, a
wholly-owned subsidiary of the Company entered into a mortgage warehouse
facility with a funding corporation to facilitate the underwriting and
origination of multi-family mortgage loans to be purchased by Freddie Mac or
Fannie Mae.  Indebtedness under the facility generally bears interest at a rate
based upon LIBOR (as defined by the facility) plus 3.0%.  The lender





                                      F-12
<PAGE>   40
reduced the interest rate to LIBOR plus 1.25% on current borrowings (6.6% at
December 31, 1996).  The subsidiary may also be required to pay certain other
fees in addition to or in lieu of interest.  The maturity is expected to be
approximately 60 to 80 days from the date of each such borrowing.  The loan is
secured by the mortgage loans originated by the Company and held for sale under
the facility.  At December 31, 1996, the balance outstanding under this
facility was $46,960,000.

          On April 28, 1995, a wholly-owned subsidiary of the Company entered
into a $25,000,000 revolving credit loan agreement with a bank to finance the
origination and warehousing of certain commercial mortgage loans which was
subsequently reduced to $10,000,000, however, on December 18, 1996, the bank
allowed the subsidiary to borrow approximately $8,500,000 in excess of the
$10,000,000 line of credit on a one-time basis.  The Company has guaranteed
certain of the subsidiaries obligations under the facility.  Indebtedness under
the facility generally bears interest at a rate based (at the subsidiary's
option) upon either (i) the prime rate established by the Bank, as announced
from time to time or (ii) the adjusted LIBOR Rate (as defined) plus either
1.65% or 2.0% depending upon certain enumerated factors.  The subsidiary's
indebtedness under the facility is secured by all mortgage loans originated by
the subsidiary using funds obtained under the facility and related collection
and other accounts.  The original maturity date of the facility is January 25,
1998.  At December 31, 1996, $18,466,000 was outstanding bearing interest at
7.3% to 7.6%.

         At December 31, 1996, $65,426,000 was outstanding under the commercial
warehouse debt facilities secured by assets totaling $66,784,000.

         8.75% Senior Notes Due July 1, 1999 -- On July 16, 1996, the Company
issued $57,500,000 principal amount of Senior Notes.  The net proceeds of
approximately $55,775,000 from such sale were used to repay borrowings under
the Revolving Loan Agreement.  The Senior Notes bear interest at a rate of
8.75% per annum and mature on July 1, 1999.  There is no sinking fund or
amortization of principal prior to maturity.  The debt offering costs have been
included in other assets and are amortized over the life of the debt using the
effective interest method.  The Senior Notes are not redeemable prior to
maturity.  The Senior Notes are unsecured senior obligations of the Company and
subordinated to the rights of holders of secured unsubordinated indebtedness of
the Company to the extent of the value of the collateral securing such
indebtedness.

         10% Senior Subordinated Notes Due January 15, 2003 -- On January 30,
1996, the Company issued $57,500,000 principal amount of Senior Subordinated
Notes.  The net proceeds of approximately $54,900,000 from such offering were
used to repay borrowings under the Revolving Loan Agreement.  The Senior
Subordinated Notes bear interest at 10% per annum and mature on January 15,
2003.  There is no sinking fund or amortization of principal prior to maturity.
The debt offering costs were included in other assets and are amortized over
the life of the debt using the effective interest method.  The Senior
Subordinated Notes are not redeemable prior to January 15, 2001.  The Senior
Subordinated Notes are unsecured general obligations of the Company and
subordinated to all existing and future Senior Indebtedness (as defined in
Senior Subordinated Notes Indenture) of the Company.

         8% Convertible Subordinated Debentures Due December 15, 2005 -- On
October 31, 1996, the Company called for redemption on  December 27, 1996, its
outstanding 8%, Convertible Subordinated Debentures due 2005 (the "Convertible
Debentures") at 108% of the face amount (or $1,080 per $1,000 principal amount)
plus accrued and unpaid interest.  The Convertible Debentures, with an
aggregate face amount of $45,000,000, were converted into 3,600,000 shares of
the Company's common stock at a conversion price of $12.50 per share
(equivalent to a conversion rate of 80 shares per $1,000 principal amount of
Convertible Subordinated Debentures).  All unamortized debt offering costs
related to the Convertible Debentures and included in other assets were
recorded as a reduction to capital in excess of par.

         Covenants -- Each of the Company's notes payable and other debt
agreements has certain covenants which include financial tests, including
minimum consolidated tangible net worth, maximum consolidated funded debt to
consolidated capitalization ratio, minimum fixed charge coverage ratio, minimum
interest coverage ratio, maximum consolidated funded debt to consolidated
earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio
and maximum corporate facility outstanding to consolidated EBITDA ratio.  The
agreements also contain covenants that, among other things, limit the
incurrence of additional indebtedness, investments, asset sales, loans to
shareholders, dividends, transactions with affiliates, acquisitions, mergers
and consolidations, liens and encumbrances and other matters customarily
restricted.





                                      F-13
<PAGE>   41
         On September 7, 1995, the Company entered into an interest rate swap
agreement to hedge a portion of its 30-day LIBOR floating rate debt.  The swap
agreement has a notional amount of $25,000,000 and requires payment of interest
by the Company at a fixed rate of 5.8% and receipt of interest by the Company
at a floating rate equal to 30-day LIBOR.  The agreement matures on September
7, 1997.

         Aggregate amounts of notes payable and other debt that mature during
the next five years were as follows (in thousands):

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED DECEMBER 31,
                                              -----------------------------------------------------------------
                                                1997       1998         1999      2000      2001     THEREAFTER
                                              --------   --------     -------  ---------  ---------- ----------
<S>                                           <C>        <C>          <C>                               <C>
Notes payable . . . . . . . . . . . . . . .    $75,139   $184,953
Warehouse loans payable . . . . . . . . . .    336,096     18,466
8.75% senior notes due July 1, 1999 . . . .                           $57,500
10.0% senior subordinate notes due January
     15, 2003   . . . . . . . . . . . . . .                                                             $57,500
                                              --------   --------     -------  ---------  ----------    -------
                                              $411,235   $203,419     $57,500                           $57,500
                                              ========   ========     =======  =========  ==========    =======
</TABLE>

8.        INCOME TAXES

         Income tax expense (benefit) consisted of the following for the years
ended December 31, 1996, 1995 and 1994 (in thousands):

<TABLE>
<CAPTION>
                                                                               1996          1995         1994
                                                                              -------       -------      -------
<S>                                                                          <C>            <C>          <C>
 Current:
   Federal  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $18,456        $6,040       $9,665
   State  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,779         2,147        2,609
                                                                              -------       -------      -------
        Total current tax expense . . . . . . . . . . . . . . . . . . .        20,235         8,187       12,274
Deferred tax expense (benefit)  . . . . . . . . . . . . . . . . . . . .        (1,101)        5,023          966
                                                                              -------       -------      -------
     Total income tax expense   . . . . . . . . . . . . . . . . . . . .       $19,134       $13,210      $13,240
                                                                              =======       =======      =======

Income tax expense (benefit) attributable to:
    Continuing operations . . . . . . . . . . . . . . . . . . . . . . .       $19,134       $11,593      $14,753
    Discontinued operations . . . . . . . . . . . . . . . . . . . . . .                       1,617       (1,513)
                                                                              -------       -------      -------
       Total income tax expense . . . . . . . . . . . . . . . . . . . .       $19,134       $13,210      $13,240
                                                                              =======       =======      =======
</TABLE>


         A reconciliation of income taxes on reported pretax income at
statutory rates to actual income tax expense for the years ended December 31,
1996, 1995 and 1994, is as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                         1996                 1995                1994
                                                                 -------------------  ------------------   ------------------
                                                                 DOLLARS        RATE  DOLLARS       RATE   DOLLARS       RATE
                                                                 -------        --    -------        --    -------        --
<S>                                                              <C>            <C>   <C>            <C>   <C>            <C>
      Income tax at statutory rates ..........................   $17,663        35%   $12,005        35%   $11,196        35%
      State income taxes, net of Federal tax .................     1,471         3      1,205         4      1,606         5
         benefit .............................................
      Other ..................................................                                                 438         1
                                                                 -------        --    -------        --    -------        --
         Total income tax expense ............................   $19,134        38%   $13,210        39%   $13,240        41%
                                                                 =======        ==    =======        ==    =======        ==
      </TABLE>





                                      F-14
<PAGE>   42
         The net deferred tax assets at December 31, 1996 and 1995, consisted
of the tax effects of temporary differences related to the following (in
thousands):

<TABLE>
<CAPTION>
                                                                                             1996         1995
                                                                                           ---------  -----------
<S>                                                                                      <C>         <C>
Allowance for uncollectible accounts receivable . . . . . . . . . . . . . . . . . . . .  $       275 $        594
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        2,128        1,759
Investment in subsidiaries  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          477          477
Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          842
Accrued employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        1,414        2,085
Net operating loss carryforwards of acquired company  . . . . . . . . . . . . . . . . .        3,848        5,334
AMT credit carryforwards  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          602          602
Reserves on real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        2,075        2,075
Securitized loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        1,176
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        1,123          (67)
                                                                                           ---------  -----------
   Deferred tax asset before valuation allowance  . . . . . . . . . . . . . . . . . . .       13,960       12,859
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (675)        (675)
                                                                                           ---------  -----------
   Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $  13,285  $    12,184
                                                                                           =========  ===========
</TABLE>




         As a result of an acquisition, the Company has available for its use
the acquired net operating loss carryforwards existing at the acquisition date.
The Company is limited to utilizing approximately $4,246,000 of such losses
annually.  The following were the expiration dates and the approximate net
operating loss carry forwards at December 31, 1996 (in thousands):

<TABLE>
<CAPTION>
EXPIRATION DATE                                                                      AMOUNT
---------------                                                                   -----------
<S>                                                                               <C>
2001  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $     3,051
2002  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           2,071
2003  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,459
2006  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             372
2007  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           2,867
                                                                                  -----------
                                                                                  $     9,820
                                                                                  ===========
</TABLE>




         Realization of deferred tax assets is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset, net of applicable valuation allowance,
will be realized.  The amount of the deferred tax asset considered realizable
could be reduced or increased if estimates of future taxable income during the
carryforward period are reduced or increased.

9.        DISCONTINUED OPERATION

         The Company adopted a plan on December 1, 1994 to discontinue its data
processing operations for the banking and asset management industry and to sell
substantially all of the assets of the related subsidiary by June 30, 1995.
Gross revenues applicable to the discontinued operations were $4,542,000 for
the eleven months ended November 30, 1994.  The loss from discontinued
operations for the eleven months ended November 30, 1994 was $1,287,000 net of
a $891,000 income tax benefit.  The loss from the discontinued operations for
the period December 1, 1994 to December 31, 1994 was $95,000, net of a $63,000
income tax benefit.  The loss on the disposal of discontinued operations for
the year ended December 31, 1994 of $898,000 was net of a Company estimated
income tax benefit of $622,000.  On June 16, 1995, the Company sold
substantially all of the assets of its data processing operations for the
banking and asset management industry for $6,250,000 in cash and recorded a
gain of $2,425,000, or $0.10 per share, net of certain transaction costs and a
$1,617,000 provision for income taxes.





                                      F-15
<PAGE>   43
10.       COMMON STOCK AND EMPLOYEE STOCK OPTION AND PURCHASE PLANS

         The Company has a stock option and award plan for the benefit of key
individuals, including its directors, officers and key employees.  The plan is
administered by a committee of the Board of Directors.  Stock option activity
under the plan for the years ended December 31, 1996, 1995 and 1994 was as
follows:

<TABLE>
<CAPTION>
                                                                                                   WEIGHTED
                                                              NUMBER OF      OPTION PRICE PER   AVERAGE OPTION
                                                                SHARES             SHARE       PRICE PER SHARE
                                                              ----------      ---------------  --------------
<S>                                                           <C>             <C>                     <C>
Options outstanding at January 1, 1994  . . . . . . . .        2,094,100       $0.60 to $4.50         $  2.96
   Granted  . . . . . . . . . . . . . . . . . . . . . .          500,000         7.00 to 8.94            7.62
   Exercised  . . . . . . . . . . . . . . . . . . . . .         (711,590)        0.60 to 3.50            2.24
   Forfeited  . . . . . . . . . . . . . . . . . . . . .          (10,060)                3.50            3.50
                                                              ----------
Options outstanding at December 31, 1994  . . . . . . .        1,872,450         0.60 to 4.50            4.41
   Granted  . . . . . . . . . . . . . . . . . . . . . .          872,160        6.88 to 11.38            9.78
   Exercised  . . . . . . . . . . . . . . . . . . . . .         (434,480)        0.60 to 6.88            2.99
   Forfeited  . . . . . . . . . . . . . . . . . . . . .           (8,337)        2.75 to 3.75            3.15
                                                              ----------
Options outstanding at December 31, 1995  . . . . . . .        2,301,793        0.60 to 11.38            6.77
   Granted  . . . . . . . . . . . . . . . . . . . . . .           45,500       13.13 to 21.75           17.39
   Exercised  . . . . . . . . . . . . . . . . . . . . .         (466,760)       3.50 to 11.38            4.28
   Forfeited  . . . . . . . . . . . . . . . . . . . . .          (68,181)       4.50 to 11.38            6.98
                                                              ----------
Options outstanding at December 31, 1996  . . . . . . .        1,812,352        0.60 to 21.75            7.67
                                                              ==========
Options exercisable at December 31, 1996  . . . . . . .        1,168,289      $0.60 to $21.75         $  6.47

Options available for grant at December 31, 1996  . . .        1,674,478
</TABLE>

         At December 31, 1996, the Company has reserved a total of 1,812,352
shares of common stock for exercise of stock options.

         The following table summarizes information about stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                                                                                     Weighted
                                              Weighted       Weighted Average                        Average
                                              Average         Exercise Price                         Exercise
                           Number            Remaining        of Outstanding         Number          Price of
 Range of Exercise     Outstanding at       Contractual           Options        Exercisable at    Exercisable
      Prices              12/31/96              Life                                12/31/96         Options
---------------------  --------------       -----------      ----------------    --------------    -----------
    <S>                   <C>                   <C>                   <C>              <C>             <C>
    $ 0.60 - $ 2.75        165,165              5                $  2.03           165,165         $  2.03
      3.50 -   3.75        301,220              6                   3.56           301,220            3.56
      6.88 -   7.00        493,167              9                   6.93           276,352            6.95
      7.50 -   9.38        286,000              8                   8.22           209,732            8.20
      11.38 - 11.38        521,300              6                  11.38           206,720           11.38
      13.13 - 21.75         45,500              7                  17.39             9,100           17.39
</TABLE>

         At December 31, 1996, the Company has reserved a total of 1,812,352
shares of common stock for exercise of stock options.





                                      F-16
<PAGE>   44
         The Company applies APB Opinion No.  25, "Accounting for Stock Issued
to Employees," in accounting for its stock option and award plans.  Under the
terms of the plans, the exercise price of each option is equal to the market
price of the Company's stock on the date of grant.  Accordingly, no
compensation expense has been recognized under these plans.  Net income and
earnings per share on a proforma basis as if the Company had utilized the
accounting methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," would have been as follows (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                                                       Years ended December 31,
                                                                                       ------------------------
                                                                                         1996           1995
                                                                                       ---------      ---------
<S>                                                                                    <C>            <C>
Net income:
 As reported  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $31,332        $21,090
 Pro forma  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           30,015         19,102

Primary earnings per share:
 As reported  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $    1.12      $    0.86
 Pro forma  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             1.07           0.77

Fully diluted earnings per share:
 As reported  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $    1.05      $    0.85
 Pro forma  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             1.01           0.77
</TABLE>

         The estimated fair value of options granted during 1996 and 1995 was
$9.61 and $4.99 per share, respectively.  For purposes of determining fair
value of each option, the Company used the Black-Scholes model with the
following assumptions:

<TABLE>
          <S>                             <C>
          Risk-free interest rate         5.98% -7.21%
          Expected life                   7 - 8  years
          Expected volatility              43% - 45%
</TABLE>

         A stock subscription agreement and related shareholders' agreement
("Shareholder Agreements") were entered into by the Company with various
officers and other parties ("Subscribers") on December 9, 1992.  The purchase
price was based on $.60 per share.  Certain executive officers purchased common
stock with cash and promissory notes.  The notes accrue interest at 6% per
annum and are due and payable in December 2002 or within one year of
termination of employment.  The shares are subject to certain restrictions and
repurchase rights pursuant to the Shareholder Agreements.  In the event of
termination of employment prior to December 2002, the Company could cancel
unvested shares by canceling related indebtedness based on the original issue
price.  The notes are secured by the stock acquired and are nonrecourse to the
Subscribers.  The notes are classified as a reduction of shareholders' equity
for financial reporting purposes.  At December 31, 1996 and 1995, reductions
for employee stock included notes receivable for officers' shares of $105,000
and $120,000, respectively.  During 1996, $15,000 in officers' notes receivable
were collected.  During 1995, $309,000 in officers' notes receivable were
collected, including $220,000 in cash and $89,000 in common stock.

         The Company did not issue any shares of restricted common stock during
1996 under the Company's stock option and award plan.  During 1995, the Company
issued 250,202 shares of restricted common stock at prices ranging from $6.88
per share to $11.38 per share under the Company's stock option and award plan.
During 1996 and 1995, $1,015,000 and $279,000 in unearned stock compensation
was amortized as compensation expense, respectively.  At December 31, 1996 and
1995, reductions for employee stock included unearned stock compensation of
$1,024,000 and $2,118,000, respectively.

         In November and December 1996, the Company completed a registered
public offering of 2,992,148 shares of common stock including the underwriters'
over-allotment option.  The net proceeds from such offering aggregated
approximately $60,400,000 and were used to repay borrowings under the Revolving
Loan Agreement.  The price to the public was $21.25 per share and the proceeds
to the Company per share were $20.35, after underwriting discounts.  In
addition to the offering of shares of common stock by the Company, certain
selling shareholders sold an aggregate of 5,931,852 shares of common stock for
which the Company did not receive any proceeds from the sale of these shares.





                                      F-17
<PAGE>   45
         On December 27, 1996, the Company issued 3,600,000 shares of common
stock upon redemption of all of the outstanding 8% Convertible Debentures.  The
Convertible Debentures were convertible at a conversion rate of 80.0 shares of
common stock for each $1,000 principal amount of Convertible Debentures.  See
Note 7.

         In December 1995, the Company completed a registered public offering
of 2,300,000 shares of common stock including the underwriters' over-allotment
option.  The net proceeds from such offering, aggregating approximately
$25,110,000, were used to repay borrowings.  The price to the public was $11.75
per share and the proceeds to the Company were $11.10 per share, after
underwriting discounts.  In addition to the offering of shares of common stock
by the Company, two institutional shareholders sold an aggregate of 2,300,000
shares of common stock for which the Company did not receive any proceeds from
the sale of these shares.

         During 1996, the Company instituted a stock compensation plan that
covers certain senior managers of the Company.  The awards are contingent on
certain earnings levels being reached by the Company in 1998 and will award
participants two times their 1996 annual salary in restricted common stock of
the Company of which 20% would vest immediately and the remainder would vest at
the rate of 20% per year.  No compensation expense was recorded in 1996 related
to this plan.

11.       EMPLOYEE COMPENSATION AND BENEFITS

         Accrued employee compensation and benefits at December 31, 1996 and
1995, included amounts for incentive compensation, severance and benefits.
Certain employees are eligible to receive a bonus from a pool computed on
pretax income over predetermined minimum earning levels.  In addition, certain
employees are covered by severance plans in the event their employment is
terminated due to reductions in the workforce.  The Company accrues for such
costs over the service period.  At December 31, 1996 and 1995, a total of
$572,000 and $1,423,000, respectively, was accrued for costs incurred or
expected to be incurred under the severance plans of continuing operations.

         The AMRESCO Retirement Savings and Profit Sharing Plan ("Plan")
qualifies under Section 401(k) of the Internal Revenue Code and incorporates
both a savings component and a profit sharing component for eligible employees.
As determined each year by the Board of Directors, the Company may match the
employee contribution up to 6% of their base pay based on the Company's
performance.  For 1996, the matching contribution was set at $.50 for each
$1.00 contributed by the employees.  In addition to the matching savings
contribution, the Company provided an annual contribution to the profit sharing
retirement component of the Plan on behalf of all eligible employees.  This
portion of the Plan has been amended to assure that the Company is not required
to make an employer profit sharing contribution to the Plan.  However, it is
anticipated that some level of profit sharing contribution will continue in
future periods.  For the years ended December 31, 1996, 1995 and 1994, the
Company accrued profit sharing contributions of $1,688,000, $1,218,000 and
$1,312,000, respectively.  Allocation of the Company's contribution will be
based on a percentage of an employee's weighted total pay.  Weighted total pay
places a stronger emphasis on the age of the employee and provides an
increasingly larger profit sharing contribution as an employee nears
retirement.

12.       COMMITMENTS AND CONTINGENCIES

         The Company has entered into non-cancelable operating leases covering
office facilities which expire at various dates through 2006.  Certain of the
lease agreements provide for minimum annual rentals with provisions to increase
the rents to cover increases in real estate taxes and other expenses of the
lessor.  The Company also has leases on equipment, some of which are
non-cancelable, which expire on various dates through 1999.  The total rent
expense for the years ended December 31, 1996, 1995 and 1994, was approximately
$5,334,000, $3,655,000, and $4,386,000, respectively.  The future minimum
annual rental commitments under non-cancelable operating lease agreements
having a remaining term in excess of one year at December 31, 1996 were as
follows (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
   <S>                                                                                 <C>
   1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $2,171
   1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,667
   1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,256
   2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           746
   2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           178
   Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           718
</TABLE>





                                      F-18
<PAGE>   46
         Certain pending or threatened legal actions have alleged that the
Company may be liable with respect to certain actions which allege that Quality
violated certain provisions of the Real Estate Settlement Procedures Act
("RESPA") when it made certain payments to brokers in transactions that occured
prior to October 25, 1996.  The Company did not assume any liabilities for
litigation arising out of the operations of Quality prior to October 25, 1996,
the date the Company purchased substantially all of the assets of Quality.  In
addition to not assuming any liabilities relating to such litigation, the
Company obtained an indemnification aggregating $10,000,000 from Quality, its
shareholders and certain individuals which would be applicable to such
litigation.  Therefore, the Company does not believe that it has any liability
with respect to such litigation against Quality.  Even though the Company has
continued, in certain instances, to make these types of payments to brokers,
the Company does not believe that it has significant exposure to loss for any
alleged violation of RESPA since it believes the payments it has made are not a
violation of RESPA and such payments have been made on only a small portion of
the residential mortgage loans which it has originated.

         The Company is a defendant in other various legal actions.  In the
opinion of management, such actions will not materially affect the financial
position, results of operations or cash flows of the Company.

13.       FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

         The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to hedge against changes in interest
rates.  These financial instruments include commitments to sell certain
mortgage loans, interest rate swap agreements and forward and futures
contracts.  These instruments involve, to varying degrees, elements of interest
rate risk in excess of the amount recognized in the consolidated statements of
financial condition.  The Company controls the risk of its hedging agreements,
interest rate swap agreements and forward and futures contracts through
approvals, limits and monitoring procedures.

         The Company may reduce its exposure to fluctuations in interest rates
by creating offsetting positions through the use of derivative financial
instruments, particularly forward contracts and interest rate swaps.  The
Company currently does not use derivative financial instruments for trading or
speculative purposes, nor is the Company party to highly-leveraged derivatives.
The notional amount of interest rate swaps is the underlying principal amount
used in determining the interest payments exchanged over the life of the swap.
The notional amounts are not a measure of the Company's exposure through its
use of derivatives.

         The Company had four forward contracts at December 31, 1996, to sell a
total of $19,000,000 three year and five year treasury securities at contracted
forward prices and the Company had entered into Euro-dollar and U.S. Treasury
futures contracts with a notional amount of $1,605,000,000.  The Company
matches the duration of the items being hedged with offsetting futures
positions.  At December 31, 1996, the outstanding futures contracts were
hedging assets with a carrying value of approximately $218,000,000.  The
Company's forward contracts and futures contracts are hedges against a change
in a forward contract's value which would be offset with an equivalent but
opposite change in hedged residential mortgage loans and retained interests in
securitizations.  The forward contracts matured on March 10, 1997 and the
futures contracts expire on various dates through 2000.

         The Company has eight forward contracts to sell Fannie Mae mortgage
backed securities totaling $43,410,000.  The contracts mature at varying dates
in 1997. These forward contracts are hedges against a change in a forward
contract's value which would be offset with an equivalent but opposite change
in the hedged commercial mortgage loans.

         Interest rate swap agreements are used to reduce interest rate risks
and costs inherent in the Company's outstanding debt.  The Company enters into
these agreements to change the fixed/variable interest rate mix of the debt
portfolio to reduce the Company's aggregate risk to movements in interest
rates.  Accordingly, the Company enters into agreements to effectively convert
variable-rate debt to fixed-rate debt to reduce the Company's risk of incurring
higher interest costs due to rising interest rates.  During 1995, the Company
entered into a $25,000,000 interest rate swap agreement thereby allowing the
Company to establish fixed interest rates on a portion of its outstanding debt.
During 1996 and 1995, there were no deferred gains or losses related to the
swap agreement.  This swap agreement matures September 7, 1997.  See Note 7.

         The Company continually monitors the market risk of its forward,
futures and interest rate swap contracts.  The Company uses commercial rating
agencies to evaluate the credit quality of the counterparties, all of whom are





                                      F-19
<PAGE>   47
major international financial institutions.  The Company does not anticipate a
loss resulting from any credit risk of these institutions.

         The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.  107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.  However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value.  Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange.  The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1996             DECEMBER 31, 1995
                                                         --------------------------       --------------------
                                                         CARRYING         ESTIMATED      CARRYING     ESTIMATED
                                                          AMOUNT          FAIR VALUE      AMOUNT     FAIR VALUE
                                                         --------         ---------       -------      -------
                                                                     (DOLLARS IN THOUSANDS)
 <S>                                                      <C>             <C>             <C>          <C>
 Assets:
   Cash and cash equivalents  . . . . . . . . . .         $29,046         $  29,046       $16,139      $16,139
   Temporary investments  . . . . . . . . . . . .          34,190            34,190        21,942       21,942
   Accounts receivable, net . . . . . . . . . . .          12,243            12,243        18,576       18,576
   Mortgage loans held for sale, net  . . . . . .         374,536           374,236       160,843      161,841
   Loans, net . . . . . . . . . . . . . . . . . .          42,188            42,188         3,389        3,389
   Investments in purchased loan and other asset
     portfolios   . . . . . . . . . . . . . . . .         251,060           267,395       176,753      183,194
   Asset backed securities - available for sale .          55,678            55,678        34,038       34,038
   Retained interests in securitizations - trading        130,328           130,328        12,149       12,149
 Liabilities:
   Accounts payable . . . . . . . . . . . . . . .          15,988            15,988        14,124       14,124
   Notes payable and warehouse loans payable  . .         614,654           614,654       280,954      281,354
   Senior notes . . . . . . . . . . . . . . . . .          57,500            58,988
   Senior subordinated notes  . . . . . . . . . .          57,500            58,844
   Convertible debt . . . . . . . . . . . . . . .                                          45,000       45,000
 Off-Balance Sheet:
   Interest rate swap . . . . . . . . . . . . . .                               (41)                      (251)
   Forward contracts  . . . . . . . . . . . . . .                                77                       (998)
   Futures contracts  . . . . . . . . . . . . . .                               256
   Letters of credit ($3,272 and $239,
     respectively)  . . . . . . . . . . . . . . .
</TABLE>

         The fair values of loans, investments in purchased loan and other
asset portfolios, asset backed securities, retained interests in
securitizations, notes payable and other debt, senior notes, senior
subordinated notes and convertible debt were estimated based on present values
of estimated cash flows using current entry-value interest rates applicable to
each category of such financial instruments (which notes reflect the credit
risk applicable to the instruments).  Mortgage loans held for sale were valued
at their contracted sales prices.  The carrying amount of cash and cash
equivalents, temporary investments, accounts receivable, net of reserves and
accounts payable approximated fair value.  The Company has reviewed its
exposure on standby letters of credit and has determined that the fair value of
such exposure is not material.  The fair values of the interest rate swap and
forward contracts were estimated using market quotes.  The fair value estimates
presented herein were based on pertinent information available to management as
of December 31, 1996 and 1995. Although management is not aware of any factors
that would significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since the date presented, and therefore, current estimates of fair
value may differ significantly from the amounts presented herein.

14.       SUBSEQUENT EVENTS (UNAUDITED)

         On February 25, 1997, the Company issued options to purchase
approximately 2,400,000 shares of common stock and approximately 150,000
restricted shares to certain key employees and directors.  The Board of
Directors approved two plans which will allow the Company to issue up to
3,850,000 shares of the Company's common stock pursuant to the exercise of
stock options and the grant of restricted shares.





                                      F-20
<PAGE>   48
         On March 12, 1997, the Company issued $192,500,000 aggregate principal
amount of senior subordinated notes.  The notes bear interest at 10% per annum
and mature on March 15, 2004.  The notes are unsecured obligations of the
Company and are subordinated to prior payment of all existing and future senior
debt and to indebtedness and other liabilities of the Company's subsidiaries.
The notes are not redeemable prior to maturity.

         On March 21, 1997, the Company entered into a definitive stock and
asset purchase agreement with Commercial Lending Corporation and certain of its
affiliates ("CLC") to acquire the operations and certain assets of CLC.  CLC's
primary line of business is originating, securitizing and servicing franchise
loans.  The purchase price consists of (i) approximately 1.9 million shares of
the Company's common stock, (ii) the assumption of certain liabilities
estimated at $14,000,000 and (iii) contingent earnout payments of additional
shares of the Company's common stock based upon the operating performance of
the acquired entities through March 31, 2000.  The consumation of the
transaction is subject to satisfaction of certain conditions. The transaction
is expected to close in late March 1997.



15.       QUARTERLY FINANCIAL DATA (UNAUDITED)

         The following is a summary of unaudited quarterly results of
operations for the years ended December 31, 1996 and 1995 (in thousands, except
per share amounts):

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31, 1995
                                                                    ---------------------------------------------
                                                                     FIRST       SECOND        THIRD       FOURTH
                                                                    QUARTER      QUARTER      QUARTER     QUARTER
                                                                    -------      -------       -------    -------
<S>                                                                 <C>           <C>        <C>         <C>
Revenues  . . . . . . . . . . . . . . . . . . . . . . . . . .       $36,896       $46,813    $45,486     $70,872
Income before income taxes  . . . . . . . . . . . . . . . . .         8,095        11,851     13,721      16,799
Net income  . . . . . . . . . . . . . . . . . . . . . . . . .         4,795         7,348      8,556      10,633
Earnings per share: . . . . . . . . . . . . . . . . . . . . .
  Primary . . . . . . . . . . . . . . . . . . . . . . . . . .          0.18          0.27       0.31        0.36
  Fully-diluted . . . . . . . . . . . . . . . . . . . . . . .          0.17          0.25       0.29        0.34
</TABLE>

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31, 1995
                                                                    ---------------------------------------------
                                                                     FIRST       SECOND        THIRD       FOURTH
                                                                    QUARTER      QUARTER      QUARTER     QUARTER
                                                                    -------      -------       -------    -------
<S>                                                                 <C>          <C>           <C>        <C>
Revenues from continuing operations . . . . . . . . . . . . .       $20,177      $23,482       $25,416    $41,411
Income from continuing operations before income taxes . . . .         5,336        6,205         8,430     10,287
Income from continuing operations . . . . . . . . . . . . . .         3,155        4,079         5,196      6,235
Gain from sale of discontinued operations . . . . . . . . . .                      2,425
Net income  . . . . . . . . . . . . . . . . . . . . . . . . .         3,155        6,504         5,196      6,235
Earnings per share from continuing operations:
  Primary . . . . . . . . . . . . . . . . . . . . . . . . . .          0.13         0.17          0.21       0.25
  Fully-diluted . . . . . . . . . . . . . . . . . . . . . . .          0.13         0.17          0.21       0.24
Earnings per share:
  Primary . . . . . . . . . . . . . . . . . . . . . . . . . .          0.13         0.27          0.21       0.25
  Fully-diluted . . . . . . . . . . . . . . . . . . . . . . .          0.13         0.27          0.21       0.24
</TABLE>

         A nonrecurring gain on the sale of a discontinued operation was
recorded during the second quarter of 1995.  Included in revenues for the
fourth quarter of 1995 is $4,000,000 related to an expired RTC contract.





                                      F-21
<PAGE>   49
                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors of AMRESCO, INC.:



         We have audited the accompanying consolidated balance sheets of
AMRESCO, INC.  and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996.  These
financial statements are the responsibility of AMRESCO, INC.'s management.  Our
responsibility is to express an opinion on these financial statements 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, such consolidated financial statements present fairly,
in all material respects, the financial position of AMRESCO, INC.  and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

Deloitte & Touche LLP

Dallas, Texas
February 7, 1997





                                      F-22
<PAGE>   50

                       REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors
Quality Mortgage USA, Inc.


We have audited the accompanying consolidated balance sheets of Quality
Mortgage USA, Inc. as of September 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated 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 consolidated financial position of
Quality Mortgage USA, Inc. as of September 30, 1996 and 1995, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.





Coopers & Lybrand LLP

Newport Beach, California
December 19, 1996





                                      F-23
<PAGE>   51
                           QUALITY MORTGAGE USA, INC.

                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 1996 AND 1995

<TABLE>
<CAPTION>
                                               ASSETS


                                                                       1996                 1995
                                                                   ------------        ------------
Assets:
      <S>                                                         <C>                  <C>
      Cash and cash equivalents                                   $   8,298,777        $ 19,912,703
      Advances and wet fundings                                      10,751,838          25,814,662
      Investments, net                                               29,479,131           4,194,470
      Mortgage loans held for sale, net                              61,489,358         197,216,733
      Interest receivable                                               331,025           1,566,896
      Real estate held for sale, net                                  1,122,793           3,555,041
      Other assets                                                    2,995,198           2,876,938
      Property and equipment, net                                     5,715,617           8,284,924
      Income tax refund receivable                                      940,266
      Deferred tax asset                                              4,575,838           7,277,263
                                                                   ------------        ------------
                    Total assets                                   $125,699,841        $270,699,630
                                                                   ============        ============

                                LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

      Related party notes payable                                  $ 92,695,761        $230,947,747
      Accounts payable and accrued expenses                           3,775,692           7,335,756
      Income tax payable                                                                  3,955,915
      Deferred tax liability                                          1,279,979             621,373
                                                                   ------------        ------------
                    Total liabilities                                97,751,432         242,860,791
                                                                   ------------        ------------
Commitments and contingencies

Stockholders' equity:
      Series A common stock, no par value, 200 shares
          authorized, issued and outstanding                                198                 198
      Additional paid-in capital                                      2,137,398           2,137,398
      Retained earnings                                              25,810,813          25,701,243
                                                                   ------------        ------------
                    Total stockholders' equity                       27,948,409          27,838,839
                                                                   ------------        ------------
                    Total liabilities and stockholders' equity     $125,699,841        $270,699,630
                                                                   ============        ============
</TABLE>





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





                                      F-24
<PAGE>   52
                           QUALITY MORTGAGE USA, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                       1996                 1995
                                                                    -----------         -----------
<S>                                                                 <C>                 <C>
Revenues:
      Loan origination fees, net                                    $ 9,787,677         $12,641,985
      Interest                                                       23,518,433          34,721,394
      Gain on Sale of mortgage loans                                 23,645,096          40,676,945
      Prepayment and late fees                                       20,775,169          14,280,731
      Loss on sale of real estate held for sale                      (2,487,712)         (6,268,944)
      Other                                                           2,195,537           1,989,274
                                                                    -----------         -----------

                                                                     77,434,200          98,041,385
                                                                    -----------         -----------
Operating expenses:
      Interest                                                       15,302,254          23,113,640
      Commissions                                                     5,972,381           5,837,811
      Salaries                                                       22,035,006          27,585,478
      Professional and consulting fees                                5,612,792           3,906,046
      Selling, general and administrative                            12,929,060           7,645,938
      Realized losses on investments                                  7,513,450           3,914,364
      Rent and other occupancy costs                                  2,330,557           1,724,583
      Depreciation and amortization                                   1,908,542           1,436,406
                                                                    -----------         -----------
                                                                     73,604,042          75,164,266
                                                                    -----------         -----------
        Income before provision for income taxes                      3,830,158          22,877,119
                                                                    -----------         -----------
Provision for income taxes                                            1,728,465           9,756,946
                                                                    -----------         -----------
               Net income                                           $ 2,101,693         $13,120,173
                                                                    ===========         ===========
</TABLE>





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





                                      F-25
<PAGE>   53
                           QUALITY MORTGAGE USA, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

                                   __________


<TABLE>
<CAPTION>
                                            Class A               Class B           Additional
                                          Common Stock          Common Stock          Paid-in       Retained
                                       Shares     Amount    Shares       Amount       Capital       Earnings          Total
                                       -------   --------   -------     --------    ------------   ------------    ------------
<S>                                      <C>      <C>       <C>                       <C>         <C>
Balances, October 31, 1994                 200   $    198     --        $     --    $  1,999,900   $ 34,993,565    $ 36,993,663
Dividends paid                              --         --     --              --              --    (22,412,495)    (22,412,495)
Issuance of common  stock                   --         --      6.87      137,498              --             --         137,498
Common stock reacquired pursuant
to the terms of a separation                --         --     (6.87)    (137,498)        137,498             --              --
agreement
Net income                                  --         --     --              --              --     13,120,173      13,120,173
                                       -------   --------   -------     --------    ------------   ------------    ------------
Balances, September 30, 1995               200        198     --              --       2,137,398     25,701,243      27,838,839

Dividends in-kind                           --         --     --              --              --     (1,992,123)     (1,992,123)
Net income                                  --         --     --              --              --      2,101,693       2,101,693
                                       -------   --------   -------     --------    ------------   ------------    ------------
Balances, September 30, 1996               200   $    198                     -$    $  2,137,398   $ 25,810,813    $ 27,948,409
                                       =======   ========   =======     ========    ============   ============    ============
</TABLE>





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





                                      F-26
<PAGE>   54
                           QUALITY MORTGAGE USA, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                           1996               1995
                                                                      ---------------     ------------
<S>                                                                   <C>                 <C>
Cash flows from operating activities:
      Net income                                                        $   2,101,693     $ 13,120,173
      Adjustments to reconcile net income to net cash provided
        (used) by operating activities:
          Depreciation and amortization                                     1,908,542        1,436,406
          Realized loss on sale of real estate held for sale                2,487,712        6,268,944
          Realized loss on investments                                      7,513,450        3,914,364
          Change in provision for losses on investments, mortgage
             loans and real estate held for sale                             (762,670)
          (Increase) decrease in advances and wet fundings                 15,062,824      (13,268,674)
          (Increase) decrease in mortgage loans held for sale             136,137,038      (50,033,470)
          (Increase) decrease in interest receivable                        1,235,871         (919,386)
          (Increase) decrease in other assets                                (527,921)        (144,618)
          Increase (decrease) in deferred taxes, net                        3,360,031      (3,173,646)
          Increase (decrease) in accounts payable and accrued
              expenses                                                     (3,560,069)         283,341
          Increase (decrease) in income taxes payable/receivable           (4,896,181)         907,284
                                                                      ---------------     ------------
             Net cash provided (used) by operating activities             160,060,320      (41,609,282)
                                                                      ---------------     ------------
Cash flows from investing activities:
      Proceeds from investments sold                                          183,145       13,882,275
      Purchases of investments                                            (32,799,579)      (7,708,605)
      Capital expenditures                                                 (1,331,353)      (3,239,854)
      Purchase of real estate held for sale                                (8,175,998)     (24,133,326)
      Proceeds from sale of real estate                                     8,701,524       23,005,019
                                                                      ---------------     ------------
              Net cash provided (used) by investing activities            (33,422,261)       1,805,509
                                                                      ---------------     ------------
Cash flows from financing activities:
      Net borrowings (payments) on related party notes payable           (138,251,985)      62,842,195
      Dividends paid                                                                       (22,412,495)
      Proceeds from sale of stock                                                              137,498
                                                                      ---------------     ------------
            Net cash provided (used) by financing activities             (138,251,985)      40,567,198
                                                                      ---------------     ------------
            Net increase (decrease) in cash equivalents                   (11,613,926)         763,425

Cash and cash equivalents, beginning of year                               19,912,703       19,149,278
                                                                      ---------------     ------------
Cash and cash equivalents, end of year                                $     8,298,777     $ 19,912,703
                                                                      ===============     ============

Supplemental disclosure of cash flow information:
      Cash paid during the year for:
      Interest                                                         $   15,570,221     $ 22,635,519

      Income taxes                                                          3,264,615        7,761,000
</TABLE>



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





                                      F-27
<PAGE>   55
                           QUALITY MORTGAGE USA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   __________


 1.   Organization And Basis Of Presentation:

      Quality Mortgage USA, Inc., a California corporation, originates,
      purchases and sells primarily "B" and "C" grade residential mortgage
      loans collateralized by one to four single family homes throughout the
      United States and is approved as a nonsupervised mortgagee by the United
      States Department of Housing and Urban Development.  The aggregate amount
      of loans originated or purchased during the years ended September 30,
      1996 and 1995 was approximately $1.008 billion and $1.607 billion,
      respectively.  The common stock of Quality Mortgage USA, Inc. is owned
      51% by Calmac Funding ("Calmac"), a Nevada corporation, and 49% by DLJ
      Mortgage Capital, Inc. ("DLJ"), a Delaware corporation.

      The accompanying consolidated financial statements include the accounts
      of Quality Mortgage USA, Inc. and all of its wholly-owned subsidiaries
      (collectively, the "Company") as follows:

       o      Quality Funding, Inc.,  a Hawaiian corporation, acts as a loan
              originator exclusively for Quality Mortgage USA, Inc.

       o      Save-More Insurance Services, Inc., a California corporation,
              acts as an insurance agent selling homeowners, property and
              various other insurance products primarily to mortgagees of
              Quality Mortgage USA, Inc.

       o      Commonwealth Trust Deed Services, Inc., a California corporation,
              acts as a trustee for foreclosed mortgage loans collateralized by
              California property originated or acquired by Quality Mortgage
              USA, Inc.

       o      Quality Trustee, Inc., a Missouri corporation, performs certain
              trust deed recording services on foreclosed mortgage loans
              originated or acquired by Quality Mortgage USA, Inc.

      All significant intercompany balances and transactions have been
      eliminated.

 2.   Significant Accounting Policies:

      CASH AND EQUIVALENTS

      Cash equivalents consist primarily of  money market accounts which are
      convertible into a known amount of cash and carry insignificant risk of
      loss. Cash equivalents are recorded at cost which approximates fair
      value.





                                      F-28
<PAGE>   56
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   __________


 2.   Significant Accounting Policies, Continued:

      ADVANCES AND WET FUNDINGS

      Advances and wet fundings consist of funds advanced for the purpose of
      funding mortgage loans in certain states which require loan proceeds to
      be transferred to the closing agent or escrow company prior to the loan
      closing.  Execution of these loan transactions normally occur three to
      five days following distribution of the loan funds.

      INVESTMENTS

      Investments consist primarily of, Class B, C and R mortgage pass-through
      certificates and interest only strips, all with maturities exceeding
      three months on the date of acquisition.  Management has classified
      investments at September 30, 1996 and 1995 as available-for-sale.
      Investment fair market value is determined using various factors,
      including related fair market values and estimated future cash flows.  At
      September 30, 1996 and 1995, investments are carried at amortized cost,
      which approximates market.

      MORTGAGE LOANS HELD FOR SALE

      Mortgage loans held for sale are stated at the lower of aggregate cost or
      aggregate estimated fair value, with fair value primarily based upon
      outstanding commitments that the Company has received from investors for
      the purchase of such mortgages.  Interest income is recognized using the
      effective interest method.  Gains or losses on sales of mortgage loans
      are recorded at the time in which all risks and rewards have been
      transferred to the buyer.

      REAL ESTATE HELD FOR SALE

      Real estate held for sale consists of residential real estate located
      primarily in Southern California and is stated at the lower of cost or
      estimated net realizable value.

      ORIGINATED MORTGAGE SERVICING RIGHTS

      On May 12, 1995, the Financial Accounting Standards Board (FASB) issued
      Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting
      for Mortgage Servicing Rights, an amendment to SFAS No. 65.  The Company
      elected to adopt this standard for its financial statement reporting
      beginning in fiscal 1996.





                                      F-29
<PAGE>   57
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   __________


 2.   Significant Accounting Policies, Continued:

      SFAS No. 122 requires that a portion of the cost of originating a
      mortgage loan be allocated to the mortgage servicing right based on its
      fair value relative to the loan as a whole.  To determine the fair value
      of the servicing rights created during the year, the Company used the
      market prices under comparable servicing sale contracts, when available,
      or alternatively used a valuation model that calculates the present value
      of future cash flows to determine the fair value of the servicing rights.
      In using this valuation method, the Company incorporated assumptions that
      market participants would use in estimating future net servicing income
      which included estimates of the cost of servicing per loan, the discount
      rate, float value, an inflation rate, ancillary income per loan,
      prepayment speeds and default rates.

      In determining servicing value impairment at the end of the year, the
      post-implementation originated servicing portfolio was disaggregated into
      its predominant risk characteristics.  The Company has determined those
      risk characteristics to be prepayment and foreclosure risks.  The Company
      has disaggregated the portfolio by loan type and investor type to reflect
      those risk characteristics.  These segments of the portfolio were then
      valued, using market prices under comparable servicing sale contracts
      when available or, alternatively using the same model as was used to
      originally determine the fair value at origination, using current
      assumptions.  The calculated value was then compared with the book value
      of each segment to determine if a reserve for impairment was required.

      PROPERTY AND EQUIPMENT

      Property and equipment are stated at cost, less accumulated depreciation
      and amortization.  Depreciation is provided using the straight-line
      method over the estimated useful lives of the assets which range from
      three to thirty years.  Leasehold improvements are amortized on the
      straight-line method over the estimated useful life of the asset or the
      terms of the lease, whichever is shorter.  Maintenance and repairs are
      expensed as incurred while renewals and betterments are capitalized.
      Upon the sale or retirement of property and equipment, the accounts are
      relieved of the cost and the related accumulated depreciation, and any
      resulting gain or loss is included in operations.

      INCOME TAXES

      Deferred income taxes are recognized for the tax consequences in future
      years of differences between the tax bases of assets and liabilities and
      their financial reporting amounts at each year-end based on enacted tax
      laws and statutory tax rates applicable to the periods in which the
      differences are expected to affect taxable income.  Valuation allowances
      are established, when necessary, to reduce deferred tax assets to the
      amount expected to be realized.  The provision for income taxes
      represents the tax payable for the period and the change during the
      period in deferred tax assets and liabilities.





                                      F-30
<PAGE>   58
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



 2.   Significant Accounting Policies, Continued:

      ADVERTISING

      Advertising costs are expensed as incurred.  Advertising costs for the
      year ended September 30, 1996 were approximately $955,000.

      USE OF ESTIMATES

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

      RECLASSIFICATIONS

      Certain prior year amounts have been reclassified to conform with the
      current year presentation.



 3.   Cash And Cash Equivalents:

      Cash and cash equivalents consist of the following at September 30:

<TABLE>
<CAPTION>
                                                          1996               1995
                                                        ----------        -----------
<S>                                                     <C>              <C>
Short-term investments                                  $3,082,755       $  9,855,902
Other cash deposits                                      5,216,022         10,056,801
                                                        ----------        -----------
                                                        $8,298,777        $19,912,703
                                                        ==========        ===========
</TABLE>

      Short-term investments consist primarily of money market accounts.

 4.   Mortgage Loans Held For Sale:

      Mortgage loans held for sale, net consist of the following at September
      30:

<TABLE>
<CAPTION>
                                                          1996               1995
                                                    --------------       ------------
<S>                                                 <C>                  <C>
Principal balance outstanding                       $   62,471,329       $199,044,085
Premium paid on purchased loans                             13,240          1,171,330
Deferred loan fees, net                                    (67,124)          (798,682)
Allowance for estimated losses                            (928,087)        (2,200,000)
                                                    --------------       ------------
                                                    $   61,489,358       $197,216,733
                                                    ==============       ============

Weighted average interest rate                              10.84%             11.19%
</TABLE>





                                      F-31
<PAGE>   59
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   __________



 4.   Mortgage Loans Held For Sale, Continued:

      Premium paid on purchased loans represents the amount above par that the
      Company paid for certain loans that are held for sale as discussed in
      Note 8.

      Deferred loan fees, net represent loan origination fees received in
      connection with the origination of residential mortgage loans, and are
      net of direct loan origination costs, related to mortgage loans held for
      sale.  Such fees and costs are deferred until the related loans are sold.



 5.   Real Estate Held For Sale:

      Through various Pooling and Servicing Agreements between Lomas Mortgage
      USA, Inc. (the "Servicer"), DLJ and Bankers Trust Company, the Company is
      provided with a first right of refusal to purchase mortgaged property
      acquired or about to be acquired by foreclosure from the Servicer.  Under
      the agreement, the Company will forfeit the right to acquire properties
      from a particular trust if the Company elects not to purchase any two
      mortgaged properties.  The Pooling and Servicing Agreements provide that
      the purchase price for any mortgaged property acquired by the Company be
      equal to the sum of the outstanding principal balance of the related
      mortgage loan plus accrued interest thereon and the amount of any
      unreimbursed advances.  During April 1995, the Company discontinued its
      policy of purchasing mortgaged property acquired or about to be acquired
      by foreclosure by the Servicer.

      At September 30, 1996 and 1995, the Company's real estate held for sale
      consisted of twenty-five and thrity-two properties, respectively,
      primarily located in Southern California.  These properties are reflected
      in the accompanying financial statements at appraised value less sales
      commissions and other estimated costs of disposal.
      At September 30, 1996 and 1995, these properties were carried at
      $2,156,663, with estimated selling cost of $1,033,870 and $5,169,902,
      with estimated selling costs of $1,614,861, respectively.

      The Company may provide mortgage loans to purchasers in order to
      facilitate the sale of the Company's real estate held for sale.  As of
      September 30, 1996 and 1995, the Company had loans outstanding of $0 and
      $4,913,057, respectively, collateralized by first trust deeds in the
      respective property, to purchasers of the Company's real estate held for
      sale.  Such amounts are included in mortgage loans held for sale, net on
      the accompanying balance sheets.

      The Company also provided second trust deeds in conjunction with the sale
      transactions described above totaling $92,425 and $1,719,679 as of
      September 30, 1996 and 1995, respectively.  Such amounts are included in
      other assets on the accompanying balance sheets.





                                      F-32
<PAGE>   60
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   __________




 6.   Originated Mortgage Servicing Rights:

      Originated loan servicing, net of accumulated amortization and impairment
      was as follows



<TABLE>
<CAPTION>
                                                                          Originated
                                                                          Servicing
                                                                             Net
                                                                         -----------
<S>                                                                      <C>
Balance, September 30, 1995                                              $         -
Scheduled amortization                                                      (123,071)
Impairment                                                                         -
Basis on servicing sales                                                   1,460,736
                                                                         -----------
Balance, September 30,1996                                               $ 1,337,665
                                                                         ===========
</TABLE>

 7.   PROPERTY AND EQUIPMENT:

      Property and equipment consist of the following at September 30:

<TABLE>
<CAPTION>
                                                       1996                  1995
                                                   -----------           -----------
<S>                                                <C>                   <C>
Office Buildings                                   $ 3,823,854           $ 5,905,635
Computer hardware and software                       3,618,864             2,782,184
Office machinery and equipment                       1,831,984             1,538,326
Furniture and fixtures                                 694,649               637,178
Leasehold improvements                                 371,685               320,178
                                                   -----------           -----------
                                                    10,341,036            11,183,501
Less accumulated depreciation                       (4,625,419)           (2,898,577)
                                                   -----------           -----------
                                                   $ 5,715,617           $ 8,284,924
                                                   ===========           ===========
</TABLE>


      During 1996, the Company recorded an in-kind dividend to both
      shareholders.   The dividend consisted of the transfer of  real estate
      with a carrying value of approximately $1,900,000.  During October, 1996,
      the related party  transferred the same real estate back into the Company
      as a capital contribution of approximately $1,900,000.





                                      F-33
<PAGE>   61
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   __________


 8.   Related Party Transactions:

      DLJ REPURCHASE AGREEMENT

      The Company has entered into a Whole Loan Master Repurchase Agreement
      with DLJ (the "DLJ Agreement") whereby the Company sells substantially
      all mortgage loans originated and acquired during the year.  The
      aggregate amount of loans sold to DLJ during the year ended September 30,
      1996 and 1995 was approximately $.827 billion and $1.421 billion, which
      resulted in gains of $24.6 million and $39.6 million, respectively  Under
      the DLJ Agreement, the Company sells loans servicing released.  However,
      the Company retains the rights to receive prepayment penalties and late
      charges as they are collected by the Servicer assigned by DLJ.

      The Company has a line of credit under the DLJ agreement which provides
      for up to $300,000,000, of which advances at September 30, 1996 and 1995
      totaled $64,610,406 and $198,966,085, respectively.  Repayment of
      principal and interest are due and payable at the earlier of six months
      from the advance date or the sale of the related loans.  The interest
      rate on advances is equal to DLJ's cost of funds plus .125%, not to
      exceed the thirty-day LIBOR rate plus 1.375%.  The effective interest
      rates as of September 30, 1996 and 1995 were 6.875% and 7.75%,
      respectively.  Borrowings are collateralized by the underlying mortgage
      loans.

      WET FUNDING LINE

      In July 1994, the Company executed a separate Whole Loan Financing
      Facility, Tri-Party Custody Agreement, Pledge Agreement and Promissory
      Note (together, the "Financing Program") with DLJ and the Custodian.
      Under the Financing Program, the Company can borrow up to $100,000,000
      for the purpose of funding mortgage loans whose loan documents have not
      yet been shipped to the Custodian.  Advances are ultimately
      collateralized with mortgage loans originated in the Company's name.
      Interest rates on advances made pursuant to the Financing Program vary
      and are mutually agreed upon.  As of September 30, 1996 and 1995, the
      effective interest rates approximated the rates on the DLJ line of
      credit.  At September 30, 1996 and 1995, $7,773,011 and $25,814,662 were
      outstanding under this Financing Program, respectively.

      CONSULTING AGREEMENT

      Under the terms of a five-year consulting agreement Calmac will provide
      marketing, administrative, cost containment and expense reduction
      services to the Company.  The provisions of the agreement stipulate
      minimum amounts be paid over the term of the agreement and, under certain
      conditions, upon termination.  The Company records such payments as
      professional and consulting fees.





                                      F-34
<PAGE>   62
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   __________



 8.   Related Party Transactions, Continued:

      EFI PURCHASE AGREEMENT

      The Company has a Whole Loan Master Repurchase Agreement with Express
      Funding, Inc. ("EFI"), a related entity which is 100% owned by an officer
      of the Company.  Under this agreement, the Company will purchase
      substantially all mortgage loans originated by EFI at market prices
      generally in excess of par value.  The Company subsequently sells these
      loans to DLJ pursuant to the terms of the DLJ Agreement.  During the
      years ended September 30, 1996 and 1995, the Company purchased a total of
      $178,779,893 and $490,984,561, respectively, of mortgage loans from EFI.
      Total premiums paid on mortgage loans purchased from EFI totaled
      $1,922,296 and $6,206,855 for the years ended September 30, 1996 and
      1995, respectively.

      OTHER

      During the year ended September 30, 1996, the Company paid $181,670 for
      appraisal services provided by an entity owned by Calmac.



 9.   Income Taxes:

      The following table presents the current and deferred income tax
      provision (benefit) for federal and state income taxes at September 30:

<TABLE>
<CAPTION>
                                         1996               1995
                                      -----------       -----------
<S>                                 <C>                 <C>
Current:
    Federal                         $  (1,758,777)      $ 9,340,301
    State                                 127,212         3,590,292
                                      -----------       -----------
                                       (1,631,565)       12,930,593
Deferred:
    Federal                             2,889,693        (2,205,756)
    State                                 470,337          (967,891)
                                      -----------       -----------
                                        3,360,030        (3,173,647)
                                      -----------       -----------
                                      $ 1,728,465       $ 9,756,946
                                      ===========       ===========
</TABLE>





                                      F-35
<PAGE>   63
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   __________



 9.   Income Taxes, Continued:

 Significant components of the deferred income tax asset at September 30 are as
                                   follows:
<TABLE>
<CAPTION>
                                                              1996                  1995
                                                            ----------           ----------
<S>                                                        <C>                 <C>
Deferred tax assets:
   Accrued salaries                                        $   267,257           $  137,470
   State taxes                                                                      743,585
   REO reserve                                                 478,682              750,426
   Mortgage reserve                                            429,704            1,022,340
   Litigation reserve                                          240,566              348,525
   Investment income                                         2,797,461            3,964,534
   Fair market value adjustment                                                     273,420
   Accumulated depreciation                                    151,326
   Other                                                        77,876               36,963
   Net operating loss                                          132,966
                                                            ----------           ----------
                                                             4,575,838            7,277,263
                                                            ----------           ----------
Deferred tax liabilities:
   Loan origination costs                                     (277,404)            (612,326)
   State taxes                                                (344,461)
   Fair market value adjustment                               (658,114)
   Other                                                                             (9,047)
                                                            ----------           ----------
                                                            (1,279,979)            (621,373)
                                                            ----------           ----------
Net deferred tax asset                                      $3,295,859           $6,655,890
                                                            ==========           ==========
</TABLE>


      Management has determined that a valuation allowance for the net deferred
      tax asset is not necessary based on the Company's ability, in the event
      of future losses, to carry back and recover the majority of its deferred
      tax assets from refunds of taxes paid in prior years.  Although
      realization is not assured, management believes it is more likely than
      not that all of the deferred tax asset will be realized.


10.   Common Stock:

      During the year ended September 30, 1995, the Company issued 6.87 shares
      of Class B common stock to an officer of the Company for cash of
      $137,498.  In connection with such officer's separation agreement, these
      shares were reacquired by the Company.





                                      F-36
<PAGE>   64
                           QUALITY MORTGAGE USA, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



11.   Fair Value Of Financial Instruments:

      The estimated fair value of the Company's financial instruments has been
      determined by the Company using appropriate market information and
      valuation methodologies.  Considerable judgment is required to develop
      the estimates of fair value thus, the estimates provided herein are not
      necessarily indicative of the amounts that could be realized in a current
      market exchange.  Estimated fair values at September 30, 1996 and 1995
      are summarized as follows:
<TABLE>
<CAPTION>
                                                      1996                   1995
                                              -------------------     -------------------
                                              Carrying      Fair      Carrying      Fair
                                               Value       Value       Value        Value
                                               ------      ------     -------     -------
                                                              (In 000's)
<S>                                           <C>         <C>       <C>         <C>
Financial assets:
  Cash and cash equivalents                   $ 8,299     $ 8,299   $  19,913   $  19,913
  Investments                                  29,479      29,479       8,109       8,109
  Mortgage loans held for sale                 61,489      63,266     197,217     203,330
Financial liabilities:
  Related party notes payable                  92,696      92,696     230,948     230,948

</TABLE>


      Fair value of related party notes payable is estimated using rates
      currently available to the Company with similar terms.



12.   Commitments And Contingencies:

      LITIGATION

      The Company is a defendant in various class-action litigation alleging
      certain Truth-in-Lending  Act and Real Estate Settlement and Procedures
      Act violations.  Based upon the opinions of in-house and external
      counsel, the ultimate outcome and amount of any potential liability upon
      disposition of these matters is not determinable.

      OPERATING LEASES

      The Company leases various branch office locations under operating
      leases.  Lease terms range from six to thirty- six months and the
      majority of the Company's operating leases include options to extend the
      lease term.  Future minimum lease payments at September 30, 1996 under
      these obligations are as follows:



<TABLE>
<CAPTION>
For the years ending September 20,
----------------------------------
               <S>                                    <C>
               1997                                   $496,787
               1998                                     72,895
                                                      --------
                                                      $569,682
                                                      ========
</TABLE>





                                      F-37
<PAGE>   65
                           QUALITY MORTGAGE USA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                   __________



12.   Commitments And Contingencies, Continued:

      CUSTODY AGREEMENT

      The Company has a mortgage loan custody agreement with Bankers Trust
      Company to hold mortgage notes for the Company for a specified fee.  The
      agreement has no stated expiration date but can be terminated by the
      Company or by Bankers Trust Company with 90 days written notice.

      LOANS SERVICED

      In July 1995, the Company began servicing mortgage loans.  At September
      30, 1996 and 1995, loans with principal balances totaling approximately
      $-0- and $35,579,936, respectively, were being serviced by the Company.
      The average annual servicing fee received by the Company was
      approximately 50 basis points times the principal balance serviced.

      Custodial funds amounted to $34,324 and $542,469 at September 30, 1996
      and 1995, respectively.  Such funds, which are maintained by the Company
      on behalf of various parties, are deposited in trust bank accounts and
      are excluded from assets and liabilities in the accompanying balance
      sheets.



13.   Credit Risk:

      At September 30, 1996 and 1995, the Company had cash balances at certain
      institutions that were in excess of the federally-insured limit of
      $100,000.  The Company has not experienced any losses due to funds on
      deposit in excess of federally-insured amounts.



14.   Subsequent Event:

      In October 1996,  substantially all of the net assets of the Company were
      sold to Amresco Residential Mortgage Corporation for approximately
      $65,000,000 under the terms of an asset purchase agreement.





                                      F-38
<PAGE>   66
                                 EXHIBIT INDEX

EXHIBIT
NUMBER            DESCRIPTION OF EXHIBIT
-------           ----------------------
<TABLE>
           <S>    <C>
            2.(a) Agreement for Purchase  and Sale of  Assets, dated as of  July 28, 1994, among  Holliday Fenoglio
                  Dockerty &  Gibson,  Inc.,  Holliday  Fenoglio  Dockerty &  Gibson  of  Dallas,  Inc.,   Holliday
                  Fenoglio & Monte, Inc.  and 3003,  Inc.  and Holliday Acquisition Corp., filed as Exhibit 2.1  to
                  Registrant's Current  Report on  Form 8-K dated August 15,  1994, which  exhibit is  incorporated
                  herein by reference.
            3.(a) Restated  Certificate of Incorporation,  filed as Exhibit 3(i) to the  Registrant's Form 10-Q for
                  the quarter ended September 30, 1995, which exhibit is incorporated herein by reference.
              (b) Amended and Restated Bylaws effective as of February 25, 1997.(1)
            4.(a) See Exhibits 3(a) and (b).
              (b) Indenture, dated as  of November 27, 1995,  between the Registrant  and First Interstate  Bank of
                  Texas,  National  Association  in  respect  of  the  Registrant's  8%  Convertible   Subordinated
                  Debentures  due 2005, filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-3
                  (No.  33-63683), which exhibit is incorporated herein by reference.
              (c) Indenture, dated as of January 15, 1996, between the Registrant and  Bank One, Columbus, N.A., as
                  trustee,  filed as Exhibit 4.1 to the Registrant's Form 8-K dated February 2, 1996, which exhibit
                  is incorporated herein by reference.
              (d) Indenture, dated as of March 1, 1997, between the Company and Bank One, Columbus, N.A., as
                  trustee, filed as Exhibit 4.1 to the Registrant's Form 8-K dated March 12, 1997, which exhibit is
                  incorporated herein by reference.
              (e) Officers' Certificate and Company Order dated as of March 12, 1997, establishing the terms of the
                  Company's Senior Subordinated Notes, Series 1997-A due 2004, filed as Exhibit 4.2 to the
                  Registrant's Form 8-K dated March 12, 1997, which exhibit is incorporated herein by reference.
              (f) Specimen Common Stock  Certificate, filed as exhibit 4.4  to the Company's Registration Statement
                  on Form S-3 (No. 33-63683), which exhibit is incorporated herein by reference.
           10.(a) Form  of Indemnification Agreement together  with a list  of all officers and  directors who have
                  signed such agreement, filed as  Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for
                  the year ended October 31, 1987, which exhibit is incorporated herein by reference.
              (b) Form  of Indemnification  Agreement dated  as of  August 24, 1993,  together with  a list  of all
                  officers  and  directors  who  have   signed  such  agreement,  filed  as  Exhibit 10(g)  to  the
                  Registrant's Quarterly  Report on  Form 10-Q  for the  quarter  ended September 31,  1993,  which
                  exhibit is incorporated herein by reference.
              (c) Fifth Amended and  Restated Incentive Stock Option  Plan dated as of November 20, 1990,  filed as
                  Exhibit 10(h) to  the Registrant's  Annual Report on  Form 10-K for the  year ended  December 31,
                  1991, which exhibit is incorporated herein by references.(2)
              (d) Fourth  Amended and  Restated  Stock  Option  Plan  dated  as  of  November 20,  1991,  filed  as
                  Exhibit 10(i)  to the  Registrants Annual  Report on  Form 10-K for  the year  ended December 31,
                  1991, which exhibit is incorporated herein by reference.(2)
              (e) Stock  Option  Agreement,  dated as  of  April 17,  1990,  between  the  Registrant and  Bruce W.
                  Schnitzer,  and Termination  of  Warrant between  Mr.   Schnitzer  and the  Registrant,  filed as
                  Exhibit 10(s)  to the  Registrant's Annual  Report on  Form 10-K for  the year  ended October 31,
                  1990, which exhibit is incorporated herein by reference.(2)
              (f) Promissory Note dated October 31, 1990 issued by James P.  Cotton, Jr.  to the Registrant,  filed
                  as Exhibit 10(s) to  the Registrant's Annual Report on  Form 10-K for the year  ended October 31,
                  1990, which exhibit is incorporated herein by reference.
              (g) Promissory Note dated October 31, 1990 issued by Gerald E.  Eickhoff to the  Registrant, filed as
                  Exhibit 10(w) to  the Registrant's Annual Report  Form 10-K for the year  ended October 31, 1990,
                  which exhibit is incorporated herein by reference.
              (h) Registrant's  1993 Key  Individual Stock Option  Plan filed as Exhibit 10(z)  to the Registration
                  Statement of Registrant on Form S-4 under the  Securities Act of 1993 (File No.  33-72732), which
                  exhibit is incorporated herein by reference.(2)
              (i) Indemnification Agreement, dated  March 30, 1993, between AMRESCO Holdings,  Inc.  and Richard L.
                  Cravey, filed  as Exhibit 10(ab)  to the  Registrant's Annual  Report on  Form 10-K for  the year
                  ended December 31, 1993, which exhibit is incorporated herein by reference.
              (j) Indemnification  Agreement,  dated  March 30,  1993,  between  AMRESCO  Holdings,  and William S.
                  Green, filed as Exhibit 10(ac) to the Registrant's Annual Report on  Form 10-K for the year ended
                  December 31, 1993, which exhibit is incorporated herein by reference.
              (k) The Registrant's Retirement  Savings and Profit Sharing Plan and Trust filed as Exhibit 10(ag) to
                  the Registrant's Annual Report on Form 10-K  for the year ended December 31, 1993,  which exhibit
                  is incorporated herein by reference.(2)
              (l) The Registrant's  Retention Bonus Plan, as  amended, filed as Exhibit 10(ah)  to the Registrant's
                  Annual Report  on Form 10-K  for the  year ended  December 31, 1993  and as Exhibit 10(y)  to the
                  Registration Statement of the Registrant on Form S-4 under  the Securities Act of 1993 (File  No.
                  33-72321), which exhibits are incorporated herein by reference.(2)
</TABLE>

<PAGE>   67
<TABLE>
              <S> <C>
              (m) The Registrant's Severance Pay Plan filed as Exhibit 10(ai) to the Registrant's  Annual Report on
                  Form 10-K  for  the  year ended  December 31,  1993,  which  exhibit  is  incorporated herein  by
                  reference.(2)
              (n) The  Registrant's Thrift  Restoration Plan  filed as  Exhibit 10(ak)  to the  Registrant's Annual
                  Report on  Form 10-K for the year  ended December 31, 1993, which  exhibit is incorporated herein
                  by reference.(2)
              (o) Employment Agreement, dated  as of May 31,  1994, between  Registrant and  Robert H.   Lutz, Jr.,
                  filed  as Exhibit 10(y)  to the  Registrant's Form 10-K  for the  fiscal year  ended December 31,
                  1994, which exhibit is incorporated herein by reference.(2)
              (p) Warehousing Credit and Security Agreement, dated as  of August 15, 1995, between AMRESCO  Capital
                  Corporation and  Residential Funding  Corporation,  filed as  Exhibit 10(a) to  the  Registrant's
                  Form 10-Q/A No.   1  dated  October 25, 1995  for  the quarter  ended September 30,  1995,  which
                  exhibit is incorporated herein by reference.
              (q) Second Amendment to  Agreement for Purchase and Sale of  Assets, dated November 21, 1995,  by and
                  among the  Registrant,  Holliday  Fenoglio, Inc.    and certain  sellers and  shareholders  named
                  therein  filed  as Exhibit 10(am)  to  the  Registrant's  Form 10-K for  the  fiscal  year  ended
                  December 31, 1995, which exhibit is incorporated herein by reference.
              (r) Amendment  to Stock  Option Agreement,  dated as  of  April 1, 1995,  between the  Registrant and
                  Bruce W.  Schnitzer  filed as Exhibit 10(an) to  the Registrant's Form 10-K  for the fiscal  year
                  ended December 31, 1995, which exhibit is incorporated herein by reference.(2)
              (s) Lease Agreement, dated as  of February 9,  1996, between K-P  Plaza Limited  Partnership and  the
                  Registrant filed  as  Exhibit 10(ao) to  the Registrant's  Form 10-K for  the  fiscal year  ended
                  December 31, 1995, which exhibit is incorporated herein by reference.
              (t) Interim  Warehouse and  Security  Agreement,  dated as  of  February 23, 1996,  among  Prudential
                  Securities Realty  Funding Corporation  and  AMRESCO Residential  Mortgage Corporation  filed  as
                  Exhibit 10(ap) to the  Registrant's Form 10-K for the fiscal  year ended December 31, 1995, which
                  exhibit is incorporated herein by reference.
              (u) Second Amended and  Restated Loan Agreement dated  as of February  7, 1997 by and  among AMRESCO,
                  INC.  and certain of its  subsidiaries and NationsBank  of Texas, N.A. and  certain other lenders
                  designated therein filed  as Exhibit 10.1 to  the Registrant's Form 8-K  dated February 20, 1997,
                  which exhibit is incorporated herein by reference.
              (v) Letter Agreement related  to the Bridge Loan, dated February  7, 1997 by and  among AMRESCO, INC.
                  and certain  of its subsidiaries  and NationsBank  of Texas, N.A.  filed as Exhibit  10.2 to  the
                  Registrant's Form  8-K  dated  February  20,  1997,  which  exhibit  is  incorporated  herein  by
                  reference.
              (w) Promissory Note related  to the Letter  Agreement dated  February 7, 1997 by  and among  AMRESCO,
                  INC. and certain of its subsidiaries and NationsBank of Texas, N.A. filed as Exhibit 10.3  to the
                  Registrant's  Form  8-K  dated  February  20,  1997,  which  exhibit is  incorporated  herein  by
                  reference.
              (x) Form of Severance Agreement,  dated as of May 29, 1996, with Robert H Lutz, Jr., Robert L. Adair,
                  Barry L. Edwards, L. Keith Blackwell, Ronald B. Kirkland and Ronald Castleman. (1) (2)
              (y) Form of Letter Agreement, dated as of March 20, 1997,  with Harold E. Holliday, Jr. and Scott  J.
                  Reading. (1) (2)
              (z) Incentive  Compensation  Program,  dated  August  15,  1996,  for  certain  employees  of AMRESCO
                  Residential Credit Corporation. (1) (2)
             (aa) AMRESCO Deferrred Compensation Program, Dated as of January 1, 1996. (1) (2)
             (ab) Amendment No. 1 to AMRESCO Deferred Compensation Program, dated December 31, 1996. (1) (2)
             (ac) AMRESCO, INC. 1997 Stock Option Plan. (1) (2)
             (ad) AMRESCO, INC. 1995 Stock Option and Award Plan, as amended and restated. (1) (2)
              11. Statement re: Computation of Per Share Earnings.(1)
              21. Subsidiaries of the Registrant.(1)
           23.(a) Consent of Independent Auditors-Deloitte and Touche L.L.P.(1)
              (b) Consent of Independent Auditors-Coopers and Lybrand L.L.P.(1)
              24. Power of Attorney of the Directors and certain officers of the Registrant.(1)
              27. Financial Data Schedule.(1)
</TABLE>

___________

(1)      Filed herewith.

(2)      Management contract or compensatory plan or arrangement required to be
         filed as an exhibit pursuant to Item 14(c) of this Report.